In our comprehensive guide to Bitcoin, we mention the different ways you can purchase Bitcoin. Today we’re going to take a closer look at what a Bitcoin “wallet” really is, what “mining” means in the Bitcoin world, and all those other complicated concepts involved in diving into the Bitcoin community.
I want to mention at the outset that at Money Under 30, we recommend a cautious approach to investing. As far as we’re concerned, putting money into a 401k will always be a safer long-term investment than trying to jump on the Bitcoin bandwagon.
But for those of you with the stomach to withstand the ups and downs of the cryptocurrency marketplace, we figured we’d give you the information you need.
First things first: How much is a single Bitcoin worth…and why does the price change so often?
First things first, you probably want to know how much bitcoins translates to in dollars. As of writing, one bitcoin is worth $14,090 in U.S. dollars. Now you see why it’s so popular right now.
Like any currency, Bitcoin has value because we give it value. But it’s not that simple.
Supply and demand
Of course, supply and demand have a factor in any currency, including cryptocurrencies. So the sudden popularity of Bitcoin, especially this past year, has helped drive the price well over $10,000.
There’s also a limited number of Bitcoin—21 million to be exact. Since there are over seven billion people in the world, if everyone could easily mine (see below) bitcoins, the currency wouldn’t have much value. But not everyone does—so the precious few that do attain a high value.
It’s difficult to get
Just like gold, Bitcoin is difficult to mine, and requires very specific technology (and a lot of energy) to do so.
The harder something is to get; the more people want it—raising its value.
More places are accepting Bitcoin.
Currency has no value if you can’t use it. But more and more businesses are accepting Bitcoin as legitimate payment around the world. Microsoft, Dell, some airlines, and even pizza places accept Bitcoin. And in some countries (Australia, for example) Bitcoin is viewed the same as traditional currencies.
Now that you know the basics of the price behind Bitcoin, it’s time to actually buy some (if you want to, of course).
Step 1: Get a Bitcoin wallet
Before you buy bitcoins, you’ll need to set up a bitcoin “wallet”. A Bitcoin “wallet” is just a virtual storage center, just like your wallet holds your cash and credit cards.
The main wallet options are:
1. A software wallet stored on the hard drive of your computer
2. An online, web-based service
3. A ‘vault’ service that keeps your bitcoins protected offline or multisig wallet that uses a number of keys to protect the account.
If you’re an everyday user, the online services are your best option, as long as you don’t need complete anonymity and don’t mind the long setup procedures. However, some people believe that this erases the point of Bitcoin and its anonymity.
If you’re an investor, any of these platforms will work since you likely won’t be regularly spending from your wallet.
Now that you understand what a Bitcoin wallet is, you’re probably wondering how you actually find the wallet that’s best for you. Here are some of the most secure wallets:
Coinbase
Coinbase is the most widely used online Bitcoin wallet. It’s free, and comes with an easy-to-use app!
You can also buy, sell, exchange and trade bitcoin on Coinbase—making it one of the most user-friendly Bitcoin sites.
However, there are a lot of risks with keeping bitcoin on the same site where you buy it, and Coinbase (as well as any other online wallet server) has had a poor track record in the past. But they do offer a more secure option, known as “vault”.
Electrum
According to US News:
Electrum is a popular, free storage option in the bitcoin community, and is one of the most, if not the most, well-respected desktop storage apps out there.
Based on Electrum’s site, this holds true. This one is probably one of the best storage options for investors, since it is software based, rather than online—providing an extra layer of security.
Cold storage
For those who don’t trust the security of wallets, cold storage options allow you to store your bitcoins offline. Some people keep their bitcoin info on a USB locked in a safe deposit box. Others use a paper wallet, which is simply a document containing all of the data necessary to generate any number of Bitcoin private keys (a secret number that allows bitcoins to be spent).
The problem with cold storage is obvious—if your USB drive or paper wallet gets stolen, or you lose it, you have no way of getting your bitcoins back.
Step 2: Buy Bitcoin with cash, or get paid in Bitcoin to get started
Those who don’t have the technology, or understanding of complex computer software, can buy bitcoins with cold hard cash, credit or debit cards (apps like Coinbase currently accept Visa and Mastercard), and wire transfers. You can spend as much as you like, and you obviously don’t have to buy a whole Bitcoin for over $10,000. You can purchase fractions of bitcoins.
You can also get paid with bitcoins. If you’re trying to break into the Bitcoin world, finding a side hustle that pays you in bitcoin is a great way to get started.
Step 3: Transfer Bitcoins to your wallet
So you have a wallet and you have bitcoins, but if you’ve never been in the Bitcoin game before, you may not know how to combine the two.
That’s where your wallet ID (or address) comes in. This is sort of like your bank account info that you give to get your check directly deposited into your account each pay period. You’ll enter your address into the proper field each time you buy or trade bitcoins—which we’ll talk about below.
Ledger offers a range of Bitcoin storage devices. Their most secure wallet is the Ledger Nano S.
TREZOR is another option. It generates your Bitcoin private keys offline, and it’s the original hardware wallet that was built to secure bitcoins.
Step 4: Trade with bitcoins
Like any method of trading (think stocks), Bitcoin trading is a risky endeavor, but it is one of the better ways to make money through Bitcoin.
This site explains Bitcoin trading best:
[exchanges]act as intermediaries for currency transactions, converting wealth from Bitcoin to US dollars to other national currencies, back to dollars or Bitcoin. And that’s how you make money. By exploiting the constantly shifting relative values of various currencies…Since the price of Bitcoin does fluctuate constantly, holding onto your bitcoins until you believe there will be a rise in price, and then selling can make you a lot of money.
This is buying and holding. If you want to trade in order to make money you can do so in a few different ways.
Use an exchange
There are a number of exhanges you can use—Kraken, Bitfinex, and Bitstamp are three of the largest.
To start trading through an exchange, you need to create an account. For some, you’ll need to go through a verification process. In addition, for most exchanges, you’ll pay a fee each time you trade through them.
Each site has a “trading” section that allow you to decide how much you want to trade. It’s as simple as joining the stock market.
Be aware, however, that there are risks with trading Bitcoin. The collapse of Mt. Gox—previously the largest exchange platform—demonstrates just that.
Trade directly
If you don’t want to go through exchanges in order to avoid trading fees, you can trade directly with other Bitcoin buyers.
Sites like Coinbase don’t charge you to trade bitcoins to different users. All you need is the wallet address of the person you want to trade with.
Step 5: Spend your Bitcoins (at legal locations)
If you buy bitcoins to spend rather than just trade, you probably want to know where you can spend them.
Since Bitcoin has grown in popularity, in part, thanks to the media, more and more vendors are accepting Bitcoin. Microsoft is the most notable company that accepts Bitcoin, but others include:
REEDS Jewler
Newegg
Expedia
WordPress.com
Subway
Whole Foods (via giftcards)
Dish Network
Overstock
Tesla
Mint
Step 6: When you get more experienced, you can “mine” Bitcoin
Bitcoin mining is like digging for gold online—that’s why it’s called “mining”.
With paper money, a government decides when to print and distribute money, but Bitcoin doesn’t have a central regulator, which is what allows anyone to start mining.
The actual process of mining involves one (or more) computer(s) with a special software that, in simplest terms, solves complex math problems. Your computer must correctly come up with the right combination of 64 digits—also known as nodes. You’re then issued a certain number of Bitcoins in exchange for solving them correctly.
Summary
Buying and selling bitcoins is becoming easier, thanks to apps like Coinbase. All you have to do is set up a wallet for safe storage, and you can get to buying.
This article was republished with permission from Money Under 30.