How to Buy Bitcoin with a Bank Account, Cash, or PayPal

How to Buy Bitcoin with a Bank Account, Cash, or PayPal

How to Buy Bitcoin - Normally I would not recommend a book that tells you how to make money in the stock market. Most of these books are aimed at gullible folk, and they usually make much more money for their authors than they do for the investing public.
—Financial Times writer Gavyn Davies

People have called Bitcoin a network, a distributed ledger, and various other things, and they aren’t incorrect. But above all, Bitcoin is a currency, a way to track and transfer value. And when it comes to currency, people inevitably ask how they can get a lot of it.

I can’t teach you how to get rich off Bitcoin. If I had a foolproof plan, I would be implementing it instead of writing this book. What I can do is give you a basic overview of the landscape, some fundamental techniques for working with Bitcoin, to hopefully set you off in the right direction.

Day trading, the practice of making daily trades in order to make a profit off of volatile securities, is undoubtedly lucrative for some. People make money every day buying and selling Bitcoin and other cryptocurrencies. I don’t. Part of the reason is that I don’t have the disposable income to risk and make the potential payoff worth the time and effort. But that isn’t the only reason.

Cryptocurrency day trading is ruthless. Outside of Bitcoin and a few other major altcoins and projects, nearly every other cryptocurrency has a horrible long-term outlook with the only potential profit to be grabbed by riding usually manufactured speculative bubbles. The reason they have a bad long-term outlook is because most of them don’t bring anything new to the table—or if they do, it isn’t enough. 

Ethereum has gained acceptance with some mainstream companies, with large banks such as UBS and Barclays announcing experiments with the technology, but this is exceedingly rare. Only a small fraction of altcoins bring anything new to the table, only a fraction of those have shown long-term viability and only a fraction of those have demonstrated any interest from outside the cryptocurrency community.

That isn’t to say the space isn’t full of innovation and well-meaning developers; it is. But even as emergent technologies go, I can’t call them a half-safe investment. Most of them only exist to pump-and-dump—more on that later—and bring nothing new to the table.

At the time of this writing, the space is largely unregulated. Laws such as New York State’s BitLicense are coming into effect, but authorities have so far focused on making sure exchanges are following anti-money laundering (AML) and know-your-customer (KYC) regulations. They don’t seem to have much interest in preventing insider trading, market manipulation, or the other hijinks that are common with the more obscure altcoins and in any unregulated security market.

Much of the issue can be avoided by sticking strictly to Bitcoin and perhaps a few of the larger altcoins. The larger a market, the harder it is to manipulate, with or without regulators. The most common way to manipulate any market is to make small, incrementally higher buys to make the market appear to be going up. Once the market is high enough, the manipulator sells all of his or her cryptocurrency—or stock or other security—at the new price that they created. These are the basics of any pump-and-dump scheme. It is more difficult with larger markets because the manipulator will have to make more buys to influence the price.

My first direct experience with Bitcoin day traders was at the Bitcoin in the Beltway Conference in Washington, DC, in 2014. I met a few former Wall Street traders who had transitioned into Bitcoin consultants and day traders. After two days of nearly 12-hour-long conferences, I met up with them at an afterparty.

As the party was winding down, one of them said something to me that made me realize that I don’t have the dedication required to be a successful day trader. It was nearing 1:00 a.m., everyone was ready to pass out after two full days of conferencing and partying, and he asked if I wanted to hang out for a while longer because “the Japanese markets wake up in a few hours” and he was planning to make some profit on that action.

It dawned on me then that Bitcoin day traders are animals. You can’t hope to compete with them unless you become equally obsessed. To get to that level, you will need more than this book. Making money without any actual work is an extremely competitive industry and requires, ironically, a lot of work. Unlike the stock market, the Bitcoin markets never close, and it is possible to wake up and find that all your hard work during the previous day was wiped out by a massive early morning price swing.

My recommendation is to bet on Bitcoin long-term. Purchase Bitcoin, put it in a safe place and then wait and hope that the price rises over the next five, 10 or 15 years. Buying Bitcoin is relatively straightforward; it simply requires finding someone willing to sell it to you. The first few chapters of this section explain how to obtain and store bitcoins with the intention of holding them long-term. 

If you are determined to get into day trading, this book gives you the basics but don’t expect to make thousands of dollars without any work and without learning from someone more experienced. I recommend you search the Internet for guides not only on how to day-trade Bitcoin but also the fundamentals of trading traditional stocks. Many of the same principles transfer over to the Bitcoin world and unless you master them, you will always be a step behind the most advanced traders.

Buying Bitcoin with Cash


Buying bitcoins is possible in almost any country, although it is easier in some than in others. The most reliable and private way of buying bitcoins directly with cash is to use LocalBitcoins (localbitcoins.com). To do so, log onto the site, select “cash” under “in person” in the payment method, type in your location, and see if anyone nearby wants to sell bitcoins for cash.

