How Do I Get Bitcoin?
Table of Contents
- An individual can buy bitcoin with fiat currency or other tokens.
- A bitcoin mining machine earns bitcoin by working to build the blockchain.
- Anyone with internet connection and a Bitcoin wallet can be paid in bitcoin.
- Cash, credit card, debit card, bank wire, automated clearinghouse, or payment application can be used to buy bitcoin.
How to Buy Bitcoin
Individuals looking to acquire bitcoin have many options at their disposal, and each option presents unique benefits and drawbacks. Buying bitcoin with fiat money is the most common method of acquisition.
Know Your Customer (KYC) Requirements
Financial Crimes Enforcement Network (FinCEN) requires financial institutions to collect certain information about bitcoin investors. Accordingly, investors who buy bitcoin with fiat money at a FinCEN-regulated financial institution, such as a brokerage or exchange, must complete the Know Your Customer (KYC) process. Investors who transact bitcoin peer-to-peer may not be governed by this rule.
There are several steps in the KYC process. First, a bitcoin brokerage or exchange must collect the investor’s legal name, date of birth, physical address, email address, and social security number. This initial KYC is typically automated, meaning that computers review the information provided by the investor. The financial institution client services team will then verify the name, date of birth, and physical address. If the investor wishes to withdrawal bitcoin to self-custody, the financial institution may also require them to submit photo identification, such as a driver’s license or passport.
Exchanges and Brokerages
Exchanges, brokerages, and OTC desks are the most prominent market makers that facilitate bitcoin trades and investments. Most brokerages and exchanges make it possible for an investor to buy bitcoin within a matter of minutes. To buy bitcoin through a brokerage, exchange, or OTC desk, the investor would create an account, complete KYC requirements, connect a bank account or credit card, and then purchase bitcoin.
An exchange does not provide liquidity because it does not hold any assets. Conversely, a brokerage is actively involved in the trade, and thus provides liquidity. An OTC desk acts as a direct dealer or supplier, and is generally restricted to institutional clients and time-sensitive purchase orders. Brokerages typically purchase bitcoin from an OTC desk on behalf of their clients.
An individual can buy bitcoin from a Bitcoin ATM, which accepts fiat currency in exchange for bitcoin. Some Bitcoin ATMs have more lenient KYC standards in comparison to exchanges, brokerages, or OTC desks. However, bitcoin ATMs often charge a higher fee than other purchase options.
Bitcoin can be bought through a payment application, such as Paypal and Venmo. However, these applications aggregate coins from many users into large institutional wallets. This means that an individual who holds bitcoin on these platforms might not have the option to send bitcoin from the payment application to an external wallet.
Private keys are used to spend bitcoin, and confer ownership of bitcoin. A user will not be able to transact on the blockchain without a private key. This explains a popular Bitcoin mantra “Not your keys, not your coins.” Individuals who desire to transact with bitcoin and control their private keys generally do not buy bitcoin through a payment application.
How to Fund a Bitcoin Purchase
Bitcoin can be purchased with a credit or debit card, wire transfer, ACH payment, or through a payment application. Payment applications and cards charge higher fees on bitcoin purchases, but they remain a common and accessible option for low volume orders. Wire transfers and ACH payments have longer settlement times but lower fees, which may be preferable for larger bitcoin purchases.
Bitcoin can be bought by wiring funds directly to a bitcoin financial institution. Bank wires relay information between connected banks at the request of a client, allowing an investor to send money from their bank account to the institution through which bitcoin will be purchased. Bank wire transfers are typically used for large bitcoin buy orders, and excess funds are kept on the platform as a cash balance.
An individual can also buy bitcoin with a bank transfer that is facilitated by an automated clearing house (ACH). ACH systems settle transactions in batches and can take three to four days to complete a transfer. After placing a buy order, funds are typically debited from the linked bank account between 1 to 3 business days.
Credit or Debit Card
Bitcoin can also be bought with a credit card or a debit card. These purchases will include an interchange fee charged by the credit card brand, which typically hovers around 2%, plus an additional fee charged by the credit card processing company.
