Back in 2009, a single Bitcoin was worth just pennies – but during the bull run of 2021, the cryptocurrency reached a high of nearly $70,000.
The meteoric rise in Bitcoin’s price over the last several years has caught the attention of many new investors. For a first-time buyer, however, purchasing Bitcoin can seem overwhelming. Luckily, many platforms have emerged in recent years that have simplified the process of buying Bitcoin.
Ways to Buy Bitcoin
Today, there are many ways to buy Bitcoin, such as:
The easiest way to buy and sell Bitcoin is using a centralized exchange. On a centralized exchange, the platform facilitates the transfer of assets and funds when a transaction occurs. Transactions happen on the exchange when a seller’s asking price and the price a buyer is willing to pay overlap.
There are many centralized exchanges to choose from, and the reputability, fees, and liquidity vary widely between them.
It’s important to vet the exchanges you use carefully. Since crypto assets aren’t insured, you risk losing any assets that are stored on an exchange if it goes out of business. This happened to many investors using Mt. Gox back in 2014 when the exchange quickly lost nearly 250,000 BTC and filed for bankruptcy.
Know Your Customer
When dealing with centralized exchanges, they are required by law to collect personal information about their clients. The most well-known regulations are known as Know Your Customer (KYC) and Anti-Money Laundering (AML). These practices work to prevent bad actors from committing crimes using these financial services.
Another way to buy Bitcoin is to use a peer-to-peer exchange. Bitcoin was initially created as a peer-to-peer digital currency, meaning that it doesn’t require a third-party intermediary (like an exchange) to facilitate transactions.
These platforms allow sellers and buyers to connect (either in-person locally or digitally through forums) and transact their assets with one another. Typically, these types of platforms will integrate escrow, reputation tracking, and dispute systems to help facilitate safer transactions between their users.
Over The Counter Markets
Typically reserved for high net-worth individuals, Over The Counter (or OTC) markets are platforms that enable transactions directly between two parties. Unlike centralized exchanges, the buyers and sellers directly negotiate pricing terms and the transfer of assets on their own.
In Over The Counter transactions, one party is typically a ‘desk’. An OTC desk is a business that specifically deals in the buying and selling of a specific asset class, like cryptocurrencies.
Since there isn’t a third party (like an exchange) facilitating the transactions, nobody knows the prices or volumes negotiated between the parties. This provides both parties with a greater level of privacy compared to using centralized exchanges.
Over The Counter markets primarily exist to conduct large transactions that would be difficult on regular exchanges. For example, if you were to buy a large quantity of Bitcoin on a regular exchange, you would likely end up paying over market price due to slippage. By dealing with an OTC principal desk, you can conveniently buy or sell a large quantity of Bitcoin at a flat negotiated price.
In the broader financial markets, most global trade occurs through Over The Counter markets.
Payment Services Apps
In recent years, centralized payment service applications like PayPal and CashApp have enabled users to purchase Bitcoin within their apps.
However, it’s important to understand that these platforms generally don’t give you full custody of your Bitcoin. This means that you’re unable to transfer your Bitcoin to another wallet – you can only buy or sell the Bitcoin on their app.
Now that you’ve purchased some Bitcoin, you might be wondering what the best way to store it is.
Whether you’re looking to hold your Bitcoin long-term or trying to trade the market for profits, storing your Bitcoin safely is very important.
A ‘custodial wallet’ is a wallet where someone else takes custody of your private keys.
These types of wallets often impose restrictions on how you can use your funds. For example, you may be required to provide personal information, be unable to transfer your Bitcoin to another wallet, or have your account frozen entirely.
A ‘non-custodial’ wallet is a wallet where you are responsible for securely managing your own private keys.
With proper key management practices in place, this option is much safer than using a custodial wallet. You don’t have to worry about counterparty risk in the event that a centralized exchange goes belly up, as you’ll be in full control of your own private keys.
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