How to Buy Cryptocurrency: Step-by-Step Guide
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- Cryptocurrencies are digital assets that can be transferred without third parties.
- There are generally three ways to buy crypto: crypto exchanges, brokerages, or payment services.
- Order types greatly influence how much you’ll pay for different cryptocurrencies.
Cryptocurrencies are digital assets that trade on a 24/7 global market. If you’re thinking about adding cryptocurrencies like Bitcoin, Ether, or Dogecoin to your investment portfolio, you have several options for doing so.
“Cryptocurrency is a unit of measure. It is a digital token that can be transferred from one party to another, but not duplicated,” explains Charles Allen, chief executive of BTCS, Inc.
Understanding cryptocurrency basics
What is cryptocurrency?
Cryptocurrencies are digital currencies (digital representations of value) secured using cryptography. Interested parties can use them to purchase goods and services. They also enable individuals to make transactions without the interference of third-party intermediaries.
How does cryptocurrency work?
Unlike physical fiat currencies (e.g., the U.S. dollar), cryptocurrencies use decentralized networks, and their transactions are generally recorded on the blockchain, an immutable, decentralized ledger.
The first known blockchain was rolled out with bitcoin, the first digital currency to scale. This blockchain was designed to be immutable (meaning transactions cannot be reversed or deleted) and decentralized (meaning its records are stored on many different computers) to safeguard against fraud and also boost transparency.
Every bitcoin transaction in the more than 15 years since the digital currency network began has been logged on the network’s blockchain, which helps create greater transparency.
“If I own a bitcoin, I don’t really own anything physical,” Allen says. “I just own a key that allows me to move a record or a unit of measure from one person to another without a trusted third party.” And that’s really all the cryptocurrency is, he explains.
So if I own two bitcoins, he adds, I can move it from myself to someone else without a trusted third party in the middle. “And that transaction would be verified by this decentralized network of computers from nodes and miners.”
Why invest in cryptocurrency?
Investing in cryptocurrencies can potentially deliver substantial returns. According to CoinMarketCap figures, the price of bitcoin, for example, has gone from pennies during the first few years of its existence to more than $60,000 per unit at the time of this writing.
Another benefit of investing in digital currency is that it can be used to diversify one’s portfolio. The idea behind diversification is to include multiple assets (potentially from various asset types) so that if one portfolio component falls in value, the other components rise to maintain the portfolio’s overall value.
While cryptocurrency certainly has benefits, interested parties should keep in mind that these digital assets can experience sharp volatility. Stocks can certainly experience price fluctuations, but the volatility experienced by digital currencies is more intense.
As a result, individuals who put their money into digital currency face significant downside risk, referring to the risk that the value of their principal could fall in value.
Past that, digital currencies are a very new asset class, at least compared to other more established asset classes like stocks and real estate. The first units of bitcoin came into existence in 2009, which means that this digital asset has been around for 15 years at the time of this writing.
Different ways to buy crypto
Cryptocurrency exchanges
A crypto exchange is a platform dedicated to facilitating the trading of cryptocurrency. Each exchange has its own rules for buying, selling, and trading cryptocurrency.
The best exchange for you depends on your needs, but beginners should look for exchanges that offer simple web and mobile interfaces, educational resources, and readily available customer support.
It is worth keeping in mind that while there is a large number of such marketplaces, there is a short list of organizations you should consider if you are seeking to use one of the best crypto exchanges out there.
Depending on the crypto exchange, you can trade one cryptocurrency for another, or exchange fiat money (like the U.S. dollar) for cryptocurrency, or vice versa. Prices are based on daily market rates.
Quick tip: With crypto also comes stablecoins and non-fungible tokens (NFTs). Stablecoins are backed by fiat currencies like the US Dollar to stabilize their value (if it’s backed by dollars, you can usually redeem one stablecoin for $1). NFTs, however, are unique, art-or-collectible-associated tokens that can’t be exchanged for other tokens.
It should be noted that not every exchange offers every cryptocurrency. But here are several exchanges and brokerages that do:
There are both centralized and decentralized exchanges. The most prominent exchanges, for example Coinbase and Kraken, are centralized, whereas decentralized exchanges are peer-to-peer (P2P) marketplaces where transactions take place directly between users.
Decentralized exchanges rely on smart contracts, which ensure that transactions take place as long as specific requirements are fulfilled.
While decentralized exchanges have seen increasing usage over time, centralized exchanges still see far more activity.
Traditional brokers
Interested parties can also purchase digital currencies through traditional brokers. Traditional online brokerages that offer cryptocurrencies are few, but more options are becoming available for crypto-oriented traders.
Online brokerages usually don’t offer as many cryptocurrencies as crypto exchanges (nor do they provide interest-earning account perks like staking).
