Here's Everything You Need to Get Started With Bitcoin

By Damian Davila on 30 October 2015 0 comments

It's understandable that you haven't heard about Bitcoin in a while. From an all-time high market value of $1,242 per Bitcoin back in November 29, 2013, the cryptocurrency is, at the time of this writing, trading at a much more humble value of about $246 per Bitcoin. (Update on 11/3/15: Bitcoin is currently trading at more than $400 per coin.)

But Bitcoin is still very much on the rise. The number of Bitcoin transactions per day has increased by 57% since 2013 and the Commodity Futures Trading Commission (CFTC) recently defined cryptocurrencies as commodities, paving the way for more open trading. That means everyday people like you and I will be able to trade Bitcoin more easily. (See also: 6 Mobile Payment Tools You Should Start Using Today)

Here's what this historic announcement means for the average investor, as well as some best practices for getting into the cryptocurrency game.

So, What's a Bitcoin?

In very simple terms, Bitcoin is a form of digital money that you can use to make purchases, or save as an investment. Unlike other virtual currencies, such as Second Life's Linden dollars, Bitcoin adds a layer of security through cryptography on all transactions and emissions of new units.

What Can I Do With Bitcoin?

You can use bitcoins for virtually anything. (Pun intended!)

  • Shop for products using Bitcoin at several retailers, such as Overstock, Dell, and Microsoft.
     
  • Get a magazine subscription, such as Time, Fortune, or Travel + Leisure, with Bitcoins.
     
  • Use Bitcoins to book your next flight at Expedia. If that sounds too boring, then book a space flight with Virgin Galactic instead.
     
  • Pay for a Master of Science in Digital Currency at the University of Nicosia (Cyprus) entirely or partly in Bitcoins.
     
  • Leave your wallet at home and convert your Bitcoins into cash at one of many Bitcoin ATMs around the world.
     
  • Buy and sell and Bitcoins in Bitcoin exchanges to try to make a profit.
     
  • Trade Bitcoin swaps and other types of derivatives in Bitcoin exchanges, such as TeraExchange.
     
  • Buy and hold Bitcoins for a long time to see what happens!

Since people can trade derivatives on Bitcoin, it was in the interest of the CFTC to classify Bitcoin as a commodity. That way the CFTC has jurisdiction over companies trading Bitcoin swaps, and can protect the interests of consumers.

How Do I Get Bitcoins?

To start using Bitcoins, you need first to get some coins into your digital wallet. The easiest way to get a hold of some bitcoins is to buy them at an exchange. Here's how to do it.

1. Choose a Wallet

You can pick from many available desktop (Windows, Mac, Linux), mobile (Android, iOS, Windows Phone, or Blackberry), hardware, or web Bitcoin wallets to store and use your Bitcoins.

Each type of wallet has it advantages and disadvantages, so take the time to review each option. Novice users of Bitcoin may be better off to sticking to a widely used alternative, such as Coinbase — it has 2.6 million users with four million wallets and is accepted by 40,000 merchants.

2. Fund Your Wallet

Most Bitcoin users complete their first deposit using a bank account. No matter what wallet you choose, you'll need to first verify your bank account with the company managing the wallet. Keep in mind that some wallets may require you to verify a bank account before you can start using the wallet.

3. Get Free Bitcoins

There are a few ways to score some free coins. First, you could receive Bitcoin tips by posting awesome content on certain sites, such as Reddit, or connecting your social media accounts to ChangeTip. Second, you could receive cryptocurrency payments for completing small tasks, such as viewing websites or completing surveys, at BitVisitor and FaucetBTC.

4. Buy and Sell Bitcoins

Depending on your Bitcoin needs, you may need to buy additional coins when your balance is running low or to exchange coins into dollars. Fees vary per exchange and financial institution. For example, Coinbase doesn't charge fees for accepting and receiving Bitcoins, but does charge you a 1% fee when converting Bitcoins to dollars. Some banks may charge you a fee for transferring funds from your wallet to your checking account.

What Are Some Best Practices?

Bitcoin is still in development, so it's better to be safe than sorry. Here are some key things to consider:

1. Keep an Eye on Market Value

The price of a Bitcoin in dollars is very volatile. On January 3, 2015, the market value of one Bitcoin was $302.33 and on the very next day, it was $270.93. If you're risk averse, then Bitcoin isn't for you.

2. Have Only What You Really Need in Your Wallet

Just like you keep only a few hundred or thousands dollars in your checking account to cover your monthly expenses and the rest on a saving or investment account, you should keep your Bitcoin wallet only with what you need. You don't walk around with $10,000 on your normal wallet, do you?

3. Understand That Bitcoin Payments Are Irreversible

Nowadays, even barbers and lawyers are accepting Bitcoin. When buying with Bitcoin, make sure to deal only with reputable merchants. Once a payment is completed, the only way to reverse it is by having the person receiving the payment reverse it themselves — which means they can refuse to do so. When making payments online, check out the company's reputation before handing over your coins.

4. Learn How to Maintain and Backup and Online Wallet

Depending on what type of wallet you use, you may be ultimately responsible for backing up its data. In the event that you receive a large amount of Bitcoins, it's a good idea to stash some of them in an offline wallet and have a backup. Learn from the lesson of the man who lost $7.5 million in Bitcoins when his computer hard drive got thrown away.

5. Don't Put Your Life Savings Into Bitcoin

Unlike bank accounts, Bitcoin wallets aren't covered by the Federal Deposit Insurance Corporation (FDIC). The FDIC provides coverage of up to $250,000 for a wide variety of deposit accounts. Any losses that Bitcoin exchanges suffer have to be covered either by themselves or by an insurance plan that those exchanges pay for. Exchanges have to be very vigilant of malicious hacker attacks, such as the $460 million heist on Mt. Gox.

5. There's More Than One Type of Cryptocurrency

Bitcoin is just one of several hundreds of cryptocurrencies. Just because Litecoin sounds like Bitcoin, doesn't mean that they are worth the same. One Litecoin is worth 0.01 Bitcoins. Some cryptocurrencies may have funny names, such as Dogecoin or Unobtanium, but they do have an actual market value.

6. Learn the Tax Implications of Using Bitcoin

Since the IRS treats Bitcoin as property, federal tax rules for property transactions apply to any transaction involving Bitcoin. If you only plan on using Bitcoin sporadically, keeping track of the market losses or gains of your few transactions won't be that hard. If you plan to pay with Bitcoin regularly, receive or issue wages in Bitcoin, or start a Bitcoin mining operation, then learn more about the tax implications of using Bitcoin.

Are you considering buying Bitcoin or other cryptocurrencies?

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