How to buy Bitcoin: 5 ways to add the popular cryptocurrency to your portfolio
Bitcoin is a cryptocurrency with a rapidly rising popularity that’s encountered some wild swings in its price along the way. It’s been a roller coaster ride, especially in the last few years, and many traders have plunged into bitcoins, with some having made millions. How to buy Bitcoin: 5 ways to add the popular cryptocurrency to your portfolio
If you’re considering this decentralized version of digital cash, you have a few different ways to buy bitcoins. You can buy them directly or indirectly from a few traditional brokers, as well as some newer upstarts. In fact, it’s easier than ever to buy bitcoins, and you can likely do it at a lower commission than before too.
Here are five ways to buy bitcoins and some key factors that you need to watch.
What is Bitcoin?
Bitcoin is one kind of digital currency or cryptocurrency, a way to pay for things that exist only virtually. The currency debuted in 2009 and really broke into mainstream consciousness in 2017 with its rapid rise that year. Coins are created, or “mined,” when computers that organize the currency process and legitimize transactions in the currency.
Bitcoin uses a decentralized network of computers to manage everything — a distributed ledger called a blockchain that tracks transactions in the currency. It’s like a huge public record of every transaction that has taken place in the currency. And the network monitors everything, ensuring the currency’s integrity and the ownership of bitcoins.
5 ways to buy bitcoins
If you’re looking to trade Bitcoin, the good news is that you now have several options. You may not even need to open a separate and specialized account to do so since many major brokers offer a way to buy them. (Here are some of the top brokers for trading cryptocurrency.) Plus, some unexpected players – PayPal and Cash App for example – now allow U.S. residents to buy, sell and hold Bitcoin, too.
Each method below offers a different combination of cost, security, and potential upside and downside.
Financial apps
Many financial apps such as PayPal and Venmo now allow you to trade cryptocurrency.
PayPal makes it tremendously easy to directly buy or sell bitcoins using the same app that you’ve come to trust with your online payments. You’ll pay $0.50 for trades involving less than $5, and the fees rise from there. Trades involving $200 – $1,000 cost 1.8 percent, while those above $1,000 come in at 1.5 percent. There’s a spread markup on trades, but you won’t pay a fee for holding cryptocurrency in your account, and you can trade as little as $1 at a time. Ethereum, Litecoin, and Bitcoin Cash are also tradable here.
Venmo charges the same fees since it’s owned by PayPal.
Crypto exchanges
Crypto exchanges are another popular option for those looking to buy Bitcoin. Exchanges offer a few key advantages to traders. First, the best crypto exchanges offer the lowest possible all-in costs for trading cryptocurrency. So they’re your best bet if cost is your key objective. Second, many exchanges don’t charge spread mark-ups, which are hidden fees built into the trading prices. Third, many exchanges offer wallets, allowing you to securely store your cryptocurrency.
The fees at various crypto exchanges can differ markedly, so it’s worthwhile looking around to find which offers the best combination of price, crypto choice, and service. Popular options include Coinbase, Binance, Crypto.com, and Kraken.
Trading apps
You can pick up a few bitcoins with no direct commission by using a trading app such as Webull or Robinhood, though you’ll end up making up for it with a spread markup.
Robinhood takes its best trick – no commissions – and applies it to cryptocurrency, but it does charge a spread markup, the exact cost of which it does not reveal. You’ll be able to buy bitcoins directly, and will have access to other digital currencies, too, a feature that other brokers listed here don’t offer. Of course, you’ll be able to buy stocks, ETFs, and options while you’re on the easy-to-use platform.
Webull lets you trade more than 25 cryptos, including Bitcoin. You’ll pay a spread markup of 1 percent on each transaction, however. You can also trade stocks, ETFs, and options.
Traditional brokers
Some traditional brokers have also ventured into the cryptocurrency arena, including Interactive Brokers and TradeStation.
At Interactive Brokers, you’ll be able to buy futures contracts on Bitcoin as well as trade the coin directly. The broker charges $10.02 per futures contract, which gives you exposure to five bitcoins. If you want to trade Bitcoin directly, you’ll pay a competitive commission of 0.12-0.18 percent of your trade value, depending on your monthly volume. You’ll also have access to Ethereum, Bitcoin Cash, and Litecoin. Interactive Brokers provides a whole range of other tradable securities, giving you access to securities across the world.
Bitcoin ATMs
Another option is to buy bitcoins directly through a Bitcoin ATM, though you’re likely to pay much more in commissions than you would elsewhere. You’ll be able to buy bitcoins and some ATMs will allow you to sell them, too, using cash or a debit card. But you may need a Bitcoin wallet to make the transaction. Commissions can be pricey, with some ATMs charging around 7 percent per transaction, while the fees at others may stretch into the teens.
Buying Bitcoin: Here’s what to watch for
As you’re considering how to buy Bitcoin, you’ll want to evaluate the following factors, since they should influence your choice of where to buy it or whether to ultimately avoid it altogether.
