How to Buy Bitcoin

Investing in Bitcoin (BTCUSD) can seem complicated, but it is much easier when you break it down into steps. Investing or trading Bitcoin only requires an account at a service or an exchange, although further safe storage practices are recommended.

There are several things that aspiring Bitcoin investors need: a cryptocurrency exchange account, personal identification documents if you are using a Know Your Customer (KYC) platform, a secure connection to the Internet, and a method of payment. It is also recommended that you have your own personal wallet outside of the exchange account. Valid methods of payment using this path include bank accounts, debit cards, and credit cards. It is also possible to get bitcoin at specialized ATMs and via P2P exchanges.

Before You Buy Bitcoin

Privacy and security are important issues for Bitcoin investors. Anyone who gains the private key to a public address on the Bitcoin blockchain can authorize transactions. Private keys should be kept secret—criminals may attempt to steal them if they learn of large holdings. Be aware that anyone can see the balance of a public address you use. The flip side to this public information is that an individual can create multiple public addresses for themselves. Thus, they can distribute their stash of Bitcoin over many addresses. A good strategy is to keep significant investments at public addresses that are not directly connected to ones that are used in transactions.

Anyone can view a history of transactions made on the blockchain—even you. Although transactions are publicly recorded on the blockchain, 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. In that sense, Bitcoin transactions are more transparent and traceable than cash because all of them are available for public view, unlike private cash transactions. But Bitcoin transactions also have an element of anonymity built into their design. It is very difficult to trace the transacting parties—i.e., the sender and recipient of the bitcoin—on the cryptocurrency’s blockchain.

International researchers and the FBI have claimed they can track transactions made on the Bitcoin blockchain to users’ other online accounts, including their digital wallets. For example, if someone creates an account on Coinbase, they must provide their identification. Now, when that person purchases bitcoin, it is tied to their name. 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. This should not concern most investors because Bitcoin is legal in the U.S. and most other developed countries.

Buying Bitcoin 

We have broken down the steps to buying bitcoin below. Remember that you still need to do your research and select the best option for yourself based on your circumstances.

Step 1: Choose a crypto trading service or venue

The first step in buying bitcoin consists of choosing a crypto trading service or venue. Popular trading services and venues for purchasing cryptocurrencies include cryptocurrency exchanges, payment services, and brokerages. Out of these, cryptocurrency exchanges are the most convenient option because they offer a breadth of features and more cryptocurrencies for trading.

Signing up for a cryptocurrency exchange will enable you to buy, sell, and hold cryptocurrency. It is generally best practice to use an exchange that allows its users to withdraw crypto to their own personal online wallet for safekeeping. For those looking to trade Bitcoin or other cryptocurrencies, this feature may not matter.

There are many types of cryptocurrency exchanges. Because the Bitcoin ethos is about decentralization and individual sovereignty, some exchanges allow users to remain anonymous and do not require users to enter personal information. Such exchanges operate autonomously and are typically decentralized, which means they do not have a central point of control.

Although such systems can serve nefarious purposes, they can also provide services to the world’s unbanked population. For certain categories of people—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.

Right now, however, most popular exchanges are not decentralized and follow laws that require users to submit identifying documentation. In the United States, these exchanges include Coinbase, Kraken, Gemini, FTX, and Binance.US, to name a few. These exchanges have grown significantly in the number of features they offer.

The crypto universe has grown rapidly in the past decades, with many new tokens competing for investor dollars. With the exception of Bitcoin and certain prominent coins, such as Ethereum, not all of these tokens are available at all exchanges. Each exchange has its own set of criteria to determine whether to include or exclude the trading of certain tokens. 

Coinbase, Kraken, and Gemini offer Bitcoin and a growing number of altcoins. These three are probably the easiest on-ramps to crypto in the entire industry. 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. However, traders outside the U.S. have a greater choice of tokens on its platform.  

