So, how exactly do you buy digital assets? This guide is going to explain in detail the nitty-gritties of buying cryptocurrencies.
Cryptocurrencies as coined by Wei Dai in 1998 was a term that was invented to distinguish between digital currencies and fiat money. Cryptocurrencies are decentralized digital assets controlled by a cryptographic system through blockchain technology.
Several asset classes within the cryptocurrency ecosystem are aligned with the specifications of the digital currency exchange. Examples of cryptocurrencies include Bitcoin, Dogecoin, LiteCoin, and Ethereum among others.
So, how can you acquire these cryptocurrencies?
As of now, crypto investors cannot purchase their cryptocurrencies through banks or other firms. Though there are firms that are working towards providing the buying and trading of cryptocurrency services.
You can buy your cryptocurrencies through the following sources.
- A crypto exchange platform
- A crypto broker
- Crypto mining
- Bitcoin ATMs
- Peer-to-peer crypto owners
- Exchange-traded funds
- Grayscale funds
Let’s take a look at all each of these methods in detail.
Cryptocurrency Exchange Platforms
They are online stores where investors buy, sell or trade cryptocurrencies. In simple terms, they are just online marketplaces where cryptocurrency trading takes place.
While using the cryptocurrency exchange platforms users deposit their fiat currency into the exchange platforms and use the money to purchase their desired cryptocurrency.
Users can also earn interest while holding onto the cryptocurrency assets. Although this is only if your chosen crypto exchange platform allows it.
The exchange platforms are meshed in low fee structures but have complex interfaces that support multiple trade systems and advanced performance graphical charts.
Basically, there are two types of cryptocurrency exchanges and these are the decentralized exchange platforms and the centralized exchange platforms.
The centralized exchange platforms are regulated by government authorities such as the U.S. Security and Exchange Commission. These platforms require users to provide proof of identity and to insure US dollar funding.
On the other hand, the decentralized exchange platforms are rather unregulated and they do not have a centralized authority controlling them. These are peer-to-peer exchanges and offer transparency on the transactions and on fee payments.
What to consider when choosing an exchange platform
Of course, when you’re a beginner investor in the crypto space, getting around the numerous options isn’t easy.
If you decide to purchase crypto from an exchange platform, it is important to understand how different players in the cryptocurrency market operate.
Coinbase, a popular crypto exchange platform provides insurance for all losses incurred in the event of fraudulent activities or malicious security breaches.
Gemini, another crypto exchange, offers an avenue for trading Bitcoin among veteran and casual investors with differently structured user interfaces and fees.
The San Francisco company, Kraken, allows traders to purchase crypto across different currencies globally. BitFinex creates a platform for lenders in the crypto space.
Acquisition of cryptocurrencies such as Bitcoin directly from an app like Coinbase ensures that investors can take ownership of their acquired assets.
When shopping around for your first crypto exchange, check and compare several factors across different exchange options. These include the security, the fees charged, and the available cryptocurrency trading options available.
You should also check that the platform supports your preferred payment method. Ideally, the exchange should offer several options, such as using a debit card or your bank account.
Consider how the crypto exchange platforms allow users to store their cryptocurrencies. The most important thing is for you as an investor to have full control of your assets by transferring them to a separate crypto wallet.
Examples of crypto exchange platforms include Gemini which is the best when it comes to security, and Coinbase is the best alternative for beginners.
Another example is Binance, which is the largest exchange platform in terms of volume as of May 2022.
Crypto Exchange Brokers
You can also trade crypto through brokers. Purchasing cryptocurrencies from a broker can be quite easy. This is because they help to reduce the complexity of user interfaces and trading within the exchange sites.
A key example of a brokerage entity in the trade exchange platform is Robinhood. Cryptocurrency brokers make their money by offering user-friendly interfaces at a higher price or selling trading information of buyers and sellers to large brokerage entities.
However, there are demerits when it comes to dealing with brokerage parties. When using Robinhood, the transfer of crypto holdings from your crypto account is not permitted. A hardware-based crypto wallet without an internet connection is a safer bet.
Buying Cryptocurrencies from Brokers and Exchanges
After selecting your preferred exchange account or broker, here are some steps you can take to buy bitcoin and other cryptos.
