Bitcoin Explained – Chapter 8: How to buy and use Bitcoin
15 August 2019Reading time: 6 minutes
Since Bitcoin
first appeared more than 10 years ago, the use and transfer of Bitcoins has
clearly been the focus of attention. Initially, it was relatively easy for all participants
in the Bitcoin project to "create" Bitcoins on their own through the
mining process. Over time, the Bitcoin project grew rapidly, increasing the
value of the Bitcoin and making the mining process impossible or lucrative for
every single participant. Little by little, various exchange-like online
platforms for exchanging and trading Bitcoins developed, which have developed
steadily to this day and can be used for secure payment transactions and
Bitcoin purchases.
How to buy and use Bitcoin? A practical example
Over the years,
the process of acquiring and using Bitcoin has continuously improved.
Initially, it was a complicated process for many newcomers and enthusiasts of
the community to purchase or sell Bitcoins securely and fairly via a stock
exchange or face-to-face exchange. Also the safekeeping of Bitcoins was not
always as easy as it is today.
A typical process
plan and decision-making process in the acquisition and safekeeping process
could look as follows:
1. the choice of the appropriate wallet
The first step in
buying Bitcoins is to choose a suitable wallet. Nowadays there are many
different wallets, which have various advantages for Bitcoin owners. The
differences between the different wallets lie in the storage location, the
security or the access mechanisms. Strictly speaking, Bitcoins are not
"stored" in a Bitcoin Wallet. Instead, the wallets are used to store
the private keys which are required for managing and sending the Bitcoins. The
variations in wallet selection are mainly divided into 5 options:
- A software or desktop wallet that is installed on the
computer. These original Bitcoin clients are also known as Bitcoin Core Wallets
and are used to forward transactions or generate Bitcoin addresses to receive
or send Bitcoins.
- Although desktop wallets usually offer a very high level of security,
they are not suitable for the daily use of Bitcoins. Mobile wallets are a better alternative when it comes to using
Bitcoins as a means of payment on a daily basis. As a smartphone app, they act
as an interface to make payments with Bitcoins in a matter of seconds. As the
private keys are stored on the mobile device, security is rather low compared
to desktop wallets.
- When it comes to safekeeping and availability, online wallets are generally the easiest choice. With web-based
wallets, the private key is stored on an external server. Independence from the
end device and constant availability of the Bitcoins is offered as a product or
service of an external provider. By managing the private keys by third parties,
the Bitcoin user runs the risk that he cannot guarantee the security of his
Bitcoins himself and theoretically entrusts control of the Bitcoins to a third
party. One of the best-known providers of Bitcoin online wallets is also one of
the best-known Bitcoin exchanges: Coinbase.
- Hardware wallets offer the option of storing the keys
(private keys) electronically, usually in the form of USB access. In addition
to a high degree of security, hardware wallets often offer the option of
storing different crypto currencies. Well-known providers of hardware wallets
are Trezor and Ledger.
- Paper wallets are still one of the most secure ways of storing Bitcoins. It
was also one of the first storage methods available. Both the public key (for
receiving Bitcoins) and the private key (for managing and sending Bitcoins) are
printed on paper in the form of QR codes. A unique advantage of Paper Wallets
is the offline storage of the Private Keys - also known as "Cold-Storage"
- Paper Wallets thus offer the greatest possible immunity against cyber
attacks.
2. Where to buy Bitcoins?
As already
mentioned, the purchase of Bitcoins a few years ago was extremely cumbersome.
Meanwhile there are several ways to buy crypto currencies.
The most popular
and conventional way to buy Bitcoins is through crypto currency exchanges.
Nowadays there are several crypto currency exchanges. Popular exchanges to
exchange EUR or USD for BTC are for example Kraken Bitcoin Exchange, Coinbase
Pro, GDAX or Bitfinex, just to name a few. Every exchange is first preceded by
the registration process, in which every user first has to provide various
personal details. In most cases, users are asked to provide a valid bank
account for processing payments on the platform. A stock exchange must be
regulated by the competent national authorities, which means that users
automatically waive Bitcoin's anonymity when the registration process is
completed by providing their bank details.
Nevertheless, the
current crypto exchange landscape offers an enormous variety of trading options
and choices. Whether you are an institutional company, a private investor or a
one-time trader - every interested party will find a suitable exchange for
their individual needs. The exchanges differ in the currency pairs offered,
security levels, purchase and sale limits, transaction costs, verification
measures, requirements, etc... Most exchanges accept the purchase of Bitcoins
via bank transfer or credit card payment.
All Bitcoin
exchanges already have "integrated" Bitcoin Wallets for processing
payments. Since cyber attacks on large crypto exchanges have increased in the
past, however, users should transfer their purchased Bitcoins from their
exchange wallets to their private wallets as soon as possible.
There are now even
Bitcoin ATMs in many cities around the world. To purchase Bitcoins at a
"Bitcoin ATM", you insert the respective national currency into the
machine, scan the QR code of your own mobile wallet or paper wallet in the
second step and then receive a direct transfer of the respective value to the
Bitcoin wallet.
3. Transferring Bitcoins from the Exchange to the own
Wallet
If you decide to
purchase Bitcoins in the classic way via crypto currency exchanges, the
Bitcoins must be transferred from the wallet of the exchange account to your
own personal wallet for security reasons after purchase.
In order to
successfully transfer Bitcoins from the exchange account to your own wallet,
the Public ID must be entered as the address together with the number of
Bitcoins to be sent in the form of the exchange. The amount sent is then
available on the specified wallet after less than one hour, less the processing
fees or the respective transaction fees.
4. Spending Bitcoins
It was already
mentioned at the beginning of the article that Bitcoin should primarily serve
as a currency. For various reasons, which have already been discussed in
previous chapters of Bitcoin 1x1, Bitcoin is currently a rather limited option
for the daily exchange of goods. Depending on the level of activity in the
blockchain, the transaction costs and the transaction duration fluctuate
enormously. According to BitInfoCharts, transaction costs in the winter of
2017/2018 averaged USD 55 per transaction, so that a transaction was completed
after an average of 90 minutes. In this environment, of course, no one would
want to pay for breakfast with Bitcoins if the transaction costs alone exceeded
the cost of the goods or services purchased.
Currently, the transaction
time amounts to an average of 20 minutes with a transaction fee of around USD
1. Whether the level will increase again in the future is not yet foreseeable.
Many Bitcoin enthusiasts are hoping to bring stability to the transaction
process with the help of the Lightning Network.
Despite the current uncertainties in the transaction process, there are
more and more merchants who accept Bitcoin in exchange for their goods or
services. Especially in online trading, Bitcoin has been an alternative to
Visa, Paypal and Co. for quite some time. A general overview of various
merchants who accept Bitcoin is provided by aggregates such as Coinmap and useBitcoins. Well-known online
merchants or services include Microsoft, Expedia, Overstock, Reddit, WordPress
and Etsy. Bitcoin is currently discussed by everyone - and with increasing
popularity, the number of merchants who accept Bitcoin as a means of payment is
also increasing. It can therefore be expected that Bitcoin will continue to be
accepted as a currency by various merchants in the future.
Next in Bitcoin Explained
In spite of the wide-ranging support of the Bitcoin project and the
establishment of the currency, the critical aspects of Bitcoin must not be
forgotten. Therefore the final part of Bitcoin Explained will summarize the
different advantages and disadvantages of the Bitcoin project.
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01/04/2023 13:36:29