Bitcoin is a cryptocurrency with rapidly increasing popularity that has 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 dived into bitcoin, with some making millions.
If you’re considering this decentralized version of digital cash, you have a few different ways to buy bitcoin. You can buy them directly or indirectly from some traditional brokers as well as some newer upstarts. in fact, it’s easier than ever to buy bitcoin, and you can probably do it for a lower fee than before, too.
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Here are five ways to buy bitcoin and some key factors to consider.
topics discussed on this page
- what is bitcoin?
- 5 ways to buy bitcoin
- buy bitcoin: here’s what to watch for
- what information is needed to buy bitcoin?
- is bitcoin an effective hedge against inflation?
- what is the best place to store bitcoins?
- conclusion
what is bitcoin?
bitcoin is a type of digital currency or cryptocurrency, a way of paying for things that only exists virtually. the coin debuted in 2009 and really broke into mainstream awareness in 2017 with its rapid rise that year. Coins are created, or “mined,” when the computers that organize the coin process and legitimize transactions in the coin.
bitcoin uses a decentralized network of computers to manage everything: a distributed ledger called a blockchain that tracks transactions in the currency. it is like a huge public record of every transaction that has ever taken place in the currency. and the network monitors everything, ensuring the integrity of the currency and 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, specialized account to do so, as many major brokers offer a way to purchase them. (here are some of the top brokers for cryptocurrency trading). In addition, some unexpected players, like PayPal and the cash app, for example, now allow us residents to buy, sell and hold bitcoins as well.
Each method below offers a different mix of cost, security, and potential trade-offs.
financial applications
many financial apps like paypal and venmo now allow you to trade cryptocurrencies.
paypal makes it incredibly easy to buy or sell bitcoin directly using the same application you trust for your online payments. you’ll pay $0.50 for trades involving less than $5, and the fees go up from there. trades involving $200 – $1,000 cost 1.8 percent, while those above $1,000 cost 1.5 percent. there is a markup spread on trades, but you won’t pay a fee to hold crypto in your account, and you can trade with as little as $1 at a time. ethereum, litecoin and bitcoin cash are also tradable here.
venmo charges the same fees as it is owned by paypal.
cryptocurrency exchanges
Cryptocurrency exchanges are another popular option for those looking to buy bitcoin. exchanges offer some key advantages for traders. First, the best cryptocurrency exchanges offer the lowest total costs possible for trading cryptocurrencies. so they are your best bet if cost is your key goal. Second, many exchanges do not charge margin fees, which are hidden fees built into trading prices. Third, many exchanges offer wallets, allowing you to safely store your cryptocurrency.
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Fees on various cryptocurrency exchanges can differ markedly, so it’s worth searching to find which one offers the best combination of price, cryptocurrency option, and service. popular options include coinbase, binance, crypto.com, and kraken.
business applications
You can collect some bitcoins with no direct commission using a trading app like webull or robinhood, though you’ll end up compensating for it with a spread markup.
robinhood takes its best trick, no fees, and applies it to cryptocurrency, but charges a markup, the exact cost of which it does not reveal. You will be able to buy bitcoins directly and you will also have access to other digital currencies, a feature that other brokers listed here do not offer. Of course, you’ll be able to buy stocks, ETFs, and options while on the easy-to-use platform. read more about robinhood.
webull allows you to trade over 25 cryptocurrencies, including bitcoin. however, you will pay a 1 percent markup on each transaction. You can also trade stocks, ETFs, and options. read more at webull.
traditional corridors
some traditional brokers have also ventured into the crypto arena, including interactive brokers and trading station.
In interactive brokers, you will be able to buy bitcoin futures contracts and also trade the currency directly. The broker charges $10.02 per futures contract, giving you exposure to five bitcoins. If you want to trade bitcoins directly, you’ll pay a competitive fee of 0.12 to 0.18 percent of their trade value, depending on your monthly volume. you will also have access to ethereum, bitcoin cash and litecoin. Interactive brokers provide a wide range of other tradable securities, giving you access to securities around the world. read more about interactive brokers.
bitcoin ATMs
Another option is to buy bitcoins directly through a bitcoin ATM, though you’ll likely pay a lot more in fees than anywhere else. you will be able to buy bitcoins and some ATMs will also allow you to sell them using cash or a debit card. but you may need a bitcoin wallet to make the transaction. Fees can be expensive, with some ATMs charging around 7 percent per transaction, while fees at others can stretch into the teens.
buy bitcoin: here’s what to keep in mind
While you’re considering how to buy bitcoin, you’ll want to evaluate the following factors, as they should influence your choice of where to buy it, or whether to ultimately avoid it altogether.