- Create and verify your account
Once you have decided on which broker or platform to use, you will sign up and open an account depending on the amount you plan to invest and the platform you choose. Verifying your identity is essential for you to start buying or selling cryptocurrencies.
To complete the verification process, the platform may ask for your passport or ask you to upload a selfie or even your driver’s license to prove that your appearance matches the documents you submit.
- Deposit cash to invest
You will need funds in the account you have created to start buying crypto. You may need to link your bank account to the account you have just created to deposit funds. You may even authorize a wire transfer or make payments through your debit or credit cards.
After you are done with the funding, you may need to wait for a few days depending on the exchange platform or the broker and your chosen funding process.
- Place your cryptocurrency order
You may need to choose from hundreds of cryptocurrencies once your fund your account. Decide which cryptocurrency you want to buy and enter on the ticker symbol. Then choose how many coins you would like to purchase.
Crypto exchanges and brokers offer the option of purchasing fractional shares of cryptocurrencies which allows buyers to purchase a portion of high-priced tokens such as Ethereum or Bitcoin.
- Choose your preferred storage method
Cryptocurrencies are prone to theft or hacking. If you forget or lose the code to your account, you could lose your investments. This is why storing your cryptocurrencies in a secure place is essential.
Crypto mining
Mining is the process of creating new crypto by solving puzzles. You can acquire cryptocurrency without having to put in your money when mining. Crypto miners receive cryptocurrencies as a reward for completing “blocks” of verified transactions, which are added to the blockchain.
The miner who manages to solve a complex hashing puzzle first will receive the mining reward. The probability that a participant will be the one to discover the solution is related to the portion of the network’s total mining power.
As of March 2022, Bitcoin cost approximately $39,000 per Bitcoin. This means that a miner would earn $243,750 (6.25 x 39,000) for completing a block.
Bitcoin ATMs
These are just like the normal ATMs and only the users can buy or sell Bitcoin from them. There are more than 27,000 Bitcoin ATMs in the U.S according to Coin ATM Radar.
While buying your cryptocurrencies from a teller machine you will need a crypto wallet and a Bitcoin ATM near you.
Once you have these just follow the steps in order to purchase your cryptocurrencies.
- Set an account with the ATM operator. This is usually done by scanning your ID or your driver’s license in order to provide your identity for verification.
- Provide your crypto wallet information. This is done either at the ATM or by scanning a QR code using your phone.
- Insert your cash. depending on the amount of crypto you want to purchase, insert your money and convert it into bitcoins. You’ll be able to see the number of bitcoins you have received and the amount of money you entered before.
- Confirm your purchase. The ATM will ask you to confirm your purchase by hitting the send button. Once confirmed the cryptos will be deposited into your wallet.
It is that simple. The steps may vary on different ATMs, but the basics are just the same.
Peer-to-peer crypto owners
Individual crypto owners can also sell cryptocurrency. They can sell through peer-to-peer tools and platforms like Bisq, Bitquick, and LocalBitcoins.com. Although buyers must be skeptical while purchasing crypto from individual owners.
Depending on what kind of trading experience you prefer, peer-to-peer trading may be more suitable for your needs than the regular exchange. Generally, peer-to-peer trades do not require you to provide any documentation regarding your identity and offer a reputation system in order to track your own — and other users’ — trading history.
Exchange-traded funds
A good example is the Bitcoin ETF which was launched in October of 2021. The fund (ticker: BITO) invests in futures contracts for Bitcoin and not directly to Bitcoin.
New investors are able to access crypto assets with ease and at the same time manage risks through diversified ETFs.
the good thing with ETF is that investors can in different kinds of digital assets. this reduces the risk of going all-in on one type of asset.
Grayscale funds
Grayscale Investments is a digital currency asset manager. It has two investment trusts which are Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Classic Trust (ETCG). These two are publicly traded, meaning you can buy them through many discount brokers. Of course at a fee.
How to Buy Cryptocurrencies from an Exchange
How about we take an example and show you how you can purchase bitcoin or any other digital asset on Binance, one of the most popular platforms.
Step by step guide for buying crypto using Binance exchange
- Go to the Binance Homepage and click register on the top right corner
- Fill in the details providing your email address and choose a strong password. You can choose to sign up using your mobile number or fill in a referral code if you are referred by a friend.
