Investing in bitcoin (BTCUSD) can seem complicated, but it isn't. It only requires an account at a service or a cryptocurrency exchange, and a way to store your purchases safely.
Bitcoin investors need a cryptocurrency exchange account, personal identification documents if you are using a Know Your Client (KYC) platform, a secure connection to the internet, a method of payment, and a personal digital wallet outside the exchange account. Valid methods of bitcoin payment include bank accounts, debit cards, and credit cards. It's also possible to get bitcoin at specialized ATMs and via peer-to-peer (P2P) exchanges.
- Bitcoin's value comes from its store of value and payment system and its finite supply.
- Because a bitcoin wallet or exchange account can be compromised, it's key to find out about safe storage and practice it and to take the necessary crypto security measures.
- Services such as Coinbase, PayPal, and Robinhood, among others, sell bitcoin.
Before You Buy Bitcoin
Privacy and security are important issues in the Bitcoin world. Investors who gain the private key to a public address, which is a cryptographic code similar to a password that allows a user to accept cryptocurrencies in their account on the Bitcoin blockchain can authorize transactions. Private keys should be kept secret, and investors must be aware that the balance of a public address is visible.
Individuals can create multiple public addresses and distribute their collection of bitcoin over many addresses. A good strategy is to keep significant investments at public addresses, which aren't directly connected to those used in transactions.
Less Than 1 Bitcoin
Investors can buy less than a whole bitcoin. Whether a wallet is 1 bitcoin, 15 bitcoins, or 0.01 bitcoin, investors are equally exposed to the cryptocurrency's ups and downs. Coinbase requires a minimum investment of 1 of your local currency, such as $1 or €1.
The history of transactions made on the blockchain is transparent, but identifying user information isn't. On the Bitcoin blockchain, only a user's public key appears next to a transaction, making transactions confidential, but not anonymous.
Bitcoin transactions are more traceable than cash because they are available for public view and it is very difficult to trace the transacting parties on the cryptocurrency's blockchain. However, researchers and the FBI have claimed that they can track transactions made on the Bitcoin blockchain to users' other online accounts, including their digital wallets.
When an investor creates an account on Coinbase, they must provide their identification. If they send it to another wallet, it can still be traced back to the Coinbase purchase connected to the account holder's identity.
Before buying bitcoin, be sure to check out the legal, regulatory, and tax status of purchasing it where you live.
How To Buy Bitcoin
Step 1: Choose a Crypto-Trading Service or Venue
Exchanges are a convenient option because they offer a breadth of features and more cryptocurrencies for trading. Exchanges also enable investors to buy, sell, and hold cryptocurrency and allow users to transfer crypto to their online wallet for safekeeping.
There are many types of cryptocurrency exchanges. Some allow users to remain anonymous and are decentralized and don't require users to enter personal information. For certain demographics, including refugees or those living in countries with little to no infrastructure for government credit or banking, anonymous exchanges can help bring them into the mainstream economy.
Popular exchanges in the U.S. aren't decentralized and follow laws that require users to submit identifying documentation. These exchanges include Coinbase, Kraken, Gemini, and Binance; they offer bitcoin and a growing number of altcoins.
When creating a cryptocurrency exchange account, use two-factor authentication and a long, unique password that includes a variety of letters—lowercased and capitalized—special characters, and numbers.
Step 2: Connect Your Exchange to a Payment Option
Depending on the exchange, personal identification can be required and may mean that you have to include a picture of a driver's license or Social Security card, as well as information about your employer and source of funds. The process is largely the same as setting up a typical brokerage account.
At most exchanges, you can connect your bank account directly or you can link it to a debit or credit card. Although you can use a credit card to purchase cryptocurrency, cryptocurrency price volatility could inflate the overall cost of purchasing a token when combined with a credit card's interest charges. Bitcoin is legal in the U.S., but some banks may question or even stop deposits to crypto-related sites or exchanges.
Fees vary for deposits via a bank account, debit, or credit card, and exchanges also charge fees per transaction.
Step 3: Place an Order
Cryptocurrency exchanges have evolved and now mimic the same features as their stockbrokerage counterparts. Crypto exchanges offer several order types and ways to invest. Almost all crypto exchanges offer both market and limit orders, and some also provide stop-loss orders.
