What you Need to Know Before Buying Bitcoin

Despite recent volatility in the Bitcoin price, it has risen almost 30% in a year. You might be wondering how to start buying Bitcoin.

You may be feeling brave and want to try a new type of investment which has the potential to form the backbone of a new financial system. The first thing you need to know, is you don’t need to buy a whole Bitcoin currently valued at over R146 000.

Marius Reitz, GM for Africa of Luno, South Africa’s leading cryptocurrency exchange, explains that you can invest any amount from R20.

With more than 2000 cryptocurrencies in existence, he unpacks how to identify credible exchanges, what you need to know about cryptocurrency and how to get started in investing in a few simple steps.

What is Bitcoin?

When trying something new, you need to understand what it is. Bitcoin is a new technology that’s a mix of a credit card, a piece of gold and hint of ‘internet’. Because it allows you to move money so easily, Bitcoin functions as a global payment system, similar to bank transfers or credit cards. It is similar to gold in that gold can also be used as money or as an investment, but Bitcoin is much easier to move.

In South Africa, most people currently use Bitcoin as an investment, but increasingly people are using it as a payment system.

Finally, Bitcoin is like the internet in that no single person or entity controls it, and this gives it some very distinct characteristics. Bitcoin has already changed our financial system and makes money easier and cheaper to move.

How is the price of Bitcoin calculated?

The price of Bitcoin works in the same way as it would with other currencies or objects. It’s based on supply and demand. The price of a currency or Bitcoin boils down to the price a buyer and seller will agree upon.

A key differentiator of Bitcoin though, is that there is a finite supply. Once the 21 million in existence are in circulation, Bitcoin cannot be reproduced, nor can more currency be printed as with hard currency. Over 17 million have been mined to date. This scarcity drives the future value of Bitcoin and this is expected to increase as more people use Bitcoin.

What are the risks?

The same intuitive rules that apply to traditional money also apply to Bitcoin. For example, don’t invest more than you can afford to lose and don’t put all your eggs in one basket. Bitcoin is a brand-new technology and it will mature, addressing some of these risks in the process. Bitcoin is more volatile (it can move a lot in value both up or down in a short time) than many other currencies.

Transactions are like cash in that they are irreversible – so if you send Bitcoin to the wrong person, or your wallet is compromised and someone steals your Bitcoin, it might be impossible to get it back. On the upside, this makes it more secure and easier for retailers to accept with a lower risk of payments being reversed.

Just as in the traditional investment world, it is important to do your own research and to use your own judgement. Ensure that you partner with a trusted exchange with transparent investor and director information. Be wary of any scheme that promises guaranteed returns on investment. Read how to avoid Bitcoin scams and protect your crypto from hacks, scams and phishing and use Luno built-in security features like OTP (one-time-pin) authentication.

What happens if the price goes down after I buy?

Just like investing in shares on the stock exchange, ideally, you buy Bitcoin at one price and then sell it at a higher price. You can expect lots of spikes and troughs, but when viewed as a long-term investment, the price is on an upward trajectory despite all the ups and downs over the past few years. You are in control and make your own decision about whether you’d like to wait for a higher price or at which point you want to sell.

 How do I get Bitcoin?

You can buy Bitcoin from a credible exchange provider, like Luno. This is similar to how you would buy shares online.

Just like traditional money, you can earn it by providing goods or services, and asking for people to pay you in Bitcoin rather than in traditional money. This is one of the easiest ways to get your hands on some Bitcoin. Online retailers, including Bidorbuy, allow you to make purchases with Bitcoin.

How does the Luno exchange work?

An exchange is simply a platform that connects potential buyers with potential sellers. It allows them to exchange things like products, stocks, currencies and in Luno’s case, Bitcoin and Ethereum. Luno doesn’t buy or sell Bitcoin, neither does it set the rate of exchange. Rather, Luno is simply the platform to connect buyers and sellers.

Opening your Luno account or wallet is quick and painless. After downloading the app, verify your identity and submit required documents. In just minutes you are ready to buy cryptocurrency.

How much do I buy?

One of Bitcoin’s distinct characteristics is that you don’t have to purchase a single Bitcoin currently valued at around R146 000, but you can buy small fractions from as little as R20.

Once you’ve deposited money via EFT from your bank, you’ll choose the cryptocurrency you want to buy (Bitcoin and Ethereum are traded on Luno).

You can then track the price of your chosen currency in Rand. Selling cryptocurrency is just as easy. Simply select the ‘sell’ option and enter the amount in Rand you want to sell.  There are transaction fees payable for buying and selling cryptocurrencies, which range between 0 and 1% per transaction on Luno.