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Acquiring Bitcoin: How to Avoid Centralized Exchanges

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If you search Google for how to buy Bitcoin, or for a Bitcoin exchange, far too many roads will lead you to centralized exchanges. Bitcoin is not a centralized currency, as you know, but instead is secured and generated via a global peer-to-peer network and ledger called the Blockchain.

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This article intends to be an overview on how to keep your sound money sound, how to truly be your own bank and not rely on the whims of an exchange like Coinbase or any of its major competitors. First, perhaps, we should discuss why one would want to avoid a “top shelf” exchange like Coinbase.

The first thing you should know about Coinbase is that they have frequently been guilty of canceling trades during the escrow period for bank and credit card purchases. They typically use “security” as an excuse for these cancellations. Here is an example of a group of Coinbase users complaining about this process. These cancellations rarely occur when the price of Bitcoin drops between the date of purchase and finalization of the transaction, rather they occur when the price of Bitcoin swells.

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Secondly, Coinbase is overly friendly with regulators. Despite fighting a blanket order by the IRS for customer records, the company will freeze accounts on a whim. The centralized nature of the exchange allows them to hold user funds, be they in fiat currency or cryptocurrency, for long periods of time. For someone intending to profit through Bitcoin trading, or even simply to secure wealth, this can be a lot of unnecessary headache.

An alternative way to trade bitcoins

How is this headache unnecessary? There are alternative ways to trade. A decentralized, peer-to-peer currency does not rely on agents such as federal reserves or banks like Coinbase. Instead, it relies on other users of the currency, which is one of the reasons regulators are weary of it. Just like cash, the criminal element can of course use Bitcoin and other cryptocurrencies to mask their financial activities from government authorities. This can be said about any article of value, however, from precious metals to vehicles.

For the purpose of this article, the writer can personally recommend LocalBitcoins.com. LocalBitcoins is a worldwide platform of peer-to-peer traders. In the same way that eBay early on relied entirely on user reputation, trading on LocalBitcoins can be risky if you go in blind. It is important to always read the user profile for positive feedback, and any user with more than a few negative feedback comments is probably not worth taking a risk on.

However, LocalBitcoins does use an escrow system, which is the exchange itself’s primary function. In-person trades for cash or other items can be escrowed within LocalBitcoins, and once the funds have been received by the seller, the coins can be released. This writer, however, has personally never done an in-person trade. Primarily this writer has used Paypal and Western Union to do trades, on the selling bitcoin side. From a buyer’s (your) perspective, without this writer’s 100% positive feedback, it would be overtly risky to send funds first via Paypal or Western Union. From the seller’s perspective, it is also risky to accept Paypal, because Paypal transactions can be reversed whimsically. This is why feedback and trust are important on the platform.

But there are several advantages you cannot get with centralized Bitcoin exchanges like Coinbase. First, LocalBitcoins can be used as a standard currency exchange once you have Bitcoin. You can then purchase funds in most of the world’s currencies using your Bitcoin. If you manage to buy Bitcoin low, this can be a force multiplier in FOREX trading, since many FOREX exchanges give no heed to Bitcoin at all.

Second, there is a wider and more competitive price market. Depending on the payment method, sellers will sell Bitcoin at different rates to compete with other sellers. Sometimes the mark-up on smaller buy orders can be as high as a few hundred dollars.

Third, signing up for LocalBitcoins is less involved in terms of privacy. One does not need to have a bank account, or any account at all, linked with LocalBitcoins in order to trade. A Paypal account or cash, or a variety of other methods the world over (or even a payment method not listed on the site) that one can take to a money transfer service will be sufficient. One can even exchange gift cards for Bitcoins on LocalBitcoins. The exchange will ask for your photo identification card once you have begun trading. Again, this is much less involved than the process presented by Coinbase.

One thing should be said before we bid adieu: never, ever leave coins on the exchange overnight. Doing so involves the same hazard as using a centralized exchange entails: risk of total loss. Negligible amounts, maybe, but it is unadvisable to leave bitcoins in any wallet to which you do not have physical access.

In the next Acquiring Bitcoin article, we will discuss, in concrete terms, how to make your first peer-to-peer Bitcoin purchase via LocalBitcoins.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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9 Comments

9 Comments

  1. Angel1236

    March 9, 2017 at 1:22 pm

    Hi
    my name is Andrew
    I have no bitcoins but was in the process of buying .
    First would like to say im very pleased i joined Hacked.com
    Looking forward to peer to peer purchase via localbitcoins
    Andrew

    • Edward Talliot

      March 9, 2017 at 4:08 pm

      That is great to hear Andrew. We are here to help and enlight!

  2. tadej

    March 9, 2017 at 4:49 pm

    Hi,

    I’m also a new user of hacked.com. I do posses significant amount (at least for my financial capabilities) of BTC and I do leave them on the exchange (BITSTAMP). I know hotwallets are the most insecure method of storing BTC. The only reason I’m doing this is to avoid loosing my hard earn money meaning I can be prepared and sell when the market is going down and minimizing my loss. Especially now in the time of big volatility approaching SEC decision. Once we get over this period I plan to transfer BTC to hard wallet or paper wallet. In your opinion what is the best solution to keep the BTC safe and still have flexibility to react to the market changes?

