Bitcoin Explained – Chapter 8: How to buy and use Bitcoin

Bitcoin Explained – Chapter 8: How to buy and use Bitcoin

15 August 2019

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.

  

Important Notice:

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the securities, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the sole binding sales documents for the securities. It is recommended that potential investors read these documents before making any investment decision in order to fully understand the potential risks and rewards of deciding to invest in the securities. The documents and the key information document are published on the website of the issuer on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information contains an indication of past performance. Past performance is not a reliable indicator of future results.

This document and the information contained in it may only be distributed or published in countries where such distribution or publication is permitted by applicable law. As stated in the relevant base prospectus, the distribution of the securities mentioned in this information is subject to restrictions in certain jurisdictions. This advertisement may not be reproduced or redistributed without Vontobel’s permission.

20/11/2019 20:09:20

 

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