One example of a broker that offers these digital assets is eToro USA, which offers trading in more than 20 cryptocurrencies.
Another example is Robinhood, which currently offers no-commission cryptocurrency trades. Users can buy and sell 15 different digital currencies through this platform.
Interactive Brokers offers digital currency trading, although it only allows investors to trade four cryptocurrencies, specifically bitcoin, ethereum, litecoin and bitcoin cash. This platform offers low commissions for such transactions, which can be as little as 0.12% to 0.18% of the value of the asset traded.
You should choose a broker if you’re looking to trade a variety of asset types under the same roof. TradeStation offers cryptocurrencies in addition to its selection of stocks, ETFs, options, bonds, and mutual funds.
Payment apps
Several payment apps give their users the ability to purchase cryptocurrencies. These software programs can offer easy access to digital assets.
In recent years, payment services like PayPal, Cash App, and Venmo, all expanded their accepted payment options, allowing users to buy, sell, or hold cryptocurrencies like bitcoin. Every one of these services has an app that users can access to make transactions.
Bitcoin ATMs
Bitcoin ATMs provide an easy way for interested parties to buy and sell the digital currency. As of January 1, 2024, there were more than 30,000 of these machines worldwide, according to Statista figures.
These machines offer users a straightforward way to purchase bitcoin using more traditional payment methods like cash and bank cards. These machines frequently leverage two-factor authentication, which requires multiple steps to verify a user, to help ensure the security of transactions.
Users should keep in mind that the fees associated with bitcoin ATMs can be high, according to figures provided by the Federal Reserve Bank of Kansas City, with interested parties often paying total fees of 20%.
Peer-to-peer (P2P) marketplaces
As stated earlier, decentralized exchanges provide crypto investors with P2P marketplaces where they can make transactions involving digital currencies.
These platforms depend on smart contracts to make sure that transactions take place.
Investors might take an interest in decentralized exchanges because transaction participants are not required to disclose their private keys like they would when using a centralized exchange.
Further, decentralized exchanges can charge low fees.
Decentralized exchanges also don’t hold investor funds, making them less appealing to hackers.
Choosing the right platform
Fees and commissions
Keep in mind that the total fees and commissions associated with trading platforms can vary quite a bit. Many exchanges charge not only trading fees, but also fees for deposits and withdrawals.
Fortunately, there are many different exchanges, platforms and apps you can use to purchase cryptocurrency. This competition may place downward pressure on total fees.
Security
When evaluating different platforms, the measures they use to ensure the security of their users is a major consideration. Two-factor authentication is common. Some exchanges put their cryptocurrency into cold storage, meaning that it is held offline, helping eliminate much of the risk that digital currencies will be compromised as a result of a hack.
In addition, some exchanges pay for insurance to help safeguard their users. Coinbase, for example, has crime insurance. “Coinbase carries crime insurance that protects a portion of digital currencies held across our storage systems against losses from theft, including cybersecurity breaches,” the Coinbase website states.
“However, our policy does not cover any losses resulting from unauthorized access to your personal Coinbase or Coinbase Pro account(s) due to a breach or loss of your credentials,” it adds.
Investors should keep in mind that cryptocurrency exchanges are not insured by the Federal Deposit Insurance Corporation, which provides insurance for banks.
Available cryptocurrencies
Bitcoin, the world’s most well-known cryptocurrency, can be purchased through many different mediums. Many exchanges offer far more than bitcoin, with some of these marketplaces offering trading of hundreds of cryptocurrencies.
The easiest way to determine which cryptocurrencies a platform, exchange or app offers is to simply peruse its website.
Reputation and user experience
As always, investors should perform thorough due diligence before using any platform, exploring its reputation and reviews left by users. Fortunately, there is a wealth of information on different exchanges that interested parties can access online.
Coinbase, in particular, has a reputation of being a safe exchange, although this organization is not without security breaches. In 2021, this platform suffered a hack that resulted in at least 6,000 users losing funds.
Setting up your wallet
Types of wallets
Cryptocurrency users frequently use wallets to hold the private keys they need to access their digital assets. These wallets can come in many forms, ranging from software wallets to hardware devices specifically designed to retain this information.
Technically, a user can write their private keys on a piece of paper, or alternatively, they can type them up using a word processor and print them out. While this may seem basic, it at least eliminates the risk of someone accessing one’s private keys through the internet.
Hardware wallets, for example thumb drives, are also secure, as they only connect to computers (like desktop and laptop devices) when necessary.
There are several variables to consider for investors who are trying to determine how to choose a crypto wallet.
