In Lesson 8, we explored the world of mining and the process of adding and confirming transaction records to the blockchain. This process is also how new bitcoins are created. You learned that mining is a resource-intensive process and how nowadays it is mostly done by specialized mining computers in large data centers.
In Lesson 9 you will learn:
- More about bitcoin exchanges and the importance of finding one that suits your needs
- The initial ID verification can take a few days, but after that you can usually buy or sell bitcoin instantly
- A few tricks to help you determine how serious and secure an exchange is by checking for basic things like SSL encryption, two-factor authentication
Most bitcoins are bought and sold through online services called exchanges. Knowing how to buy bitcoin is an essential first step in getting started with the digital currency. However, knowing which bitcoin exchange to choose is one of the most important initial steps. Since you will be investing money into bitcoin you need to trust the exchange. Selecting the right exchange is a critical step on bitcoin journey.
Lesson 9 will guide you through the most important steps to take before selecting a bitcoin exchange. Remember, these are just suggestions to help you make the right decision. In the end, circumstances can be different based on the exchange and the market. Do your homework first!
Choosing an Exchange
Knowing where your bitcoin exchange is based is very important. The laws and regulations of your own country can vary from those of another, and what is considered legal practice in a foreign country may not be so in yours. You may notice that while certain exchanges are based in a specific country, they may still accept multiple national currencies. Make sure to check the fine print; exchanges usually post what currencies they do and do not accept in their terms of service.
You can usually transfer fiat currencies to an exchange with a wire transfer, credit card, PayPal, or other payment method. Use what works best for you at your convenience. Please make sure to consider your privacy levels. For example, credit cards may be convenient and secure but are one of the least private ways to transfer money.
You will also want to make sure that the exchange fees are within reason and not excessive compared to the rest of the market. Fees can change over time and can vary from exchange to exchange. Some exchanges charge additional fees on top of the bitcoin network transaction fees. Different payment methods also have varying fees.
Credit card purchases, for example, are often charged a fee of 3–10%. Services provided by credit card companies may be convenient but are one of the least private ways to transfer money. While most deposits with bank transfers are free at the exchange, banks usually charge hefty fees to transfer money abroad. More information about fees can be found on each exchange’s website. By comparing a local bitcoin exchange’s prices to a bitcoin price index, it’s easier to get the best bitcoin exchange rate. If an exchange constantly has substantially different prices than others, it is a sign of trouble and that exchange should probably be avoided.
As with everything else, do your research and find an exchange you can both use and trust. It’s also a good idea not to use your exchange’s wallet to store your bitcoins long-term. Move your purchased bitcoin to a personal wallet when you’re done so that you always have control over your money.
Security and Anonymity
Initial verification can often take a couple of days, but all subsequent purchases on the same exchange are usually instant if you have funds available to buy or sell. Do some research on each bitcoin exchange to determine verification levels and delivery speeds. Also, make sure to check if the exchange offers ‘locked in’ pricing. This means that the price you buy at is the price you will be charged even if the bitcoins take a few days to arrive.
A lot of exchanges follow the Know Your Customer (KYC) and Anti-Money Laundering (AML) laws in their specific country. If they do, then some identity information will have to be sent to them before buying. Exchanges that accept credit cards or bank transfers are also required by law to collect information about users’ identities.
Staying completely anonymous is difficult. If you seek total anonymity, you can buy in cash locally from someone else through a person-to-person marketplace like Localbitcoins.
Making sure the exchange website is secure is extremely important and should not be overlooked. As you initially investigate a potential exchange, always ensure that the website domain has a HTTPS address. This, as you learned in previous lessons, shows that the site and your connection to it is secured by an SSL encrypted protocol. Look for the padlock symbol next to the URL or in the bottom of the browser window. Another important consideration is two-factor authentication (2FA) secure login. If you enable two-factor authentication on an exchange that offers this type of service, you will be prompted to enter a short code at login that will be delivered typically to a mobile device you pair with the service. Enabling two-factor authentication will provide a second layer of verification that is required to access your account.
Do not forget to keep your bitcoin off of public exchanges. Keep your coins stored in your own personal wallet(s). Whenever your bitcoins are stored with third parties, it is easier for them to fall prey to hackers or unexpected exchange shutdowns. Your private key is your lifeline to your funds. Remember: bitcoin is about taking the power into your own hands and not relying on third party intermediaries or middlemen.
And, as always, when deciding whether to put your trust in any service, do an online search of the company or service in question and look for customer feedback and experiences regarding the service.
This concludes today’s lesson. You now know more about bitcoin exchanges and the importance of finding one that suits your needs. You also know that the initial ID verification can take a few days, but after that you can usually buy or sell instantly. You have also learned a few tricks on figuring out how secure an exchange is by checking basic things like SSL encryption, two-factor authentication, and the customary Google search.