How to buy Bitcoin and Ethereum

The insane rise of Bitcoin and Ethereum makes investments in the two main cryptocurrencies very attractive. You can turn a nice profit in trading but, to play in this market, you first need to get your hands on some coins. So, how do you buy Bitcoin or Ethereum?

Like all the cryptocurrencies that matter, Bitcoin and Ethereum are mainly available through dedicated exchanges. There are also other ways to get Bitcoin and Ethereum, like mining and private trading but, for most people, an exchange is the safest and easiest way to buy into this market, so this is what we will look at here.

What are your options?

There are lots of exchanges out there for Bitcoin or Ethereum, but only a few have significant volume in a day -- like Coinbase, Kraken and Bitstamp. Those are the exchanges where the most coins are traded, which also makes them the first places to consider for buying Bitcoin or Ethereum with fiat currency (US dollars, Euro, British Pounds, and so on).

However, there are some exceptions to this rule -- and the biggest one of them is Poloniex -- which only lets you buy cryptocurrency using other cryptocurrency. Naturally, those are not an option if you want to turn your money into Bitcoin or Ethereum, but they are worth your attention later down the road, when you are considering buying other cryptocurrency.

But what you should first find out is which of those exchanges support your country. Some may be open to a limited number of markets, whereas others may be more permissive. Exchanges list the supported markets on their website, so it is easy to check which ones work for you.

If you live in the US, Canada, UK or any of the big European markets you should not have any issues here though. Regardless, there should be at least one major exchange available to you.

If you want to buy both Bitcoin and Ethereum from the same exchange, that narrows down the list a bit further. For instance, Coinbase and Kraken offer both, whereas Bitstamp only carries Bitcoin.

Research the exchange

It is also extremely important to look at the track record of the exchanges that you are considering. So, research whether they had any security problems in the past (stolen Bitcoin or Ethereum is a warning sign) and how those were dealt with (customers not getting compensated after a theft is another one).

Next find out what sort of security features they offer and how they are implemented. Two-factor authentication is a must-have option, but not all exchanges that offer it let you receive codes via SMS, for instance.

Prices can differ

In terms of prices, they do not vary dramatically from exchange to exchange, but there are some exceptions here as well. As a result, some exchanges are better for buying, others for selling. You should also look at the daily variations, if you want to take advantage of fluctuations, as some exchanges show more volatility while others are more stable.

The verification

It may seem contrary to what you may know about cryptocurrencies, but there are rules involved when it comes to trading and exchanges like to follow them. The idea of buying loads of Bitcoin or Ethereum -- through an exchange at least -- right away is not really grounded in reality.

All the major exchanges require some form of verification before you can buy Bitcoin and Ethereum. After you sign up, you will be required to upload documents that prove who you are and where you live. The type of documents supported depends on the exchange, but, generally speaking, scans of your ID and a copy of a recent utility bill or bank statement will do the trick.

What is not immediately obvious when it comes to verification is how long the whole process can take. The big exchanges get a huge number of requests these days, so it can take anywhere from a day to a couple of weeks before you get the green light. How long it takes varies, so it might be a good idea to request verification on multiple exchanges.

Account funding

There are two main ways that you can fund your account. The first is a bank transfer, for which there are generally no fees involved on the exchange side, but typically involves a stricter level of verification. The second is a debit or credit card payment, which may be available on a lower verification level, but comes with daily and monthly limits.

Generally speaking, bank transfers are ideal if you want to invest large sums of money, but you also have to add processing times into the equation. When cryptocurrencies are stable, that is not a problem, but if there is a dip you want to take advantage of, time is of the essence.

Before you make an investment, you should know that exchanges may not guarantee your money or coins in case they are stolen -- unlike a bank, for instance.

Learning the codes

Find out what the code or the abbreviation for Bitcoin or Ethereum is on the exchange that you are using. Why is this important? Because Bitcoin is commonly listed as BTC, but it can also be XBT, for instance. Ethereum, meanwhile, is typically listed as ETH.

However, there may be similar codes on the exchange, like ETC, which is a different coin altogether, although similar in name (Ethereum Classic, in this case). Buying the wrong coin is not something that you want to risk.

Trends and volatility

Take a look at the historical data provided by the exchange for the exact pair that you want to trade (for instance, BTC/USD or ETH/EUR), and set your expectations accordingly. Take volatility into account as well, if the exchange has large variations in buying prices for the day.

