Thursday, January 14, 2016

Lessons in buying Bitcoin

While bitcoin is far from mainstream, with it making headlines like Mark Zuckerberg's nemesis twins Tyler and Cameron launching Gemini, I figured I'd learn how to use bitcoin.  Aside from nerds using it to tip on reddit and github, bitcoin doesn't have much practical use.  Personally my interest is primarily educational, so if any bitcoin related business opportunities arise in the future, I may be able to capitalize on them.

With their logo at the start of this post, you can probably guess that I recommend coinbase for Canadians and Americans looking to buy small amounts of bitcoin (under US$500 worth of bitcoin).  This recommendation comes after I've looked at the offerings from several bitcoin exchanges including bitstamp, bitfinex, Kraken,, and Canadian exchange QuadrigaCX.  I registered for an account at bitstamp and coinbase, and traded bitcoin on the latter.

Bitstamp supports funding (sending money to bitstamp so you can buy bitcoin) from Canadian bank accounts.  Any funds are converted to USD, but finding out the exchange rate takes some work.  I emailed bitstamp on Christmas eve asking for their foreign exchange fees, and received a reply back on the 28th:
to view our exchange rates, please see the following link and click on the "Corporate exchange rates" for the correct rates: .Please note that all currencies are converted to USD free of charge by our bank.
I checked the exchange rates, and found that their bank adds about 0.6% to the spot rate for CAD/USD.  On top of that you'd have to add their trading fee of 0.1% for a limit order or 0.2% for a market order.  Adding that to their $1 minimum e-check fee means that the total fees to buy $100 in bitcoin would be $1.70.  That's reasonable compared to most other exchanges, but you'll have to pass their account verification first.  Despite providing a 300dpi high-quality jpeg scan of my driver's license, my account verification request was denied with the message, "the quality of the image/scan cannot be accepted according to UK AML standards."  In other words, no bitstamp for me!

For coinbase I couldn't completely figure out their fees until I actually set up an account.  Some of their support pages refer to 0% maker and 0.25% taker fees on their exchange.  Other support pages will refer to a 1% fee for buying bitcoin.  In the end I figured out both are correct, since there are two ways to buy and sell bitcoin.

With coinbase, unlike bitstamp, you can fund your account without ID verification.  You will need a cell phone with a US or Canadian number for a basic residency check.  Once your account is setup and you choose to deposit funds to your "CAD wallet", you are presented with the following options:

When I chose "Deposit with Interac", I wasn't able to proceed and was given an error message that I need to verify my account.  A good account interface design wouldn't have presented the option, and instead would have it greyed out with a note that the option is available after ID verification.  To use the bank account, you need to provide your bank, transit, and account number.  After a day or two you'll see a small deposit to your account (for me it was under 50c).  You need to log into your online banking to see the amount of the deposit, and then enter the exact amount in your coinbase account to link with your bank account.  Once that is done, you can take funds from your bank account, and after a few days the funds will become available for buying bitcoin.

Being a bit impatient, I decided to provide ID verification so I could use Interac Online in order to get funds instantly into my account.  A few minutes after uploading same jpeg file of my license that bitstamp refused to accept, I got an email stating my identity has been verified.  In addition to making the Interac Online available, verifying my account increased my limits from $500/day to $3000/day (not that the $500 limit was a problem for me).  However I still couldn't use Interac Online because, "Interac online is not available for visa debit card holders."  If you have a relatively new bank card (issued in the last couple years) with the Visa debit logo in the corner, you're out of luck.

My wife's account, however, doesn't have the Visa debit logo.  After noticing this, and reading about the referral program that gives $10 in BTC for the new account and for my account, I set up another account for my wife.  Now that I knew how coinbase worked, the process was a lot quicker.  I helped he set up the account, and had her account verified with a copy of her license.  Then I used Interac Online to withdraw C$149 from her account, leaving C$148 in her CAD wallet after the $1 fee was deducted.  I then chose to buy bitcoin, entered $148, which left $146.52 after the 1% fee, and completed the transaction at the quoted exchange rate (about C$620/BTC).  A few minutes later I got an email about my invitation bonus, and at the same time an additional US$10 worth of BTC showed up in my wife's account.

So what about those 0% maker and 0.25% taker fees?  For that you need to use the coinbase exchange, which you can do by clicking on "exchange" from your account, and then click on log in with coinbase.  The interface is similar to a discount stock broker, with a list of bid and ask prices along with a calculation of the current spread.  With a Canadian account you can only trade CAD/BTC, but you can view the USD/BTC order book.  The spreads on the USD/BTC exchange are usually only 1-2c, while spreads of $1-$2 are common for CAD/BTC.   Because of that I was able to get better prices than I could if I was trading USD/BTC.  I tried a couple small (<0.1BTC) limit sell orders, with a price a few cents below the lowest listed sell order price.  The first one filled in about 10 minutes, and the second filled in less than a minute.  Both, as expected, had no fees as "maker" orders.

As long as the invitation program continues, the net fees to get C$160 in bitcoin is actually negative.  After paying $2.50 in fees to buy $146 in bitcoin, you'll get US$10(C$14) in bitcoin as a bonus.  Probably not worth the trouble for most people, but certainly worth it for the nerds and geeks that want to give out bitcoin tips.

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