How to Buy Bitcoin — Intermediate
For those looking to invest a little more and want to do it right
The best way to understand bitcoin and other cryptocurrencies is simply to buy some and try them out. I always recommend everyone buy $1 worth as an interesting learning experience. Whether to invest, what you invest in, and when you invest is up to you. This guide is not investment advice. If you want to read up on bitcoin before buying, check out my blog post on basic resources.
The most important rule of buying crypto is only invest what you are willing to lose completely. Those of us who have been around for a while are used to watching half our investment disappear overnight. Most people aren’t — and it’s not a good feeling. If you invest in crypto, it will happen to you too. That’s the downside of a volatile market. If you can’t handle that stress or will need your money to maintain its value because you need it in the short term, then investing more than a few bucks in crypto is not for you.
This guide is for the average person who wants a medium level of security for their crypto. While the top level security is always best, this can work for small investments in crypto — notably an amount of money you are willing to lose. If you want the easiest way to buy crypto, then check out my other blog that has step by step instructions for the absolute easiest way to buy bitcoin.
The first thing to know about buying bitcoin is that you will need two things:
- A place to buy it — an exchange
- A place to store it — a wallet
So imagine you want to convert your CAD into Mexican Pesos. You take your cash to a foreign exchange counter (the exchange). You give them CAD, they take a cut and give you the rest in pesos. You then put the pesos in your wallet (the wallet). Buying bitcoin is similar to that, but the transactions are digital.
Step 1 — Get a Wallet
There are many different wallets out there you can choose from. For the intermediate level of bitcoin buying and storing you are specifically looking for a wallet that is ‘non-custodial’. This means that they don’t own or manage your private keys or your crypto, they just provide a nice interface for you to do that yourself. The benefit of using a non-custodial wallet is that if a custodial wallet company goes bankrupt or is blocked by government or just stops working, your money is gone. With a non-custodial wallet, you can just take your private keys (like a password of sorts) and move your money to another wallet. The danger of using a non-custodial wallet is that if you don’t back it up properly you can lose all your money. And there is no recourse.
If you don’t back it up properly you can lose all your money and there is no recourse.
In choosing a wallet, you need to balance the features you want. Things like mobile vs desktop, which tokens it will support, and Android vs iPhone. Here’s a handy list that may help you decide. I personally use blockchain.com, as it has both mobile and desktop, which I find handy, and it’s fairly intuitive. Do not use Coinbase. Coinbase is a custodial wallet that doesn’t give you your private keys. Again. Do not use Coinbase for your wallet.
Go through the steps of signing up for a new wallet. Make sure that you do all of their backup steps and most importantly, ensure that you get a copy of your private key. This may be a long string of letters and numbers, or more likely, it will be a set of 12 or 24 words in a particular order. You need to store this information securely in a separate, offline location. That location could be a safe, a safety deposit box, or a file where you keep important things. It should not be your gmail or your icloud files. Those things can get hacked. If the wallet company ever goes down, you can use your private key to move your funds to another wallet.
Do the backup now. Don’t put this off for later.
Step 2 — Get an Exchange
There are several ways to buy bitcoin, including using a bitcoin ATM or buying it direct off someone on localbitcoins.com, however the most effective way for most people is to use an online exchange. These are websites that allow you to connect your bank account and transfer money over. Note that some exchanges (like Binance) allow you to trade crypto, but only allow you to transfer bitcoin in to make those trades. This type of exchange will not work for you. You need one that will enable you to load traditional fiat currencies from your bank account.
Now because banking is regulated country by country, the exchange you use will depend on where you live. Do a google search or ask around local bitcoin communities which one to use. If you’re in Canada, take a look at Coinsquare, Huobi, and Kraken. You can even use Coinbase as long as you don’t use it as a wallet. Once you’ve selected the exchange you want to use, begin the process of setting up an account.
As you go through this process, remember the first time you got a bank account. It may have seemed easy at the time, but in retrospect, the process was pretty intensive. You had to show up at a physical bank branch. You also had to show up during banker’s hours during the middle of a work day. You had to present government issued photo ID — to a manager — and if the manager wasn’t there, you had to come back another day. You had to fill out form after form — all on paper — and sign them so they could store them in a filing cabinet. All to have a place to store your money. Getting set up to purchase crypto is not all that different, it’s just done online. Remember that when you get frustrated at any point in the process.
During your sign up process, the exchange may ask you for information like a photo of your ID, a photo of yourself holding your ID, and other details. These requests are because the exchanges are requried to comply with anti-money laundering laws, just like banks. Verifying your identity can take days and sometimes weeks depending on the capacity of the exchange. I always recommend setting up accounts with multiple exchanges right away in case the one you prefer is delayed or goes under.
