You want to buy crypto but you don’t know where to start. What are the different options on the market and what are their advantages and disadvantages?
When you want to get started with cryptocurrencies, you face a very real obstacle: where and how to buy cryptocurrency?
It seems trivial enough, but with so many available, you can’t blame a beginner for getting confused. In a jungle of different requirements and fee structures, finding the right way is no easy task.. That's why in this lesson, you will learn:
- The different options to buy crypto
- The difference between buying bitcoin and other coins
- How to buy bitcoin and other cryptocurrencies
- The requirements of each option
- The fees for every option
Where can you buy cryptocurrency?
These are the most common options for beginners (and everyone else when it comes to buying bitcoin). A centralized exchange is an exchange operated by a central entity, i.e. there is a company behind the exchange. Centralized exchanges work pretty much like a stock broker, where the exchange is the middleman between the buyer and the seller.
Centralized exchanges provide a good user experience. Buying cryptocurrency at an exchange is almost as easy as using Amazon to order stuff. The downside of this convenience is that centralized exchanges keep custody of your coins, meaning they are in possession of the private keys and, as such, ultimately have control over your coins. In practice, this can become a problem if an exchange faces a regulatory issue or suffers a hacker attack - as has been the case for Mount Gox in 2013.
There are countless centralized exchanges on the market but some of the most common ones are Coinbase, Kraken, and Binance.
Bitcoin ATMs are the most common option to buy crypto at an ATM. At a few ATMs, you can also purchase Ether but those are not as widespread. Bitcoin ATMs work similar to regular ATMs, only that you have to provide identification at most and incur higher fees compared to other options. The majority of ATMs only offer buying bitcoin, but ATMs where you can sell bitcoin also exist.
Essentially, peer-to-peer exchanges are platforms that provide escrow services for buyers and sellers to come together. Think of eBay, just for cryptocurrency. Since cryptocurrency transactions cannot be reversed, you need a mechanism to establish trust and guarantee a trade between two parties is executed smoothly. While on Ethereum and other blockchains technology can be this guarantor of trust, Bitcoin doesn't support this sort of software code (called smart contracts) that allows for building trustless exchanges on the blockchain (decentralized exchanges). That's why P2P exchanges exist only for Bitcoin. The most well-known P2P exchange is Localbitcoins.
Decentralized exchanges are also peer-to-peer, however, you do not need the website as the middleman between the trading parties for successful trade execution. Instead of an escrow service, decentralized exchanges (DEXes) operate with smart contracts that allow you to trade without giving up custody of your coins.
If you buy ether at a decentralized exchange, your cash goes straight from your wallet to a liquidity pool and you receive Ether straight to your wallet. You are never trading with an actual person unlike on a P2P exchange. You cannot buy bitcoin since bitcoin operates on another blockchain. There is one decentralized exchange where bitcoin are traded, but it operates in a distinct manner and requires downloading a program.
Moreover, you cannot buy crypto with regular fiat currency like dollars at decentralized exchanges but have to buy with other cryptocurrencies (usually stablecoins). That, and the fact the user experience is not as smooth as on centralized exchanges, make them a more advanced option. The most well-known decentralized exchanges are Uniswap and Sushiswap.
PayPal and banks
The last option is to buy crypto on PayPal or from your bank (if available). That is the easiest and most convenient option since pretty much everyone has at least a bank account. Unfortunately, buying bitcoin from PayPal or banks means that you are not actually buying bitcoin because there is no way to send your coins to another wallet. Thus, you technically aren't owning the bitcoin directly but have bought a share of the banks bitcoin which hopefully they will allow you to sell and withdraw at some point in the future.
The difference between buying bitcoin and other coins
Decentralized exchanges only trade altcoins
The only decentralized exchange that enables buying bitcoin is Bisq. You have to download a program and connect to an anonymous P2P network, similar to downloading torrents. Localbitcoins is another option, though, it is different since the website mediates between traders.
"Regular" decentralized exchanges are browser-based and integrate with web-based wallets. Since they're almost always built on Ethereum, they do not support buying bitcoin.
ATMs usually only have Bitcoin
Sites like Coinatmradar let you search for Bitcoin ATMs near you. Most ATMs have Bitcoin, sometimes Ether. Other currencies are rare.
Centralized exchanges offer major coins only
For newcomers, this isn't too relevant, but experienced crypto users know that more obscure coins are not always traded on exchanges. Each exchange has its own portfolio and if you're just starting out, you can expect to find everything you need (the top 20-50 coins). If you plan to dive really deep into crypto at some point, you will have to turn to a decentralized exchange because small projects get listed there first and have to earn the standing and trust of big exchanges first.
Buying crypto at a centralized exchange
Required: ID, proof of address, maybe proof of funds, means of payment
Fees: vary by exchange, usually under 1% (plus card fees)
This is the most likely route for a cryptocurrency beginner. Centralized exchanges provide the best combination of convenience, security, simplicity and reasonable fees. To begin, find an exchange that operates in your jurisdiction and has a good reputation. Coinbase and Kraken are popular options in the US, Binance is the biggest exchange by market capitalization in the world. If you do not plan to keep your coins on the exchange for a longer period (as recommended), then any reputable operator will do. You can also compare prices between the different companies since they tend to vary slightly.