An important thing to note when creating a cryptocurrency exchange account is to use safe Internet practices. This includes two-factor authentication and a long, unique password that includes a variety of lowercase letters, capitalized letters, special characters, and numbers.

Step 2: Connect your exchange to a payment option

After you have chosen an exchange, you will need to gather your personal documents. Depending on the exchange, these may include pictures of a driver’s license or Social Security card, as well as information about your employer and source of funds. The information you may need can depend on the region you live in and the laws within it. The process is largely the same as setting up a typical brokerage account.

After the exchange has verified your identity, you will be asked to connect a payment option. 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, it is not a good idea because cryptocurrency price volatility could inflate the overall cost of purchasing a coin.

Bitcoin is legal in the United States, but some banks may question or even stop deposits to crypto-related sites or exchanges. It is a good idea to check to make sure that your bank allows deposits at your chosen exchange.

There are varying fees for deposits via a bank account, debit, or credit card. Coinbase is a solid exchange for beginners and has a 1.49% fee for bank accounts, with a 3.99% fee for debit and credit cards. It is important to research the fees associated with each payment option to help choose an exchange or to choose which payment option works best for you.

Exchanges also charge fees per transaction. These fees can either be a flat fee (if the trading amount is low) or a percentage of the trading amount. Credit cards incur a processing fee in addition to the transaction fees.

Step 3: Place an order

You can buy bitcoin (or other cryptocurrencies) after choosing an exchange and connecting a payment option. In recent years, cryptocurrency exchanges have slowly become more mainstream. They have grown significantly in terms of liquidity and their breadth of features. The operational changes at cryptocurrency exchanges parallel the change in the perception of cryptocurrencies. An industry that was once thought of as a scam or one with questionable practices is slowly morphing into a legitimate one that has drawn interest from all the big players in the financial services industry.

Now, cryptocurrency exchanges have gotten to a point where they have nearly the same level of features as their stock brokerage counterparts. Crypto exchanges today offer a number of order types and ways to invest. Almost all crypto exchanges offer both market and limit orders, and some also offer stop-loss orders. Of the exchanges mentioned above, Kraken offers the most order types. Kraken allows for market, limit, stop-loss, stop-limit, take-profit, and take-profit limit orders.

Aside from a variety of order types, 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. Having your crypto outside of the exchange and in your personal wallet ensures that only you have control over the private key to your funds. It also gives you the ability to store funds away from an exchange and avoid the risk of your exchange getting hacked and losing your funds.

Although most exchanges offer wallets for their users, security is not their primary business. We generally do not recommend using an exchange wallet for large or long-term cryptocurrency holdings.

Some wallets have more features than others. Some are Bitcoin only, and some offer the ability to store numerous types of altcoins. Some wallets also offer the ability to swap one token for another.

When it comes to choosing a Bitcoin wallet, you have a number of options. The first thing you will need to understand about crypto wallets is the concept of hot wallets (online wallets) and cold wallets (paper or hardware wallets).

Hot wallets

Online wallets are also known as hot wallets. Hot wallets are wallets that run on Internet-connected devices such as computers, phones, or tablets. This can create vulnerability because these wallets generate the private keys to your coins on these Internet-connected devices. Though a hot wallet can be very convenient in the way you are able to access and make transactions with your assets quickly, storing your private key on an Internet-connected device makes it more susceptible to a hack.

This may sound farfetched, but hot wallet holders who haven’t set up enough security run the risk of losing funds to theft. This is not an infrequent occurrence, and it can happen in a number of ways. For example, boasting on a public forum such as Reddit about how much bitcoin you hold while you are using little to no security and storing it in a hot wallet would not be wise. That said, these wallets can be made secure so long as precautions are taken. Strong passwords, two-factor authentication, and safe Internet browsing should be considered minimum requirements.

These wallets are best for small amounts of cryptocurrency or cryptocurrency that you are actively trading on an exchange. You could liken a hot wallet to a checking account. Conventional financial wisdom would say to hold only spending money in a checking account while the bulk of your money is in savings accounts or other investment accounts. The same could be said for hot wallets. Hot wallets encompass mobile, desktop, web, and exchange account custody wallets. 

