When it was created, Bitcoin was perceived as a scam or a fad. Fast forward to 2020, Bitcoin is the most popular cryptocurrency with over $160 billion in market cap. Many investors compare Bitcoin to gold, and Bitcoin is the best performing asset in the 21st century. It has outperformed the stock market and other highly traded commodities.
nce you decide to buy Bitcoin, you should do so knowing that there is risk involved and no capital gains are guaranteed. Before buying Bitcoin, it is recommended that the buyer purchase a Bitcoin wallet so they can keep their Bitcoin secure.
There are multiple types of wallets such as mobile, paper and hardware, but for the sake of this article we will not go in depth describing the differences between them. This article will provide some guidance on the multiple methods on buying Bitcoin along with each method’s pros and cons.
Once a Bitcoin wallet is acquired, the easiest way to buy Bitcoin is through an exchange. Using a cryptocurrency exchange is the same as using an online brokerage. You sign up for an account, and you provide your banking and personal information.
Some of the most popular Bitcoin exchanges are Coinbase, Coinmama or Kraken. The advantages to buying with an exchange is that it is convenient. The process of signing up and providing your information will be very familiar to those who are active in the investing world.
To buy Bitcoin on an exchange, you would have to fund the account, this is typically done through a bank wire. Once the wire goes through, you will then be able to buy as much Bitcoin as your funds allow.
When buying Bitcoin, there are small fees that the exchange charges. These fees represent the cost (per transaction) it takes for the Bitcoin network to operate, the fees themselves are very low compared to other Bitcoin buying methods.
In the cryptocurrency world, it is advised that you do not keep all your Bitcoin on an exchange. When Bitcoin is being held on an exchange, it is in the safekeeping of the exchange and not the owner of themselves.
Since Bitcoin exchanges are always connected to the internet, their holdings are vulnerable to hacking attacks. There have been instances of exchanges being hacked, leading to many people losing their holdings. That is why it is advised to transfer your Bitcoin holdings to a wallet once you’ve bought some from an exchange.
Exchanges are a great way to buy Bitcoin. The transaction fees are cheap, and the process is very similar to other financial instruments. If the user can hold their own funds via a Bitcoin wallet and they are comfortable providing their personal information, there is very little downside in using an exchange.
For those who value their privacy, an exchange may not be the most suitable option. If someone would like to buy Bitcoin anonymously, services such as a Bitcoin ATM may be more viable.
Unlike buying from an exchange, where you have the option to keep your funds with them, a Bitcoin wallet is required if you are buying from a Bitcoin ATM. To buy from an ATM, just click “Buy Bitcoin” and scan the QR code with your Bitcoin Wallet. Once scanned, insert the cash into the atm and press finish.
Due to Bitcoin being a relatively new financial instrument, the biggest drawback of Bitcoin ATMs is the inconvenience. Depending on where you live, Bitcoin ATMs can be few and far between, websites such as Coinatmradar can help pinpoint ATMs allowing you to find one a lot easier.
Another drawback to using an ATM is that the transaction fees are very high, typical ranges are from 5% - 10%, comparative to exchanges where fees are usually 0.75% - 1.25%. If the buyer is adamant in keeping their Bitcoin transactions anonymous, and they do not mind the high transaction fees, then a Bitcoin ATM is the perfect option for them.
Peer to Peer Networks are online marketplaces that allow two users to make a transaction without any third-party involvement. P2P networks work similarly to Kijiji and Facebook Marketplace, sellers post their selling price for Bitcoin along with their preferred payment method.
An example of a P2P network would be the website LocalBitcoins. The advantage of P2P networks is that it makes purchasing Bitcoin a buyer’s market. Since the selling prices are transparent, a person looking to buy Bitcoin can find a person selling it for the lowest price.
The person to person interaction on P2P networks is the major advantage for using one. Prices, payment methods and even meeting in person can be negotiated. However, this could also be a downside as any transaction with a stranger can be potentially dangerous.
Usually, P2P networks implement an escrow service to prevent scams from taking place, but the buyer should use their due diligence and be careful when making a transaction. If a buyer is willing to do their due diligence and search for the best-selling price, then a P2P network would be the best option for them to buy Bitcoin.
Like other financial instruments, Bitcoin can also be bought “Over the Counter” (OTC). The purpose of buying Bitcoin over the counter is when a person is looking to buy large amounts (usually $25,000 worth or more).
OTC services are usually provided by Bitcoin Exchanges, this is because exchanges have large amounts of Bitcoin and cash on hand to handle these transactions. When buying large amounts of Bitcoin on an exchange, the buyer can experience “slippage”.
Slippage is when all the low-price orders and high price orders are bought up, giving a higher than average “market” price. OTC purchases bypass this since a fixed quote is provided for the large amount of Bitcoin. This saves the buyer a lot of money on their transaction.
The downside to OTC purchasing is the time-consuming process, as negotiations, KYC (Know Your Customer) and other logistics are required for the trade to go through. If the buyer is willing to spend the time for an OTC purchase, then it is the perfect option for them. The ability to negotiate, get fixed quotes and avoid slippage is an invaluable advantage for large scale transactions.
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