After signing up, you will need to pass KYC (know your customer) regulations. You'll be required to provide a valid ID, proof of address (like bank statement or utility bill), and for larger sums a "liveness test", where you need to take a selfie with your ID and the current date. Centralized exchanges offer different deposit options, but bank wires are recommended since they carry the least amount of fees. Credit card deposits, while convenient, incur hefty fees of up to 5%.
To buy crypto after you have deposited, you go to the Trade section of the exchange and find the correct currency pair. If you deposited dollars and want to buy bitcoin, that's going to be BTC/USD. Enter the dollar value of the cryptocurrency you want to buy and you're done.
Remember that keeping your cryptocurrency on the centralized exchange is not ideal if you are buying a larger sum. In that case, you should look at another wallet to increase security and get custody of your coins. For instance, Coinbase does not offer to withdraw the coins themselves. You have to sign up for Coinbase Pro to actually withdraw your bitcoin instead of their dollar value.
Buying crypto at an ATM
Required: ID, phone, QR code of your Bitcoin wallet, cash
Fees: varies, worldwide average is 8.4% (so high!)
Bitcoin ATMs provide a simple yet pricey solution to getting crypto. The machines are similar to regular ATMs and work in a comparable fashion. You scan your wallet's QR code to link it to the machine. Most ATMs require ID verification, although there are a few that don't. Depending on the operator, you might get a one-time password on your phone or scan your ID or both. You type in the amount of bitcoin you wish to receive and pay cash. Cards are usually not accepted.
Buying crypto at a P2P exchange
Required: ID, proof of address
Fees: 1% per created trade
P2P exchanges like Localbitcoins allow you to buy bitcoin, but they are not anonymous. You can buy up to $500 without verification but will have to pass KYC after that. Like for centralized exchanges, ID, proof of address, and a selfie with ID are the standard practice.
On the site itself, you pick the country you wish to buy bitcoin in and the preferred means of payment. You then get to choose from a list of offers that are created by different individuals. Pick a price and a reputable vendor and click on it to enter the trade. The seller will give you instructions on how to pay and put the bitcoin in an escrow. Once the seller marks the payment complete, the bitcoin are released from escrow. In case of problems, you can dispute the trade and support will resolve the situation.
Taking offers is free, as is depositing and withdrawing from the site. Creating an offer incurs a 1% fee, but you can set your own exchange rate.
Buying crypto at a decentralized exchange
Required: cryptocurrency wallet, cryptocurrency
Fees: 0.2% - 1% plus gas fees
Buying crypto at a decentralized exchange is the most advanced way to get crypto because you are not dealing with an onramp but the ecosystem itself. So brace yourself for less shiny websites and a bumpier user experience.
When accessing sites like Uniswap or Sushiswap, you already need to have a cryptocurrency and a crypto wallet. But not just any crypto and any wallet, you need a coin that exists on the Ethereum blockchain (so not Bitcoin) and a web-based wallet (so you can't buy from your mobile wallet). The sites require you to connect your wallet to the site because you trade directly from the wallet without a custodian.
Then you choose the pairs you want to swap, say ether for Dai (a dollar-pegged stablecoin), and complete the trade. The trade itself is pretty easy and your coins are immediately in your own wallet.
The downside is the fees because the bigger your trade and the more obscure the coin you want to buy, the bigger the fees will be. You also need to pay gas fees, which are fees for using the Ethereum blockchain. Those can range from a few dollars to double-digit amounts and make small trades completely uneconomical. So there are issues with both large and small purchases!
For that reason, decentralized exchanges are so far in an experimental stage and not yet usable for the broader public. Once fees go down and the user experience is improved, decentralized exchanges will be able to compete with their bigger, centralized counterparts.
Buying crypto from PayPal or bank accounts
Required: PayPal account, means of payment
Fees: 2% on PayPal, banks vary
Buying crypto on PayPal is very simple. You buy directly from your account at the click of a button. That's pretty much it. PayPal offers only a limited selection of cryptocurrencies: Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. Transaction fees are around 2% per transaction.
For banks, the process is generally similar, but details depend on the individual bank, as do fees. Fintech companies will have more selection than legacy retail banks.
The most significant downside of buying crypto on these platforms is not being able to transfer your assets and get custody of them. In essence, you are not even buying the underlying asset but merely speculating on price appreciation. While this is convenient and you can benefit from an increase in value, it defeats the point of cryptocurrencies. If the bank doesnt want you to have the money then there is nothing you can do.
There is no best option to buy crypto. Some are clearly better than others, though. Most users, even crypto natives, buy their coins at centralized exchanges because they provide the lowest fees and smoothest experience. Whether you make the switch to decentralized exchanges depends on how deep you want to get involved in the crypto space.