Buying and Selling Bitcoin – A Guide to Bitcoin Transactions
As the Bitcoin craze rages on, more people are looking into what buying and selling Bitcoin really entails.
Though the price of Bitcoin is much higher than it was even 2 or 3 years ago, it’s not too late to get in on the action. Gaining experience with digital assets, even if you don’t stick with it, and you decide it’s not for you, can give you a huge insight into the world of cryptocurrency.
Whether you’re here out of curiosity or interest in beginning your Bitcoin journey, we hope this article helps you decide your best course of action when buying and selling Bitcoin.
What Is Bitcoin?
You can learn everything you need to know about this cryptocurrency in our comprehensive guide to Bitcoin. For now, here’s a quick overview.
Bitcoin was started in 2009 by an anonymous group called Satoshi Nakamoto. It wasn’t the first type of digital currency to ever hit the market, but it is the one that seemed to solve all of the previous problems that eventually made other digital currencies collapse.
Blockchain, a public ledger secured by cryptography, ensures that the users’ information attached to each transaction can’t be infiltrated by hackers. The design of the blockchain means that if one of the blocks is tampered with, the entire chain collapses as a security measure.
Blockchain takes the need for a central authority out of the equation, connecting the transactions between users itself. Each transaction made in a particular block is strung together based on when they were made.
Because it is a decentralized digital currency, it relies on certain Bitcoin users (called miners) to verify the transactions and string the blocks together via cryptography. Bitcoin mining is a vital part of the process because it doesn’t rely on central authorities like banks, so the work is spread out in order to maximize efficiency.
If you’d like to learn more about mining, please check out the following page.
Bitcoin wallets are basically a way for you to access your Bitcoin and any other altcoins or tokens you might also own. You can see your transactions, balance, and add more to your wallet through buying or exchanging.
It’s good to have a wallet that fits well with your personal spending patterns, but you should never compromise your safety for convenience.
There are a handful of different Bitcoin wallet types for you to choose from, as outlined below.
Online Exchange Wallets
These are the standard, most convenient option for anyone who uses online exchanges regularly. It is also typically the riskiest of the wallet options.
It allows the owner to easily buy, sell, and trade Bitcoin from the wallet already attached to and active on the exchange site. Some exchanges require you to open a wallet with them in order to use the exchange at all, but that doesn’t mean you HAVE to use it as your primary wallet.
Major exchange hacks have occurred in the past, and they have resulted in hundreds of thousands of Bitcoins being stolen from those who were using the site and keeping their Bitcoin stored on it – most notably the Mt. Gox hack of 2011, which has yet to be resolved completely.
It’s important to remember that Bitcoin and other altcoins are unregulated and therefore uninsured by your country’s government, so if you do fall victim to a hack, you will most likely suffer a permanent loss.
You can take advantage of the convenience of an online wallet while still remaining relatively safe by using an offline Bitcoin wallet as your primary wallet and transferring a small amount of Bitcoin every time you want to use it.
Online Third-Party Wallets
Although these exist online, instead of being directly connected to an exchange, they are hosted on a third-party site. This makes them a lot safer in comparison to the exchange wallets, but you also have to rely on a third party that you have no control over.
So, if the server was hacked or corrupted, your wallet could be in danger. If you are concerned first and foremost about maintaining the safety of your Bitcoin, this wallet isn’t going to be a great option for use as your primary wallet.
This wallet is very convenient for those that buy, sell, and trade Bitcoin often because it is attached to the internet. For anyone that enjoys the flexibility and convenience of an online wallet but wants to maintain a level of safety that this wallet type can’t provide, use it as a secondary wallet.
Having a wallet “hierarchy” of sorts can really help you protect yourself against theft and hacking.
These are the most expensive choice. Most go for $100 or so, but they are also the most secure. Hardware wallets function like an external hard drive, meaning that in order to use them, they need to be connected to your computer via USB port. And when you’re done using it, it can be stored in a safe in your home.
For that reason, it is the least convenient choice on the list, but it is head and shoulders above the rest in terms of safety.