Use basic trading recommendations and frequently check prices before you buy Bitcoin or Ethereum. If you do not do your research, you risk losing big. If you do your research, the profits can be substantial.

For instance, buying Bitcoin or Ethereum right when there is a new price record is a massive, massive risk, because there can be a huge correction right after that. That is not uncommon.

A sensible piece of advice would be not to buy when the frenzy is at its peak, but rather to buy when there is (some) stability in the market. It may be hard to follow, but it is a safer strategy in the long run.

Much of what has been said above applies to selling as well. For instance, it may be a bad idea to sell Bitcoin or Ethereum when the price takes a massive dive, like during a correction, because you can never really know how quickly it will bounce back.

Sometimes it can take hours or days and sometimes it can take minutes. That is not to say that the price will always recover, no matter what, but in 2017 it has.

Know that trading cryptocurrency is risky, so only risk money that you are prepared to lose.

Market vs limit prices

Let's talk about the cost of buying some Bitcoin or Ethereum. Readily available you have what is commonly known as the market price. That's the rate that the exchange offers for instant purchases, and the one that you typically see when you have instant buy buttons, like $500 for a certain amount of Bitcoin or $100 for a certain amount of Ethereum.

Market prices usually do not net you the most coins for your money, because exchanges can use rates that are worse than what is available in trading. Sometimes, the difference can be dramatic, so be sure to look at the trading section to check what the difference in rate is. Generally speaking, where you get the best rate is in trading.

Order types

In trading, a basic option that you can use -- and what I recommend you start with -- is limit orders, which apply to both buying and selling. Limit orders let you set the price that you want to pay or receive for a given amount of Bitcoin or Ethereum, and, as a result, they give you (some) control over the price.

If the orders are filled, you will receive the equivalent amount, typically with a transaction fee deducted. If the orders are not filled, you can either wait for the price to be met or create new orders. Keep in mind that once you have created a limit order, the respective amount (in either fiat currency or cryptocurrency) will be reserved by the exchange until the order is filled or you cancel it.

To give you an example of why trends and volatility matter, in a period when prices are rising setting a low order price will result in an order that will not get filled until the price drops. That may not happen, so you risk losing an opportunity. At the same time, you can also end up with some cheap Bitcoin or Ethereum, when there is a large-enough drop in the market and recovery afterwards.

There are other order options available as well, in case you want to have more control over your order. For instance, you can set up an order to buy at a limit price, that kicks in when the rate reaches a certain level (called a stop).

It is important to know exactly how these work before creating one, because the naming and terminology used and the underlying principles can be hard to understand just by looking at the order page. Exchanges usually have a support section that breaks down every order type available and with an example to help you better understand them.

What's next after buying?

After your have purchased Bitcoin or Ethereum, you should decide where you want to store your coins. If you are interested in trading, it may be best to keep them on the exchange, so you can have your Bitcoin or Ethereum readily available for a quick order. There is a certain level of risk involved here though: if the exchange gets hacked or someone hacks your account you can lose everything.

An alternative is offered by private wallets, which can be ideal for the long-term storage of Bitcoin or Ethereum. With a wallet you can withdraw Bitcoin or Ethereum and make payments without restrictions. (There are different wallets for Bitcoin and Ethereum -- Ethereum has an official one.)

The benefit, if you have accounts on multiple exchanges, is that you can withdraw every Bitcoin or Ethereum to a single wallet, which is convenient. Same goes for deposits, you can transfer to whichever wallet you want. (Exchanges have wallets for Bitcoin and Ethereum, so you can deposit from a personal wallet and also withdraw to a personal wallet.)

But there is a big catch with personal wallets. It offers a certain degree of security, because you need to have both the (random) username and the password that you have set up to use it but, because the wallet is not tied to anything, if you don't have the username and the password anymore you can kiss your Bitcoin or Ethereum goodbye as there is no way to recover that information. And you would not be the first person to lose a wallet either.

Taxes

Bitcoin and Ethereum may not be clearly regulated or regulated at all in your country, but that does not mean that you will not have to pay taxes if you net a profit (or if you do any transactions involving the two cryptocurrencies). So do your research on this before you jump on the bandwagon. There is a good chance that, if you net a profit, you will net a profit after taxes too, but how much depends on what the law says.

What else?

These are the basics of buying Bitcoin and Ethereum, but if there is something else that you would like to know feel free to drop a comment in the section below.

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