- property. what do you want to have exactly? you can own bitcoin directly or a derivative, such as a futures contract, that offers a return on the currency’s movement.
- up/down. your potential profit is directly related to whether to hold the currency directly or through a futures contract. By owning bitcoin directly, your profit increases by one dollar with each dollar increase in the currency. on the contrary, with futures you can earn much more quickly without having to put up as much capital. however, your downside is more limited if you own outright, while you stand to lose more money with futures.
- cost. fees can vary widely depending on how you buy bitcoin. Futures contracts give you a large chunk of the action for a relatively low price, while some brokers may charge you various percentages to buy outright. a small percentage may not sound like much, but if you’re trading in and out of the market, it will quickly eat up your profits.
- safety. One of the biggest concerns with any investment is making sure it’s safe. some newer cryptocurrency players have had serious issues 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 have been dealing with the problem for much longer.
You can also receive bitcoins as part of business transactions. Regardless of how you obtained your coins, any cryptocurrency transactions must be reported to the IRS at tax time.
what information is needed to buy bitcoin?
When you open an account with a traditional brokerage or cryptocurrency exchange, you will need to provide basic personal information. Of course, you’ll need to provide your name, but the company will also require other information, such as your social security number, address, phone number, and bank account number. You may also need to detail how much trading experience you have and how comfortable you are with trading, depending on the institution.
This information allows the company to identify you and verify who you are. It’s also vital during tax time when the broker or stock exchange prepares documents about your profits and losses, reports you’ll need to file your taxes accurately.
is bitcoin an effective hedge against inflation?
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Some people think that bitcoin can be an effective way to hedge against inflation, or what is called inflation hedging. A hedge is a type of investment that partially or fully offsets the decline in another asset. therefore, an inflation hedge would protect you from inflation in some way.
There is little evidence to support the claim that bitcoin acts as a hedge against inflation, experts say. bitcoin hasn’t been around long enough to have gone through a major inflationary period.
And it’s also not an effective hedge against stock market volatility. Experts say bitcoin acts more like a risky tech stock or momentum stock, meaning it goes up when these stocks go up and down when they go down. that’s not the kind of thing you want from a hedge, which should work in the opposite way to the asset being hedged, zigzagging when the market zigzags.
what 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 to trade them, it may be best to keep them with the cryptocurrency exchange or broker where you trade, especially if you are trading frequently or on a short-term basis.
others may opt for a crypto wallet, if they plan to spend the cryptocurrency or just lock it up for safekeeping. a crypto wallet can hold and secure your cryptocurrency, although if you are taking custody of your assets then it is your full responsibility, and you could end up losing your cryptocurrency if you are not careful.
Two popular options for the latter group include active wallets and cold wallets.
hot wallets
A hot wallet allows your cryptocurrency to be easily used or moved. Because your coins are protected by software rather than hardware and are still connected to the internet, they are less secure than cold wallets. but if you are using a wallet because you intend to use cryptocurrency, it makes sense to opt for an active wallet. hot wallets come in a few varieties:
- desktop wallets: you can download the wallet software to your computer and manage your cryptocurrency holdings from there. when you’re done transacting, you can even turn it off, increasing your security.
- web wallets: this browser plugin allows you to connect to the blockchain and transact quickly , but the internet connection makes it less secure.
- mobile wallets: you can use software on a mobile device if you are using cryptocurrency to pay or make transactions.
Some hot wallet providers also offer multiple types of hardware wallets, so you can use one type of software on multiple devices.
cold wallets
A cold wallet is more valuable if you really want to lock your cryptocurrency and make it nearly waterproof. cold wallets rely on hardware, a physical device, to secure your holdings, and it looks like a usb stick. This can be disconnected from the internet, which makes your stocks very safe. when you’re ready to transact, you can plug it in and do business.
While more secure than a hot wallet, a cold wallet has other potential risks, including device theft, wallet loss, and even password loss. therefore, even cold wallets are not foolproof.
end result
If you want to buy bitcoin or other digital currencies as an investment, it’s important to keep costs to a minimum. Given the newness of the crypto market, many brokers would love to maximize their commissions (unlike the stock market, where trading fees have dropped to zero). Those fees eat into your profits, so find a way to minimize those frictional costs.
While the price of bitcoin has skyrocketed, 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 only trading an amount they are willing to lose.
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