Things To Know Before You Buy Bitcoin
You’re thinking about buying bitcoin, but you’re not quite there yet. Something is missing, but you’re not sure what. Well, you won’t learn everything there is about Bitcoin and blockchain in a day, though there are few things you should be aware of before you buy bitcoin.
This guide focuses on three things you should know before you buy bitcoin.
- What is bitcoin actually and what does it mean?
- How profitable is bitcoin trading?
- How to avoid bitcoin frauds and scams?
Let’s have a closer look at each of these.
Before you buy bitcoin #1: What is Bitcoin and what does it mean?
First of all, bitcoin, cryptocurrencies, and blockchain are nothing like traditional finance. In fact, they were created in response to traditional banking failure during the 2008 global financial crisis.
The creator of Bitcoin, a mysterious group or individual Satoshi Nakamoto strictly believed in personal freedom to transact with whomever you want, individual privacy (which is why he remained anonymous), and fragility of centralized traditional finance (evident in the corruption and abuse of its power, which also leads to detrimental events like financial crisis).
Modern money system relies on inflating people’s hard-earned cash by design to discourage saving and encourage spending. Precisely for this reason, Bitcoin was made to be deflationary (but not in a way you think).
Digital cash systems (like DigiCash or E-Gold) were already conceived in the ’90s but failed in their implementation. According to Satoshi Nakamoto, it was their centralized nature that led to their failure. That’s why the individual or group of people behind the Satoshi’s pseudonym designed bitcoin to be a completely decentralized system with no central authority or central point of failure (like central and commercial banks) to control it, freeze your account if they don’t like you, censor your transactions or simply confiscate your money without your permission. Decentralization is a security feature, too - there’s no central institution or data center to be hacked, which is why Bitcoin is the most secure financial system ever made.
Essentially, the Bitcoin Network is an open-source P2P project much like Wikipedia or Linux-based operational systems. Anyone is free to run a bitcoin node, develop applications on top of its protocol, or fork it, which makes Bitcoin the ultimate people’s money and free speech tool - something that our civilization has never had before.
Before you buy bitcoin #2: There are no guaranteed profits in bitcoin
The internet is full of pieces of advice about buying bitcoins, but you need to keep in mind that not everything applies to every instance. Your mileage may vary, as they say.
Many people looking to buy bitcoin still treat it as a get-rich-quick scheme. That is not entirely wrong - bitcoin has made a lot of early adopters filthy rich. Just look at this incredible performance during the first ten years of bitcoins existence - it’s definitely something to behold.
Despite a successful decade, there are no guaranteed returns in bitcoin. In fact, bitcoin is very volatile, and many people have lost their hard-earned money, too. A golden rule to follow here is that you should never buy bitcoin for more than you can afford to lose. Keep in mind that despite the security of a decentralized network, Bitcoin is still a social experiment in its infancy. It may succeed, or it may fail, and no one knows for sure which one it will be.
The situation is best illustrated in the following tweet by Bitcoin developer Jameson Lopp.
Before you buy bitcoin #3: Beware of frauds and scams
Third, you’ve probably heard about many hacks and scams surrounding the cryptocurrency space. Indeed, in 2018 alone, hackers manage to steal nearly $1.7 billion. But does that mean bitcoin and cryptocurrencies are unsafe? Not exactly.
Most cryptocurrency hacks happen due to security holes in cryptocurrency exchanges. Every crypto exchange has a built-in wallet where you can send and receive your crypto funds. It’s a rather convenient place to keep your coins - you can sell it anytime, and you don’t have to do anything to set up your own crypto wallet - the funds are always at your fingertips. They are like banks of the crypto world. However, there’s an issue.
Funds stored at a cryptocurrency exchange aren’t precisely yours. Exchanges do not give you any private keys which prove your ownership of bitcoin. So, if an exchange mismanages its operations, they can lose your funds, too, and it has happened many times before (ever head of Mt. Gox?).
Whether it is out of sheer ignorance or convenience, many people still keep their bitcoins in a cryptocurrency exchange wallet. This makes exchanges an ideal target for a hacking attack. It’s like a honeypot with minimal risk and maximum reward. That’s why hackers develop extremely elaborate schemes on how to rob cryptocurrency exchanges. Unfortunately, some of them are successful. Ultimately, there’s no point to rely on centralized services if you want to use a decentralized system like bitcoin. It just goes against the entire idea.
If you’re going to buy Bitcoin, do not keep it in the exchange account. Learn how to set up an own Bitcoin wallet, or simply buy a hardware one from Ledger or Trezor. It will help you to maximize your security and avoid any unpleasant situations.
Apart from bitcoin, there are more than 4000 cryptocurrencies which utilize blockchain technology in one way or another, and some of them are complete scams. Bitcoin is like a father figure to most altcoins. Some of them are mere copies of the core protocol, while others are doing something completely different.
For instance, if you’d go to Bitcoin.com or followed @Bitcoin handle on Twitter, it would like you have found an easy way to buy bitcoin. However, Bitcoin.com actually sells Bitcoin Cash (BCH), a fork of original Bitcoin (BTC). Although typically it would be treated as false advertising, Bitcoin Cash (BCH) developers believe that their version of Bitcoin (Cash) is the actual original bitcoin, even though most of the world disagrees. Since bitcoin is open-source software and not a copyrighted brand, there are misinformation campaigns like this.
If you would like to learn more about Bitcoin forks, see our Bitcoin forks guide.
Always do your own research and don’t put your money into coins that don’t inspire you with confidence. There are few gems among all cryptocurrencies that genuinely seek to create useful and disruptive blockchain-based technologies but you have to find them yourself.
Now that you’re more informed about what bitcoin is and what it isn’t, you can proceed with your purchase. Hopefully, our informative guide did not dissuade you. And if it did, that’s also good - just wait for a few years until it is much easier to use and protect your cryptocurrency.
Ideally, you should start by researching where to buy bitcoin. Our guide on choosing a cryptocurrency exchange can help you with that. You can take a look at our price tracker that will show you what is currently the best place to buy bitcoins price-wise.
There is no single fastest way to buy Bitcoin, as it depends on many factors like your geographic location and preferred payment methods. See our comprehensive exchange reviews to find out which exchanges are the best for your situation.
If you want more quick tips, see our next guide about things to know before you sell bitcoin.
Aside from bitcoin buying and selling tips, it is of critical importance to stay secure and keep your wealth from being stolen. Read our guide on security tips to learn more.