A Bitcoin Adventure: How to Buy and Sell Crypto-Currencies
To coincide with the release of our policy brief on crypto-currencies, I have written a post about my experiences attempting and ultimately succeeding in buying, trading, and selling bitcoins (BTC). In addition to getting hands-on experience with Bitcoin, I have also partially hedged myself against the collapse of the global fractional reserve banking system.
Seriously, though, my first step in this endeavour was to ask Google “How to buy bitcoin,” which yielded some helpful links. Topping the list was the Bitcoin Foundation, which has an FAQ section on the matter. It advises that before buying any bitcoins, it is necessary to have somewhere to put them — essentially you need a bitcoin-compatible account, known as an e-wallet. Informed readers will be aware that bitcoins are only ever stored on the blockchain, but for the lay user this is not very helpful so an e-wallet is the first step. There are myriad e-wallets available, and it is difficult to have an opinion a priori on which is most secure and robust. My judgment, based on anecdotal information and the frequency with which I had seen them referenced in the media, was to decide between Coinbase and Blockchain.info. I chose Coinbase because of its seemingly simpler and more modern user interface. All that Coinbase required for starting an e-wallet was an email address used to register an account.
So far, so easy.
With my e-wallet and public address in hand, I encountered my first difficulties with the Bitcoin system — as a UK user, I was not allowed to buy bitcoins. Although Coinbase has a facility that allows you to exchange fiat currencies for bitcoins, this feature is not available in the UK. It appears that settlement and regulatory requirements have not yet been conquered by Coinbase across the pond.
Back to Google …
Bitbargain.co.uk and Bittylicious.com were the two highest search results for “Buying Bitcoin in the UK.” A Telegraph article extolling the user-friendliness of Bittylicious.com swung my decision in its favour. The website design is, perhaps suitably, low-rent although the features are state of the art. First, it is important to realise the constraints on sellers of Bitcoin. Many if not most banks refuse to deal with businesses that want to settle bitcoin transactions. In addition, most fiat currency to bitcoin transactions are processed as international transfers, meaning large fees. Websites like Bitbargain have extensive proof-of-identity processes where one must submit scans of passports, proof of addresses, and so on. Bittylicious is slightly different — it is simply a middle man that brings buyers and sellers together. As a result, for small transactions such extensive proof of identity is not necessary, although mobile phone verification is still required.
The bare-basics account will not let you purchase bitcoins via bank transfer, credit, or debit cards. Luckily, UK banks have recently introduced Faster Payment Service-based mobile phone apps, like Barclays Pingit, which allows the instantaneous transfer of small amounts between bank accounts that are linked to mobile phone numbers. Using this app I was able to purchase a maximum of 0.2 BTC in my first transaction. In order to purchase larger amounts, I submitted personal proof-of-identity documents to Bittylicious.com, which took a couple of days to be verified.
Entering the address of my bitcoin e-wallet as the destination and clicking on “Get some coins” matches my buy order for 0.2 BTC to a seller that is willing to sell. The website provides the mobile phone and reference numbers of the seller, which I have to enter as the payment destination in my Barclays Pingit mobile phone app. The cost is £51, which compares to a market price of around £47 for 0.2 BTC at the time of the transaction, meaning transaction costs were around 8%.
It takes about 15 minutes before Bittylicious confirms that my payment and trade has gone through. At this stage the transaction is added to the blockchain, and I wait for the Bitcoin miners to do their work and update the block that contains my transaction. This happens 12 minutes after the trade is announced to the network, which means that the updating is running slightly behind Bitcoin’s target of 10-minute-long block updates. Looking up the Bitcoin address of the seller on blockchain.info suggests that the user has around $1,400 worth of bitcoins in total. The user offered one-ten-thousandth of a bitcoin as a transaction fee to whichever node managed to verify block 323365. Incidentally, the block was verified by 11 nodes before the system moved on to block 323366.
In summary, purchasing bitcoins in the UK is not necessarily difficult, but has a lot of moving parts. If it were not for the ability to pay for them by Barclays Pingit (which I did not know about prior to this exercise) I would have probably not bothered to collect and scan all my personal identification documents in order to be allowed to purchase via bank transfers. These difficulties highlight the strict terms under which Bitcoin businesses get even limited access to the existing financial system and contrasts with the perception of bitcoin as a Wild West frontier where anarchy rules and organised crime thrives in anonymity.
It took a few days before I was able to purchase the remaining 0.8 BTC to reach my goal of owning one bitcoin and while I was waiting I attempted to buy some altcoins. My research suggested a few names — Ripple, Litecoin, Dogecoin, and NXTcoin among others. I decided to invest in the second- and third-largest coins, which at the time happened to be Ripple and Litecoin. Coinbase does not have an exchange facility, and the big players in the crypto exchange space are Kraken, Bitstamp, and BTC China. For no particular reason I chose Kraken, which had similar verification requirements to Bittylicious. Once I had transferred funds from my Coinbase e-wallet to the Kraken trading account, It was relatively easy to execute some market and limit orders for Ripple coins and Litecoins. The process was disappointingly straightforward and similar to any other Internet trading facility. It is possible to put in more advanced orders, such as stop-loss, trailing stop limits, and so on, but I did not bother as I was ready to get out.
I had accumulated around 1.2 BTC, and as a final experiment I wanted to cash-out 0.2 BTC to leave me with my long-term hedge position of 1 BTC. Naively, I went to Bittylicious looking for a “sell” button to press. Unfortunately, selling bitcoins appears to be more difficult than buying them. Bittylicious has an applications process for anyone wishing to become a bitcoin seller, but the requirement to sell at least £1,000 per week in BTC is clearly aimed at a more professional trader. It appears they are looking for bitcoin market-makers. As an aside, Bittylicious takes 1% as commission. Bitbargain had similar requirements for selling bitcoin, so that was no help.
Surprisingly, this is something I had completely not expected despite weeks of researching the topic. There is probably a way to become a seller on Bittylicious (or similar) or to find an exchange that can be linked to a UK bank account, but there was a more intriguing option — a Bitcoin ATM. CFA Institute is based near the famous silicon roundabout in London, which is well known for housing many of the UK’s Internet start-ups. As a result, the area is somewhat of a trendsetter in terms of Bitcoin infrastructure.
There are two Bitcoin ATMs in London that allow you to sell bitcoins in exchange for pounds — one in an e-cigarette shop in Shoreditch, the other in Holborn. There are other ATMs that allow you to buy bitcoins only, but these appear to be of little use. The Bitcoin ATM resembles any other, and the process of withdrawing cash is as follows. After selecting the amount of cash to withdraw, the ATM displays a Bitcoin address in the form of a QR code to which you must send your bitcoins. A paper receipt is also printed with a QR code record of the transaction, which you later use to redeem your bitcoins. I used the Coinbase app to send 0.09 BTC to the address of the ATM. It takes the Bitcoin network approximately 10 minutes to verify the transaction and for the ATM to know that you have delivered the BTC to its address. At this point I could scan in the QR code on my receipt and collect £20 in cash.
Clearly there is a way to go before the user experience improves — the main stumbling block is the interaction between the Bitcoin network and the existing financial system. It is quite difficult converting cash into bitcoins and vice versa. One assumes this process will be simplified relatively quickly and as my experience shows, the moving parts of the Bitcoin future are all in place. What’s left to determine is whether enough people will use them.
For more on Bitcoin, read the related Policy Brief: “Crypto-Currencies — Intellectual Curiosity or the Future of Finance?” and view this video.
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Photo credit: Sviatoslav Rosov