How to Buy Cryptocurrency: A Clear and Confident Guide
Cryptocurrency has become a buzzword in the world of finance. According to a recent survey by Forbes Advisor, 90% of respondents had heard of Bitcoin, making it the most well-known cryptocurrency. Ethereum, Dogecoin, and Binance Coin were also among the familiar coins, while Solana and Cardano were lesser-known.
For those interested in investing in cryptocurrency, figuring out how to buy it can be confusing. However, with appropriate financial advice and awareness of the considerable risks, learning the ropes can be pretty simple. This article provides five easy steps to get started.
1. Choose a Broker or Crypto Exchange
What is a Cryptocurrency Exchange?
A cryptocurrency exchange is a platform where buyers and sellers can meet to trade cryptocurrencies. These exchanges typically have low fees, but their interfaces can be complex and intimidating for new investors. Some of the most popular exchanges include Coinbase, Gemini, and eToro, which offer user-friendly purchase options, but at a higher cost than their standard trading interfaces. It is recommended that investors learn enough about the standard trading platforms before making their first crypto purchase to save on costs. It is also important to ensure that the exchange or brokerage allows fiat currency transfers and purchases made with fiat currency.
What is a Cryptocurrency Broker?
Cryptocurrency brokers offer potentially easier-to-use interfaces that interact with exchanges for investors. While they can be more convenient, some brokers charge higher fees than exchanges and may not allow investors to transfer crypto holdings out of their account. This can be a concern for advanced investors who prefer to hold their coins in crypto wallets for extra security. It is important to be cautious with brokers and understand any restrictions before choosing to use their services.
2. Creating and Verifying an Account
To start trading cryptocurrencies, investors must first select a cryptocurrency broker or exchange and sign up to open an account. Depending on the platform and the amount they plan to buy, they may need to verify their identity. This is a necessary step to prevent fraud and comply with anti-money-laundering regulations.
Before buying or selling cryptocurrency, investors must complete the verification process. The platform may require them to submit a copy of their passport or driving license and even upload a selfie to confirm their appearance matches the documents they provide. Once the verification is complete, investors can start trading cryptocurrencies on the platform.
3. Deposit Cash to Invest
Before buying cryptocurrency, investors must ensure that they have sufficient funds in their account. This can be done by depositing money into their crypto account through a bank transfer or by using a debit card or credit card. However, it is important to be aware that using a credit card can be risky and expensive due to high charges from card providers.
Depending on the exchange or broker and the funding method used, investors may have to wait for a few days before they can use the deposited funds to buy cryptocurrency.
When using a credit card to purchase cryptocurrency, investors should be cautious as many credit card companies process such transactions as cash advances. This means that they are subject to higher interest rates and additional cash advance fees, which can be as high as 5% of the transaction amount. In addition to these fees, crypto exchanges or brokerages may also charge fees of up to 5%, which can result in investors losing up to 10% of their crypto purchase to fees.
Therefore, it is recommended that investors use a bank transfer or debit card to deposit funds into their crypto account to avoid high charges and fees. It is also important to carefully review the terms and conditions of the exchange or brokerage before depositing funds to ensure that there are no hidden fees or charges.
4. Placing a Cryptocurrency Order
Once an investor has money in their account, they can proceed to place their first cryptocurrency order. There are numerous cryptocurrencies to choose from, ranging from well-known names like Bitcoin and Ethereum to lesser-known ones like Theta Fuel.
To place an order, investors can enter the ticker symbol of the cryptocurrency they wish to purchase, such as BTC for Bitcoin, and indicate the number of coins they want to buy. Most exchanges and brokers allow investors to purchase fractional shares of cryptocurrency, enabling them to buy a portion of high-priced tokens like Bitcoin or Ethereum that would otherwise require thousands of pounds to own.
According to a Forbes Advisor survey, 27% of respondents reported having cryptocurrency holdings of up to £500, while 24% had exposure to the sector between £501 and £1,000. It’s important for investors to only invest what they can afford to lose.
Overall, placing a cryptocurrency order is a straightforward process that requires investors to select their desired cryptocurrency, enter the ticker symbol and number of coins, and purchase fractional shares if necessary. It’s crucial to exercise caution and only invest funds that can be afforded to lose.
5. Select a storage method
Investors who purchase cryptocurrency through an exchange have more storage options than those who buy through a broker. One option is to leave the cryptocurrency on the exchange, where it is stored in a crypto wallet. If an investor wants to move their cryptocurrency to a more secure location, they can transfer it off the exchange to a separate hot or cold wallet. Depending on the exchange and the size of the transfer, investors may have to pay a small fee to do this.
Hot wallets are another storage option. These wallets are stored online and run on internet-connected devices, such as tablets, computers, or phones. While they are convenient, there is a higher risk of theft since they are connected to the internet.
Cold wallets are the most secure option for holding cryptocurrency. These wallets are not automatically connected to the internet and take the form of external devices, such as a USB drive or a hard drive. However, investors should be careful with cold wallets. If they lose the key code associated with the wallet or the device breaks or fails, they may lose access to their cryptocurrency for good. This risk also applies to certain hot wallets, but some hot wallets are run by custodians who can help investors recover their account if they are locked out.
