Key points
- Bitcoin is the world’s first decentralized currency.
- There’s a limited supply of bitcoin.
- The crypto coin is known for its price volatility.
Whether it’s a good or bad thing, there’s nothing quite like Bitcoin (BTC).
The original cryptocurrency, launched in 2009, is perhaps one of the most polarizing financial assets. Its ups and downs are as unnerving as they are enthralling.
If you’re thinking about jumping on the bitcoin bandwagon, there are several things to consider, starting with what exactly you’re getting into. Here’s what you need to know before buying bitcoin.
What is bitcoin?
Bitcoin is a virtual currency. It’s designed to exist outside the control of any central entity, such as banks or governments.
Fiat currencies like the U.S. dollar and the British pound are created by government orders as legal tender. In contrast, bitcoin offers a peer-to-peer form of money without an intermediary. That’s why it’s known as decentralized currency.
For many, a big selling point for cryptocurrencies is that they aren’t governed or issued by central banks or authorities.
Like most cryptocurrencies, bitcoin is created through cryptographic computer technology called a blockchain. The blockchain and bitcoin were created by a person or group using the pseudonym Satoshi Nakamoto.
The blockchain on which bitcoin runs can be considered a distributed ledger. Transactions are recorded on the blockchain, continuously updated by volunteers known as miners and available for all to see on the internet.
Another key difference between bitcoin and conventional money is that there is a hard cap of 21 million coins. When the supply reaches this number, no more bitcoin will be created.
Fiat currency, on the other hand, is created by central banks or governments, and its supply is governed by monetary policies.
Is bitcoin a currency?
Some experts argue bitcoin hasn’t achieved currency status.
“A viable currency must have low volatility,” said Kelly Gilbert, owner and principal at EFG Financial. It’s hard to use a currency that is worth $500 one day and $50 the next.
“For this reason, bitcoin is not yet a viable currency,” Gilbert said. “If you buy bitcoin now, remember it is more of a speculative stock than it is a viable currency”
How to buy bitcoin through a crypto exchange
Several companies offer bitcoin trading. But they vary in terms of whether they offer actual ownership or just exposure. If you’re looking to buy bitcoin, a good place to start is with a trading app like eToro or through a crypto exchange like Coinbase or Gemini.
Remember that trading fees and other factors, such as storage, apply.
Step 1: Choose a crypto trading platform
The easiest way for an individual to buy bitcoin is through a crypto exchange, such as Kraken or Binance.US.
Online stockbrokers, such as Robinhood, also offer their customers the ability to buy bitcoin and other cryptocurrencies.
Tip: You’ll need a crypto wallet to store your coins. While crypto trading platforms offer exchange accounts, storing your crypto in a cold wallet tends to be more secure.
Step 2: Set up an account
Most accounts require users to authenticate their identity and register a payment method.
While some decentralized exchanges allow users to remain anonymous, most popular exchanges, such as Binance.US, Coinbase and Kraken, require identifying documentation.
The setup process is nearly the same as what is required for brokerage accounts, as many centralized exchanges follow Know Your Customer standards. You may be asked to provide the following:
- Government-issued ID.
- Social Security number or taxpayer identification number.
- ID photo or video confirmation.
- Proof-of-address documents.
When selecting a crypto trading platform, be aware that different exchanges allow different payment methods and fees will vary.
Step 3: Place an order
Crypto exchanges offer many of the same order types as online brokers. Most popular crypto exchanges facilitate the following:
- Market order. You receive the next available price after your trade is placed.
- Limit order. You set a specified price for selling or buying crypto so you receive the limit price or better. If your limit price isn’t met, your order is canceled.
- Stop-limit order. A pending order that becomes a market order once your desired price is met. You may receive a final price that is above or below your limit price.
Step. 4: Store your crypto
You can store your bitcoin in myriad ways. Two popular methods are hot wallets and cold wallet.
- Hot wallet. You can store bitcoin on an online wallet or exchange account. These hot wallets are known for their convenience and ease of accessibility. But they also have drawbacks, including security risks. Hot wallets are more vulnerable to hacks and cyberattacks because of their online nature.
- Cold wallet. Cold wallets are small, encrypted portable devices that sometimes look like a USB drive.They are often considered more secure because their offline nature prevents hacks through traditional means.
How to buy bitcoin on a trading app
Trading apps like Robinhood let you buy bitcoin from your phone. Exchanges and online brokers also may provide trading apps alongside their desktop sites.
The trading fees and amount of bitcoin you receive for each dollar you spend may vary across apps.
When you buy through an app, you are the legal owner of your coins, although the app may store your crypto for you.
To get started, download the app and sign up for an account. Depending on the app you use, you may need to provide personal information, such as your name, address and Social Security number. If the platform requires you to send documents for verification, it will explain how to do so.
Once your account is set up, you can fund it from your bank or debit card. Note that bank transfers may take several business days to process before you can start trading.
How to buy bitcoin through an online broker
Some online brokers, such as Schwab and Fidelity, allow customers to purchase bitcoin through their platforms. This can be a convenient way to invest in bitcoin if you already have an account at the firm.
The exact methods for owning bitcoin vary by provider. For example, Schwab doesn’t let you buy or sell bitcoin directly. Instead, you can invest in bitcoin through exchange-traded funds, mutual funds, trusts, futures and stocks that provide indirect exposure, such as Coinbase.
You can buy bitcoin directly with Fidelity. But ethereum is the only available altcoin, so it can be hard to diversify your crypto assets unless you use an ETF or another fund.
Brokers may not allow crypto investing in all states. Confirm with the company whether you are eligible to open an account.
