How to Buy Bitcoin

As someone who recently purchased Bitcoin and two other crypto currencies using three different methods, I thought I’d share how to buy Bitcoin because I know there’s precious little information out there:

Coinbase:

The easiest way I found without leaving your computer is to sign into Coinbase.com and add your bank account. They’ll do 2 small deposits, you need to wait around 2 days for them to show up, then you verify your account by telling them what the deposits were. Once that’s done you can make your first Bitcoin buy using coinbase.

NOTE that when buying with Coinbase, you only get to make one purchase until it clears which takes around 7 days right now. So buy whatever the maximum bitcoin is that you want to purchase on Coinbase in the next week. The good news is that the bitcoin price will lock in at the time of purchase so even though you’ll only be able to spend your bitcoin after the transaction is approved 7 days later, you still benefit from locking in the price at the time of purchase. For me that meant several hundred dollars in gains because the price was rising steeply when I bought and it continued to rise over the next week.

The benefit of Coinbase is that you don’t need to leave your computer to do it and you don’t need to meet strangers in a dark alley (see below). The down side is that it takes 7 days before you can spend your bitcoin and you need to give them your bank account details.

In Person:

LocalBitcoins.com is a reputable site which is popular with the Reddit community and they have ads for people local to you who are selling Bitcoin. The sites popularity has grown enormously in the last few months and every town world-wide (including South Africa) that I’ve checked has bitcoin for sale.

LocalBitcoins has a reputation system similar to eBay that lets you find someone who has a good reputation for not scamming folks. I found someone in Denver, Colorado yesterday and within about 30 minutes of contacting them via the site they phoned my cellphone. We arranged to meet in a parking lot outside a well known computer store. The guy was a typical twenty-something computer geek type – really nice guy actually. I was happy to give my first name but he seemed to want to go by his online handle. I handed him a rather large stack of cash and then we spent a few minutes figuring out what the best way was to send the Bitcoin. I ended up using the Bitcoin wallet for Android, he scanned my QR code, sent me the coins at the current localbitcoins.com exchange rate (which was quite good) and within 10 seconds my phone went KACHING and I had my Bitcoin. We said our goodbyes and that was it. Except…..

PRO TIP: If you’re buying Bitcoin from someone in person, make sure they include a small transaction fee with the Bitcoin when they send you the coins. If they don’t, the coins will show up in your wallet but it may take several days until you can actually spend them. The guy I was buying from had a wallet that added zero transaction fee and I had to wait just under 5 hours until the transaction was finally completed by the network and the coins became spendable. I did a few tests later and added everything from 10 US cents to $9 as a transaction fee and it radically improved the processing time. The $9 transaction fee took 30 minutes to complete and when adding a few cents it takes about an hour. Many wallets don’t give you the option of adding a transaction fee. The Bitcoin-QT client does give you that option and I understand that the “Mycelium wallet” for android lets you modify the transaction fee but I haven’t verified this. The miners who process your transaction get the fee and they prioritize transactions with fees associated with them first.

The benefits of buying in person are that you get your bitcoin immediately and you usually get a better price that you do if you’re buying at an exchange or a service like Coinbase. The down-side is obviously that you might get mugged or scammed. But with a reputation system like LocalBitcoins and meeting in a crowded place, there are ways to minimize that risk.

Buying on exchanges:

After buying bitcoin I wanted to buy some Litecoin and found BTC-e exchange which offers trading in several other Crypto currencies. Note that BTC-e is based in Bulgaria and no one knows who the owner is so it’s highly risky. You’ll notice that all crypto currencies are cheaper on this site and it’s because of the risk premium. So I send them some Bitcoin as a deposit and started trading – bought some Litecoin which has yielded a nice profit along with some Feathercoin which is still extremely cheap and new and has also behaved quite nicely since the purchase.

I haven’t used Mtgox, but I understand that it only offers Bitcoin trading at this point which seems a little pointless because that doesn’t really make it an exchange – more of a place to buy Bitcoin like Coinbase.

Conclusion and my recommendation:

If you’re going to buy Bitcoin in the USA at this point, and if I buy again, I’ll definitely buy in person. It’s very fast, fun and with the reputation management that LocalBitcoins offers it seems fairly safe. If you have patience, Coinbase seems like a good option but in a fast moving market it moves a little too slowly for my liking.

Happy crypto currency trading!!!

Update:

Since I posted this 6 days ago, I’m still trading occasionally on BTC-e, but only alternative crypto currencies. I do all my Bitcoin buying on Coinbase. Today there were claims on Reddit that some folks couldn’t get their money out of BTC-e. Turns out BTC-e’s email servers were down for a while, so anyone who had email verification for withdrawals couldn’t withdraw their money. Sounds like an honest bug that hit BTC-e. I’m still quite happy there although I never leave a positive balance on the system. I’ll deposit, trade and then get out. Also note that they charge 0.1 Litecoins (About $4 today) for a litecoin withdrawal and .001 Bitcoins (About $1.20 today) for a Bitcoin withdrawal. The Litecoin folks are up in arms about this.

