Are you finally ready to take the plunge into the world of cryptocurrencies? It may seem complicated, but with a little research, beginners can be buying and selling Bitcoin in no time.
Bitcoin is the most ubiquitous digital currency on the market, so we’ll show you the ropes on buying, selling, and storing it. However, these tips can apply to other cryptocurrencies like Ethereum (or even Dogecoin, if that’s your thing).
What to Know Before Buying Bitcoin
At the time of this writing, Bitcoin is experiencing record highs in price. But don’t worry, you can still buy Bitcoin in fractional amounts even if you aren’t obscenely wealthy. Before you buy your slice of Bitcoin pie, however, there are a few things you’ll need to do first. These include:
- Set up an account with a reputable cryptocurrency exchange.
- Collect the documents needed to verify your identity for Know Your Customer (KYC) exchanges.
- Get a cryptocurrency wallet.
- Set up your wallet.
- Make sure you have a fast, reliable internet connection.
You’ll also need to go into the experience with an understanding that cryptocurrencies—and Bitcoin in particular—can be volatile, drastically changing in value from one day to the next. With that in mind, never invest more than you can afford to lose when purchasing cryptocurrency.
Choose a Cryptocurrency Wallet
Before you buy digital currency, you need a place to store it, and that’s where crypto wallets come in. They’re known by several names—hot wallet, hardware wallet, software wallet—but come in two main types:
- Cold Wallet: A physical, hardware-based digital wallet for storing cryptocurrency that isn’t connected to the internet, akin to a very high-tech flash drive for storing cryptocurrency. Cold wallets come with multiple layers of security, and are more difficult to hack than an internet-connected wallet.
- Hot Wallet: A software-based digital wallet that is connected to the internet and often comes in the form of an app.
Over the years, certain companies have emerged as reliable crypto hardware wallet manufacturers. Ledger, for example, has been making cold wallets for years now and could be a good place to start. Trezor is another big name in the hardware wallet space.
If you want to go with a digital wallet, most major cryptocurrency exchanges package an online wallet with your user account. Coinbase, maybe the largest cryptocurrency exchange out there, does this. Its wallet is highly rated, and you don’t need a Coinbase account to use its app.
Set Up Your Cryptocurrency Wallet
If you’re using a software wallet (aka, a hosted wallet, since it’s hosted on third-party servers), you just create an account with a username and password and enable two-factor authentication. If you’re setting up your wallet as part of a cryptocurrency exchange account and that exchange uses KYC, you’ll need to provide documents like a driver’s license to verify your identity.
Non-custodial hot wallets aren’t hosted by a third party and take more security measures than a standard hot wallet. Users get a randomly generated “private key” or “seed phrase” that they can use to access the wallet. These keys are usually around 12 words long and are known only by the user. It’s recommended that you store this passphrase somewhere safe and offline—it’s more difficult to hack that way. But if you lose the phrase, you’re locked out of your own wallet.
Cold wallets also generate a key phrase known only to the user that allows access to the wallet. This key phrase is usually a string of 24 randomly generated words, and you’ll also create a PIN to gain access. Cold wallets work together with apps and software on your smartphone or desktop device, so you’ll install them as needed when setting up a cold wallet.
A paper wallet is a type of cold wallet in which the public and private keys needed for a transaction are printed on a piece of paper for an extra measure of security. A transaction cannot be made without the information on the piece of paper, which is generated online and can then be printed. More often used for long-term or high-security investments, they’re intentionally slower to use than other kinds of cryptocurrency wallets.
No matter which wallet type you use, you’ll need to link a payment method to it for purchases. That can be a bank account, or a payment service like PayPal or Apple Pay. When submitting payment information, you’ll have to verify your identity.
