How Does the Average Investor Buy a Bitcoin?

On Oct 2 Ross Ulbricht, the founder of illicit online drug marketplace Silk Road was arrested by federal authorities for drug trafficking and reportedly trying to order a murder. After Ulbricht was arrested, the Feds tried to seize his stash of the digital currency on which his site effectively runs, bitcoins.

The Feds have encountered a bevy of problems after seizing Ulbricht's bitcoins. It’s not just that they aren’t sure how to classify the seizure of Bitcoins. After all, are they an asset? Money? Just worthless numbers on a screen?

But more than figuring out what bitcoins really are, the Feds have a bigger problem: they can’t even get to them in the first place. Ulbricht’s bitcoin hoard (valued at roughly $80 million), which could contain up to 5 percent of the total bitcoins in circulation, are stored in a digital “wallet” that is encrypted so well even the FBI can’t crack into it.

The deluge of coverage bitcoins have experienced since Ulbricht’s capture, and the subsequent shutting down of Silk Road, piqued our curiosity. While bitcoins certainly have found a home as currency used to facilitate illegal trades, they are also gaining mainstream attention.

The Winklevoss Twins of Facebook Inc. (FB) fame have filed with the SEC in hopes of starting a Bitcoin ETF. In late September SecondMarket set up the Bitcoin Investment Trust, allowing traders to speculate on bitcoin in “real” money. And while the closure of Silk Road caused a panic and the loss of a third of the value of the currency, their price relative to the dollar has almost returned to pre-Silk Road bust levels, suggesting the marketplace for the currency has more stability and thus a brighter future with sophisticated, legitimate speculators than previously thought.    

For average investors, bitcoin raises a lot of broad questions about the nature and value of money, and the relationship between the traditional market and a digital cryptocurrency.

For us at Equities.com, however, the question is more simple: how the heck do you buy a bitcoin?

With Bitcoin, There's No There There

Bitcoin lacks a backing government, and thus a central bank. This forces investors to buy a bitcoin from one of the several exchanges operating in the digital currency. The closest thing bitcoin has to an industry leader is Mt. Gox, a Japanese website that acts as a real-money exchange between bitcoins and more established currencies. It also tracks the current exchange rate for the currency (on Oct 8, the Mt. Gox exchange rate was almost exactly $137 a bitcoin.)  

However, though Mt. Gox is the most established and respected bitcoin marketplace, it has also been targeted by US federal investigators for operating outside of US monetary regulations. In May the Department of Homeland Security seized $5 million from the exchange for operating without registering as a money transmitting company.

That made us a little skittish. Our other two major options for a bitcoin exchange looked to be the Slovenia-headquartered Bitstamp or San Francisco start-up Coinbase. Both seemed to offer a quicker turnaround time than Mt. Gox, which reportedly takes up to seven days to transfer money into and out of bitcoin (something about their bank making them wait until real money clears before completing the conversion.) But those lacked the credibility and history of Mt. Gox.

After doing some digging around the internet, it became clear that aside from Mt. Gox, there isn’t a real market center in bitcoin currency exchange. Frankly, getting into and out of the system is not easy, and though mainstream media often reports that the entire thing is completely decentralized, this fact doesn’t hit home until one simply tries to buy into the digital system, only to find there’s no one way to go about it.

Buying Bitcoins: It Ain’t Easy…

That barrier is part of what makes bitcoin so attractive to its proponents. Bitcoin traders act as if there shouldn’t be a reason to be in a rush to trade out of the system at all. Moving the currency into and out of real dollars takes days, sometimes a week.

But despite the various impracticalities arising from the exchanges, we had to choose one way in to get our money into bitcoin. Millions of people seem to trust the currency, so why not take the plunge?

While Mt. Gox has had its issues with regulators, it is, by most accounts, the closest thing the currency has to a centralized authority. Traditional as we are, we liked the idea of going with the biggest player as we sink our hard-earned cash into the cryptocurrency.

…But We’re Doing it Anyways

After going to the Mt. Gox exchange, we set up a “wallet” to hold our bitcoin. After confirming our account, Mt. Gox asked for personal information to verify our identity, and said they’d need two days to confirm. We guessed this is to protect against that whole “Mt. Gox is a money laundering operation” thing.

Giving our personal information to Mt. Gox made us a little uneasy, so next we made an account with Coinbase. That site only asked us to verify with a phone number to get started, which sounded better. After all, isn’t bitcoin’s allure its anonymity?

But hold on: after creating our wallet Coinbase sent a “phone confirmation” that required us to install the Coinbase app. This put us off, until then we noticed you can click a box to request a code instead. Done and done.

After that our wallet was created. We suppose Gigaom was right when they called Coinbase the “easiest on-ramp to the Bitcoin world.”

Success! We had a Coinbase account wherein we could buy and sell bitcoin, albeit after a bank account is verified via deposit and withdrawal 2-3 days later. Once we confirm the deposit, we’ll be online, and ready to trade bitcoin.

Bitcoin is A Lot of Work, But Now We’re Here

Frankly, we found getting into the world is far more work than the average person is willing to put in. But with startups like Coinbase getting $5 million in seed money, and more and more serious investors working to legitimize it, the “friction” of exchange is likely to smooth out.

Bitcoin, as a phenomenon, will be interesting to watch as the currency continues to evolve – or de-evolves. But regardless of whether bitcoin is worthless, the future of currency, or something in between, we’ll be a part of it, and plan on reporting back as the industry changes.