It is important for investors to carefully consider their storage options and choose a method that best fits their needs and risk tolerance. While leaving cryptocurrency on an exchange may be convenient, it is important to remember that exchanges are not backed by protections like the UK’s Financial Services Compensation Scheme and are at an additional risk of theft or hacking. Additionally, investors could lose their investment if they forget or lose the codes to access their account. By selecting a secure storage method, investors can help protect their cryptocurrency investments.
Alternative ways to buy cryptocurrency
Investing in cryptocurrency can be a risky and volatile investment, and may not be suitable for all investors. However, some investors may still want to indirectly invest in Bitcoin and other cryptocurrencies. Here are some alternative ways to invest in cryptocurrency:
1. Crypto exchange-traded funds (ETFs)
Exchange traded funds (ETFs) are a popular investment option that provide immediate diversification by allowing investors exposure to hundreds of individual holdings in one fell swoop. Cryptocurrency ETFs offer investors exposure to multiple cryptocurrencies at once, which can be less risky than selecting individual investments.
The first cryptocurrency ETFs were rolled out to private investors in Autumn 2021, and there is an increasing appetite for these types of investments.
2. Companies connected to cryptocurrency
Investors who prefer to invest in companies with tangible products or services but still want exposure to the cryptocurrency market can consider buying shares in companies that use or own cryptocurrencies and the blockchain technology that powers them. Some publicly-listed companies that offer exposure to the cryptocurrency market include:
Nvidia (NVDA): This technology company designs and sells graphics processing units, which are at the heart of the systems used to mine cryptocurrency.
PayPal (PYPL): This payments platform allows customers to buy and sell select cryptocurrencies with their PayPal accounts, in addition to its existing services for online payments and money transfers.
Square (SQ): This payment services provider for small businesses has purchased Bitcoin worth millions of dollars since October 2020. In February 2021, the firm disclosed that Bitcoin made up around 5% of the cash on its balance sheet. In addition, Square’s Cash App allows people to buy, sell and store cryptocurrency.
It is important to note that cryptocurrency remains a highly speculative investment, and investors should carefully consider their investment goals and current financial situation before investing. According to a Forbes Advisor survey, 58% of respondents stated that they do not trust cryptocurrency, while 34% do not understand the technology.
Investors should also be aware that cryptocurrency is unregulated in the UK, and the Financial Conduct Authority has repeatedly warned investors that they risk losing all their money if they buy cryptocurrency, with no possibility of compensation.
In conclusion, alternative ways to invest in cryptocurrency include ETFs that offer exposure to multiple cryptocurrencies at once, as well as investing in companies that use or own cryptocurrencies and the blockchain technology that powers them. However, investors should carefully consider the risks associated with cryptocurrency investments and their own investment goals and financial situation before investing.
Frequently Asked Questions (FAQs)
How much money is required to buy cryptocurrency?
The cost of owning cryptocurrency can vary greatly depending on the type of token an investor is interested in. Some cryptocurrencies, such as Dogecoin (DOGE) and Shiba Inu (SHIB), can be purchased for very low prices, while others like Bitcoin and Ethereum can cost tens of thousands of pounds. It is important to note that crypto exchanges typically require a minimum deposit of around £10 before allowing investors to purchase any cryptocurrency, even if the token is worth less than a penny. However, investors should not focus solely on the cost of buying cryptocurrency. Instead, they should consider how much they can afford to lose, as the markets can be very volatile. The Financial Conduct Authority (FCA) has warned investors that they should be prepared to lose all their money when investing in cryptocurrencies.
Is cryptocurrency a good investment?
The FCA has issued several warnings that cryptocurrencies are unpredictable and volatile, and investors should be prepared to lose all their money. For example, Bitcoin holders saw their holdings lose more than 60% of their value between March and December last year. While there were intermittent peaks during that time, crypto cannot be relied on for consistent returns. However, if an investor has a high tolerance for risk and is willing to invest only what they can afford to lose, they might consider investing in cryptocurrency.
Is tax payable on cryptocurrency?
Profits from cryptocurrency are subject to Capital Gains Tax (CGT). Everyone has a CGT allowance of £6,000 (from April 2023), which means that tax is not payable on profits below that figure. Anything above the allowance is taxed at 10% up to the basic tax rate band and 20% at the higher and additional bands.
What could be the best way to buy cryptocurrency for beginners?
Cryptocurrencies are sold through crypto exchanges, and some exchanges are more beginner-friendly than others. These exchanges offer educational resources to help newcomers understand the basics of cryptocurrency investing. Investors can find a list of the best crypto exchanges ranked by experts to help them choose the right one for their needs.
How can a crypto exchange account be opened?
Investors can open a crypto exchange account by visiting the exchange’s website or downloading its app. Each exchange has its own unique registration process, and some may allow investors to buy and sell small amounts of crypto without verifying their identity or submitting much sensitive information. However, as the industry has evolved, measures to prevent money laundering and fraud have been introduced, and investors will need to provide their name, date of birth, and postal address. They may also need to verify their identity by submitting photo identification.