This article will provide an overview of some essential knowledge you need to know before rushing to a Bitcoin exchange and starting your cryptocurrency buying journey.
Required Knowledge
A good question to ask would be to clarify why people buy Bitcoin in the first place. There are two main reasons why people might buy Bitcoin, and these two can be divided into use short and long term .
Short term use
Short-term use has two main functions: speculation and using Bitcoin as a currency to conduct transactions.
In short-term speculation, people make use of the rapid changes in the price of Bitcoin, known as volatility, to make money quickly. Because the price of Bitcoin has been known to change very quickly at times, – such as on December 15th, 2017, when Bitcoin jumped in value from the previous day’s high of $17,601 to its peak value of $19,343, Bitcoin is known as a speculative currency. A person who invested $1,000 in Bitcoin on December 14th and sold it on December 15th would have been able to sell it for $1,098, which is almost a 10 percent gain in a single day. However, short-term speculators should be very careful indeed, because if that same person had bought $1,000 on December 21st and sold it on December 22nd, they would have lost almost $110.
Using Bitcoin as a currency for many smaller transactions may be closer to what its creators intended. However, with Bitcoin's high transaction fees at the moment, this particular use is not recommended.
Bitcoin fees are not dependent on the amount of money sent and are fixed whether you are sending 1 cent or a million dollars. However, fees do depend on how busy the network is at any given time. At the time of the major spikes in Bitcoin’s price, fees were between $16 and $19, and a short four days later, they were at a shocking $37. Currently, with Bitcoin in a downward trend, it costs 27 cents for a one-hour transaction or $2.19 for a transaction to complete in ten minutes.
These reasons make Bitcoin impractical for use in many stores (since waiting 10 minutes for confirmation is too long) and the fees make Bitcoin impractical for microtransactions, which is arguably one of the reasons why blockchain technology has such potential.
Long term use
Long-term use of Bitcoin generally indicates that the buyer believes the value will appreciate, and possibly also that the buyer believes that volatility will eventually slow down as more and more people own Bitcoin, more cryptocurrencies exist, and the blockchain becomes better understood.
It’s also important to know some relevant investment terms. Investopedia is a good place to look for some of these, and Cryptocompare is a good site for cryptocurrency-specific terms. For now, it’s recommended that you learn the meanings of market cap, bull and bear markets, altcoins, exchanges and wallets, private and public keys, as well as the aforementioned blockchain, volatility, and speculation.
Exchanges
An exchange is a platform where investors buy and sell Bitcoins and sometimes other cryptocurrencies, known as altcoins. An exchange is usually the first place to start on your journey into trading and holding cryptocurrencies. Exchanges almost always allow you to buy and sell fiat currency like USD, EUR, GBP, etc.
Some exchanges will also hold your cryptocurrency for you in an 'account', but you should be aware that exchanges are often targeted by hackers as they are known to hold large amounts of cryptocurrency and therefore may be worth the hacker's time and energy to steal. Bitcoinica, Bitfloor, Mt Gox, Bitstamp, Bitfinex and NiceHash have all been hacked , in high-profile thefts that involved, in some cases, millions of dollars. For this reason, it is much better to install your own cryptocurrency wallet, which you will learn about in the next section.
If you want to use an exchange, remember that most exchanges require a name and address to verify your identity and thus prevent criminal activity on their platforms.
Portfolio
While choosing a wallet can be a maze of information, it doesn’t have to be. First, you need to understand that there are different types of wallets: software wallets that run on a desktop computer, wallets that run on a mobile phone, hardware wallets that are standalone computing devices, and paper wallets that store a key on an actual piece of paper. hardware wallets have the highest security, but require an upfront fee to purchase the devices. The easiest way to choose a wallet is to use a simple decision matrix.
If you’re an amateur investor who’s dealing with a week’s worth of cash or less, it might not be worth buying a hardware wallet. In that case, the decision is simple: you can use a desktop or mobile app.
If you are interested in investing slightly larger amounts of money in cryptocurrency, it is recommended to use a hardware wallet on a USB device, such as Ledger Nano
, along with a compatible software wallet. Even if your chosen hardware wallet is not compatible with your chosen software wallet, you can always transfer your funds between the two, it just means you will have to pay the transaction fee every time you do so.
Conclusion
As mentioned earlier, transaction fees, along with transaction wait times, are currently one of the biggest limitations for Bitcoin transactions. It is likely that over time, computer engineers will find solutions to this problem, as they are certainly incentivized to do through the promise of a financial reward. In this way, blockchain and Bitcoin are self-correcting technologies. Since they cannot be owned and controlled by any specific entity, they are almost guaranteed to improve over time.
While there’s no way an article of this length can tell you everything you need to know before buying Bitcoin, I hope it can give you a good start on your journey. Happy investing!