    Thanks

    Tadej

    • P. H. Madore

      March 9, 2017 at 7:42 pm

      Hi Tadej,

      Previously I would have recommended the Armory Bitcoin wallet, but they have since discontinued development. Currently, I personally use the Bitcoin Core wallet, and I have transactions on it password secured. The only issue I face is I must pay increasingly significant fees when transacting. It’s good that you are aware that it is a very bad idea, especially with Bitstamp and others, who have previously been hacked, to store your bitcoins in a hot wallet which you don’t control. It would be more ideal if they allowed you to import private keys, and then you could simply store coins across multiple cold wallets. But, for your purposes, I believe the best available wallet at this time is Bitcoin Core. You may be willing to use Electrum, as few people have ever had serious issues with that program, in order to avoid storing and downloading the blockchain. However, given that you are financially secure, it would be even better for you to acquire a Linux laptop with extreme security settings and use it only for storing your coins, while keeping it segregated from all networking the majority of the time. I hope this helps.

      PHM

  3. LuckySeven

    March 12, 2017 at 2:42 am

    Why not use a Trezor hardware wallet?

    • P. H. Madore

      March 12, 2017 at 6:01 pm

      I’m personally unable to recommend one of those as I’ve never had one.

    • gspoosi

      March 19, 2017 at 4:37 pm

      I have a ledger nano s, which I can gladly recommend.
      It’s multicoin with support for many other coins besides Ethereum and Bitcoin.

      And its cheaper than tremor.

  4. corporate_citizen

    March 25, 2017 at 12:11 am

    KeepKey seems to be a well designed hard wallet. I haven’t owned a Trezor or Nano, but these hard wallets are great for containing the critically sensitive part of transactions on their own screens. Hard wallets secure against potential screen capture or keystroke logging software.

    One unique feature of the KeepKey is the ability to convert between accounts on the wallet. This is done through ShapeShift. The KeepKey makes conversions idiot proof (as compared to doing it on from the ShapeShift webpage and potentially mixing up addresses, god forbid).

    John McAfee has admitted to losing quite a bit of cryptocoin when several of the wallets he had on his computer were hijacked. Crazy as he is, he admitted being on some porn sites and clicking “close” on pop-ups which executed script. His Mycelium wallet was the last to get robbed (since it requires a password to move coins) immediately after he entered the password to send a transaction. Keeping large sums at an exchange or on one’s computer is foolish, in my opinion.

  5. cryptofund17

    June 20, 2017 at 10:44 pm

    Another recommendation: MyCelium (App)
    Has a local marketplace, and a variety of Vendors.

    Located in Germany, so YMMV

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Articles

Fidelity Investments is Mining Cryptocurrency

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Fidelity Investments is a multi-billion dollar brokerage  that just so happens to be mining cryptocurrency. In fact, it has been at it for three years, using its own computers to harvest bitcoin and Ethereum.

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Profitable Experiment

CEO Abby Johnson recently told Fortune that its U.S.-based mining operation is “making a lot of money.” This comes despite running a relatively modest operation.

Hadley Stern, Senior VP of Fidelity Labs, described his company’s venture as an “experiment.”

The real reason we began mining, and still do, is to learn how the network works, how consensus works, how difficulty levels work,” he said in reference to the mining process.

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The key to profitability has been the dramatic rise in cryptocurrency over the past year. Bitcoin and Ethereum are the world’s No. 1 and 2 cryptocurrencies by market capitalization, and no-one else comes close.

Well Ahead of the Pack

The fact that Fidelity has been at this for three years speaks volumes about the company. Other, much bigger players are still dipping their toes in the market, but are unsure about how to proceed. Goldman Sachs is reportedly on the fence about starting a cryptocurrency trading operation, while J.P. Morgan has already begun handling customer orders for bitcoin-based instruments.

Fidelity is doing a lot more than just mining tokens. Earlier this year, it reached an agreement with Coinbase to let customers view cryptocurrency prices alongside other assets on their Fidelity homepage.

Coinbase is the world’s most funded cryptocurrency exchange with more than 7.4 million users.

Cryptocurrency Prices

The cryptocurrency market ended the week on a firm note, with bitcoin (BTC/USD) reaching a session high of $4,425.00. At press time, the index was up 1.6% at $4,368.

Ether is also trading higher against the dollar, with the ETH/USD rallying more than 3% to $305.

Ripple (XRP) lost momentum on Friday, but still managed a weekly gain of 21%.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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Articles

Chinese Government Eyeing Fresh Bitcoin Legislation?

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The Chinese government could roll out fresh cryptocurrency regulation in the coming months permitting licensed brokers to operate, based on recent information from Xinhua.

