Before you can start using Bitcoin you must obtain some Bitcoin, and this lesson explores how to buy Bitcoin with fiat currency. This is not the only way to obtain Bitcoin, you can earn Bitcoin via mining or working for it, but buying Bitcoin with fiat is the easiest way if you have cash available. There are four primary ways to buy Bitcoin: peer to peer trading, buying Bitcoin from a cryptocurrency exchange, Bitcoin ATMs, and over the counter (OTC) trading desks.
There are numerous cryptocurrency exchanges around the world which offer Bitcoin in exchange for fiat. In the United States the most popular options include Coinbase and Square Cash, as well as CEX.io. There are numerous other crypto exchanges in the United States which offer Bitcoin besides these 3, but the 3 listed don’t charge excessive fees and are easy to use. Worldwide there are hundreds of cryptocurrency exchanges where Bitcoin can be bought with fiat according to CoinMarketCap, and that’s not even the full list. There are numerous other exchanges with higher fees that have relatively low trading volume, so they don’t make the CoinMarketCap list.
Using a cryptocurrency exchange like Coinbase is relatively simple, but has important caveats. First, a user must provide identification information before using Coinbase, such as their driver’s license or passport, in addition to social security number. Due to know your customer (KYC) and anti-money laundering (AML) regulations, exchanges like Coinbase cannot sell you Bitcoin without fully knowing who you are, to prevent crime and terrorism. This can be bad for a Bitcoin user who wants to maintain anonymity, since Coinbase has been known to report all transactions to the government.
Once identity verification is completed, Coinbase allows users to buy a small amount of Bitcoin, in the USD 100 to USD 1,000 range. The process is relatively straight forward. A user connects their debit card or checking account to Coinbase and withdraws money from their bank account. For small amounts Coinbase instantly puts Bitcoin in the user’s account when completing a transaction, however over a certain limit it might take 3-5 days for Bitcoin to be credited. The relatively small instant buy limits and long wait times for larger amounts makes Coinbase less than ideal. A Bitcoin buyer should use their other options, like Square Cash and CEX.io, to get as much Bitcoin as they need in a timely fashion. However, this requires completing identity verification on those exchanges too.
One critical mistake that a lot of newbie Bitcoin users make is they keep their Bitcoins on an exchange like Coinbase long term, since they think it’s a proper wallet. Refer to the lesson on wallets and how to properly store Bitcoins to learn what you should do, it is not proper to store Bitcoins on Coinbase or any other crypto exchange. If you store your Bitcoins on a crypto exchange you don’t have full ownership of your Bitcoins, since the crypto exchange holds the private key as well. If the exchange is hacked, or you lose your password, or get locked out for any other reason, you can lose your Bitcoins. It is essential you move your Bitcoins from the exchange to a wallet you solely control immediately after purchasing Bitcoin.
Peer to peer Bitcoin trading alleviates some of the caveats associated with Bitcoin exchanges like Coinbase, but comes with its own caveats. Peer to peer trading has been a primary mechanism to buy Bitcoin since the early days, and is conducted particularly around the site Localbitcoins. On Localbitcoins users can contact other Bitcoin traders, and buy Bitcoins with every payment method imaginable, such as cash, gift cards, Western Union, MoneyGram, bank transfers, cash bank deposits, and even PayPal. Localbitcoins uses an escrow system, where if you initiate a purchase, the seller’s Bitcoins are locked up in an escrow until you pay, and once the seller confirms you paid, the Bitcoins are released to you. Just like with crypto exchanges, it is crucial to immediately withdraw Bitcoins from Localbitcoins to your own wallet off-site.
Localbitcoins has some identity verification requirements, especially when dealing with larger amounts, and the escrow costs a fee. It is common practice for buyers to find a Bitcoin seller they particularly like and then stop using the escrow, to avoid identity verification and escrow fees, especially since Localbitcoins has been known to report large transactions to the government. For complete anonymity when buying Bitcoin, the best method is to form a personal relationship with a Bitcoin Dealer. Bitcoin Dealers often charge much higher fees than exchanges, but some of them don’t. The caveats of this are depending on where you are in the world, such as the United States, Bitcoin Dealing is mostly illegal, and not using escrow can end up being a costly decision.
Bitcoin ATMs are an excellent option to buy Bitcoin, and they are kind of like a crypto exchange that you can physically visit. To buy Bitcoin at a Bitcoin ATM you usually have to complete KYC and AML requirements by uploading your identity, it is essential to bring your ID to a Bitcoin ATM the first time you use it or you might not be able to buy any Bitcoin. A user then puts cash into the Bitcoin ATM, and usually the Bitcoin ATM instantly sends Bitcoin to a Bitcoin address of your choice, or prints out a paper wallet that stores the Bitcoins you just purchased. It is essential to transfer Bitcoins you purchase at a Bitcoin ATM to a secure wallet you solely control.
Bitcoin ATMs are usually far costlier than a Bitcoin exchange, with fees averaging about 10%, versus the about 3% that crypto exchanges like Coinbase charge. However, Bitcoin ATMs allow users to buy relatively larger amounts of Bitcoin instantly, sometimes up to USD 10,000. If a newbie was trying to buy USD 10,000 of Bitcoin on Coinbase it would usually take 3-5 days, if Coinbase even lets you buy that much. Waiting that long for Bitcoins can be risky, since the market can move significantly by the time you get the Bitcoins from Coinbase or another crypto exchange, causing you a heavy loss. Paying extra fees at a Bitcoin ATM for an instant transaction might be worth it, in order to get Bitcoins instantly and avoid market volatility.
Over the counter (OTC) Bitcoin trading desks like on Circle and Coinbase can be very useful for Bitcoin users who want to buy large amounts. OTC trading desks can sell you pretty much an unlimited amount of Bitcoin at a relatively low fee in a bulk deal, but often you have to be an accredited investor, which usually requires more than USD 1 million in the bank, just to have access to a Bitcoin OTC trading desk. Of course, there is also heavy identification requirements before you can use an OTC trading desk. Most newbie Bitcoin users don’t use OTC trading desks, but it is an important option to know about.
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