Step 3: Transfer Funds
The next step is to transfer funds from your bank account to the exchange account. Each exchange has different mechanisms for how to do this and different minimum/maximum amounts and fees for each. Some will allow you to make direct transfers via creditcard or email money transfer, but more than likely you will have to send a bank wire, which can be a bit of a hassle. For many banks, you need to show up to a branch in person with the right ID that is then verified by a manager. When they ask you what it’s for, I would be purposefully vague and not mention crypto at all. Say “it’s for an investment”. While crypto is completely legal in most places, most banks aren’t too crypto friendly.
When the money clears and is deposited in your exchange account (a process that can take several days), you are ready to trade.
Step 4: Trade!
Most exchanges work by simply setting up a marketplace — they match people who want to buy with people who want to sell. If you’ve never done any trading before, it’s useful to know that you can either set a particular price you’re willing to pay and the exchange will make the trade when someone matches that price, or, you can do a ‘buy now’ style transaction that lets you buy at the best price available right now.
Different exchanges will trade different cryptocurrencies and tokens. Most exchanges that also accept fiat currencies have a limited number, typically bitcoin and ether. If you are new to crypto, it’s helpful to know that because of some changes in the bitcoin and ethereum tech and communities it looks like there are two versions of each, BTC/BCH and ETH/ETC. If you want to buy bitcoin and ether but don’t know which one to get, then the ones you want are BTC and ETH.
If you are looking for a particular token and don’t see the token you want to buy here, you will have to sign up for a different exchange. Likely, you will need to load that exchange with bitcoin and trade from there. Binance has a greater selection of tokens, but there are many other exchanges out there.
After you complete your trade, you will now have a balance of crypto in your exchange account. The number one rule in crypto is…
Never leave crypto in your exchange account. Never.
Step 5: Transfer the Coins to your Wallet
Leaving money in an exchange is risky. Risky like putting a wallet full of cash on a seat on a subway and expecting it to still be there at the end of the day. Why? Because exchanges get hacked. All.The.Time. Here are some examples you can read up on: Mt Gox, Gatehub, and most notably, Quadriga, where over $190M in user funds are now gone forever.
Once your trade has completed, you need to immediately withdraw the funds to your wallet. In the exchange, there will be an option to withdraw, with a place to put your wallet address in. To find your wallet address (‘public key’), look for a ‘receive’ icon/option in your wallet and copy the long string of numbers and letters that appears. This is your address.
Note that if you input even one letter wrong, your money will be unrecoverable, so always use the copy/paste function instead of typing it in. Be sure that if you are sending bitcoin (BTC) you are using a bitcoin address and not a bitcoin Cash (BCH) address — they are not interchangeable.
It’s a good idea to send a test transaction for $1 from your exchange to your wallet to check you have the right address and everything is sending correctly. Once you receive the dollar in your wallet, you can send another transaction for the rest. A good way to double check if the transaction has gone through if you are nervous is to input your public key into a block explorer. Blockchain.info has one:
If you invest a larger amount of money (a relative term for each person), you will want to store your crypto using a hard wallet like Trezor, KeepKey, or Ledger Nano.
Step 6: Track your Trades
Just like other financial instruments, the gains that come from cryptocurrencies are taxable as income or capital gains, depending on how often you trade. Start tracking your purchases and sales right from the get-go or you’ll find yourself in a right mess at tax time. There are apps out there like Cointracker and Shapeshift that offer integrations with wallets and exchange accounts, but I haven’t found one yet that actually tracks better than excel. Do not skip this step. Many people relied on their trade histories in their exchange profiles only to get screwed when the exchange shut down. Track every single trade in excel.
Congratulations!
You are now the proud owner of cryptocurrency. You have joined some of the world’s brightest minds in a technology that is transforming the financial sector and disrupting some of the oldest societal systems we know. Enjoy the ride as you watch the price rise and fall, plummet and go to the moon.
Anne Connelly is passionate about harnessing blockchain and decentralized technology to transform the lives of people in developing countries. Anne is Faculty at Singularity University and has been an active part of the global blockchain community since 2012. She previously worked with Doctors Without Borders Canada in Central Africa and currently serves on their board of directors. Anne was honoured as one of CBC’s 12 Young Leaders Changing Canada and one of the Fifty Most Inspirational Women in Technology in Canada. You can find her at www.anneconnelly.ca.
Want to learn more about blockchain and cryptocurrencies? Check out the resources on my blog: New Kids on the Block: Resources to get up to speed on blockchain technology