- From there you will be directed to a page where you are required to fill in your verification details. You’ll be required to input the code that will be sent to you via your email address or phone number.
- Once verified your Binance account should now be set and you can start by purchasing your first crypto.
Buying cryptocurrencies from your Binance account
After you’re done with the know-your-customer (KYC) process that is filling in your identity verification you can now purchase crypto.
Crypto purchases can be done in various ways including;
- The debit or credit card method is the easiest option for new investors.
- You can also deposit funds into your fiat wallet. By wiring your bank account to the exchange platform you can transfer fund currency directly.
- You can also purchase through the Binance P2P platform that enables users to buy crypto from other users directly.
Buyer tip
Credit companies process the purchase of crypto at higher interest rates than normal purchases with additional cash advance fees.
This means that a cash advance of for example 5% and an additional 5% on cash advance fees for the purchase of crypto hence a loss of 10% of your purchased crypto is deducted to cater for transaction fees.
Benefits of buying cryptocurrencies
- Cryptocurrency transactions can be made efficiently and cheaply. You can either send or receive cryptocurrencies using an exchange wallet or hardware wallet up in your smartphone at a lower cost.
- Crypto transactions are very secure. Cryptocurrencies are mostly based on blockchain technology and hence cannot easily be compromised.
- Cross-border transactions. Unlike traditional financial services, cryptocurrencies do not recognize international borders as one can transact crypto across the borders without any difficulties.
- High returns potential. As crypto adoption increases and continues to spread across the globe, the digital currencies continue to produce high returns for the investors
- Additional utility. Cryptocurrencies for example Bitcoin can be used to make payments for goods and services.
- Quick settlement time and low fees. As opposed to the high cost that comes with wire bank transfers, crypto payments take short time to transact and the transactions come at a lower fee.
How to store your cryptocurrencies
Selecting a storage unit in exchange platforms for your acquired crypto is crucial as most cryptocurrency exchange platforms are not financially protected by a Deposit Insurance Corporation.
This may expose crypto accounts to theft or hacking through malicious bots and links. In contrast to an exchange platform, buying crypto through a broker limits your choice in determining how your acquired crypto will be stored.
However, there are ways to bypass this hurdle in an exchange platform.
You may want to own a cryptocurrency wallet and use it instead. Cryptocurrency wallets simply store your private keys. The private keys act as the password that gives you access to your cryptocurrencies. The key allows you to send and receive cryptocurrencies.
There are two types of cryptocurrency wallets and these are the cold wallets and the hot wallets.
Owning a cold crypto wallet
The establishment of a hardware-based cold crypto wallet that is not connected to the internet is a great security measure. Cold crypto wallets take the shape of a hard drive or USB flash drive.
Examples of cold wallets include Ledger Nano X, Trezor Model T, and CoolWallet Pro among others. Wallets such as Ledger Nano and Trezor will cost you between $50 – $100 and will be more efficient and secure.
The only setback with a cold crypto wallet is that in the event you lose the key codes to access your account or the hardware malfunctions then everything is lost.
Owning a hot crypto wallet
The introduction of internet-supported wallets that can store cryptocurrencies, also known as hot wallets has greatly improved the security of crypto in an exchange platform.
Examples of hot wallets include the mobile-based app, Mycelium, and the PC-based software, Electrum. However, hot wallets are not a secure way of storing crypto due to their internet connectivity capabilities.
Some researchers argue that leaving the cryptocurrency in the exchange platform in a crypto wallet is a reliable safety precaution. However, the buyer is expected to pay a small fee to ensure that the crypto in the exchange crypto wallet is well protected.
Coinbase allows traders to buy crypto and store it in their exchange platform wallets. These wallets are encryption enabled and hence ensure safe storage of crypto.
Investing your newly acquired cryptocurrencies
Crypto staking
You can decide to lock your cryptocurrencies so that they earn a certain percentage of interest or so that you can receive rewards. This is what is referred to as staking.
When you lock your cryptocurrencies in the crypto wallet the blockchain network uses their holding to create new blocks. As you stake more crypto you increase the chances of your holdings being selected.
Crypto lending
New investors can borrow and lend crypto at a certain fee and in turn gain some interest. This is referred to as crypto lending.
