Getting started with Bitcoin
In this section, we’ll go over everything you need to know to get started with Bitcoin. We’ll cover buying and storing bitcoin, basic security tips, and a few other fun things.
Before you get started, it’s important to do the due diligence and think about how you’re going to use Bitcoin. Do you want to use it as an investment? Buy weird stuff on the Internet? Learn more about how it works? Whatever you plan to do with it, it’s a good idea to have a plan in place before you start buying loads.
There are two major ways to purchase bitcoin: through an exchange, or via private sale. Most people purchase and trade cryptocurrency with the help of cryptocurrency exchanges. These entities allow people to exchange fiat currency for crypto, and different types of crypto for each other. Almost all exchanges are available online, although there are frequent geographic restrictions for their use due to differences in regulation around the world. While a few do operate brick and mortar storefronts, this has become increasingly unusual.
Getting started on an exchange
In this section, we’ll cover different types of exchanges, guidelines on choosing the right one for you, and best practices to make sure your exchange experience is safe.
If there’s one thing the world doesn’t lack right now, it’s cryptocurrency exchanges. 1 There are well over 1000 cryptocurrency exchanges in existence. How can you choose one that works for your needs? Before you pick which exchange you want to use, it’s a good idea to think about what factors are the most important. We’ve included a few parameters to think about while choosing an exchange.
Centralized vs. Decentralized
There are three main types of exchange: centralized exchanges, decentralized exchanges (DEX) and hybrid exchanges.
- Centralized exchanges
The exchanges you’ve most likely heard of before, such as Coinbase and Binance, are all centralized exchanges. They also tend to be the most commonly used by cryptocurrency investors. Centralized exchanges often act like traditional banks and stock exchanges, providing financial services to users for a fee. On top of network transaction fees, they often charge a commission on trades.
While Bitcoin was designed as a decentralized utility, many consumers prefer the benefits that accompany centralized services. Centralized exchanges act as a middleman and provide liquidity. Users generally put their funds (either fiat or crypto) into the care of the exchange. When they place a buy or sell order, the exchange is responsible for finding a seller or buyer to match. It’s often more convenient than hunting down a suitable buyer or seller yourself. However, convenience almost always comes at a premium.
Centralized exchanges also require a lot of trust from their users. When storing crypto on a centralized exchange, users do not control the private keys associated with the crypto. It’s vital to consider the security of the exchange when choosing one.
- Decentralized exchanges
Decentralized exchanges, commonly referred to as DEXs, follow the original ethos of Bitcoin by cutting out the middleman entirely.
DEXs are usually permissionless, which means that anyone can access and trade directly without intermediaries. The DEX enables users to carry out peer-to-peer transactions.
How do transactions typically work on a DEX? When Alice places an offer, it usually goes to a smart contract. Smart contracts are a type of protocol that can self-execute, self-verify, and self-enforce contracts. The terms of the contract are written into code itself, and contained within a blockchain network.
Alice’s offer is submitted to the smart contract. Bob places a bid by submitting a transaction to the smart contract, which then matches buyer and seller and executes the trade.
Decentralized exchanges have a few advantages over centralized exchanges. Since they do not usually take custody of customer funds, they have a lower risk of hacks. The transactions are also more anonymous, since exchanges often don’t require users to conform to KYC and AML regulation. Users keep control over their crypto and private keys, and exchanges are fully transparent and easily audited.
There are also a few disadvantages that come along with using decentralized exchanges. They can be much slower than centralized exchanges. The fact that DEXs don’t usually enforce AML or KYC legislation puts them under increased scrutiny from regulatory bodies. There have historically been liquidity problems, and trading volume on DEXs relatively low compared to that of centralized exchanges. 2
Geographic and currency restrictions
Exchanges tend to have geographic restrictions based on the rules and regulations of different countries. Exchanges also have limitations on the type of fiat currency they accept. Check to make sure that your target exchange works in your country, and accepts your currency. While you can technically use a VPN to access exchanges that aren’t legally allowed to transact in your country, this is rarely worth the potential trouble.
This is the real kicker. Exchanges need to make money somehow, and a lot of them are raking in the dough by charging high fees on top of every crypto transaction. Yes, this is often in addition to the miner fee. There is a trend where the nicer and easier to use the exchange is, the more expensive the fees get. Always make sure to go over the different fee schedules. Fees can vary depending on the type of fiat, trading volume, method of purchase, etc. Read the fine print to avoid any nasty surprises.
If you’re planning to make frequent transactions or do any kind of trading, it pays to find an exchange with a preferential fee rate. Many will offer special discounts and promotions, so keep an eye out.
Bitcoin has had a few liquidity crises over the years, often due to bubbles bursting or major exchange hacks. During those times, people were unable to withdraw funds from exchanges. For this reason, you’ll want an exchange with high liquidity. This is generally measured by 24-hour trading volume. The bigger the number, the greater the liquidity.
Trying to get customer support from a crypto exchange is like trying to get therapy from your dentist; almost always unsatisfactory. Standards range from bad to criminal. Still, it’s worth it to research which exchanges have semi-decent customer service. If something goes wrong with your account, they’re the ones you’re going to have to talk to.
KYC and AML compliance
These days, your average Bitcoin exchange transaction is as far from anonymous as you can get. After the 2017 bubble burst, regulators took notice of the rampant scams and gleeful tax dodging that characterized the crypto ecosystem. Exchanges were pressured to comply with KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations.
What this meant for users is that they were required to produce extensive documentation (passport, proof of address, photo of face, etc.) to prove that they weren’t using their crypto to commit a crime. If you want perfect anonymity, look for exchanges that aren’t KYC compliant. If you’re looking for insurance or consumer protection, stick with regulated exchanges.
Ease of use
If you don’t feel confident about your technical ability, try to find an exchange with a user-friendly interface. Bitcoin transactions by themselves are notoriously difficult to parse and user-hostile. If you’re worried about messing up when you start out, it’s worth it to pay higher fees for an exchange with smooth user experience.
If you’re looking to jump right in and start trading, it pays off to find exchanges with rewards schemes, volume-based discounts, and low trading fees.
There are many ways to buy bitcoin. In this book, we are mainly concerned with exchanges. However, there are other options, including meeting someone in person. You should generally avoid telling strangers that you are going to show up somewhere with mounds of cash and/or bitcoins. Only transact in bitcoins if the counterparty is someone you know and trust. There have been many reported thefts, some violent, associated with this method of exchange.