As mentioned previously, exchange wallets are custodial accounts provided by the exchange. The user of this wallet type is not the holder of the private key to the cryptocurrency that is held in this wallet. If an event were to occur wherein the exchange is hacked or your account becomes compromised, you would lose your funds. The phrase “not your key, not your coin” is heavily repeated within cryptocurrency forums and communities.

Cold wallets

The simplest description of a cold wallet is that it is not connected to the Internet and therefore stands at a far lesser risk of being compromised. These wallets can also be referred to as offline wallets or hardware wallets. These wallets store a user’s private key on something that is not connected to the internet and can come with software that works in parallel so that the user can view their portfolio without putting their private key at risk. 

Perhaps the most secure way to store cryptocurrency offline is via a paper wallet. A paper wallet is a wallet that you can generate off of certain websites. It then produces both public and private keys that you print out on a piece of paper. The ability to access cryptocurrency in these addresses is only possible if you have that piece of paper with the private key. Many people laminate these paper wallets and store them in safe deposit boxes at their bank or even in a safe in their home. These wallets are meant for high-security and long-term investments because you cannot quickly sell or trade bitcoin stored this way.

A more common type of cold wallet is a hardware wallet. A hardware wallet is typically a USB drive device that stores a user’s private keys securely offline. Such wallets have serious 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 your network-connected computer or potentially vulnerable software. These devices are also typically open source, allowing the community to determine their safety through code audits rather than a company declaring that they are safe to use.

Cold wallets are the most secure way to store your bitcoin or other cryptocurrencies. But they require more technical knowledge to set up.

A good way to set up your wallets is to have three things: an exchange account for buying and selling, a hot wallet to hold small to medium amounts of crypto you wish to trade or sell, and a cold hardware wallet to store larger holdings for long-term durations.

How to Buy Bitcoin With PayPal

You can also buy bitcoin through payment processor PayPal Holdings, Inc. (PYPL). There are two ways to purchase bitcoin using PayPal. The first and most convenient method is to purchase cryptocurrencies using your PayPal account that is connected to a payment mechanism, such as a debit card or bank account. The second option is to use the balance of your PayPal account to purchase cryptocurrencies from a third-party provider. This option is not as convenient as the first because very few third-party sites allow users to purchase bitcoin using the PayPal button.

Four cryptocurrencies—Bitcoin, Ethereum, Litecoin, and Bitcoin Cash—can be purchased directly through PayPal. With the exception of 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.

To set up a crypto account with PayPal, the following information is required: name, physical address, date of birth, and tax identification number. 

It is not possible to use a credit card to purchase Bitcoin using PayPal. During the buying process, PayPal will display a price for the cryptocurrency. But that price is subject to rapid change due to the volatility of cryptocurrency markets. It is a good idea to make sure you have more than the price you budgeted for the purchase in your bank account. 

When you buy bitcoin directly from PayPal, it makes money off 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. For example, a flat fee of $0.50 is charged for purchases between $100 and $200. Thereafter, the fee is a percentage of the overall dollar amount. For example, a fee of 2% of the total amount is charged for crypto purchases between $100 and $200.

One disadvantage of purchasing cryptocurrencies through PayPal is that you cannot transfer the crypto outside the payment processor’s platform. Therefore, it is not possible for you to transfer your purchased bitcoin from PayPal’s wallet to an external crypto wallet or your personal wallet.

The other disadvantage of using PayPal is that very 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

The process for purchasing bitcoin with credit cards is similar to the process for buying it with debit cards or through automated clearing house (ACH) transfers. You will need to enter your credit card details with the exchange or online trading firm and authorize the transaction. In general, however, it is not a good idea to purchase bitcoin with credit cards. There are a couple of reasons for this.

