There are currently three ways a person can buy cryptocurrency: mining, buying from online wallets and exchanges, and buying or receiving from others.
In this article, we’ll be focusing about the ins and outs of buying cryptocurrencies from online wallets, exchanges, selling online, and walk you through the whole process with a step-by-step illustrative guide on some of the most popular online wallets, exchanges, and marketplace.
Cryptocurrencies vs. Fiat
Cryptocurrencies have unique properties which make them a lot different from our fiat currencies. They exhibit both properties as a medium of exchange for paying goods and services and as a commodity like gold and other precious metals that have intrinsic value.
It takes hours and huge amounts of computing power minting (or ‘mining’ in cryptocurrency parlance) these digital currencies, the same way gold is mined with hundreds of man-hours using expensive tools and equipment.
In comparison, fiat currencies use very little resources, if at all. Banks don’t even have to print or stamp paper bills and metal coins these days; they simply type in an arbitrary number on their computers to create more money.
Why People Buy Cryptocurrencies
In some countries where inflation has severely diminished the purchasing power of fiat currency, people turned to cryptocurrency and mining as their sole refuge against the rising prices of commodities and the unrestrained creation of money by banks and financial institutions.
Others view cryptocurrency as an opportunity for investment, particularly Bitcoin and other major currencies like Ethereum. Bitcoin’s value has been going up unabated for nearly a year, and more people are starting to look into it as a result of its rising demand, popularity, and to some extent, the use and promotion of cryptocurrency education.
For some users, they see it as a more affordable and secure way to send and receive money without going through any bank or financial institution. It’s almost like sending an email from one person to another where information is shared only between the sender and recipient.
Whatever your purpose is, you can always have an edge if you know the different methods of buying cryptocurrencies and how to take advantage of the differences in pricing, volatility, wallet features, and other factors.
Factors Affecting a Cryptocurrency’s Price
A casual visitor at coinmarketcap.com will quickly notice how fast the price of a certain currency changes – in a matter of seconds! (Check out the site and reload the page once every 5 minutes and see for yourself.)
This rapid movement in price is attributed to the cryptocurrency’s volatility. The fewer there are in circulation, the more volatile a certain currency is. Conversely, as a currency gains widespread adoption due to its abundant supply, price starts to become more stable.
Supply and demand also determines the current price of a particular currency.
In some instances, the relationship between supply and demand and the current price is a direct result of fear of missing out (FOMO). This is the typical bandwagon mentality people get into when something new or ‘trending’ comes along. Bitcoin is not a new thing, except for the vast majority who never heard of it. But towards the middle of 2017 when everything people talked about is Bitcoin, suddenly, everyone is dipping their hands into it.
Similarly, fear, uncertainty, and doubt works in much the same way, but with opposite results. People can succeed in convincing millions to sell their Bitcoin or face massive loss and cause huge price dip as people sell them in panic.
We can infer if a certain news or upcoming event has, or will likely cause fear when it coincides with sustained price drop such as the Bitcoin hard fork of August 1 where Bitcoin price went down unimpeded for 3 days, two weeks prior to the split, and on September 12-15 where Bitcoin came crashing down to USD 2947.69 with China’s ban on Bitcoin exchanges and ICOs a week later.
Price spread which is determined by comparing prices of cryptocurrencies in exchanges all over the Internet can also affect how a particular currency is priced. Exchanges work in some ways like trading where buyers and sellers negotiate on bid and ask price.
Price variance within the exchange itself is often negligible as both sides are given the average price by default (this can be changed by buyers and sellers as they wish). However, when comparing the average price from one exchange to another, we start to see a significant difference in pricing. (Clicking the link under ‘Volume’ at Coinmarketcap allows you to see this in real time.)
Opening/Installing Your Wallet
Your wallet is the key (no pun intended) to the world of cryptocurrency. This software allows you to make transactions with other wallet users and interact with the blockchain ledger using a pair of keys known as the private and public keys. For a detailed discussion about cryptocurrency wallets, go to Everything You Need to Know About Cryptocurrency Wallets.
Creating an Online Wallet Account
Setting up an online wallet is as easy as signing up for an email or social media account. Here are the steps in creating your Coinbase and Blockchain wallet.
To get started with Coinbase, go to their signup page and type in your name, email address, and wallet password. You will be sent a verification email by Coinbase. Go to your email and click Verify Email Address to activate your account.
Coinbase currently supports Bitcoin, Ethereum, and Litecoin. It generates your private and public keys for all three of them when you sign up to their wallet service. However, you don’t have access to your own private keys; only your public keys/wallet address.
You can start sending and receiving Bitcoin, Etherium, and Litecoin with your wallet account. However, if you want to buy cryptocurrency with fiat from Coinbase using your bank account or credit/debit account, you need to go through their payment verification process.
Blockchain.io is a block explorer for Bitcoin which allows everyone to see the status of every Bitcoin transactions ever made and are constantly being made in real time. To provide Bitcoin users, traders, and miners with an online wallet to store their private and public keys, they’ve also introduced their own Blockchain Wallet for Bitcoin.
(Update: as of August 2017, Blockchain began supporting Ethereum.)
Blockchain Wallet generates your private and public keys when you sign up to their online wallet service. However, unlike Coinbase, Blockchain allows users to export/import their private keys.
