How Bitcoin is Acquired
Bitcoin is acquired in two main ways.
The first way is through a method of contributing computing power to the Bitcoin network through a process called mining. In this process, people who do mining are trying to "solve" a mathematical problem in order to validate all of the transactions during a 10 minute period. Every 10 minutes, a new "block" is created and added to the Blockchain. As a reward for validating transactions, miners are given bitcoin in exchange. The first miner to "win" the transaction verification over those 10 minutes is given a predetermined amount of Bitcoin that slowly declines over the years (roughly every 4 years the reward gets cut in half) and also is given a small reward that is created by the fees for each transaction. This is usually a small amount for each transaction, but adds up over the course of many transactions. Eventually, the predetermined reward will reach zero by the year 2140 and the network will rely entirely on transaction fees from there on.
While this is a really cool and interesting process to earn money, today's mining technology far outpaces the capabilities of modern day computers. Aside from mining as a hobby, it is not recommended to use this as a means to earn bitcoin. Your electricity bill will far outpace the reward you could expect. I tried my hand at mining in 2014 and it cost me about $100 worth of electricity to generate about $15 of Bitcoin... and this was done with specialized hardware!
Note: If you want to try your hand at mining as a hobby, you will need to do additional resource. Here is what a small mining device can look like.
The second recommended method involves purchasing Bitcoin via an exchange. Many exchanges exist and offer different degrees of service. In order to purchase Bitcoin, you need to connect a bank account so you can exchange other currencies for Bitcoin. Suggested exchanges are listed below in the next section.
A third method is by doing work directly for Bitcoin. Put your skills to the use in the tech world and you may find someone who will pay you in Bitcoin! However, this requires some extensive knowledge (which this site can provide you!)
Where to Purchase Bitcoin
There are many exchanges that exist. Here are a few exchanges that I am aware of:
Popular Bitcoin Exchanges:
Exchanges often make you verify your identity. This is done so that a person cannot steal credit card or banking details and perform identity theft, as a Bitcoin transaction is not reversible. In addition, exchanges are required by some governments to keep records of their customers for tax purposes. If you make a profit buying and selling Bitcoin, your country may require you to report the income for your taxes. It is highly encouraged to follow all local, state and/or country laws concerning cryptocurrency.
LocalBitCoins allows you to buy Bitcoin from people in person. You can exchange cash for Bitcoin, but it comes at a premium cost since you are evading how exchanges make you verify your identity. Buy at your own risk, as an in-person exchange of currency comes with a risk.
There are many more ways to get Bitcoin. I cannot vouch on the trustworthiness of all of these exchanges and services, but Coinbase has been my exchange of choice over the years. They, like almost all exchanges, require you to prove your identity for many reasons. The most justified reason is that a Bitcoin transaction is irreversible, so if an identity were stolen and Bitcoin was purchased and transferred, there would be no way to get the Bitcoin back from the identity thief.
How to Store Bitcoin Securely
Your Bitcoin needs to be protected. The two main ways of holding Bitcoin are to either leave them in the exchange (I recommend against this), or putting the Bitcoin into your own wallet.
Pros and Cons of Leaving Bitcoin in an Exchange
- Money is often held with greater security and expertise than the individual holder
- Ability to quickly sell off Bitcoin holdings
- Some exchanges are FDIC insured
- You do not own your Bitcoin since you do not own your private keys
- If the exchange goes down or offline, you lose access to your Bitcoin
- There is a history of some exchanges taking/losing the money with no notice and no attempt to "make things right"
- The reward for trying to hack an exchange is greater than the reward for going after an individual, so these exchanges are constantly under attack
Pros and Cons of Holding Bitcoin on Your Own Wallet
- You control the money
- You have a choice between your wallet
- You can put your Bitcoin in a wallet, secure the backup keys, and uninstall said wallet. In doing so, you remove your Bitcoin holdings from any form of access until you re-initiate the wallet backup. This is called Cold Storage, as your Bitcoins are no longer accessible online, and no longer "hot"
- All responsibility for this digital cash is on you. A lost backup and device means you lose your Bitcoin forever
- A compromised device can have its Bitcoin hacked and taken, especially if you are not well-versed in security
- You can lose your private keys if you don't back them up properly
- Trezor - This small device uses multiple layers of security to ensure full control over your Bitcoin
- Mycelium (Android Apple) - Digital wallet app that is easy to use and open source
- Additional suggested Bitcoin wallets via Bitcoin.org
A note to investors/speculators...
If you are aiming to purchase Bitcoin as an investment, (or more realistically a speculation) you should read the information below VERY CAREFULLY:
Bitcoin and other cryptocurrencies are and unstable, volatile, and unpredictable type of currency. As of right now, I cannot recommend anyone invest in Bitcoin without first gaining a very strong understanding of how the currency works, the risks involved in terms of security, and the laws in your country, state, county, and/or city. Bitcoin is a relatively new and unique currency, and NO ONE can predict where the price will go. Invest at your own risk.
With that being said, if you assume the risk involved with cryptocurrencies, I do have some advice to help you minimize risk:
- Buy a tiny amount of Bitcoin as "experiment money". You shouldn't spend any more than you do on your daily lunch. Use this small amount to send a bit to a friend, or yourself. Use some to donate to charity or some other form of giving away Bitcoin. Use some to create a wallet via a smartphone or computer application. Back this money up using a seed or wallet.dat file (and you better make sure you know what you are doing). Then, uninstall the application from your device and try restoring the Bitcoin wallet from scratch. Do this before making any significant investments so you actually understand the system. You'll learn a bunch of things, such as transaction fee costs, waiting for a transaction to actually confirm, and getting involved in the system. This is also a great test to see if your device has been compromised by malware, as a compromised device would send all of your Bitcoin to another address.
- Once you have experimented around with Bitcoin a bit, now you are in a better situation to invest/speculate. Buying Bitcoin in one large amount can cause a lot of stress, especially if the price goes from, let's say, $2800 down to $2100 in the course of 3 days (yeah, this happened). Some people cannot take on that mental taxation and will feel the need to sell their Bitcoin to stop loss of profit. To prevent this mental taxation, use dollar cost averaging. Buy Bitcoin in steady increments such as a monthly or weekly purchase. This way, over time your investment averages the cost. It is less stressful to see Bitcoin drop from $2800 to $2100 if you bought at $2400, $2650, $2800, $2575, $2200 and $2100, especially if you have been investing slowly over the course of many months (or years).
- If you are here to make a quick profit on buying and selling Bitcoin or other cryptocurrencies, I have no advice for you.
Bitcoin volatility is like a roller coaster:
Sometimes it goes up:
Sometimes it goes down:
Up Next: How to Use Bitcoin