Break Loose
How to Buy Bitcoin
Bitcoin may not replace all our hard currency but it has unlocked the potential to create new media of exchange. The way Bitcoin works is pretty simple, in my mind. There is this "file" called a blockchain and it holds a copy of every Bitcoin transaction that has ever been done. It's a pretty big file. The blockchain is copied to any computer that tries to be a "miner". The miners have to solve equations that compute the "hash" of the next block in the chain. A majority of miners have to agree on what the hash will look like. They may not agree if they are not all using the same data. Blocks that don't find a majority agreement among miners are forgotten.
Bitcoin is popular overseas, especially in China. About half the world's Bitcoin is owned by Chinese investors who have built huge Bitcoin mining data centers. The miners are paid a little bit of Bitcoin for each block they help to hash. But because most people still don't use Bitcoin it's an unstable currency. That means that the value of Bitcoin when compared to regular currencies like the US dollar and the Euro fluctuates a lot.
These fluctuations make Bitcoin and other digital currencies very popular with short term investors who want their money to grow quickly. But if you're wondering how you invest in Bitcoin you're not alone. It's not yet regulated enough in the United States to make it simple to do.
There are only two companies that I know about that allow you to buy and sell Bitcoin and other digital currencies in the United States. They are CoinBase and Kraken. Coinbase is considered a more American-friendly service than Kraken. Kraken is more European-friendly.
To start buying digital currencies like Bitcoin you have to create an account with one of these exchanges. They will accept your money more easily than they'll pay it back to you. While it costs you nothing to deposit money in either Coinbase or Kraken you'll have to pay wire fees to withdraw any cash to your bank. Your bank may charge you a wire fee for receiving money, too.
Every digital currency works with a wallet. Think of a digital wallet as a kind of bank account. It's secured by encryption and passwords. If you lose the special keys that are created for your wallet you may never be able to retrieve any digital currency out of that wallet again.
You can download software to create a wallet on your computer or smartphone. You can also "bank" with a wallet service like BitGo. You can also keep your money in the wallets that Coinbase and Kraken make for you.
In addition to recording your balance, a wallet can send its digital currency to another wallet of the same type and it can receive digital currency from other wallets of the same type. The way you do that is you generate a unique "address" from the receiving wallet. This is a super long string of letters and digits that looks something like asaiuydahg28ajadj202isjsahgakjqppdw. I just made that up. I don't know if it's a real address for any digital currencies.
The person who is sending the digital currency has to send it to that receiving address. The wallet can only have one active receiving address at a time. This is why some people create their own wallets or use a digital wallet service like Bitgo. They can create as many wallets as they need.
When a digital currency is sent from one wallet to another the transaction is recorded in a potential block of transactions. The miners then go to work encoding that block with a new unique hash. When enough miners agree on what the hash value should be the block is permanently encoded into the blockchain. The wallets then permanently adjust their balances to reflect the transfer.
To convert a digital currency to another type of currency you must sell your digital currency on an exchange. Only Coinbase and Kraken accept American bank accounts. You sell your digital currencies on their markets for other currencies. You could sell Bitcoin for Ethereum, Dollars, or Euros. You could buy Ethereum with Dollars, Euros, or Monero (another digital currency). It depends on which digital currencies the exchanges support.
You'll be charged a fee when you sell any currency. That is how the exchanges make their money. The more often you sell something on an exchange the more fees you pay. If you are trying to make a profit by buying and selling digital currencies you have to take those fees into consideration.
As you gain experience in the buying and selling of digital currencies like Bitcoin and Ethereum you'll notice some patterns. A lot of people tend to buy and sell at the same times of the month, every month, and when you notice those peak buying and selling periods you'll get an idea of when it's good for you to buy or sell.
As with any investment, you want to buy your Bitcoin when it's relatively low priced for you and you want to sell it when it's relatively high priced for you.