Kraken offers the most order types, which include market, limit, stop-loss, stop-limit, take-profit, and take-profit limit orders.
Exchanges also offer ways to set up recurring investments, allowing clients to dollar-cost average into their investments of choice. Coinbase, for example, lets users set recurring purchases for every day, week, or month.
Step 4: Safe Storage
Bitcoin and cryptocurrency wallets are a place to store digital assets more securely. Keeping crypto outside the exchange and in a personal wallet ensures that investors have control over the private key to the funds. An exchange wallet is offered, but not recommended, for large or long-term cryptocurrency holdings.
Hot Wallets vs. Cold Wallets
Online wallets, also known as hot wallets, are apps on devices such as computers, phones, or tablets. These wallets generate the private keys to your coins on internet-connected devices.
The user of an online or hot wallet isn't the holder of the private key to the cryptocurrency that is held in it. Exchange wallets are custodial accounts provided by the exchange. If the exchange is hacked, investor funds are compromised. The phrase "not your key, not your coin" is heavily repeated within cryptocurrency forums and communities.
Hot wallet holders who haven't created enough security run the risk of losing funds to theft. Strong passwords, two-factor authentication, and safe internet browsing should be considered minimum requirements.
Hot wallets are best for small amounts of cryptocurrency or cryptocurrency that is actively trading on an exchange and may be used like a checking account.
A cold wallet isn't connected to the internet and is at less risk of being compromised. These offline wallets or hardware wallets store a user's private key on something that isn't connected to the internet and come with software that allows investors to view their portfolio without putting their private key at risk.
A paper wallet is a wallet generated at certain websites that produces both public and private keys printed on paper. Many people laminate these paper wallets and store them in safe deposit boxes at their bank or even in a safe in their home.
A hardware wallet is typically a USB-drive device that stores a user's private keys securely offline. Such wallets have advantages over hot wallets because they are unaffected by viruses that could infect one's computer. With hardware wallets, private keys never come into contact with a network-connected computer or potentially vulnerable software.
Cold wallets are the most secure way to store your bitcoin or other cryptocurrencies. They do require technical knowledge to set up, though.
How To Buy Bitcoin With PayPal
You can buy bitcoin through a payment processor like PayPal Holdings Inc. (PYPL). There are two ways to purchase bitcoin using PayPal, by connecting your account to a debit card or bank account or by using the balance of the PayPal account to purchase cryptocurrencies from a third-party provider.
You may also use PayPal to directly buy four cryptocurrencies: Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. Except for those who live in Hawaii, residents of all other states can either use their existing PayPal accounts or set up a new one to buy bitcoin. Additionally, you can use your cryptocurrencies to purchase products and services through the "Checkout With Crypto" feature.
When you buy bitcoin directly from PayPal, it earns money from the crypto spread, or the difference between Bitcoin's market price and its exchange rate with the U.S. dollar. For each purchase, PayPal also charges a transaction fee, which depends on the dollar amount purchased.
You can send crypto, including Bitcoin, from PayPal to an external digital asset wallet that you own and control, or to one owned and controlled by another person like a friend or family member. To send your bitcoin outside of PayPal, you will need to provide the wallet address where you want to send the assets. If you are sending bitcoin, you must use a destination wallet address designated for Bitcoin—you can't use one designated for Bitcoin Cash, for example.
The social trading and multi-asset investment company eToro is among the few online traders that allow the use of PayPal to purchase bitcoin on its platform.
How To Buy Bitcoin With a Credit Card
Using credit cards to buy bitcoin is similar to using debit cards or automated clearing house (ACH) transfers. However, not all exchanges allow you to buy bitcoin with credit cards, due to associated processing fees and the risk of fraud.
Credit card processing can tack on extra charges to such transactions. In addition to paying transaction fees, there may be processing fees that the exchange may pass onto the buyer. Credit card issuers treat bitcoin purchases as cash advances and charge hefty fees and interest rates on such advances.
For instance, American Express users will pay the current cash advance fee for such transactions, and the fee charged will vary by exchange. The credit card company also limits users to $1,000 worth of bitcoin purchases per month.
