Bitcoin: While you may be at ease investing in stocks or ETFs, purchasing and selling a cryptocurrency such as bitcoin involves a distinct procedure. Here are five important things to know before you start trading bitcoin.
You will require a crypto wallet
Money in the form of dollars and cents may be stored in a physical wallet. However, bitcoin is digital and only exists on the blockchain, necessitating the use of a crypto wallet to purchase and sell it. A crypto wallet isn’t a physical location for storing your cryptocurrency, but rather a piece of software or hardware that safeguards the public and private keys that allow you to exchange bitcoin.
• Software Wallets: You have the option of using a mobile wallet or app or a desktop wallet. These wallets, also known as hot wallets, are software-based and need a secure internet connection to access. They are handy and may make trading on exchanges easier, but any third-party software may be subject to cyber assaults.
• Physical wallets: A cold wallet downloads and secures your crypto keys using hardware, such as a thumb drive. This form of wallet is more difficult to use; you must connect it to a device to conduct a transaction. However, it has the potential to be more secure and less susceptible to hackers.
The main disadvantage is that you might lose a cold wallet and, with it, the keys that allow you to access your cryptocurrency.
Recognize Public and Private Keys
Bitcoin, like most other types of cryptocurrency, is based on the blockchain, a permanent digital ledger that records all bitcoin transactions. A complicated cryptographic mechanism is known as Proof of Work, or PoW is used to verify and add Bitcoin transactions to the blockchain.
So, to purchase, trade, transmit, or receive bitcoin, you must have a public key (basically the digital address of your wallet). However, you will also need a private key, which will let you access the bitcoin you hold. You will be unable to access your bitcoin if you lose, misplace, or forget that private key. Your bitcoin may be stolen if the private key gets into the wrong hands.
Choose a Trading Location
With the exception of certain new bitcoin-based assets, it is typically not possible to trade cryptocurrency on a conventional exchange such as the NYSE. To buy and sell bitcoin, you must use a crypto-based trading platform, such as an online exchange or app, or a conventional brokerage that enables crypto trading.
Crypto exchanges are classified into three types: centralized, decentralized, and hybrid. Most crypto exchanges provide crypto-to-crypto or fiat-to-crypto trading (meaning, you can use a traditional currency like dollars to buy and sell bitcoin and other cryptocurrencies).
• A centralized cryptocurrency exchange is a platform where cryptos are purchased and traded with the assistance of a third party.
• Decentralized exchanges (DEX) enable crypto investors to trade directly with one another, eliminating the need for an intermediary.
• Hybrid exchanges strive to combine the best of both worlds, such as the liquidity of a centralized exchange with the security and anonymity of a DEX.
You may also utilize P2P, or peer-to-peer, exchanges, which are more like open marketplaces where users can trade cryptocurrency directly with one another. Consider the convenience of use, whether your assets are protected, and the varieties of cryptocurrency available when selecting a P2P exchange.
To open an account with an exchange or brokerage, you must supply your social security number as well as bank account details. If the site follows normal KYC (Know Your Customer) guidelines, you will be required to present a government-issued photo ID.
If you value your privacy while trading bitcoin, you should think about whether you want to utilize a brokerage, crypto exchange, P2P exchange, or another option.
Add Money to Your Account
You may fund your trading account using a bank account, a debit card, a credit card, a wire transfer, or other kinds of cryptocurrency. It depends on where you want to trade and what currencies the site supports for trading.
Although trading bitcoin is allowed in the United States, certain banks may flag or even prohibit deposits to crypto-related sites or exchanges, so check with your bank first.
Also, make careful to investigate any costs related to various payment alternatives and exchanges. Credit cards, for example, incur a processing fee in addition to transaction fees, and bitcoin transactions may be seen as cash advances. Crypto exchanges often impose transaction fees, which may be either a flat fee or a percentage of the deal value.