Investing in Bitcoin (BTCUSD) can seem complicated, but trading Bitcoin only requires an account at a service or an exchange, and safe storage practices are recommended.
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 wallet outside of the exchange account.
Valid methods of bitcoin payment include bank accounts, debit cards, and credit cards and it’s possible to get bitcoin at specialized ATMs and via P2P exchanges.
Key Takeaways
- Bitcoin’s value is derived from its store of value and payment system and its finite supply.
- A bitcoin’s wallet or exchange account can be compromised so it’s important to practice proper storage and security measures.
- Bitcoin can be purchased through services like Coinbase, PayPal, and Robinhood.
Before You Buy Bitcoin
Privacy and security are important issues and investors who gain the private key to a public address on the Bitcoin blockchain can authorize transactions. Private keys should be 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 that are not directly connected to those used in transactions.
The history of transactions made on the blockchain is transparent but identifying user information is not. On the Bitcoin blockchain, only a user’s public key appears next to a transaction, making transactions confidential but not anonymous.
Less than 1 Bitcoin
Investors can buy less than a whole bitcoin. Whether a wallet is 1 bitcoin, 15 bitcoins, or 0.01 bitcoins, investors are equally exposed to the ups and downs. At Coinbase, a $2.00 minimum investment is required.
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 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 and if they send it to another wallet, it can still be traced back to the Coinbase purchase that is connected to the account holder’s identity.
Be sure to check out the legal, regulatory, and tax status of purchasing and selling bitcoin where you live before transacting.
Source: TradingView
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, enabling investors to buy, sell, and hold cryptocurrency, and allow its users to withdraw crypto to their online wallet for safekeeping.
When creating a cryptocurrency exchange account, use two-factor authentication and a long, unique password that includes a variety of lowercase letters, capitalized letters, special characters, and numbers.
There are many types of cryptocurrency exchanges. Some exchanges allow users to remain anonymous and are decentralized and do not require users to enter personal information. For certain demographics, like 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 United States are not decentralized and follow laws that require users to submit identifying documentation. These exchanges include names like Coinbase, Kraken, Gemini, FTX, and Binance which offer Bitcoin and a growing number of altcoins.
Binance caters to a more advanced trader, offering more serious trading functionality and a better variety of altcoin choices. FTX, a fast-growing crypto exchange that has garnered a multibillion-dollar valuation, offers a restricted number of altcoins to U.S. investors.
Step 2: Connect your exchange to a payment option
Depending on the exchange, personal identification is required and may include pictures 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 connect 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 coin when combined with a credit card’s interest. Bitcoin is legal in the United States, 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 to mimic the same level of features as their stock brokerage counterparts. Crypto exchanges offer several order types and ways to invest. Almost all crypto exchanges offer both market and limit orders, and some also offer stop-loss orders.
Kraken offers the most order types such as 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 of 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
Hot wallets
Online wallets, also known as hot wallets are wallets on devices such as computers, phones, or tablets. These wallets generate the private keys to your coins on these internet-connected devices.
The user of this wallet type is not the holder of the private key to the cryptocurrency that is held in this wallet. 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 are actively trading on an exchange and used like a checking account.
Cold wallets
A cold wallet is not 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 is not 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. But they require more technical knowledge to set up.
How to Buy Bitcoin With PayPal
You can also buy bitcoin through a payment processor like PayPal Holdings, Inc. (PYPL). There are two ways to purchase bitcoin using PayPal connecting your account to a debit card or bank account or using the balance of the PayPal account to purchase cryptocurrencies from a third-party provider.
Four cryptocurrencies, Bitcoin, Ethereum, Litecoin, and Bitcoin Cash, can be purchased directly through PayPal. Except for those who live in Hawaii, residents of all states can either use their existing PayPal accounts or set up new ones. You can also 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 USD. The company also charges a transaction fee for each purchase. These fees depend on the dollar amount of the purchase.
A disadvantage of purchasing cryptocurrencies through PayPal is that an investor cannot transfer the crypto outside the payment processor’s platform to an external crypto wallet or personal wallet and few exchanges and online traders allow the use of the payment processor to purchase payment. 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 for buying bitcoin is similar to debit cards or automated clearing house (ACH) transfers. However, not all exchanges allow bitcoin purchasing with credit cards due to associated processing fees and the risk of fraud.
Credit card processing can add additional charges to such transactions and 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.
American Express users will pay the current cash advance fee for such transactions plus an annual percentage fee of 25%. The credit card company also limits users to $1,000 worth of bitcoin purchases per month.
Bitcoin rewards credit cards function like a typical rewards credit card except they offer rewards in the form of bitcoin like the BlockFi Bitcoin Rewards Credit Card.
Alternative Ways to Buy Bitcoin
Bitcoin ATMs
Bitcoin ATMs act like in-person bitcoin exchanges. Individuals can insert cash into a machine and use it to purchase bitcoin which is then 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 to 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.
Bitcoin ATMs require government-issued IDs as of early 2020.
P2P exchanges
Some peer-to-peer (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 do not offer the same anonymity as decentralized exchanges, they allow users the opportunity to shop around for the best deal. Many of these exchanges also provide rating systems so users have a way to evaluate potential trade partners before transacting.
Mainstream brokerages
Robinhood Markets, Inc. (HOOD) is one exchange that offers crypto trading facilities. It charges 0% commission for cryptocurrency trades and purchases and makes money from the payment for order flow, passing its trading volume onto other trading platforms or brokerages. Robinhood had enabled trading on its platform for seven cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum, Bitcoin SV, Dogecoin, and Ethereum Classic.
In contrast, you can trade more than 100 cryptocurrencies on Coinbase, and as of 2022, traditional brokers like Fidelity Investments plan to include bitcoin investing for 401(k) accounts.
Bitcoin and other cryptocurrency investments are NOT protected by insurance from the Securities Investor Protection Corporation (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. That facility is not available to customers of cryptocurrency exchanges. Cryptocurrency exchanges like Coinbase have crime insurance to protect their infrastructure against hacks. But that insurance does not 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 charges 2.49% of the overall transaction amount as fees.
Exchanges generally have daily and monthly withdrawal limits. Therefore, cash from a large sale may not be immediately available to the trader. However, there are no limits on the amount of cryptocurrency you can sell.
What Are the Steps for Purchasing Bitcoin?
The process to purchase bitcoin consists of four steps: choosing a venue or exchange to place your order, selecting a payment method, and ensuring safe storage for your purchased cryptocurrency. There may be additional costs for an online wallet.
What Are the Most Popular Venues for Buying Bitcoin?
The most popular venues for buying bitcoins are cryptocurrency exchanges, brokerages, and payment services like PayPal. For indirect ownership of bitcoin, investors can choose to invest in companies that hold the cryptocurrency on their balance sheets, such as Tesla, Inc. (TSLA) or MicroStrategy Incorporated (MSTR).
How Much Should I Expect to Pay to Purchase Bitcoin?
Typically, the price for purchasing bitcoin 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 dollar amount of the trade. A higher trade amount will carry higher fees.
Is My Bitcoin Purchase Protected by SIPC?
No, your bitcoin purchase is not protected by SIPC. At certain exchanges, like Coinbase, fiat balances in individual accounts may be FDIC-insured to $250,000 per account.
The Bottom Line
A bitcoin purchase process consists of four steps which include selecting a service or venue for the purchase, connecting with a payment method, placing an order, and ensuring safe storage for purchased cryptocurrency. Each of these steps requires research and a careful assessment of the pros and cons of each service. Bitcoin is available at Bitcoin ATMs or from payment services like PayPal and mainstream brokerages like Robinhood.