Investors looking to make their first foray into the cryptocurrency world will likely have heard of Bitcoin—the most popular crypto and the largest by total market cap. After launching in 2009 to very little fanfare, this crypto has become a household name among many. While buying crypto might seem intimidating, it can be as straightforward as buying stocks and other types of investments online.
Before you buy Bitcoin
Before investing in Bitcoin, it helps to learn more about what Bitcoin is and how it works. Here are some key details:
- It’s mysterious. Bitcoin’s inventor or group of inventors used a pseudonym, Satoshi Nakamoto, to keep their identity secret.
- It’s volatile. The price for a single Bitcoin has had huge swings, reaching an all-time high in November 2021 of almost $69,000 before dropping to nearly $35,000 over the next two months. In general, Bitcoin is considered a risky investment, in large part because of its volatile price.
- It’s (mostly) legal in the US. It’s legal to buy and hold Bitcoin throughout the U.S., but some municipalities and states regulate organizations that sell Bitcoin.
- It can be vulnerable. Regulations and enforcement don’t keep hackers and scammers from stealing Bitcoin, and investors who get fleeced may not be able to recover their crypto.
- It’s subject to taxes. Investors could have to pay capital gains taxes on the profits they earn from Bitcoin. Crypto tax rules are similar to those that apply to stocks, but they’re also still being finalized.
5 steps to buying Bitcoin on a crypto exchange
Crypto exchanges make buying Bitcoin feel familiar to anyone who has purchased stock online.
Step 1: Choose a crypto exchange
There are hundreds of crypto exchanges available to investors, but first-time Bitcoin investors may want to look for reviews and start with one of the well-known options. Before signing up, consider:
- Availability. Some exchanges don’t operate in certain states, and some aren’t available in the U.S. For instance, Binance is one of the most popular exchanges globally, but it operates a separate Binance.us exchange for U.S.-based users.
- Funding and trading fees. The funding, trading, and withdrawal fees can vary depending on the funding source, amount, size of the trade, and the user’s total trading volume.
- Supported cryptos. Investors need to check whether Bitcoin and other cryptos are available on the exchange.
- Advanced trading platforms. Some exchanges have multiple interfaces, including advanced trading platforms with more in-depth charts, additional types of trades, and margin accounts.
- Insurance. Some exchanges, including Coinbase, Crypto.com, and Gemini, have insurance that can help reimburse users’ funds if the exchange is hacked. However, this won’t necessarily cover someone who is personally hacked or who falls victim to a scam.
Some Bitcoin exchanges offer new users an incentive to create an account and place their first trade. But focusing on the platform’s overall features, fees, and security could make more sense in the long run.
Step 2: Verify your identity
Creating an account often requires registering your full name, date of birth, mailing address, phone number, and Social Security number. Users may also need to upload a photo or use their webcam to take a picture of their driver’s license or passport to complete the verification process. Accounts that aren’t fully verified may have limitations on buying and selling crypto.
Step 3: Connect a funding source
Connect a funding source after setting up an account. Debit cards, credit cards, bank accounts, digital wallets, and wire transfers are commonly accepted.
The fees, timing, and maximum funding amount vary depending on the funding source and platform. Generally, a wire transfer offers the fastest funding with a high limit, but banks may charge a fee to send the wire and the exchange could charge a fee to accept it. Debit cards and bank account transfers are often free. While the transfer limits may be lower, sometimes the funds are available instantly.
Step 4: Place an order
Investors might want to add dollars to their account before buying crypto. Or, once a funding source is linked, they may be able to use it to purchase Bitcoin without depositing dollars first. There may be several options to place an order including:
- Market order. With a market order, the order will be fulfilled based on Bitcoin’s current price.
- Limit order. With a limit order, the order will only be fulfilled once Bitcoin is at, or below, the chosen limit price.
Bitcoin’s price can quickly swing, so limit orders can help protect investors from paying much more than they intended.
Step 5: Choose and follow an investing strategy
Investors may want to consider how Bitcoin fits into their overall investment strategy. Among other things, buying Bitcoin and other cryptos could help diversify a portfolio.
Some investors, rather than investing a large sum at once, set up recurring weekly or monthly investments. This strategy, called dollar-cost averaging, may mitigate some of the timing risk that comes with investing in volatile digital currencies like Bitcoin.
There are also investors who purchase cryptos as a long-term investment, which is sometimes referred to as “HODLing” (i.e., long-term holding). Others may create a plan to sell a portion of their investment if it increases by a certain amount. Still others take an active approach to buying and selling cryptos in an attempt to profit from the market’s ups and downs.
Alternative ways to buy Bitcoin
Buying Bitcoin on a crypto exchange is a simple option, but people can also purchase Bitcoin using other types of accounts and investments:
- Finance apps. Some payment, savings, and investment apps, such as CashApp, Venmo, and PayPal, have added crypto to their platforms.
- Using a peer-to-peer (P2P) marketplaces. P2P Bitcoin marketplaces, such as Bisq, HodlHodl, and Paxful, are Bitcoin trading platforms that let people buy Bitcoin directly from an individual seller rather than on an exchange.
- From a Bitcoin ATM. There are physical Bitcoin ATMs that sell Bitcoin, but they may have high transaction fees and poor exchange rates.
- Via other types of investments. There are Bitcoin exchange-traded funds, futures, and other types of investments that investors can purchase to get exposure to Bitcoin without buying Bitcoin directly.
Individuals may have their own preferences for where and how they want to buy and hold their Bitcoin. Some prefer a well-known and trusted exchange that they believe will keep their Bitcoin safe and reimburse them if something happens. Others create a Bitcoin wallet to buy and store their Bitcoin independently.
Buying Bitcoin-related investments can also be a good fit for individual and institutional investors who might not want to—or be allowed to—purchase Bitcoin directly or hold Bitcoin in certain types of accounts.
The bottom line
Novice crypto investors might not know where to buy Bitcoin, but there are now a variety of options to choose from and it doesn’t take a lot of expertise to get started on a crypto exchange. For investors who want to take a deeper dive into crypto, learning about Bitcoin wallets could be a good next step. Alternatively, there are ways to hire professional advisors to manage crypto investments.