You can either submit a buy order yourself and wait or find an existing sell order and purchase those bitcoins. If you wait, you might get a good deal from someone looking to offload their bitcoins quickly. If you buy bitcoins from someone who has already put in a sell order, you can expect to pay a small premium over the market price. You will then have to arrange to meet the seller in person, so make sure you read their reviews and pick a public place like a coffee shop.

To conduct the transaction, you will need a Bitcoin wallet. A web wallet with a mobile app is preferable to a paper wallet, because you want to be able to easily check that the transaction has gone through before you hand the cash to the seller. You can then transfer the bitcoins to an offline or paper wallet at your leisure.

The actual process is pretty simple but I’ll go over it since it will likely be a new experience for you. First, you’ll need a Bitcoin wallet, preferably one installed onto your smartphone. Armed with that and some cash, you can meet the seller anywhere you’d like that has an Internet connection. Each wallet app is different, but there should be a way to pull up a QR code, which is a black-and-white box like the one at the beginning of this book.

The seller will scan that using his smartphone’s camera and will then send over the agreed number of bitcoins. It shouldn’t take long to show up in your app. If it isn’t a large purchase, at that point you can hand over the cash and the transaction will be complete.

Theoretically, you should wait for three to six confirmations on the blockchain. I talk more about confirmations in the mining chapter but for now, just know that it indicates how many times the Bitcoin network has had a miner or full node check the transaction to make sure it is valid. Most wallet apps will give you an indicator of how far along a transaction is to being confirmed enough to be considered safe.

This is really only necessary if the transaction is extremely large; for a smaller transaction, one confirmation is usually enough. A double-spend attack, where someone selling bitcoins tries to sell them twice before the network confirms the first transaction, is extremely difficult for reasons I talk about elsewhere in this book, but difficult doesn’t mean impossible—so for large transactions it is best to wait until the transaction is confirmed.

It is possible to buy bitcoins with cash a few other ways on LocalBitcoins, including a cash deposit into someone’s bank account or buying someone a gift card. You can also purchase bitcoins using any electronic payment method you can think of: Western Union, Walmart-2-Walmart, Skrill, and many more. LocalBitcoins offers third-party escrow to reduce fraud but sellers will often put high requirements on the buyer to prove their legitimacy. 

Ultimately, LocalBitcoins requires a lot of trust on the part of the buyer outside of local trades. In addition, US law enforcement is seemingly watching the site and has occasionally arrested sellers, accusing them of running unlicensed money-transmitting services. No buyers have been charged with any crimes, only sellers, but it is something to consider if you plan to buy and sell bitcoins regularly with the service.

The site Bitquick.co also offers bitcoins for cash deposits and uses an escrow system. You simply have to pick a user that has a bank in your area, take the information provided to that bank and deposit cash into that person’s account. Three hours later, bitcoins should be delivered to the Bitcoin address you specified.

There is one other way to buy bitcoins anonymously with cash: Bitcoin ATMs. This method is highly dependent on your location, as Bitcoin ATMs are only starting to show up around the nation and the world. Some of them aren’t anonymous and require phone numbers and government ID scanning before they can be used but others are pretty accessible. The fees for these machines vary from reasonable to outrageous, so do your research before driving a long way. 

There are some online tools available to help you find these ATMs. Coinmap.org, for instance, is an open-source solution to finding Bitcoin ATMs, as well as businesses that accept payment in bitcoins. Coinatmradar.com is another good service that provides information on fees and conversion types. Some Bitcoin ATMs only take fiat and put out bitcoins; others will allow transactions both ways, though they generally have higher fees.

Bitcoin is a digital currency, however, so it makes much more sense to purchase it online. Although there are only a few options for buying Bitcoin physically, there is a vast number of options for buying it digitally. Below are the most secure and reputable services. While there are countless others, many of which are perfectly safe, reliable, and reputable, it is impossible to list them all here.

The one bit of advice I can give is that if it sounds too good to be true, it probably is. Any site offering a significantly better price than other exchanges is probably running a scheme or a scam. A few cents off the price of Bitcoin is a reasonable spread but any massive difference between exchanges is quickly eliminated by traders looking to take advantage of arbitrage opportunities. If a site has a large spread, regardless of what it might claim, something funny is likely going on.

Buying Bitcoin with a Credit Card


Purchasing bitcoins with a credit card or a bank account is the quickest and probably cheapest way of obtaining bitcoins in the US, though it also creates an obvious link between your Bitcoin account and real-life identity. Most of the reputable services in the US follow the KYC (know your customer) and AML (anti-money laundering) laws and you will likely be forced to comply with them by providing information about your identity.

Even if the particular jurisdiction does not have laws specific to Bitcoin, it will likely be subject to the local government’s financial services laws. Moreover, most exchanges are attempting to get in front of any pending legislation by preemptively self-regulating.

