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What is Bitcoin?

Bitcoin was the first cryptocurrency launched in 2009, invented by a mysterious person or group of people going by the name Satoshi Nakamoto. It is a digital asset that is built on a decentralized digital record called the blockchain, which eliminates the need for a central authority such as a bank or a government.

 

Bitcoin is not issued by a central bank and is not regulated by a government like conventional money. It is a currency backed by a peer-to-peer blockchain technology for verifying and keeping track of transactions. The blocks, which store information on the transactions, are linked together in a chain in a chronological order, ensuring that the same Bitcoin token cannot be spent twice and that transactions cannot be tampered with. Members of the blockchain network, the so-called minersverify all transactions and maintain the public ledger, and their efforts are rewarded by earning Bitcoins. The blockchain technology is behind more than 6,000 other cryptocurrencies as well. 

 

While the Bitcoin craze on the market might seem like a gold rush you cannot miss, it is not a stable store of value, as it is highly volatile and prone to speculation. Because of this, beginner investors should take extra care. To make sure you avoid common pitfalls, we’ll guide you through the basics!

 

If you decide to buy Bitcoin, you can do it through exchanges and brokers. Throughout the process, always take into consideration the risks of investing in digital assets!

What is Bitcoin?
Where can you buy Bitcoin?

There are several different ways to buy Bitcoin and other cryptocurrencies, including exchanges and traditional brokers. Cryptocurrency exchanges like Coinbase and a few traditional brokers like Robinhood can get you started investing in Bitcoin. Also check out our review of online brokers for crypto trading, and our detailed guide to investing in Bitcoin!

Cryptocurrency exchanges

You can purchase Bitcoin from several cryptocurrency exchanges. Many of them charge a fee calculated as a percentage of the purchase price, so check several exchanges to find the right one for you. Some of the more popular exchanges include:

  • Coinbase: This is a popular choice for US Bitcoin buyers. Coinbase’s fees are high and there is only a limited selection of cryptocurrencies, but the trading platform is great. Coinbase is listed on the NASDAQ, a good sign for its safety and transparency.
  • Binance.US: The US arm of the world’s largest exchange by volume for all cryptocurrencies, Binance.US has a great selection of cryptocurrencies on offer and has low fees. However, the platform might be a bit too complex for beginners. 
  • Gemini: This US-based crypto exchange trades Bitcoin, Ether, Bitcoin Cash, Litecoin and Zcash. Transaction fees range from $0.99 to 1.49% of your order, depending on the size of the purchase or sale, and a convenience fee of about 0.5% is also levied.
  • Coinmama: This exchange allows trades in eight cryptocurrencies, including Bitcoin. Coinmama requires a minimum $60 purchase and charges a transaction fee of up to 5.9% (plus an additional 5% fee for credit card purchases).

 

Traditional stockbrokers

There are only a few traditional brokers that allow customers to buy and sell spot crypto. Robinhood was the first mainstream broker to offer Bitcoin (Robinhood Crypto is available in most, but not all, US states). Like its stock-trading platform, Robinhood charges no fees for Bitcoin trades. TradeStation also offers crypto trading including Bitcoin; as does eToro, which also features a unique social trading platform that allows users to match the moves of popular traders.

Other ways to buy or invest in Bitcoin:

  • Bitcoin ATMs. These work like normal ATMs; you can use them to buy and sell Bitcoin. Coin ATM Radar shows more than 7,000 bitcoin ATMs around the US.
  • Peer-to-peer Bitcoin owners. You can buy Bitcoins directly from other Bitcoin owners, much like you would buy items on Craigslist, through peer-to-peer tools like Bisq, Bitquick and LocalBitcoins.com. Use extreme caution when buying Bitcoin directly from individuals.
  • Bitcoin futures. TradeStation allows the trading of Bitcoin futures, but this is recommended only for experienced traders, not for beginners. Find out more about futures here.
  • Grayscale funds. Grayscale Investments is a digital currency asset manager. Two of its investment trusts — Grayscale Bitcoin Trust (its ticker symbol is GBTC) and Grayscale Ethereum Classic Trust (ETCG) — are publicly traded over the counter, which means you can buy them through many discount brokers. The funds charge fees, and GBTC often trades at a premium, meaning that GBTC shares often cost more than Bitcoin even though Bitcoin is the fund’s only holding. The idea behind this is that some investors are willing to pay extra to buy Bitcoin through a traditional exchange, without the need to worry about wallets and storage.
  • Bitcoin CFDs. Several online brokers offer cryptocurrencies as CFDs (Contracts for Difference). This allows you to invest in cryptocurrencies by betting on their price movements, using your favorite online broker. The advantage is that brokers are regulated by financial authorities, adding a degree of safety. One downside, though, is that you don't directly own the digital currency and therefore can't use it for transactions.
  • Bitcoin ETNs. Several Exchange Traded Funds (ETFs) or Exchange Traded Notes (ETNs) are available that give you various levels of cryptocurrency exposure. Cryptocurrency ETFs/ETNs track a single cryptocurrency or a basket of different crypto tokens. This form of investment likewise doesn’t require you to manage the digital assets themselves, and is therefore a good alternative for mainstream investors or those who seek a bit more security before they enter the digital currency market.

