5 Steps to Safely Buying Bitcoin

If you're ready to buy your first Bitcoin, make sure you do it safely.

Ready to buy your first Bitcoin? You might be buying because you believe in its original ideology or think it's a solid investment. Or perhaps you want to put some Bitcoin aside for your children. Whatever your reason, it's important to keep your investment safe.

What is Bitcoin? And what are the risks?

Bitcoin is a digital currency that was launched in 2009. It's stored using something called blockchain technology -- essentially a chain of decentralized data blocks. There are now thousands of cryptocurrencies, but Bitcoin was the first and remains the largest.

If you want to buy Bitcoin safely, you'll need to consider the risks.

Cryptocurrency is extremely volatile. This year alone, Bitcoin has gained over 200% but has seen its fair share of crashes. And even though a reputable exchange or brokerage can help protect your investment, you're still going to want to pay attention to how you can safely buy and store your Bitcoin.

Keep reading to learn how to minimize those risks and buy Bitcoin safely.

1. Research

The best way to handle this high-risk investment is to know what you're investing in and have a strategy.

Buying cryptocurrency is similar to buying stocks, but it is still in its infancy stage. That's one of the reasons it's so volatile. And with over 4,000 currencies out there, you have a lot of options to explore. Unfortunately, there isn't a crypto equivalent to an index or mutual fund to help guide you. You'll have to look into individual coins for yourself and decide which ones you believe will be profitable in the long term.

And you also won't have the same protections. If you buy stocks and the brokerage fails, the Securities Investor Protection Corporation (SIPC) provides coverage to protect your investments. If your money is in the bank, it will be FDIC insured. You're not quite entering the wild west, but some of the protections we take for granted don't exist with Bitcoin.

2. Choose your exchange or brokerage wisely

There are several ways you can buy Bitcoin, including an exchange, a brokerage, a Bitcoin ATM, or a peer-to-peer network. Check out our list of the best places to buy Bitcoin to find the right option for you.

Many cryptocurrency exchanges have resources available for beginner investors. And all the reputable firms have invested heavily in security and anti-hacking measures.

To help you choose the right exchange or brokerage, here are some things to consider:

• Is it secure? Has it been hacked? What percentage of its assets are stored offline?
• Is it insured? Some exchanges have taken out their own insurance against fraud and theft.
• What are the fees like? How much will you pay to deposit or withdraw money?
• Can you sign up from your state? Some exchanges don't operate in every U.S. state. New York, in particular, has stricter restrictions on crypto activity.

3. Decide if you want a hot or cold wallet

When you first buy Bitcoin, you may think you don't need your own private crypto wallet and decide to keep your coins on the exchange. However, a wallet is a good idea because an exchange is more vulnerable to hackers, and you don't hold the keys.

Unlike the U.S dollars in your bank account, you can't hold your Bitcoin in your hand. Instead, you own public and private keys -- and if you don't control the keys, many believe that you don't truly own your coins.

That's where wallets come in. Hot wallets are connected to the internet and are usually free. They are useful for keeping assets you might want to trade or spend.

A cold wallet is a physical device that is not connected to the internet. This is an extremely secure way to keep your cryptocurrency and a better option for large amounts of money. Even if someone steals the device, only you have the access codes. You'll pay between $50 and $150 for a cold wallet.

4. Deposit funds

If you haven't bought Bitcoin before, you'll first need to deposit some fiat currency, such as U.S. dollars, into your account. You can usually do this by bank transfer, debit card, or credit card.

You may need to provide your name, address, and photo ID. In some cases, you'll need to provide proof of address. It's also worth checking to see if your bank will allow the transaction. Mine, for example, threw up several additional warnings about fraud and security before I could transfer money.

While you can use a credit card to deposit funds, it's not advisable. You will often pay a higher fee than with a bank transfer or debit card. Also, your credit card company may treat it as a cash advance, which comes with high fees and starts to accrue interest immediately.

5. Buy your Bitcoin

After all that preparation, this step is perhaps the easiest. Log in to your exchange or brokerage account and choose how much Bitcoin you want to buy. That's it. You're now the proud owner of your very own piece of Bitcoin.

One final note: It's natural to be tempted by the high-profile profits people have earned with Bitcoin. And you may be scared you'll miss out if you don't invest now.

Even so, it's not a good idea to invest money you can't afford to lose. If you're saving your money for future plans, such as buying a house or retirement, don't risk investing in Bitcoin. And make sure you have a solid emergency fund before you do begin.

Be aware that you'll need to pay taxes on your Bitcoin. Make sure you keep track of what you buy and sell so that you can declare it correctly come tax season.

There's a lot of risk involved with buying Bitcoin. By following these steps, you have a better chance of protecting your investment.