Sound Money

So, you’re interested in bitcoin and you want to get involved, but how do you actually buy the thing? There are a variety of ways to buy and store bitcoin. The answer depends on the individual allocation, knowledge, and risks, but here are a few key questions to help with this process.

TLDR: buy from a reputable exchange, make sure you can withdraw, learn about self-custody, think about your strategy, but don’t take too many steps on day one.

1. Exposure vs. actual bitcoin

You want to buy actual bitcoin, not exposure to bitcoin. Applications like PayPal and Robinhood offer exposure to bitcoin, but users must trust that Robinhood has bought the bitcoin. Clients are never allowed to withdraw bitcoin, which is suboptimal! You might not want to withdraw your funds on day 1 (see point 7 below), but you want the option. Read more about my concerns with Robinhood and the GME debacle HERE.

If, for some strange reason, you have all your capital locked up into Robinhood and you can only transact through their platform, then bitcoin exposure is better than no exposure. Or perhaps you’re only buying a tiny bit and it’s just a speculation – then I guess bitcoin exposure is palatable. But you won’t be able to use bitcoin to send peer-to-peer transactions on a decentralised network, which is what is was designed for.

Bitcoin exposure is a last resort. Rather buy the real thing. If you’re uncertain about whether or not this functionality exists, ask the platform, check out the FAQs, look at reviews online and ask a trusted crypto person on social media. Bitcoiners are very willing to help direct you towards the right platform.

2. Centralised service vs. peer-to-peer (p2p)

Any bitcoin holder can sell bitcoin to you, and you can pay them with USDs, ZARs or other currencies. You can also earn bitcoin from a bitcoiner by providing a good service. An upside of a p2p is that you don’t have to disclose your bitcoin ownership, which has privacy advantages.

However, with a p2p exchange you need to know what you’re doing. You need a bitcoin wallet, know how to use it, and personally confirm that you received funds. This process is simple for bitcoiners, but it’s not easy if you’re a beginner. So, unless you’re lucky enough to be buying from a trusted friend who is specifically helping you through the process, veer away from this option.

Exchanges allow users to log-on and interact with other users on the platform. You can buy and sell through these centralised platforms. Exchanges make money by charging a transaction fee on each trade, so they want to drive volumes. Marketing and advertising are commonplace. Elevated volumes are good for users because, unless you’re trying to trade very large volumes (millions of USDs or ZARs), you can transact whenever you want.

Most exchanges require that you provide them with personal information so that they don’t fall foul of money laundering laws. Billions of people don’t care about data privacy, so this isn’t an issue for most, but its worth mentioning.

3. How does the transfer work?

You set-up an account with exchange. They provide you with a bank account and a reference number that’s specific to your account. Then you send the USDs, GBPs, EURs or ZARs to the exchange’s bank with that reference number. Once the transactions clear, the exchange reflect the money in your account on their exchange and you can trade. Trading on an exchange involves exchanging currency for crypto and visa versa.

It’s also possible to use credit cards on some exchanges - funds may reflect quicker than bank transfers. Details can vary depending on exchange and banking sector but you get the gist.

4. Newbies tend to use market orders

New users will default to market orders or the “buy now” button. With this option you don’t choose the price at which you trade. You just take the price on the exchange at the time of execution. Fees tend to be slightly higher but new entrants tend to care less about these details as they just want to “buy now.”

As you get more comfortable you may execute limit orders where you specify the trading price and wait for the market to move towards the price you’ve specified. This tends to lower fees but there is a risk that your order doesn’t execute so there’s a trade-off.

5. Choose big reputable exchanges

It pays to go with a reasonably large reputable exchange because the volumes are large and the fees reasonable. If the exchange is large and it’s existed for a few years, then they tend to have reasonable security processes too. I’m not against small start-up exchanges but allow the experienced crypto traders to function as crash test dummies on the new platform. Let them try it out first before you put your money at risk. Waiting a few months will provide you with a little bit of insurance that everything is running well. For newbies, just stick with the big exchanges. 

In South Africa, use VALR or Luno. HERE’s my VALR referral code.

Globally, use Binance, Kraken, BitStamp or Gemini. There are some questions about CoinBase’s data privacy and business practices, but their service is good.

6. Alternatives to exchanges

There are some services which will interact with the exchanges on your behalf, like Swan Bitcoin in the US. They provide educational content, assist with self-custody of funds and setup recurring buys. It’s a great service.

Bitcoin ATMs are also an option. They tend to be a little more expensive because you don’t have to conduct KYC and people need to service the machines. You’ll also need to locate one and drive there.

7. Plan for self-custody but don’t get lost of day 1

If you’ve bought bitcoin through an exchange, it will be sitting in your account on the exchange. If your funds sit on an exchange it’s possible that the exchange can experience internal security breaches and your funds could be stolen. This would be like a security breach at a bank. Important to note that an exchange security breach is not a bitcoin hack. It’s VERY hard to hack bitcoin accounts. Exchanges are large centralised pots of money which incentivises criminals (both outside the organisation and potentially inside the organisation) to try and steal the funds.

Like banks, some exchanges are insured against security breaches, but they aren’t all insured. By contrast, all traditional banks are insured so even though they have frequent security breaches they always cover the losses. The bitcoin industry is still developing and thus it isn’t fully insured yet. The most famous example of a crypto exchange breach was Mt. Gox in 2014. Reputable bitcoin exchanges are less likely to have these types of exchange breaches in 2021 because there are more eyes on the industry today than there were in 2014. Most have better security processes than Mt. Gox. Nevertheless, the risk exists, humans can always make errors and exchanges do get hacked from time to time. The latest was OXMO in 2020. Serious bitcoiners don’t leave their funds on exchange - they withdraw the funds into self-custody and frequently say things like “not your keys, not your coins” to encourage self-custody.

The beauty of bitcoin is that it allows individuals to self-custody their funds. That is equivalent to withdrawing your money from the bank and securing it yourself, but it’s a lot cheaper and safer than physical cash. Bitcoin wallets are almost impossible to hack and they’re digital so they’re very easy to hide. However self-custody requires a level of technical knowhow. Plus, you are taking full responsibility for those funds. If you withdraw your funds, but you don’t secure your passwords properly, you can lose all of your fund. And given there is no centralised authority to cry to, you have no recourse. Most people are not used to this type of personal responsibility with their capital. You certainly do not want to withdraw all of your life-savings from an exchange on day one without having done the research about this technology and the risks involved.

There is a trade-off between self-custody and centralised ownership. I recommend that new entrants buy bitcoin on a reputable exchange and leave it there for a while. Thereafter you must plan to learn more about the technology and why it exists. Figure out how much bitcoin you want to hold and build a strategy (read more on allocation sizes HERE). If your allocation starts to grow to a level where you’d be troubled if it was stolen, start planning for self-custody. This article is insufficient for that decision. I highly recommend self-custody! It’s an important step in the bitcoin journey, but its not the first step and you don’t want to take too many steps on day one. You don’t want to lose 5000 bucks in bitcoin just because you decided to self-custody but lost the password.

Good luck out there! If you’ve got any questions, let me know.