 

What do you need to know before you buy?

 

Setting up a cryptocurrency exchange account takes minutes, but you'll need to provide some information, such as your bank account or debit/credit card number that will be used to fund your Bitcoin account, and perhaps a picture ID. Make sure to record and safeguard any new passwords for your crypto account or digital wallet.

Think twice before using a credit card! Although some providers allow you to purchase Bitcoin by credit card, you should consider whether you want to make such an investment by borrowing from a high-interest product like a credit card. This and various transaction or convenience fees mean that the total costs of paying with a debit or credit card can be several times more than that of using a bank transfer.

Spot investments in Bitcoin and other cryptocurrencies are not insured by the US Securities Investor Protection Corporation in the case of exchange failures or theft, a protection that traditional brokerage accounts enjoy up to $500,000. However, if you trade crypto CFDs or ETNs, you will be covered by the same investor protection as applies to other assets.

Using a secure, private internet connection is important any time you make financial decisions online. You should not buy Bitcoin while at the coffee shop, in your hotel room or using other public internet connections.

What is Bitcoin?
How should you store your Bitcoins?

Bitcoins can be stored in two types of digital wallets: a hot wallet or a cold wallet. With a hot wallet, transactions are generally faster. By contrast, a cold wallet often incorporates extra security steps that help to keep your assets safe but also take longer.

Hot wallets

With a hot wallet, Bitcoin is stored by a trusted exchange or a service provider in the cloud and accessed through an app or internet browser. Any trading exchange you join will offer a free Bitcoin hot wallet where your purchases will automatically be stored. But many users prefer to transfer and store their Bitcoin with a third-party hot wallet provider, which acts as their personal wallet and is also typically free to download and use.

Why choose a wallet from a specialized provider instead of a crypto exchange? While advocates of crypto say that the blockchain technology is more secure than traditional electronic money transfers, Bitcoin exchanges and hot wallets are an attractive target for hackers. 

There are many hot wallet providers, offering a range of wallet types. Here are a few:

  • Coinbase: Also a popular bitcoin currency exchange, Coinbase offers free online hot wallets, and insures losses due to security breaches or hacks, employee theft or fraudulent transfers.
  • Electrum: Software that allows your Bitcoin to be stored on your laptop or desktop computer.
  • Blockchain: Like Coinbase, Blockchain is an online hot wallet. But unlike Coinbase, Blockchain isn’t a currency exchange and is considered a less attractive target for hackers.
  • Mycelium: A mobile-only bitcoin wallet, with versions available for Android or iOS.

 

Although some hot wallet providers offer insurance for losses arising from large-scale hack attacks affecting the platform, this insurance may not cover individual cases of unauthorized access to your account. 

Cold wallets

A cold wallet is a small, encrypted portable device that allows you to download and carry your Bitcoin. Cold wallets can cost as much as $100 but are considered much more secure than hot wallets because they are not online all the time.

Cold wallet providers include:

  • Trezor: This company offers small, key-size cold wallets ranging from about $80 to $170.
  • Ledger Nano: Designed like a thumb drive, Ledger Nano has cold wallets ranging from about $60 to $120.

 

When creating accounts for your digital wallets or at a cryptocurrency exchange, use a strong password and two-factor authentication, and make sure you do not lose your passwords. Most exchanges require strong passwords and authentication to be able to create an account. Also, hold on tight to your private keys, which give access to your Bitcoins!

 

How to make your Bitcoin purchase? 

 

After linking your Bitcoin wallet to the Bitcoin exchange of your choice, the last step is the easiest — deciding how much Bitcoin you want to buy. While Bitcoin made news in January 2021 by moving past $40,000 for the first time, Bitcoin (trading symbol BTC or XBT) can be bought and sold for a fraction of this amount, so your initial investment could be as low as, say, $25. 

What is Bitcoin?
How to manage your Bitcoin investment?

If you like the idea of day trading, one option is to buy Bitcoin now and then sell it if and when its value moves higher. But if you see a future for Bitcoin as a digital currency, perhaps you should consider buying and holding for the long haul. Whatever your plan, know that owning Bitcoin can create a complex tax situation, as Bitcoin and other cryptocurrencies are considered property rather than currencies in some countries. Check the legal status of Bitcoin in your country! You also need to keep a careful track of your cryptocurrency activity, as the tax authority might ask for it.

What online brokers offer Bitcoin? 

Based on our own review, here are our top 5 picks for the best online brokers for crypto trading for 2021. Check out our detailed review of the best online brokers for crypto trading for 2021!  

Author of this article

Eszter Zalan

Author of this article

Eszter is a Brussels-based content editor and writer with over fifteen years of experience in journalism. She thrives in researching complicated issues and explain their essence in a plain and clear language to guide you through the world of finance.

Eszter Zalan

Content Editor

Eszter is a Brussels-based content editor and writer with over fifteen years of experience in journalism. She thrives in researching complicated issues and explain their essence in a plain and clear language to guide you through the world of finance.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology

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