To learn more about Bitcoin wallets and to get our recommendations, please take a look at the following page.
There are a few different options for buying Bitcoin. It was created around the P2P (peer-to-peer) model, meaning that Bitcoin and other cryptocurrencies are designed to be shared directly between users.
Most Bitcoin purchases are made in online exchanges, which we’ll explain all about shortly. They’re usually quite straightforward to use, and you’ll typically have the option to simply purchase Bitcoin by using your debit or credit card.
Many exchanges take anywhere from a few days to a few weeks to finalize your account. In the period of time between signing up and account finalization, you may not be able to make any transactions. This will depend on the exchange’s specific policy, and some do allow for new users to make limited purchases of Bitcoin.
If you’re a first-time Bitcoin user, you probably want to stick to a smaller purchase in the beginning anyhow, but the limit can be a nuisance for those who are seasoned Bitcoin buyers, sellers, and traders.
What Are Bitcoin Exchanges?
Bitcoin exchanges are basically a digital marketplace. Most of the bigger exchanges support the buying, selling, and trading of a handful of major cryptocurrencies, including Bitcoin. They are a place for P2P (peer-to-peer) transactions to take place between a huge number of Bitcoin users.
Before you get started, there are a few things you should ask yourself.
- Do you currently own other cryptocurrencies or have an interest in buying some in the future?
- What is your preferred fee structure?
- How do you want to pay?
Not all exchanges support all cryptocurrencies, though most support Bitcoin. If you see yourself wanting to expand your crypto portfolio to some other popular coins in addition to Bitcoin, you may want to keep that in mind when making your choice.
We recommend that you take a look at the supported coins and see if they are compatible with your current coins or your future interests. If Bitcoin is all you want to buy and sell, you’ll be fine with almost any exchange. If you’re interested in other coins or are likely to be at some point, then you need to be more selective.
As exchange sites use different transaction fee structures, this is something else you need to think about. Depending on your intentions, there are some that will be more favorable than others.
Here the most common structures and some associated details.
- Fixed Fee
- This is not ideal for anyone buying and selling with smaller amounts of Bitcoin. The exchange sets an amount that is taken from your transaction or added to your transaction regardless of the size. The fixed fee is typically less of an issue when it is applied to larger transactions because it has less of an impact on the final profit or price.
- Percentage Fee
- It’s similar to fixed fee structure, but a percentage is applied to the transaction instead of a fixed amount, so it is more of a sliding scale. This structure works well for users making transactions of all different sizes.
- Spread Fee
- This is a great structure for anyone who plans only on buying Bitcoin and not doing as much selling. In a spread fee structure, there are no fees applied if you do not make money on the transaction, and if you do make money, a fee is applied as a percentage.
Free structures shouldn’t necessarily make or break your decision about which exchange to use, but they’re a good thing to keep in mind.
Payment methods are also worth paying attention to. Most exchanges accept bank transfers and credit or debit cards for initial purchases of coins, but you should establish what your ideal method of payment would be.
If you currently own cryptocurrency, you can trade your existing coin for an amount of Bitcoin totaling the same value. But make sure the exchange you choose supports your existing coin.
Are Bitcoin Exchanges Safe?
The short answer is yes and no. That’s not very helpful, though, so let’s explore this question in more detail.
Bitcoin exchanges are an online marketplace for users to buy, sell, and trade their Bitcoin. Unfortunately, this means that they are a huge magnet for potential hackers and thieves.
The blockchain is helpful in securing users’ information, but only after the block has been added to the chain. When the transactions are in the transaction pool waiting to be validated and added, they are still vulnerable targets, and at that point, it is beyond your control.
Carelessness and oversight can really set you up to be in a bad situation, so you should take all the necessary precautions. Here’s some advice for protecting your Bitcoin.
Don’t Leave Any Bitcoin on the Exchange
The risk begins when you take your eye off of your Bitcoin, so make sure that every time you leave the site, you take all of your Bitcoin with you. Even if you plan on returning later that day, you should always transfer your coins back to a more secure wallet.