Since I wrote this I’ve made another trade on Coinbase on Dec 1st and am happy, although the delay to get coins is 6 days, even for your second trade. [Rather than the 4 days I wrote in the comments below]

I’ll also note that since the writing of this article I have been trading more alternative crypto currencies including Litecoin, PrimeCoin and Feathercoin. There is a lot of “pump and dump” activity around these currencies. They’re being treated like penny stocks. A cartel of people will get together, spend a few hours either boosting or insulting a particular currency to try and generate buy or sell activity, take the opposite action, and then send the opposite message. They use forums, live chat, twitter, blogging and so on. Litecoin is getting too large in market capitalization to do this (passed $1 billion compared to Bitcoin’s $13 billion and the third place Peercoin’s $136 million market cap). But smaller crypto currency perception is being manipulated by groups of folks, so beware. I still think it’s fine to trade in these currencies, but wait for a drop to buy and ignore the intra-day noise you see on forums and social media.

 

24 thoughts on “How to Buy Bitcoin

  1. With ann incredible number of transactions occurfring around the online
    platform every day, there are a number of payment options that enable merchants for payments for goods and
    services offered. Like other currencies it has also many disadvantages.
    A demo account lets you just do tthat by allowing you to go online and see how an actual forex account works, and in few cases, doesn.

  2. Hi Mark,
    What a great read. I have been researching BTC day and night for the past week and the one thing I was stuck on is – what will happen to BTC when they reach the max of 21M coins mined? And you answered it, I think. Through all my research I have rarely read about transaction fees and the fact that the larger fees get prioritized by miners and hence are processed much quicker. Now that I know about this, I can imagine once 21M BTC are in circulation, traders will have an option to send fast for a larger fee (whatever – $2 – $10) or send for significantly less of a fee but the transaction will take significantly longer. This will be the reward that fuels the continued growth of BTC far beyond the 21M max. What do you think?

  3. Trying to buy on coinbase.com. coinbase says bank account verified but have not rcvd email instructions to verify phone number or gotten deposits in bank account to verify. Not sure if this is normally what happens or I have done something incorrectly, been trying to purchase since Monday. Any feedback?
    Do I get that after the 7 days, still

    • The deposits take 2 to three days to arrive to verify your account. Then your first buy will take 7 days to clear. Your second one will take 4 days to clear. By “clear” I mean you will be able to transfer the BTC out of your coinbase account if you want to. That’s my recent experience anyway.

  4. Bitcoin newb here, but isnt lowering the txn fee a big part of using BC ?
    0.0001 is about 10cents , so micro transactions (<$5) might be cheaper through other means?

    Who gets the txn fee?

    • The miners get the transaction fee. They are the ones who keep the network working and that (along with mining bitcoins) is how they make their money.

  5. Mark, if I buy on coinbase, can I afterwards sell my coins on mtgox? Since buying in coinbase is cheaper than buying in mtgox, I thought I could make some difference.

    • I have not used mtgox yet but I do have an account there. The question you’re really asking is “Can I get my money in USD out of mtgox?”. Because you would buy on coinbase, then just transfer into your wallet on mtgox, then sell (exchange) BTC for USD on mtgox. Then you need to somehow get that USD out of mtgox. MTGox seems to be reputable so it probably won’t be a problem, but check their transaction fees first because you might get screwed on transferring your mtgox USD into your bank account. Let me know how it goes.

        • Just a quick update on Mt Gox. They had a bad account identification backlog, so if you did sign up with Mt Gox, you may have to wait a while to get identified, although word is they’ve boosted their staff so that should improve. Furthermore, they will be adding support for Litecoin in the near future according to this post:

          https://www.mtgox.com/press_release_20130805.html

          …which is interesting news if you’re trading Litecoin because it brings a lot of new buyers online very quickly….

  6. On coinbase you mentioned a 7-day wait between buys, but that’s only until you get verified. Then you can make as many buys and sells each day as you please.

    • Your second buy on coinbase will take 4 days to clear. That’s my experience anyway. Can’t tell you about what happens after that but I expect all subsequent buys to also take 4 days to clear. The delay is coinbase withdrawing the funds from your USD account.

  7. You should check out the Norwegian exchange justcoin.com. They do USD/EUD/NOK/litecoin/BTC/xrp and ripple. Totally transparent in terms of how they handle your money and coins, and is operated by the two brothers, Klaus and Andreas Brekken.

    • Thanks, they look interesting. Unfortunately they don’t seem to publish their current BTC price on their home page. So I don’t know if it’s worth signing up or not. I may sign up anyway. Thanks for the pointer Nikolai.

    • Yes I do think the USD has a high probability to, over 1 to 2 decades, lose its elite status as the world’s reserve currency. Because I see this as a real risk, I think the world is looking for other options for storing value beyond US treasury bonds and gold. So that adds to Bitcoin’s appeal. However Bitcoin and other crypto currencies have real utility rather than just being arbitrary value stores e.g. instant money transfer world wide with very low fees and no intermediaries to interfere.

  8. Re: transaction fees. Most commonly used clients include transaction fees automatically. The official client for sure, from light clients Multibit works quite well, and cannot remove the default minimum transaction fee 0.0001BTC, admittedly for the benefit of bitcoin newbies that with the fee the transaction clears quicker just as you said. Electrum can adjust the fee, while there’s a recommended minimum of 0.0002BTC. Blockchain.info also puts transaction fees on. So far I had hard time finding any clients that can really set 0 fee, e.g. to send between by own wallets, for which 0.0001 is pretty darn high, in my opinion.

    • I’m finding that everyone who builds clients is giving the same reason about why they don’t let users specify transaction fees: Because they’re worried that if the user sets a zero fee it will lead to a poor user experience with transactions taking forever to settle. In reality they need to add the feature not so that users can specify zero transaction fee but so they can increase the fee to speed up transactions if they want to. So my advice to wallet builders is to disallow a zero fee but allow users to increase it over the default.

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