Bitcoin (BTC -0.74%) has surged in popularity, but it still seems like a mystery to many people. And one of the biggest questions beginners need to answer before investing in Bitcoin is "How do you buy it?" After all, it's typically not as easy as opening your brokerage account and placing a stock trade.
We've got you covered. In this Fool Live video clip, recorded on March 18, senior analyst John Rotonti and Motley Fool Deutschland lead analyst Bernd Schmid discuss the basics of adding Bitcoin to your investment strategy.
John Rotonti: So how do I buy Bitcoin? What do I need to do?
Bernd Schmid: Yeah, that's a great question and also, there are many different answers. I think the easiest way I would do it, I would really like to own the Bitcoin itself, you can go to a so-called exchange. It's not like a New York Stock Exchange but it functions a bit similarly. Essentially, you can create an account with them. Coinbase would be one of them, probably many people have heard it, or Kraken.com. There are many exchanges. Some are more trustworthy, some are less. I would always go for the bigger ones. So you go to Coinbase or Kraken. You create an account there and then you can send your dollars there, your field currency. You can send it there via credit card or bank wire. Then essentially, like if you buy a stock, you say, "I want to buy this many Bitcoin," and click "Buy" and then there we go. They will add it to your Coinbase wallet or account, so to say.
Rotonti: O.K., so that was my next question. What is a Bitcoin wallet? It's just your account at the exchange?
Schmid: In this case, yeah. So a Bitcoin wallet, let's start with the basic. It's essentially your access to your Bitcoin, your money. How it actually works is you can think of it as a bank account. It's never a perfect analogy if you try to compare it with a, let's call it legacy financial system, but for the sake of understanding, I think it works well. You think of it that you have a bank account and then you have a bank account number and you have a personal identification number with which you can verify that you can access this bank account. The wallet is essentially a device, it can be a software running on your computer, on your mobile phone, or there's also hardware wallets, it's like USB sticks. These sticks, they contain your bank account number. It's called public address in the Bitcoin jargon, and your personal identification number, which only you should know. This is the private key essentially. The wallet has these, mostly two things. So if you have the wallet, you know your public number, your public key and your private key, your bank account number, and your personal identification number and via which you can access essentially the Bitcoin, which are stored under this address.
Rotonti: Yeah, and you don't want to forget your password. You don't want to forget your private ID, right?
Schmid: No. That's exactly the thing. If you lose your private key, your Bitcoins are lost, that's what everybody says. There are some security mechanisms. That's a whole topic we could discuss for 45 minutes and I'm probably not the best person to do it. There are different ways to secure these things, but it's not like with the bank. There's a big difference. You cannot call a Bitcoin and say, "Hey, I lost my key. Please help me to restore my Bitcoin."
Schmid: I want to add one thing. Many people consider this important is if you buy it via these exchanges, Kraken or Coinbase, it's actually not your wallet. But how they generally work is they have one big wallet where all the Bitcoin are stored with the ones you buy, the ones I buy, everybody who buys them on Coinbase, and they're stored in one wallet. It's essentially the Coinbase wallet. Coinbase makes internally sure via their own database that you have access to the amount of Bitcoins you've ever bought. You don't really own them if you leave them on Coinbase. That's why many people argue and I think I'd do the same. You can buy or download your own wallet and always transfer it from Kraken or Coinbase to your own wallet so you really own them yourself.