Don’t keep any Bitcoin in your online exchange wallet (if you use one) “just in case” an opportunity to spend it arises. Transfer the amount you need when you need it, and always transfer the lot back to your secure wallet before you log out.
That way, you don’t have to worry about anything being stolen, and you have control over where your Bitcoin is at all times.
Don’t Use an Exchange Wallet as Your Primary Wallet
It’s important that you keep your Bitcoin as secure as possible while still allowing yourself some ease of use and convenience. Keeping an exchange wallet is okay as long as you never leave anything in it while you’re not actively using the site.
Consider using a more secure wallet, like an online third-party wallet, which allows you to remain a few steps away from the danger of exchange wallets. These aren’t perfect, and they come with their own set of dangers, but they are an improvement.
Read Online Reviews
Take advantage of the internet by reading previous user experiences. It can give you invaluable information that you may not otherwise have known and can give you a good idea of the site’s reputation.
Read 6-10 reviews if possible, and more if they’re available. Gauge the praises and complaints and get a feel for the tone of the reviews. Are a lot of them glowing? Or do a lot of them bring up serious issues like missing coins or hacks?
Our dedicated page on Bitcoin exchanges includes some recommendations of the best ones to use, so that’s a good place to start. We also have a page with more advice for keeping your Bitcoin safe.
What Should I Look for in a Bitcoin Exchange?
Your specific needs and priorities will dictate the importance of certain features, so take a moment to decide what those are.
You should choose an exchange not ONLY for its safety but also for how well it works with your personal buying and selling patterns, your schedule, and your current or future altcoin interests.
We already talked about the importance of looking at fee structures, supported coins, and payment methods when choosing which exchange to use. But there are a couple of other things you should definitely consider, too.
Reputation and History
Do some research into the exchange’s history. If they have had any hacks, cases of missing coins, or other unresolved issues of that nature, it is strongly advised that you don’t choose that exchange.
You can protect yourself while using risky exchanges, but the best way to protect yourself from that risk is to not get involved with it at all.
User reviews, Wikipedia pages, and alert sites are all great tools for research, and you should take your time and not feel rushed to make a decision, especially in this stage.
Mobile and App Options
For those who are on the go, mobile and app options for 24/7 accessibility are important.
It may not be an important factor for everyone making this decision, but if you consider yourself an on-the-go person and prefer to use your mobile phone instead of a laptop or desktop computer, you might want to choose an exchange that has a mobile option.
Selling Bitcoin is just about as easy as buying it and can be done on the same platform. But remember that your goal when selling your Bitcoin is to make more than what you spent, whether that’s measured in your country’s legal tender or in an equal amount of an altcoin.
And with online exchanges, you rely on the participation of the other party, and exchanges don’t lock the price in when the transaction begins.
So, the price might fluctuate while you’re in the middle of selling your Bitcoin, which could either mean you earn more than you were supposed to, or you earn less.
Some people will buy only to sell it quickly when the market reaches a higher value. This is essentially the Bitcoin equivalent of day trading. Remember, Bitcoin is volatile, and buying it comes with inherent risks.
The value has been known to plummet without warning, which may leave you at a temporary loss, but holding onto your Bitcoin during a value drop is the only way you have a chance of making up for it.
Selling your entire lot because you’re worried the value will drop even lower means you will suffer a permanent loss, and selling out of panic doesn’t help the market even out and begin to grow again.
Don’t sell out of fear! Sit on the temporary loss and let it grow back at least to a point where you break even, and then re-assess your interest in keeping your Bitcoin.
All of the information and advice on this page may seem a little overwhelming. Take the time to digest it all, though, and you’ll soon realize that buying and selling Bitcoin is not THAT complicated.
The key points to take away here are that you need to think carefully about what you want to get out of buying and selling Bitcoin. You also need to give consideration to the wallet(s) and exchange(s) you choose to use.
Above all else, you need to do everything you can to ensure that you keep your Bitcoin safe. Take the necessary precautions, and you should be able to enjoy all the benefits of using this digital currency without any problems.