Ownership. What do you want to own exactly? You can own Bitcoin directly or a derivative such as a futures contract, which offers a return on the currency’s movement.
Upside/downside. Your potential gain is related directly to whether you own the currency directly or via a futures contract. By owning Bitcoin directly, your profit increases by a dollar with every dollar increase in the currency. In contrast, with futures, you can gain much more quickly without having to front as much capital. However, your downside is more limited by owning directly, while you can lose more money with futures.
Cost. Commissions can vary widely depending on how you purchase Bitcoin. Futures contracts get you a big piece of the action relatively cheaply, while some brokers may charge you several percent to buy directly. A few percent might not sound like a lot, but if you’re trading in and out of the market, it will quickly eat away at your profits.
Security. One of the biggest concerns with any investment is making sure that it’s secure. Some newer cryptocurrency players have had serious problems with security. For example, Binance, a high-profile cryptocurrency exchange was hacked for thousands of bitcoins in 2019. More traditional brokers may offer better security because they’ve been dealing with the issue for much longer.
You may also receive bitcoins as part of commercial transactions. Regardless of how you came by your coins, any transaction in the cryptocurrency is reportable to the IRS at tax time.
What information is needed to purchase Bitcoin?
When you open an account at a traditional brokerage or a crypto exchange, you’ll need to provide basic personal information. Of course, you’ll need to provide your name, but the firm will also require other data such as your Social Security number, your address, your phone number, and your bank account number. You may also have to detail how much trading experience you have and how comfortable you are with trading, depending on the institution.
This information allows the firm to identify you and verify who you are. It’s also vital during tax time when the broker or exchange prepares documents on your gains and losses, reports that you’ll need to accurately file your taxes.
Is Bitcoin an effective hedge against inflation?
Some people think Bitcoin may be an effective way to protect yourself from inflation, or what’s called an inflation hedge. A hedge is a kind of investment that offsets, partially or fully, the decline in another asset. So, an inflation hedge would protect you from inflation in some way.
There’s little evidence to support the assertion that Bitcoin acts as an inflation hedge, say, experts. Bitcoin has not existed long enough to have been through a major inflationary period.
And it’s not an effective hedge against the volatility of the stock market, either. Experts say that Bitcoin acts more like a risky tech stock or momentum stock, meaning that it rises when these stocks rise and falls when they fall. That’s not the kind of thing you want from a hedge, which should perform the opposite of the asset being hedged, zigging when the market zags.
Where is the best place to store bitcoins?
The best place to store your bitcoins depends on what you intend to use them for. For example, if you plan on trading them, it may be best to keep them with the crypto exchange or broker where you do your trading, especially if you’re trading frequently or in the near term.
Others may opt for a crypto wallet if they’re planning on spending the cryptocurrency or even just locking it down for safekeeping. A crypto wallet can hold and secure your cryptocurrency, though if you’re taking custody of your assets, then it’s your complete responsibility, and you could wind up losing your cryptocurrency if you’re not careful.
Two popular options for this latter group include hot wallets and cold wallets.
Hot wallets
A hot wallet allows your cryptocurrency to be used or moved around easily. Because your coins are secured by software rather than hardware and are still connected to the internet, they’re less secure than cold wallets. But if you’re using a wallet because you intend to use the cryptocurrency, it makes sense to go with a hot wallet. Hot wallets come in a few varieties:
Desktop wallets: You can download wallet software to your computer and manage your crypto holdings from there. When you’re done transacting, you can even take it offline, increasing your security.
Web wallets: This browser plug-in allows you to connect to the blockchain and make transactions quickly, but the internet connection makes it less secure.
Mobile wallets: You can use the software on a mobile device if you’re using crypto to pay or transact.
Some providers of hot wallets also offer multiple types of hardware wallets, so you can use one software type across multiple devices.
Cold wallets
A cold wallet is more valuable if you really want to lock down your cryptocurrency and make it nearly impervious. Cold wallets rely on hardware, a physical device, to secure your holdings, and it looks like a USB thumb drive. This can be disconnected from the internet, making your holdings very secure. When you’re ready to transact, you can plug it in and conduct business.
While more secure than a hot wallet, a cold wallet has other potential risks, including theft of the device, loss of the wallet and even loss of the password. So even cold wallets are not foolproof.
Bottom line
If you’re looking to purchase Bitcoin or other digital currencies as an investment, it’s important to keep costs to a minimum. Given the novelty of the crypto market, many brokers would love to maximize their commissions (in contrast to the stock market where trading fees have gone to zero). Those fees eat into your profits, so look for a way to minimize those frictional costs.
While the price of Bitcoin has run high quickly, it still carries serious risks that make it not suitable for everyone. Those looking for conservative investments or who cannot afford to lose money should consider avoiding Bitcoin or trading only with an amount they are willing to lose.