Contributed by: https://bankrate.com | James Royal
Bitcoin is a cryptocurrency with a rapidly rising popularity that’s encountered some wild swings in its price along the way. While traders have plunged into bitcoins and some have made millions, the currency carries significant risks and may not be a good investment for more conservative investors.
Those considering this decentralized version of digital cash 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 exists 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.
Buying Bitcoin: Here’s what to watch for
If you’re looking to trade bitcoins, the good news is that you now have many 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, for example – now allow U.S. residents to buy, sell and hold Bitcoin too.
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 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, one high-profile cryptocurrency exchange called Binance 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.
5 ways to buy bitcoins
Each method below offers a different combination of cost, security and potential upside/downside.
PayPal makes it tremendously easy to buy or sell bitcoins directly using the same app that you’ve come to trust with your online payments. You’ll pay $0.50 for trades involving less than $25, and from there PayPal uses a sliding commission scale that starts at 2.30 percent for trades over $25 and declines to 1.50 percent for trades of more than $1,000. Though there’s a spread markup, 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.
Coinbase is a specialized exchange for cryptocurrencies that allows you to own the currencies directly. You’ll be able to trade dozens of the most popular cryptos, including Bitcoin, Bitcoin Cash, Litecoin and Ethereum. For extra security, Coinbase also allows you to store your coins in a vault with time-delayed withdrawals. It charges a spread fee of 0.50 percent and then adds on a transaction fee that varies with the funding source and the size of the transaction. This fee could typically add another 1.49 percent on to your costs but even more with a debit card.
The fee structure is confusing, to say the least, although Coinbase promises to show you what you’re paying before you actually have to make the payment.
Robinhood takes its best trick – no commissions – and applies it to cryptocurrency. You’ll be able to buy bitcoins directly, and will have access to more than a dozen 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. Read more on Robinhood.
At Interactive Brokers you’ll be able to buy futures contracts on Bitcoin, but won’t be able to own the currency directly. The broker charges $15.01 per contract, which gives you exposure to five bitcoins. Interactive Brokers also provides a whole range of other tradable securities, giving you access to securities across the world. Read more on Interactive Brokers.
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.
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). That cost eats 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.