When evaluating different crypto wallets, keep in mind that the amount of cryptocurrency you have plays a key role. If you only have a small amount invested, paying for expensive hardware doesn’t make sense. However, if you have a significant amount of money in cryptocurrency, paying for more elaborate security measures may seem perfectly reasonable.
Quick tip: If your exchange doesn’t offer a wallet, you may need to set up one with a personal wallet service. There are several different types of providers that may charge fees depending on whether it’s a hot or cold wallet. For example, cold wallets always generally charge fees, while hot wallets generally don’t.
Importance of security
Investors who want to keep their cryptocurrency secure can benefit from using strong passwords. For example, a user might want to craft a password that has many different characters, including letters, numbers and symbols.
Two-factor authentication can go a long way toward safeguarding one’s digital currency assets. While it may seem inconvenient by taking more time, using multiple steps to verify your identity may be well worth it in the grand scheme of things.
Transferring your crypto
Another strategy that many investors use to safeguard their cryptocurrency is buying it on exchanges and then transferring it to one or more wallets. Exchanges can hold very substantial amounts of cryptocurrency, making them compelling targets for hackers.
By moving their digital currency from exchanges to digital wallets, investors can transfer these assets to a far less visible place. Further, by sending cryptocurrencies to a hardware wallet, an investor can take their assets offline and make them far more secure.
Making your first crypto purchase: Step-by-step instructions
1. Choose a crypto provider
Start by setting up an account through a platform that allows you to purchase cryptocurrencies, such as the well-known exchange Coinbase.
To initiate this process, you will need to be at least 18 years of age and have access to a valid government ID you can use to confirm your identity, a computer or smartphone you can use to access Coinbase, and updated software. More specifically, using this exchange to make transactions will require you to have the latest version of the Coinbase app or the largest version of your browser (Coinbase recommends that interested parties use Google Chrome).
2. Set up a crypto-trading account
Once you have put these resources together, you can set up an account. Coinbase suggests that you do this either through the app (if using a smartphone) or through a browser (if you are using a computer). Coinbase recommends that potential users refrain from setting up accounts through the browser on their phone.
Setting up an account requires you to enter some basic information (legal name, the state where you reside, email address and a password) and then indicate that you agree to both the company’s User Agreement and Privacy Policy. Once you have reviewed these, you click on “SIGN UP” if using a mobile device or “Create account” if using a computer.
3. Verify crypto account
After this, Coinbase may send you a message designed to verify your email address. If you receive this, it will come from [email protected], and all you have to do is click on “Verify Email Address,” which will in turn bring you to the Coinbase website where you can log in using your email address and password.
You will need to verify a phone number you wish to associate with your account, which requires signing in to your Coinbase account and then receiving a code sent to your phone via SMS, which you will, in turn, use to confirm your number with the exchange.
4. Provide personal information
After that, you enter personal information as displayed on your government ID. Keep in mind that all the information needs to match up with the form of identification, as you will be required to submit it to Coinbase as part of the verification process.
You will need to provide some more information left off an ID, including your social security number and occupation, and then you will need to answer some basic questions like “What do you use Coinbase for?” and “What is your source of funds?”
Once you have completed the aforementioned step, you will have finished the application process. Assuming Coinbase approves your account, you will need to verify your identity by submitting documentation and then link a payment method you will use to fund your account.
5. Fund your crypto account
Next, you will need to fund your account, which you can do using many different methods. The various means you can use to fund your account will vary based on your jurisdiction, but in the U.S., the methods include your bank account, a debit card, Google Pay and PayPal.
6. Purchase cryptocurrencies
Once you have funded your account, you can purchase a cryptocurrency by signing in to Coinbase.com, going to Buy/Sell, selecting a digital currency from the Buy tab, specifying the amount of the cryptocurrency you want to purchase, singling out a payment method, selecting Preview Buy so you can verify the details of your transaction, and, assuming the details reflect the exact purchase you want to make, clicking “Buy Now.”
FAQs
Yes, it is safe to buy cryptocurrency, but investors should evaluate any platform where they are considering making a purchase and follow best practices to ensure the security of their transactions.
Yes, most cryptocurrencies are divisible, meaning you can purchase just a fraction if you want.
Yes, there are taxes associated with cryptocurrencies. You can benefit from speaking with an accountant or tax professional to make sure you have all the details needed.
Yes, some platforms will allow you to purchase cryptocurrencies using a credit card, but the associated fees may be higher than if you used other payment methods.
Be sure to conduct thorough due diligence and understand the risks associated with investing in digital currencies. You might also benefit from using a paper account so you can get used to investing in these cryptocurrencies without putting any of your money at risk. Past that, it might be smart to start out small when you are first getting your feet wet. And any portfolio can benefit from diversification, which would involve incorporating many different assets.
