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How to Buy Bitcoin: A Beginner's Guide

Credit: Tom Stepanov/Shutterstock

Bitcoin has been a popular topic of discussion since its conception. And with its spike in value during the fall of 2017, there's more curiosity over the cryptocurrency than ever. A quick primer on what exactly bitcoin is – it is an all-digital, decentralized currency maintained by a network of miners who update the blockchain, a public log of all cryptocurrency transactions. Bitcoins are created as these miners update and maintain the blockchain. [Read related story: What is Blockchain Technology?]

Bitcoin has garnered interest from an investing standpoint or in its decentralized nature and simple, fee-less transactions. Any individual or business can buy and sell bitcoin. Here are a few easy steps to get started.

Your wallet is your unique ID within the worldwide network that maintains and trades bitcoin. The wallet clients are also your interface for checking your balance and sending or receiving your bitcoin. Wallets consist of a public ID and a private key that gives you access to your funds. There are several different types of wallets including:

  • Desktop wallets for your personal computer such as Electrum or Armory. These allow you to interact with your bitcoin balance and store your records on your computer's hard drive.
  • Hardware wallets are physical devices that connect to your computer via USB. Wallets like Ledger Nano S and Trezor provide small devices to store your Bitcoin information, which can only be accessed by physically having the device, making it less likely that hackers can access your wallet.
  • Mobile wallets allow you to store your bitcoin information on your mobile device. GreenAddress and Bread have versions available for iOS and Android.
  • Web wallets are cloud-based services that store your bitcoin data in their servers. CoinSpace and BitGo are easy to sign up for, and you can access your wallet from anywhere. You keep your private key, which you can store anywhere.

While it's technically possible to buy bitcoin directly from a bitcoin holder, it's risky and has too much potential for fraud. There are dozens of online exchanges that connect hundreds of buyers and sellers. Sites like Coinbase and GDax have real-time exchange rates that are constantly updated, allowing buyers and sellers to get an accurate fair market value. Most exchanges charge a transaction fee when buying or selling bitcoin.

As of this writing, a single bitcoin is worth thousands of dollars; however, you don't need to buy a whole bitcoin. Most exchanges allow you buy fractions of a bitcoin, equal to the amount you desire to invest.

Exchanges can also act as a web wallet to store your bitcoin info, but you can always transfer the bitcoin you buy to your private wallet. When it's time to sell your bitcoin, you also do it over an exchange.

Since this is an all-digital currency, you can rest assured that it's not going to be physically stolen from you (unless you keep a physical bitcoin wallet); however, it's still susceptible to cyberattackers who try to gain access to your wallet.

The system is built upon a model of public transactions but is still secure thanks to private wallet keys. The only way a thief can gain access to your wallet is with that key, so it's imperative that it's kept safe. A more advanced way of securing your funds is creating backups of your wallet and encrypting it.

While using a web-based service to store bitcoin takes security concerns out of your hands, many companies have experienced breaches with losses in customers' funds. At the very least, select a service that is insured.

There are several other cryptocurrency options besides bitcoin, collectively known as altcoin. Ethereum, Litecoin and Dash are built from similar blockchain technology as bitcoin, with some differences that affect security, privacy and efficiency. Many exchanges deal with multiple cryptocurrencies, and you're free to own multiple wallets for multiple currencies.

Like other investments and capital gains, if you've invested in cryptocurrency and have made a profit, as an individual or a business, you need to report that income on your tax return. Bitcoin and other cryptocurrencies are treated as a capital asset, like stocks or bonds, with the capital gains or loss subject to being taxed, according to a TurboTax blog post. And as such, failure to report your profits from investing in cryptocurrency can result in an audit and penalties.

You report your capital gains on Form 1040, Schedule D. Keep in mind that your capital losses can offset gains, meaning that if you lost money investing in a cryptocurrency, you can deduct that amount from taxable profit you made off another cryptocurrency or investment. Many exchanges where you sell your cryptocurrency can provide you with reports or 1099-K forms for your tax-filing purposes.

When exploring the world of cryptocurrency, there are varying levels of security and privacy you can employ when dealing with bitcoin. Since this is still a developing field, there's no guarantee that your cryptocurrency will be completely safe, let alone grow in value, so invest with caution.

Andreas Rivera

Andreas Rivera graduated from the University of Utah with a B.A. in Mass Communication and is now a staff writer for Business.com and Business News Daily. His background in journalism brings a critical eye to his reviews and features, helping business leaders make the best decisions for their companies.