Did you know that the first known bitcoin purchase was for two pepperoni pizzas? A Florida programmer offered 10,000 bitcoins to anyone who would buy him a pizza. Today, the value of those two pepperoni pizzas is almost a whopping 70 million dollars!
It’s easy to get caught up in the bitcoin frenzy. Last year, bitcoin peaked at $20,000 prompting many to invest in the digital currency. But what should you know before making your first purchase? With any investment comes potential risks. In this article, we’ll discuss concepts you should understand before making any serious transactions.
1. Understand how bitcoin works
The first question someone looking to purchase bitcoin should ask themselves is how much are you willing to lose? Bitcoin is a volatile currency and if you’re investing to get some extra cash, you may find yourself in a sea of disappointment.
There isn’t an ideal amount to invest in bitcoin, but one way to figure out how much to purchase is to think about your intended use case. Do you want bitcoin to be an asset, currency, or collectable? The creator of bitcoin, Satoshi Nakamoto stated: ““Bitcoins have no dividend or potential future dividend, therefore not like a stock. More like a collectible or commodity.” Let’s briefly consider what those use cases mean.
- Asset or commodity: Bitcoin as a stored value means it will be used primarily for savings instead of day to day purchases. A person holding bitcoin for this purpose likely does so with the expectation that the value will increase over time.
- Currency: In this use case bitcoin is digital cash. This is one use case the creator of bitcoin had in mind in his original white paper. This is the common use case for bitcoin cash. We’ll discuss more on that shortly.
- Collectable: Think of how people collect old prized baseball cards or sports jerseys. These items may not have a defined value but it provides value to the owner and anyone else who desires it. There will only ever be 21 million bitcoin, so viewing it as a collectable might make sense to some people.
After you’ve decided how you want to use bitcoin, you’ll want to gain an understanding of the following:
- What exactly is bitcoin? Put simply, Bitcoin is a digital form of money.
- What’s the difference between bitcoin cash and bitcoin? Bitcoin cash is a fork of bitcoin and was created so that transactions can be completed quickly and inexpensively. Bitcoin, on the other hand can be compared to gold and can be used as a long term investment. Nether currency is better or worst than the other. They are both different currencies each with their own unique use case.
- What is blockchain? Blockchain can be defined as a public record of transactions.
- What is a bitcoin wallet? Just as a physical wallet holds physical cash, a bitcoin wallet is where you store your bitcoin.
Researching these topics won’t tell you how much to invest, but it will help you understand what exactly you’re getting into. You’ll quickly learn that there is no official bitcoin price and there is a lot of risk involved when deciding to purchase it. Just as you wouldn’t purchase a car without doing due diligence, its best to investigate bitcoin thoroughly before diving knee deep into something you could possibly regret.
- There is no official bitcoin price. The value can change at any moment for any reason.
- Before purchasing bitcoin you should have a thorough understanding of bitcoin and how the blockchain works.
- Investing in bitcoin is a high risk. It’s important to have a clear understanding of how much money you would be willing to lose before making a purchase.
- Understand the purpose bitcoin will serve for you. Will it be an asset, currency, or collectable?
For each bitcoin you spend you will need to pay a miner fee. Bitcoin miners confirm transactions by adding them to the blockchain. These fees can range from less than a penny to hundreds or thousands of dollars depending on the size of the transaction. You can view the current bitcoin miner fee costs here.
Most true bitcoin wallets include miner fees in all outgoing transactions. We’ll talk about selecting a wallet in the next section, but for now just know that the higher the miner fee the faster the transaction will complete. This is because when you pay a miner fee you are essentially competing for the attention of the blockchain so that your transaction can be added.
Think of the blockchain as a bartender who’s working with several patrons during happy hour. In order to get the attention of the bartender, some patrons may tip with cash to be serviced more quickly. Likewise, the blockchain is more likely to complete transactions with higher miner fees. Paying a lower fee doesn’t mean that a transaction won’t complete, but it could mean that it will take longer than expected to finalize.
Some bitcoin exchanges don’t include the miner fee when you make a purchase. However, wallets that include the miner fee make it easier for transactions to confirm.
- Miner fees are the amount you have to pay to add your transaction to the blockchain.
- You can purchase bitcoin from an exchange but storing it in a digital wallet help ensure you’re paying the proper fees.
- Miner fees can range depending on the bitcoin network demand.
3. Selecting a wallet
A bitcoin wallet is a collection of private keys used to store and manage your bitcoin on the bitcoin network. It is a digital wallet and can come in various forms. Here are a few examples of bitcoin wallets:
Wallets like those listed above ensure that all the necessary fees are included in each transaction. Here are a few other articles to think about when selecting a bitcoin wallet.
Why the need for a wallet?
Using a reputable wallet can help prevent transactions from going sour. For example, imagine that you want to purchase a pair of shoes using bitcoin. If your wallet does not include the miner fees then you could send the merchant less bitcoin than original purchase price. When this happens the payment will not be successful and it could take several minutes or even days before you realize that the amount you sent was not enough. While its possible for you to personally calculate the miner fee for your transaction, it's difficult to do without knowledge of how bitcoin works. That’s why having a wallet is a huge advantage. A reputable wallet will handle the fee calculations for you so that the transaction can be confirmed as soon as possible.
Coinbase is a reputable bitcoin exchange, but it’s not a wallet. Online exchanges tend to attract hackers and are less secure than storing your bitcoin in a digital wallet. In 2016, another hack took the Bitfinex exchange platform for 120,000 bitcoin, a $75 million score that would be worth more than $890 million by 2017.
- Digital wallets are a great way to protect your bitcoins and will include all the necessary fees in each transaction.
- Online exchanges (places where you purchase bitcoin) are not synonymous with wallets.
Making your first bitcoin purchase can be exciting and scary all at the same time. While there is no right or wrong way to purchase bitcoin, educating yourself on the subject is the best way to a sound decision without risking your finances. Take the time to do the research before purchasing bitcoin, your future self will thank you later.