First, not all exchanges allow bitcoin purchasing with credit cards due to associated processing fees and the risk of fraud. This decision may work out in the best interests of customers. This is because credit card processing can tack additional charges onto such transactions. Thus, in addition to paying transaction fees, you will end up with processing fees that the exchange may pass onto you.

The second reason is that credit card purchases can be expensive. Credit card issuers treat bitcoin purchases as cash advances and charge hefty fees and interest rates on such advances. For example, American Express and Chase both count purchases of cryptocurrencies as cash advance transactions. Thus, if you purchase $100 worth of bitcoin using an American Express card, you will pay $10 (current cash advance fee for such transactions) plus an annual percentage fee of 25%. What’s more, the credit card company also limits you to $1,000 worth of bitcoin purchases per month.

An indirect method of purchasing bitcoin using a credit card is to get a Bitcoin rewards credit card. Such cards function like your typical rewards credit card except they offer rewards in the form of bitcoin. So, they invest the cash back earned from purchases into Bitcoin. One example of a Bitcoin rewards card is the BlockFi Bitcoin Rewards Credit Card. Beware, however, that the annual fees for these cards may be steep and there may be additional costs associated with the conversion of fiat currencies into crypto.

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 that is then transferred to online wallets for users. Bitcoin ATMs have become increasingly popular in recent years—even retail giant Walmart Inc. (WMT) is testing a pilot program that will offer its customers the option of purchasing bitcoin. Coin ATM Radar can help to track down the closest machines.

However, ATMs are an expensive option. There are two charges 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. For example, the worldwide average purchase fee at Bitcoin ATMs is 8.4% (of the purchase amount) and 5.4% for sales at ATMs.   

P2P exchanges

Unlike decentralized exchanges, which match buyers and sellers anonymously and facilitate all aspects of the transaction, there are some peer-to-peer (P2P) exchange services that 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. Users then browse through listings of buy and sell offers, choosing the trading partners with whom they wish to transact.

LocalBitcoins facilitates some aspects of the trade. 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  

Very few mainstream brokerages offer bitcoin purchase and trading capabilities due to the uncertainty surrounding the regulatory status of cryptocurrencies. Robinhood Markets, Inc. (HOOD), an app popular with retail investors, is one exchange that offers crypto trading facilities. It charges 0% commission for cryptocurrency trades and purchases and makes money from payment for order flow, passing its trading volume onto other trading platforms or brokerages. 

The absence of a commission fee may be an enticing prospect for beginners, but there are a couple of catches to that offer. First, Robinhood does not have the breadth of features and coins offered by prominent crypto exchanges like Coinbase. As of October 2021, Robinhood enables 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. The exchange also offers various order types to minimize risk and offset losses during trading. 

The Robinhood platform also does not have a hosted wallet. Therefore, if you want to purchase cryptocurrencies through Robinhood, you will have to factor in additional costs for an online wallet provider.

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.

For example, you may only be required to click a button and specify an order type (i.e., whether the cryptocurrency should be sold instantly at available prices or whether it should be sold to limit losses) to conduct the sale. Depending on the market composition and demand at the venue, the offering price for Bitcoin may vary. For example, exchanges in South Korea traded bitcoin at a so-called kimchi premium during the run-up in its prices back in 2018.  

Cryptocurrency exchanges charge a percentage of the crypto sale amount as fees. For example, Coinbase charges 1.49% 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. There are no limits on the amount of cryptocurrency you can sell, however.

The Bottom Line

The process for purchasing bitcoin is slightly more complicated than the process to buy regular equity or stock. This is mainly because the cryptocurrency ecosystem and infrastructure are not as well developed as those of mainstream trading.

A bitcoin purchase process consists of four steps: selecting a service or venue for the purchase, connecting with a payment method, placing an order, and ensuring safe storage for your purchased cryptocurrency. Each of these steps requires research and a careful assessment of the pros and cons of each service. You can also buy bitcoin at Bitcoin ATMs or from payment services like PayPal and mainstream brokerages like Robinhood.

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