We have so far seen how bitcoin works, created a personal bitcoin wallet, and learnt safeguard our bitcoin funds. In this section, we discover how and where to buy bitcoin safely and securely.
Bitcoin may be purchased from a person (a stranger or friend), via a Bitcoin ATM (much like a bank ATM), or via an exchange platform. We will talk about exchanges as they are the most common way for people to buy bitcoin, and in most cases, safer for someone new to bitcoin.
There are three main types of exchanges. Each type caters to a particular purpose, and can be categorised as follows:
- Fiat-to-Crypto Exchanges
- These are exchanges where local fiat currencies (USD, GBP, EUR, JPY etc) can be used to buy bitcoin.
- Cash currencies can be deposited via online bank transfer, international wire transfer or ATM cash deposit.
- For some exchanges, credit card, debit card and PayPal can be used to purchase bitcoin.
- Once your cash currency has been successfully deposited into your account, you will then be able to convert your cash for bitcoin.
- Example of fiat-to-crypto exchanges: Coinbase
- Peer-to-peer (P2P) exchanges are platforms where bitcoin can be bought or sold amongst registered users.
- The exchange doesn’t handle the buyer’s cash, but keeps the seller’s BTC locked for the purpose of selling.
- Once the buyer has deposited the correct amount of cash into the seller’s bank account, the seller would indicate a confirmation of this on his account, and the exchange would then release the agreed amount of BTC to the buyer. The transaction is then completed.
- A P2P exchange serves as an escrow platform for the safety of both the buyer and the seller. Neither party can abscond with the funds or BTC, unless both parties agree to terminate the transaction.
- Due to the buying of bitcoin using fiat currencies, a P2P exchange is also considered a fiat-to-crypto exchange.
- However, the amount of bitcoin available for sale in a single transaction is limited to the quantity of BTC a particular seller has for sale. For higher quantities of BTC, a fiat-to-crypto exchange is preferable.
- Example of P2P exchanges: Localbitcoins
- These are exchanges where you can deposit one cryptocurrency in exchange for one of the many other cryptocurrencies, also known as altcoins. For example, you could deposit bitcoin (BTC) in exchange for ether (ETH), or vice versa.
- Fiat currencies are not in any part of the transaction and hence this type of exchanges can serve an international userbase.
- Example of crypto-to-crypto exchanges: Binance
All properly regulated exchanges adhere to a set of regulations known as Know Your Customer (KYC) and Anti-Money Laundering (AML).
- In compliance with these regulations, the exchanges are required by law for registered users to provide proof of identity and proof of address during sign-up of a new account.
- Proof of identity may be provided by submitting a soft copy (pdf, jpg, png etc.) of the government-issued ID document, driver’s license, or passport with sufficient validity period.
- Proof of address may be provided by submitting a soft copy (pdf, jpg, png etc.) of a utility bill or bank statement with the name and address of the person stated at the top. Documents should be recent, usually within the last 3 months.
Spread, Trading and Withdrawal Fees
A cryptocurrency exchange operates as a business which is not unlike in nature as a bureau de change or money changer.
- A fiat-to-crypto exchange derives its profit from the buy and sell spread, i.e. the difference between the buy and sell prices of cryptocurrencies with respect to fiat currencies.
- A crypto-to-crypto exchange derives its profit from trading fees. A small percentage in trading fee is incurred when converting from one cryptocurrency to another.
- An exchange may also derive its profit from withdrawal fees, although a significant portion of this is paid to the miners, which we have seen in Section 1.5 What is Bitcoin Mining.
Safe Guidelines When Using Exchanges
While it is generally safe to buy or trade on exchanges, one must keep in mind the following safe guidelines when using a cryptocurrency exchange:
- Use a safe email address and a strong secure password for your login credentials
Safe email addresses are those which have a good reputation (have never been hacked) and are accessible only by you. Avoid using work email addresses as those are often managed and accessible by IT admin personnel.
- Activate 2-Factor Authentication (2FA) for login
2FA may be via email, SMS, or random number generation using Google Authenticator or Authy (see Section 2.3 Two-Factor Authentication.)
- Never leave your bitcoin in an exchange wallet for any prolonged duration. Withdraw immediately to your personal wallet after purchase, unless you are planning to leave a small amount in the exchange for trading purposes.
Although the exchange wallet may have been set up in your name, bear in mind that the wallet doesn’t actually belong to you. The wallet and its private keys are controlled by the exchange. This includes all the BTC and other altcoins in those wallets. Remember: “not your keys, not your coins”! Although security levels are much better these days, if a cryptocurrency exchange is hacked, bitcoin may be stolen and there is likely no recourse to recover your losses. Do not take this risk. Withdraw it to your personal wallet or even better, to your hardware wallet.
We have covered most of the key points you need to know when buying bitcoin through an exchange. To buy bitcoin at your location, go to Section 3.2 Exchange Directory by Country or click the button below.