Buying a Bitcoin: Choices, Choices, Choices

A couple weeks ago, Equities.com began a first person account of our foray into the world of bitcoin, the digital currency that has exploded in popularity the last few months. We were interested in doing the “average investor’s” take on it because bitcoin, though ostensibly a worldwide, fully democratized currency, has the feel of a subculture about it, with a lack of defined rules or regulations, or, as we found, a predominant method for even getting involved in it. So we decided the best thing to do was detail our process of buying and trading a bitcoin on the nascent online digital currency market.

With all the choices available to us – buying on eBay, going through a deep web account, the closest thing to a central bank in Mt. Gox – we settled on going through a bitcoin exchange, namely San Francisco startup Coinbase, and discussed the wait-time between paying for the bitcoin with a bank transfer (for $126 USD) to the bitcoin appearing in our “wallet.”

An email checking in on the status got a quick, friendly reply from the Coinbase staff, and the next day the bitcoin was in our account. What was interesting to us following up was the deluge of options thrust at us after the fact by readers, indicating the myriad ways to get into the market.

The origin of this series was designed as a representative example of the steps a traditional trader might go through to get involved in bitcoin. But as we move into the fourth installment in this series, we delve a little deeper into the nuances of trading in this unique, unregulated, decentralized market.    

Choices, Choices, Choices

While we went with Coinbase for our experiment, it was by no means the only option for procuring a bitcoin. Other options for “exchanges” where bitcoins can be bought and sold included the aforementioned Mt. Gox and the Slovenian-headquartered Bitstamp.

But that’s far from the only options. Bitcoins can be purchased on eBay, which bypasses the wait time for buyers. However, it should be noted that bitcoins on eBay appear to be sold at a roughly a 20 percent premium, which isn’t a percentage any trader worth his or her salt would be comfortable with.

Other options include physical marketplaces, wherein a person can hand over cash while a bitcoin is transferred into their wallet, like standard foreign currency exchange.

Or, a person can actually “mine” bitcoins.  

Digging for (Digital) Gold

Anyone can use a computer program to mine bitcoins. On the surface, mining digital currency seems a little strange – after all, couldn’t this make it so a person could conceivably make millions of bitcoins and corner the market?

But the anonymous programmer who designed bitcoin was too smart for that. The more bitcoins that have been mined, the harder it gets. And there’s only a finite number of bitcoins that can exist at any time, which acts as a kind of inflation control.

Think about it like it’s gold. There’s a set amount of gold in them hills, and the more that’s been mined out, the harder it gets. So yes, anyone can mine bitcoins – but anyone can mine silver too. Or platinum, or anything. But the manhours necessary to do so keeps most people from doing so.

Next week we'll explore the flip side of buying into the bitcoin market: trading on an exchange.