How to buy bitcoin funds
Bitcoin funds are ETFs or mutual funds that own bitcoin directly or invest in bitcoin indirectly through futures contracts or companies that service the cryptocurrency market.
You can buy bitcoin funds the way you would other ETFs or mutual funds. All you need is a trading app or platform that supports cryptocurrency investing.
One benefit of bitcoin funds is they allow you to gain exposure to bitcoin without opening a crypto account or wallet. But you may incur trading fees and management fees, which can eat into your overall returns, especially if you hold the investment for a long period.
How to buy bitcoin on Cash App
Cash App is a financial platform that offers bitcoin. Purchasing the cryptocurrency through the app is relatively straightforward if you have an account.
Navigate to the home screen, tap “Buy BTC” and select the amount you want to buy. You must then enter your PIN to complete the transaction. The fee will be listed on the screen before you confirm the trade. This will help you compare the purchasing method to other mediums available to you.
While Cash App may be a convenient way to buy bitcoin, it lacks educational resources. The app also has been the target of hackers and scams over the years, so research how to keep your assets safe before using it.
How to buy bitcoin on PayPal
From your PayPal web account, click “Finances” and then “Buy.” Select the cryptocurrency you want to purchase — in this case bitcoin — and enter an amount and a frequency. Then, choose your payment method, tap “Next” and click “Buy Now.”
If you’re on the PayPal app, the process is similar. From “Finances,” tap “Crypto” and then click “Buy.” Choose an amount, frequency and starting date and then click “Confirm” and “Next.” Select your payment method before authorizing and scheduling the transaction.
Buying bitcoin through PayPal is straightforward. But there are disadvantages. For instance, PayPal may not allow users in certain countries to transfer bitcoin off the platform. It also charges notoriously high fees.
How to buy bitcoin with a credit card
You can use a credit card to purchase bitcoin through various avenues, the most common of which are exchanges. After signing up with an exchange, you are often able to deposit funds using a credit card.
There may be additional fees when using a credit card to purchase bitcoin from an exchange. And some credit issuers don’t allow cryptocurrency purchases. More cost-effective ways to purchase bitcoin include linking your exchange account to your bank account and setting up a wire transfer.
Experts also advise against buying bitcoin with a credit card. “The constant accruing interest on credit card purchases makes bitcoin, an already risky investment, even riskier,” said Dan Casey, investment advisor and founder of Bridgeriver Advisors.
If you pay your credit card balance in full each month, you may be able to prevent accruing interest. But that won’t help you avoid additional fees charged by the platform.
How to use a bitcoin ATM
Bitcoin ATMs, or BTMs, let you use cash or debit to buy bitcoin.
BTMs look like ATMs but are connected to a bitcoin wallet instead of a bank. You typically must have an account to use the machine, and you may need to verify your identity, especially for large transactions. BTMs also may have transaction limits.
Instead of giving you physical coins, the BTM sends bitcoin to your wallet via a QR code. This means you must provide a QR code for your wallet.
While BTMs are not linked to a financial institution, they adhere to many of the same laws and regulations. But they have high fees, often between 7% and 12% of your transaction, so BTMs may not be the most cost-effective option.
Things to think about before buying bitcoin
The most important thing to consider when purchasing bitcoin is its risk profile. Bitcoin is a highly volatile asset that swings wildly.
BTC’s price performance over the past few years offers a stark example. The original crypto’s trading price fell from roughly $69,000 in November 2021 to less than $17,000 in December 2022. It reached a new high of more than $73,000 in March 2024. Year to date, BTC’s trading price is up 45%, as of March 20.
This year’s gains are a result of the Securities and Exchange Commission’s approval of spot bitcoin ETFs, according to Gilbert.
“This legitimizes the investment and has prompted large purchases by the likes of BlackRock that are sending the prices upward at an accelerated rate,” he said.
But this demand may be temporary.
“It will cool off almost as fast as it began, so if you decide to invest now, be vigilant and aware of this,” Gilbert said.
Consider bitcoin only as part of a diversified portfolio and only if it matches your risk tolerance.
Before buying bitcoin, ask yourself the following questions:
- How much am I willing to invest?
- Where do I buy it from?
- Where would I store it?
- What are my long-term goals?
Knowing your responses will help guide you and assess your risk tolerance.
How to sell bitcoin
You generally can sell bitcoin where you purchased it.
Remember that fees will be payable once more when you trade out of the asset. Taxes also may be a factor, depending on whether the sale is profitable and where you are domiciled. For instance, if you sell your bitcoin for a profit, the sale might be subject to capital gains tax.
Also consider what assets you are selling. For some exchanges and trading platforms, it may be possible to sell bitcoin only into a crypto stablecoin, such as USD coin (USDC) or tether (USDT), instead of fiat currency. In this case, you must take the additional step of selling that asset into fiat, which may require an additional layer of fees.
Frequently asked questions (FAQs)
You can buy $100 in bitcoin through a trading app or online broker that supports bitcoin, via a cryptocurrency exchange like Coinbase, on Cash App or PayPal, or through a bitcoin ATM. Depending on the method you choose, the transaction may incur fees, so be sure to read the fine print beforehand.
You can invest in bitcoin as a beginner by purchasing bitcoin directly or through a bitcoin mutual fund or ETF. Buying bitcoin directly gives you full control over your investment. But using a fund gives exposure to bitcoin with the oversight of a professional money manager.
You can make money as easily as you can lose money with bitcoin. The asset is notoriously volatile. Anyone who invests is in for a bumpy ride.
As with any investment, your gains are only paper gains until you sell. If you want to make real money from bitcoin, you must sell it for a higher price than you purchased it. That means you need to know both when it’s a good time to buy and when it’s a good time to sell.