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The state-owned news publication recently revealed that the government is mostly concerned with stamping out illegal activity involving bitcoin and other cryptos. Government authorities could be planning to regulate the market by creating a licensing program with strict Know Your Customer (KYC) and Anti-Money Laundering (AML) systems.

The Case for AML

The need for KYC/AML protocols has long been raised by cryptocurrency proponents, especially in reference to initial coin offerings (ICOs). In response, the blockchain community has come together to create the Simple Agreement for Future Tokens (SAFT). The SAFT is both an instrument and open-source framework for token sales that vets accredited investors.

SAFT activity is quickly gaining traction, with the likes of Gizer recently issuing a presale of its ICO through SAFTLaunch.

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SAFT was officially created by Protocol Labs in close collaboration with AngelList and Cooley.

China’s Stance Looms Large for Cryptocurrency Market

Although digital assets have recovered from the China-induced flash crash of September, favorable regulations on the mainland could mean big business for bitcoin exchanges. Prior to the ban on ICOs and bitcoin brokers, Chinese investors were responsible for a quarter of all BTC trades.

According to Xinhua, China is likely to pursue a licensing program similar to Japan, a country that recently approved 11 cryptocurrency exchanges. CnLedger, a leading source of cryptocurrency news in China, recently had this to say:

“Xinhua News, official press agency of CN: Virtual currencies have become the top choices of underground economies. We shall adopt ‘0-tolerance policies’ towards crimes hidden underneath and take measures such as record-keeping, licensing, AML processes, real-name, limiting large transactions.”

Is China’s cryptocurrency ban temporary? It certainly looks that way. Regulators must already know that the ban hasn’t stopped mainland investors from buying cryptocurrencies next door in Hong Kong or Singapore. A saner approach to an all-out blanket ban is a tighter regulatory framework that will stamp out money laundering and other underground activities.

«Featured image from Shutterstock.»

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Analysis

Tim Draper Has Made Over $110 Million Since 2014 With his Bitcoin Investment

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Tim Draper, the billionaire technology investor and prominent venture capitalist who has invested in some of the most successful technology startups in the likes of Coinbase, Patreon, SpaceX, Tesla, Box, FourSquare, has profited over $110 million from his investment in bitcoin less than three years ago.

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In 2014, Draper participated in the auction of 144,336 bitcoins by the US government and the US Justice Department, which were seized during the investigation into Silk Road, a dark web marketplace. Draper was granted the permission to purchase a batch of 30,000 at around $600 from the US government.

Upon securing 30,000 bitcoins, Draper told Fox Business:

“[I’m] very excited about bitcoin and what it can do for the world. Bitcoin is as big a transformation to the finance and commerce industry as the internet was for information and communications. If bitcoin were here in 2008, it would be a stability source for our world economy. Everybody should go out there and buy a bitcoin. Every investor who’s a fiduciary should at least be partially involved in bitcoin because it’s a hedge against all the other currencies. There’s a whole ecosystem being built that’s going to make commerce much easier with much less friction and safer.”

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Today, Draper’s 30,000 bitcoins are worth $129.9 million. Considering that Draper had spent $19 million purchasing the batch of 30,000 bitcoins in 2014, Draper has recorded a profit of over $110 million in less than three years.

While Draper held onto his investment in bitcoin, the US Justice Department was quick all of the 144,336 bitcoins seized during the Silk Road operation. According to various sources, the US government sold the majority of its 144,336 bitcoins at a price of $336, at $48 million. If the US government had sold its bitcoins in 2017, it would have generated an additional profit of around $573 million, as 144,336 bitcoins at today’s bitcoin price of $4,330 are worth $624.9 million.

Bitcoin price was below $350 in 2014. Today, it is over $4,330.

Since 2014, in addition to purchasing tens of thousands of bitcoins, Draper has funded some of the most successful bitcoin companies in the cryptocurrency market including Coinbase and Korbit. Earlier this year, Coinbase secured a $100 million investment at a $1.6 billion valuation, while Korbit was acquired by the parent company of a $10 billion gaming company in Nexon at a $140 million valuation.

Furthermore, Draper has not sold his stake in Coinbase and earlier this year, Brian Armstrong, the CEO of Coinbase, revealed that Coinbase is still at an early stage in terms of developing and scaling. Armstrong noted that it will evolve into the safest and most trusted exchange in the global market.

“Digital currencies are having their ‘Netscape’ moment. The pace of innovation has been accelerating and we are now seeing exciting projects and companies being built on top of digital currencies. We’re beginning to transition into phase three of our secret master plan. Our goal is to be the safest, most trusted and compliant, and easiest to use. Not the first to market with new assets. Especially at scale, it takes time to ensure any new asset we add is well tested and secure,” said Armstrong.

Coinbase is also one of the two exchanges in the US market apart from Gemini that is targeting institutional and retail investors by providing sufficient liquidity. As Coinbase and its flagship cryptocurrency trading platform GDAX continue evolve, Draper will position himself at the forefront of cryptocurrency innovation and disruption.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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