How to Earn Bitcoin
An individual can earn bitcoin by working to mine new blocks for the blockchain, or by performing labor in exchange for bitcoin as compensation. Earning bitcoin is different from buying bitcoin; work must have been performed to receive the bitcoin, as opposed to buying the bitcoin from a financial institution. Earned bitcoin is also taxed differently than bitcoin purchases and sales.
The most notable method for earning bitcoin is mining bitcoin. Bitcoin miners perform two key functions for the network: minting new bitcoin and processing transactions on the blockchain. The earning potential of a bitcoin mining operation will depend on the hardware cost, the hash rate of the Application-Specific Integrated Circuit (ASIC) mining computer, the cost of energy, and the total block reward.
The amount of bitcoin obtained from mining is based on the miner’s compute power relative to the total computing power of the network. This means that smaller operations are unlikely to earn bitcoin unless they pool resources together. It also means that an individual is incredibly unlikely to receive the block reward in its entirety. Miners also receive a transaction fee provided by users upon their submission of a transaction bid to the mempool.
Bitcoin As Compensation
Anyone with internet connection and a Bitcoin wallet can accept bitcoin as payment. Many merchants in the U.S. accept bitcoin as payment. Professional athletes, including Trevor Lawrence, Saquan Barkley, and Russell Okung, have negotiated contracts to receive bitcoin as a portion of their compensation.
Transacting On the Blockchain
An individual can send and receive bitcoin on the blockchain. Transactions on the blockchain occur in a parallel marketplace. On one side of the market, users place a transaction in the mempool, which can be thought of as their ask price for a transaction settlement. Then, miners will include that transaction into a block and process the transaction if the reward is above their bid price.
How to Send Bitcoin On the Blockchain
- Obtain the address of the receiver.
- Enter the address into a wallet.
- Enter the amount of bitcoin being sent.
- Enter the desired transaction fee.
- Enter the wallet password.
- The wallet will automatically use the private keys to sign a transaction.
- Ensure the wallet is connected to the Bitcoin Network, usually via the internet.
- The wallet may let you confirm the details before broadcasting a transaction.
- The wallet will inform you when the transaction has been confirmed.
The Lightning Network
Bitcoin payments do not have to occur on the blockchain. The Lightning Network is a second level payment system, which is lighter and more cost-efficient than transacting through the blockchain. With Lightning, parties form interconnected and censorship-resistant liquidity channels. These liquidity channels facilitate faster payments with lower transaction fees through a distributed network of payment and data routers called Lightning nodes.
Other Ways to Get Bitcoin
Sometimes an individual can obtain bitcoin at little or no cost. In these scenarios, bitcoin is either gifted to promote the network or inherited by a beneficiary.
Bitcoin Airdrops and Faucets
A bitcoin airdrop distributes free bitcoin. A bitcoin faucet releases small amounts of free bitcoin in sporadic intervals to users through a connected wallet. Airdrops and faucets are no longer common. Accordingly, users should be skeptical about any service offering to send them free bitcoin. Bitcoin received from an airdrop or faucet is taxed at the individual’s income tax rate.
Airdrops and faucets were popular in the first few years of Bitcoin’s existence, when bitcoin was cheap and demand was relatively low. Airdrops and faucets were a method for increasing bitcoin adoption, and essentially gave free bitcoin to anyone willing to provide an address. One prominent and early example of a bitcoin airdrop occurred in 2010, when Gavin Andresen, one of the earliest Bitcoin developers, created a faucet to periodically give out free bitcoin.
Airdrops have become less frequent in recent years because the value of bitcoin has increased significantly, and it is no longer economical for Bitcoin evangelists to give away free bitcoin. One recent airdrop occurred in 2021, when the El Salvadoran government airdropped $30 in bitcoin to its citizens shortly after adopting the currency as legal tender.
As the population ages, bitcoin inheritance and estate planning will become increasingly important. Depending on the storage method and purchasing activity, there are several options for ensuring that the appropriate beneficiary will inherit your bitcoin. If a beneficiary has not been established through a service or tool of the custodian, then decisions about Bitcoin accounts defer to estate planning documents or Power of Attorney.
Invest in Bitcoin.