How to Buy Bitcoin

Most people can't remember when they bought their first stock…

But you're probably going to remember your first time buying bitcoin.

Bitcoin is so volatile, buying it is fraught with risk. You might buy right before an 80% decline – like in late 2013. Or you might buy right before the next exponential move higher… which will tempt you to buy more, perhaps right before the next big decline.

You'll likely either rue the day you decided to buy bitcoin or think of it fondly… We're going to share some tips to help make sure it's the latter.

The process opening an account to buy bitcoin is similar to opening a traditional brokerage account for stocks. And people are signing up in droves.

Coinbase is the most popular bitcoin exchange. The number of Coinbase accounts has exceeded 13 million. That's up from less than 6 million at the beginning of 2017. Its cryptocurrency accounts now outnumber active accounts at Charles Schwab (SCHW), one of the leading equity brokerage firms in the U.S.

Bitcoin exchanges come in two main forms: brokers and trading platforms.

Coinbase is a cryptocurrency broker. You can buy or sell bitcoin, bitcoin cash, ether, and litecoin at prices specified by Coinbase. It allows you to convert your dollars into cryptocurrency, or vice versa. For this service, you pay a conversion fee to Coinbase ranging from 1.4% to 4%.

There are also bitcoin-trading platforms, which function as marketplaces. Buyers and sellers trade with each other via order books. These platforms allow you to enter limit orders, thereby providing liquidity to other traders. These trading platforms typically have a wide array of cryptocurrencies to trade.

Coinbase has its own trading platform called GDAX. Gemini, Bitstamp, and Bittrex are other trading platforms for cryptocurrencies.

The trading platforms are more advanced, so we'll walk you through how to open a Coinbase account.

But before we show you how to buy bitcoin, we want to share the following tips with you:

1. Start small. Open an account at an exchange, like Coinbase, and buy a small amount of bitcoin at first as a test. (We recommend $100 or less.)
2. Create a bitcoin wallet. Your bitcoin wallet stores your private keys. Once you create your wallet, write down your backup phrase (and keep it in a safe place). This will ensure you can still access your bitcoin even if you forget your wallet password.
3. Avoid holding excess bitcoin at exchanges. Bitcoin exchanges can be vulnerable to attacks by hackers. Instead of holding excess bitcoin on an exchange, transfer it to your bitcoin wallet.
4. Use two-factor authentication (2FA) on your accounts. Single-factor authentication involves only a username and password. 2FA adds an extra step, like entering a temporary PIN sent to your phone.
5. Be prepared for volatility. Again, the prices of bitcoin and cryptocurrencies are extremely volatile. This makes them unsuitable for conservative investors or those without a high-risk tolerance.
6. Have a plan. All investors – regardless of what they're investing in – need to have a plan. For example, your plan might be to allocate 1% of your portfolio to bitcoin as a portfolio diversifier with the potential for outsized gains. And you might formulate a rule that you'll only add to your position after bitcoin's price has fallen 30% or more. Stay disciplined and stick to your plan… or else the extreme volatility in bitcoin will have you buying high and selling low.
7. Limit cryptocurrency exposure. Bitcoin and cryptocurrencies can have a place in a diversified portfolio. But cryptocurrency assets should total no more than 10% of your investable assets. When determining your allocation, keep in mind that bitcoin could one day plummet to zero.
8. Keep track of your transactions. This will make Tip No. 9 easier.
9. Pay your taxes. This should go without saying, but pay your taxes. The Internal Revenue Service (IRS) considers bitcoin and other cryptocurrencies to be property for U.S. federal tax purposes. You must pay taxes on your realized gains.
10. Don't buy on margin. Some trading platforms allow you to buy cryptocurrencies with borrowed funds. This is never a good idea. Margin trading of cryptocurrencies is an easy way to quickly lose a lot of money.

How to Open a Coinbase Account

1. Click the "Sign Up" button at the top right of the coinbase.com website and enter your info and create a password.

2. Verify your e-mail address. Among the pieces of information Coinbase requires is you e-mail address. That's fine. Coinbase will use your address to send a confirmation e-mail verifying your identity.

The e-mail will look like this:

3. Once you verify your e-mail, sign in using your e-mail address and password you created.

   

4. Fill in your phone number. Again, Coinbase will use this to secure your account. The screen will look like this:

   

5. Coinbase will then send a code to your phone. Enter that code into the screen that looks like this:

   

6. You have now created an account. When logged in, click on "Settings."

   

7. Click on "Linked Accounts," then the "Link a New Account" button.

   

8. Click the "Bank Account" button. (You pay lower fees if you fund your account directly from a bank account rather than with a credit or debit card number.)

   

9. You may see your bank listed, but don't click on it (unless you want to have to give Coinbase the login ID and password for your bank website). Instead, enter "other" in the search field and click on the "Link your bank manually" button.

   

10. Select the account type. Enter your bank routing number, bank account number, and name. Click the "Verify Your Bank" button.

    

11. Two small amounts will be deposited in your bank account within 48 hours. Click the "Verify" button and enter the amounts.

    

12. Coinbase will need to verify your identity. Submit pictures of your photo identification (front and back) and use your computer's webcam to take a selfie. If you don't have a webcam, you can download the Coinbase app and use the front-facing camera on your smartphone.

    

13. Once Coinbase has verified your identity, and your bank account is linked, you can buy bitcoin. Click "Buy/Sell," choose the "Buy" tab, and then select Bitcoin.

    Don't worry… You can buy fractions of a bitcoin. Enter the U.S. dollar amount in the USD field, and Coinbase calculates how much bitcoin you'll be buying. Click the "Buy Bitcoin" button.

    

You now own some bitcoin. Since you purchased it using a linked bank account, it will take a few days for the bitcoin to appear in your Coinbase account (even though the price you paid for the bitcoin is set).

Selling bitcoin works much like Step 13… except you want to choose the "Sell" tab.

In the meantime, you might want to reread our tips. If you remember one thing about buying bitcoin, its this – volatility. Bitcoin prices fluctuate wildly, more than just about any asset you're familiar with. Please protect yourself. Have a plan and only dedicate a small portion of your capital to it.

curated by Glen Brink, InvestmentMarketingTips.com