As I have already mentioned, there are dozens of companies that will allow you to buy bitcoins using a credit card. The three giants of the industry, however, are Coinbase, Bitstamp, and Circle. Bitstamp suffered a hack earlier in 2015 and later had embarrassing details leak out in a court case with its insurance company but no consumer funds were lost. Coinbase and Circle both currently have spotless security records but you should always do a Google search for news on recent developments before handing over your credit card information.

The transaction fees are variable. Depending on the merchant, fees can range from zero percent for the first few thousand dollars per week to a flat one percent fee.

Most sites require identity verification so you will likely have to send a photocopy of your ID card as well as a bank statement or other proof of residence. Some sites might even require two forms of ID. Verification levels depend on how much you are purchasing. If your activity is deemed suspicious, you might be asked to provide further verification.

In addition, some of these sites—Coinbase in particular—have gained some notoriety for keeping an eye on their users’ Bitcoin activity and taking (some would say) extreme actions against them. If, for example, they determine a user is using their bitcoins for illegal or quasilegal activities such as gambling, they might freeze that account. For this reason, anyone planning to gamble or even do a lot of business on LocalBitcoins should mix their coins using the methods described in Chapter 6. Or better yet, move the coins off the exchange and use a local PC wallet to perform transactions.

Buying Bitcoin with PayPal


Buying with PayPal comes with a certain amount of risk for the seller. No reputable exchanges accept PayPal directly, despite what some sites might claim when you run a Google search. A few sellers on LocalBitcoins will take PayPal but they will usually charge extra for the convenience and might only deal with accounts that already have a good reputation on the site.

The reason for these hassles is that PayPal transactions, unlike Bitcoin transactions, are reversible. This is technically true with credit cards as well but it hasn’t been as much of an issue. The biggest issue is that PayPal accounts have been susceptible to hacking, mostly due to user error (weak passwords, etc.). If someone purchases bitcoins with a hacked PayPal account, PayPal will reverse the transaction, but the Bitcoin seller who legitimately sent the coins will have no way to recover the coins they already sent.

But that doesn’t mean you can’t buy bitcoins with PayPal. You just have to be a little creative. If you spend any time online, you might have heard about the online game and community Second Life. Second Life has its own built-in virtual currency called Linden Dollars. Linden Dollars is not a real digital currency, much less a cryptocurrency; it is simply an in-game currency that people are willing to buy with real currency.

Linden Labs, the company behind Second Life, came up with the genius idea of creating a real economy existing in a virtual world and gave it its own currency. Linden Dollars allows users to buy and sell goods, services, and virtual real estate to and from each other, rather than buying everything directly from Linden Labs itself. Although Linden Dollars is completely centralized and Linden Labs can digitally “print” an unlimited number of Linden Dollars at any time, it has done a commendable job of keeping the right amount of scarcity while still giving new adopters a way into the economy. 

The virtual Second Life economy has grown to the point where there are authorized resellers of Linden Dollars. As with cryptocurrencies, Linden Dollars also fluctuate in value and some people even day-trade them. One authorized reseller is VirWoX and it has the option to cash out in bitcoins. The PayPal → Linden Dollar → Bitcoin chain of transactions will end up costing you around a six percent fee, but it is probably the safest way to purchase bitcoins with PayPal.

Buying Bitcoin with Gift Cards


As mentioned above, buying gift cards and then selling them on LocalBitcoins is an option but there are others. Cardforcoin.com is a relatively new service. It started out allowing you to buy Starbucks gift cards with bitcoins and eventually evolved to allow users to buy and sell gift cards from a selection of stores, including Starbucks cards, with bitcoins. As always, do your own research, especially if you are reading this book years after it was first published.

The bottom line is that the most difficult aspect of the Bitcoin ecosystem remains getting into that ecosystem. Once inside, it is virtually effortless—other than making sure the companies you use are reputable—to take advantage of all the services offered within it.

If Bitcoin is going to enter into the mainstream, however, the community needs to make it easier for people to join. Services such as Circle go a long way toward making Bitcoin seem professional, but it is still too difficult for users to quickly buy bitcoins for their first time. Once set up, things are generally easy but getting over that initial hurdle remains difficult, as no one wants to upload personal documents or meet a stranger at a coffee shop to buy something they are only curious about. For Bitcoin to go mainstream, the community or a company needs to find a solution to the problem.

Purse.io


Purse.io is quickly becoming a staple of the industry. It gives Bitcoin users a five percent or more discount on Amazon goods when they buy with bitcoins. The flip side to that are people who want to turn their credit cards, Amazon gift cards, or PayPal accounts into Bitcoin. A Purse.io Bitcoin user places an order for the Amazon item he or she wishes to buy, and then someone who wants some bitcoin and doesn’t mind paying the fee will purchase it for them and have it sent to the Bitcoin user’s address.

Purse holds the bitcoins in escrow until the items arrive at the Bitcoin user’s residence. Currently, the service is one of the best ways for Bitcoin users to save money and for outsiders to quickly get into Bitcoin.

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