To create your online Bitcoin wallet account, go their signup page and type in your email address and a strong wallet password. A popup notification will inform you that your wallet and wallet ID has been created, followed by a welcome message.
(Note: your wallet ID is different from your wallet address/public key. This is just a series of numbers and letters that you’ll use every time you log in to your Blockchain Wallet account.)
Check your email and click ‘YES THIS IS MY EMAIL’ to complete the setup.
Installing a Desktop or Mobile Wallet
Desktop and mobile wallets require you to download and install the app on your device. They are considered more secure than online wallets because your private keys are stored within the device and have backup features.
Some desktop and mobile wallets are ‘open source’ which means tech-savvy wallet users can see exactly how the wallet works under the hood. Depending on how you look at it, open sourcing a wallet can be good or bad (e.g., transparency vs. phising/hacking, etc.).
Here are the steps on how to install an Exodus desktop wallet and Jaxx mobile wallet.
Exodus is one of the popular multi-currency, desktop wallets available online. It’s compatible with Windows (64-bit), Mac, and Linux, has backup features.
Download and install the app to your computer. Read the onscreen popups and click OK. You can start using your wallet to send and receive currencies. To buy cryptocurrency with fiat, you may open an online wallet account like Coinbase, or an exchange account like GDAX or Poloniex.
Jaxx is an open source, multi-currency, mobile wallet and is compatible with Android and iOS. It also doubles as desktop wallet when installed in Windows, OS X, and Linux.
Go to Google Play or iTunes on your mobile device and search Jaxx Blockchain Wallet. Download and install the mobile app.
To set up for first use, choose Create Wallet and use the Express Setup. If want to pair this wallet with your laptop or PC, choose Pair/Restore Wallet and enter the 12-word Backup Phrase. You can see your Backup Phrase in Menu>Tools>Backup Wallet>View Backup Phrase.
Caution: view your backup phrase only when necessary and make sure no one else is looking. People can use your backup phrase to re-generate your wallet on their device and have access to all your funds.
Setting up a Hardware Wallet
Hardware wallets like Trezor and Ledger Nano S are considered the most secure of all types (excluding paper wallets). However, they’re not cheap and setting them up are not as easy as as the other types of wallets.
To use your hardware wallet, you need to hook it up to a computer or mobile device using the the USB cable that comes with it.
Here are the steps in setting up your Trezor and Ledger Nano S wallet.
Before setting up any kind of hardware wallet, check for any sign of tampering to make sure it runs completely free of any third party software or hidden app.
Go to wallet.trezor.io on your browser and plug in your Trezor wallet. Type in your Device Label and enter your 4-digit PIN.
To be able to restore your accounts in case of damage, loss, or theft, you’ll be required to write down the 24-word recovery phrase on a piece of paper or the small booklet that comes with it. Enter your PIN to complete the setup.
Trezor currently supports Bitcoin, Ethereum, Ethereum Classic, ZCash, Litecoin, Namecoin, Dogecoin, Dash, and all ERC-20 tokens.
For more information on setting up and using the wallet, visit the Trezor User Manual.
Ledger Nano S
Setting up a Ledger Nano S is a little different from Trezor, but the process is essentially the same.
Here, you’ll be using the two buttons and the LCD screen of the hardware wallet.
Plug in the device on your laptop or PC and choose between configuring a new device or not. Choose yes (P) and type in your new password twice.
Next, you’ll be asked to write down the 24-word recovery phrase to backup your wallet. After scanning and writing down all the words, your device is now ready to use.
To use more features for your Ledger Nano S, connect your hardware wallet to your laptop or PC, go to their download page and choose between wallet apps and management apps for your Ledger Nano S.
It currently supports 18 currencies including Bitcoin, Ethereum, Bitcoin Cash, Ethereum Classic, Dash and Litecoin.
BUYING FROM AN ONLINE WALLET
To get the feel of having your own assets stored in the cryptocurrency network, you need to need to buy them with fiat currency.
For Coinbase, you need to add a payment method by going through their payment verification process, after which you can start buying Bitcoin, Ethereum, and Litecoin using your credit, debit, or bank account.
Buying cryptocurrencies with fiat will incur some fees (4% when using credit/debit account, and around 1.49% with bank accounts).
This feature is available only in 32 countries including Canada, UK, and Australia.
BUYING FROM AN ONLINE EXCHANGE
People can buy cryptocurrency directly from online exchanges. GDAX is an online cryptocurrency exchange run by the same company that operates the Coinbase online wallet.
Buying from GDAX also requires identity and payment verification process via Coinbase. To start buying, you need to fund your GDAX with your account balance from Coinbase, bank account, bank wire, or BTC address.
Some users can get away with paying less (or zero) transaction fees when buying their cryptocurrencies from online exchanges like GDAX. However, it also comes at the expense of speed and convenience.
To keep your currencies safe, you may choose to send them to your desktop, mobile, or hardware wallet after accumulating a substantial amount from exchanges. It’s always risky to keep your currencies in exchanges.
BUYING FROM A MARKETPLACE
Paxful is a popular cryptocurrency market for Bitcoin buyers and sellers online. However, unlike exchanges, buyers and sellers can interact with each other and negotiate with the price and payment methods – it’s basically an online marketplace.
The most commonly used method is through PayPal and uses Escrow for secure transactions. Buyers can narrow down their search when buying a particular amount of Bitcoin.