Crypto lending can be done through a DeFi lending DApp or through a crypto exchange platform.
The borrower can get gains by providing collateral. If the collateral falls below a specified value, the lender might top up to the expected level. Topping up should be done before liquidation. Once the borrower repays the loan and the interest fee, the capital will be released.
As a new investor, you can get loans without collateral. Such loans require the borrowers to repay back in the same transactions. A good example is a flash loan.
Crypto lending and borrowing are automated by the use of smart contracts
All cryptocurrencies have no intrinsic value, meaning that they are not backed by physical assets such as Gold or Silver and a lack of a regulatory authority like a Central Bank or Federal Reserve makes cryptocurrencies unstable. Cryptocurrencies such as Bitcoin are not directly associated with the profits of any corporation.
Bitcoin as compared to other cryptocurrencies is a very high-risk ball game. It is a volatile investment asset kit whose value rises or falls drastically over a short period.
5 bonus tips for new crypto investors
Before making your first cryptocurrency purchase, you need to have some handy market tips. Here are my top five best tricks for navigating the cryptocurrency markets.
- Do Your Research (DYOR)
The most common measure new investors are always advised on is to do their research. Before buying a volatile asset like crypto, it is essential for you to do your research and to make sure you have a strong financial footprint.
You should never rely on a single source of information to be the truth.
It is recommended that you can set up an emergency fund and have minimal debt (bad debt).
- Diversify your assets
Diversification of your portfolio will enable the crypto exchange platforms to offer you a myriad of investments to buy or trade either wholesomely or by a fraction.
In the event of selling your crypto, consult a professional crypto trader and a tax professional. Cryptocurrency is taxable and the profits accrued from the sale of cryptocurrencies are taxed under the Capital gains tax bracket by the government.
Cryptocurrencies are considered to be prone to schemes of pump and dump operators. Predatory scammers masquerading as investors reach out to new amateur investors and convince them to invest huge sums of money into crypto.
Cryptocurrencies can be traded in exchange platforms and act as an asset as long as security is assured. For beginners, research should first be done before investing, or else the volatility of the crypto market could serve as a financial Armageddon for amateur investors.
- Don’t use a credit card
Although some providers allow you to purchase Bitcoin by credit card, making investments by borrowing from a high-interest product like a credit card is never a good idea.
- Understand investor protections
Or in this case, the lack thereof: Bitcoin and other cryptocurrency investments are not insured against exchange failures or theft. Some exchanges like Coinbase provide private insurance, but that doesn’t protect against individual online breaches like someone stealing your password.
- Use a secure, private internet connection
This is important any time you make financial transactions online. Buying Bitcoin while at the coffee shop, in your hotel room, or using other public internet connections is not advised.
Cryptocurrency Exchange FAQs
As a beginner, you may have a few questions concerning the cryptocurrency exchanges that you may want to use. Well, you are not alone. So many beginners have so many questions and these are some of the common questions.
Are there ways to purchase outside crypto exchanges?
Yes, you can purchase cryptocurrencies from major payment platforms such as PayPal and Robinhood.
How volatile are crypto exchanges?
Cryptocurrencies are considered to be very volatile assets as they are susceptible to upward and downward movements of prices over a shorter time.
How do exchanges protect you from fraudsters?
Crypto exchange platforms are equipped with Two-factor authentication. some even have three-factor authentication. Also, the exchange platforms assured that their users’ accounts are linked to a certain IP address. if there’s any activity such as withdrawal from a user’s account the crypto exchange platform notifies its users.
How do crypto exchanges aid clients in the storage of crypto?
Crypto exchanges provide an exchange-hosted wallet that automatically stores your crypto funds once you’ve purchased. However, the exchange retains full control of your private keys. It is not advisable to use the crypto exchange wallets while holding large amounts of cryptocurrencies as they can be hacked. Instead, use a cold wallet to store the private keys that hold access to large amounts of cryptocurrencies.
Is there any regulatory framework for your exchange platform?
Crypto exchange platforms must register with authorized bodies before they start operation. For example, in the United States, cryptocurrency exchanges are required to register with FinCEN and Put into effect an AML/CFT program. the exchanges are also required to keep records and submit reports to the authorities.