Pick an Exchange
Once you choose a wallet and set it up, it’s time to find an exchange and make your first Bitcoin transaction. Not all crypto exchanges are regulated by the US Securities and Exchange Commission (SEC), so look for one that is. A few reputable and regulated crypto exchanges that are reasonably safe bets include:
You’ll need to do some homework to determine which exchange is the best for your needs. Since Bitcoin is the original and most popular cryptocurrency, you can be reasonably sure that all the exchanges listed above will offer it. You may also want to look into what other cryptocurrencies they offer if you have plans to expand your portfolio.
Look into each company and see what measures they take to keep people’s money safe. Are they insured? If so, for how much? What security measures do they use? Do they have a KYC policy for identity verification? Know the answers to all of these questions before you proceed.
Whichever exchange you choose will require proof of identification—usually a driver’s license or state-issued ID if you’re in the US—when signing up. Being asked to submit proof of address and scans of additional documents like a passport is also a possibility.
Do your research, choose an exchange, set up your account, fund it with some cash, and you’ll be ready to start buying Bitcoin.
How to Buy and Sell Bitcoin
Now that you’re ready to purchase Bitcoin, you’ll go through the process of buying however much you can afford. The process will be different depending on what exchange you use.
Some just have a “buy” and “sell” button where you specify how much currency you want to purchase or sell off. Others have you submit an order similar to a conventional stock exchange. Most cryptocurrency exchanges let you buy and sell using three types of orders:
- Market Order: An order to buy a set amount of Bitcoin at the current market price. This is very quick to execute and usually done in seconds.
- Stop Order: Sets a price at which you want to buy or sell Bitcoin. This type of order can be used to sell Bitcoin at a high before it drops, but can take more time to execute than a market order.
- Limit Order: Instructs the exchange to buy or sell Bitcoin at a specific price or better. These are visible to the market, and can take longer than stop orders to complete. This can be good for buying Bitcoin once it comes down in price somewhat.
Some exchanges offer even more order types than the ones listed above. As of this writing, Kraken currently offers the most order variety, including stop-loss and take-profit orders. Start with the basics listed above, and work your way up from there.
As cryptocurrencies have evolved and gained a measure of legitimacy in the public eye, crypto exchanges have grown with them into something that can be nearly equivalent to traditional stock exchanges. Some will even let you choose a recurring dollar amount to invest every day, week, or month.
Various P2P cryptocurrency and Bitcoin exchanges also exist, but we recommend sticking to conventional exchanges to trade and buy Bitcoin, unless you know the person with whom you’re making a P2P exchange.
Make a Plan and Manage Your Assets
Choosing your investment strategy is important to success in investing. A common strategy is to buy and hold onto Bitcoin in the hopes of riding out the ups and downs in valuation for a higher average return.
JPMorgan Chase analyst Nikolaos Panigirtzoglou favors this strategy. He recently told Insider that “It is better to buy and hold, perhaps allocating a small portion of your portfolio to cryptocurrencies, focusing on the ones typically held by institutional investors, such as Bitcoin and Ethereum at the moment.”
Another popular strategy is the dollar-cost-average (DCA) approach: buying a tiny bit of Bitcoin every week or month without paying much attention to the fluctuations in price. That way you continue to build your investment at a steady pace you set, holding onto it for the long term.
Experts recommend allocating a very low percentage of your portfolio to cryptocurrency investments, especially when starting out. A single digit amount—like 5% of your total investment portfolio—is reasonable. And if you’re wondering if you have to pay taxes on crypto, we answer all your questions here.
A Word of Warning
Crypto can be a fascinating investment prospect. The myriad uses of digital currency make it an interesting and enticing investment option, but every new investor should understand that they are in no way guaranteed massive returns on crypto investments. You’re more likely to lose money than become a billionaire overnight, so it’s worth reiterating: never, ever invest more than you can afford to lose.
There are so many different crypto scams out there these days—fake cold wallets, Twitter hacks, mining apps, scam calls, database hacks—that the FTC has issued a warning to consumers. As such, we recommend you find a reputable wallet and exchange that offer robust security features. Use every single tool available to protect your assets so you’ll be less likely to run into trouble long-term.