Bitcoin rewards credit cards like the BlockFi Bitcoin Rewards credit card function like a typical rewards credit card, except that they offer rewards in the form of bitcoin.
Alternative Ways to Buy Bitcoin
Bitcoin ATMs act like in-person bitcoin exchanges. Individuals can insert cash into a machine and use it to purchase bitcoin, which gets transferred to online wallets for users. Bitcoin ATMs have become increasingly popular in recent years and are available at the retail giant Walmart Inc. (WMT).
Two charges are associated with ATM bitcoin purchases: a purchase fee and a conversion fee for converting a fiat currency to bitcoin. Both fees are fairly steep compared with those of other options. The worldwide average purchase fee at bitcoin ATMs is 8.4% of the purchase amount and 5.4% for sales at ATMs.
Some P2P exchange services provide a more direct connection between users. LocalBitcoins is an example of such an exchange. After creating an account, users can post requests to buy or sell bitcoin, including information about payment methods and prices.
Although P2P exchanges don't offer the same anonymity as decentralized exchanges, they allow users the chance to shop around for the best deal. Many of these exchanges also provide rating systems, so that users have a way to evaluate potential trade partners before transacting.
Robinhood Markets Inc. (HOOD) is one exchange that offers crypto trading. It charges 0% commission for cryptocurrency trades and purchases and makes money from the payment for order flow, passing its trading volume on to other trading platforms or brokerage firms. Robinhood had enabled trading on its platform for these cryptocurrencies, among others: Bitcoin, Bitcoin Cash, Litecoin, Ethereum, Dogecoin, and Ethereum Classic.
In contrast, you can trade thousands of cryptocurrencies on Coinbase, and as of 2022, traditional brokers like Fidelity Investments began to include bitcoin investing for 401(k) accounts.
Bitcoin and other cryptocurrency investments are not protected by insurance from the Securities Investor Protection Corp. (SIPC). At regular brokerages, the agency protects against the loss of securities and cash in brokerage accounts containing up to $500,000, with a $250,000 cash limit. Cryptocurrency exchanges such as Coinbase have crime insurance to protect their infrastructure against hacks. But that insurance doesn't protect individual customers from password theft.
How To Sell Bitcoin
You can sell bitcoin at the same venues where you purchased the cryptocurrency, such as cryptocurrency exchanges and P2P platforms. Typically, the process of selling bitcoin on these platforms is similar to the process for purchasing it.
Cryptocurrency exchanges charge a percentage of the crypto sale amount as fees. For example, Coinbase says it may charge a fee when a customer cashes out their crypto, depending on the payment method selected.
Exchanges generally have daily and monthly withdrawal limits. Therefore, cash from a large sale may not be immediately available to the trader. However, with Coinbase, for example, there is no limit on the amount of cryptocurrency you can sell.
What Are the Steps for Purchasing Bitcoin?
The steps are: choosing a venue or exchange to place your order, selecting a payment method, and ensuring safe storage for your purchased cryptocurrency.
What Are the Most Popular Venues for Buying Bitcoin?
How Much Should You Expect to Pay for Bitcoin?
Typically, the price consists of a fee-per-trade, plus the cost to convert a fiat currency to bitcoin. The fee-per-trade is a function of the currency amount of the trade, and, naturally, the higher the trade amount, the higher the fee.
Is My Bitcoin Purchase Protected by the Securities Investor Protection Corp. (SIPC)?
No, your bitcoin purchase isn't protected by SIPC. At certain exchanges, like Coinbase, fiat balances in individual accounts may be Federal Deposit Insurance Corp. (FDIC-) insured for up to $250,000 per account against certain specific risks.
The Bottom Line
Buying bitcoin can seem complicated if you haven't done it, but it's relatively simple. It just requires an account at a service or an exchange, and a way to store your purchases safely.
To buy bitcoin, you must select an appropriate service or venue, connect with a payment method, place an order, and ensure stable storage for purchased cryptocurrency. Each of these steps requires research and a careful assessment of the pros and cons of the relevant service. Bitcoin is available at bitcoin ATMs or from payment services like PayPal and mainstream brokerage firms like Robinhood or Coinbase.
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