Decide where to buy it
If you want to buy Starbucks stock, you don’t order five shares along with your morning coffee: You probably use a brokerage service. Similarly, the most straightforward way to buy crypto is using an exchange. There are three main kinds of exchanges to choose from.
Centralized exchange: Often for beginners
Centralized exchanges act as a third party overseeing transactions to give customers confidence that they are getting what they pay for. These exchanges typically sell crypto at market rates, and they make money on fees for various aspects of their services. Though centralized exchanges are relatively easy to use, they also can be an attractive target for hackers given the volume of crypto that flows through them.
If you’re looking for an exchange that operates solely within the cryptocurrency world, look for pure-play crypto exchanges. These platforms, such as Coinbase, Gemini and Kraken, won’t give you access to core assets like stocks and bonds, but they typically have a much better selection of cryptocurrencies, and more on-platform crypto storage options.
Read More:How does crypto staking make money?
All-in-one exchanges: Trade more than crypto
If you’re an investor who’s more accustomed to traditional brokerage accounts, there are a few online brokers that offer access to cryptocurrencies as well as stocks. Of the online brokers reviewed by NerdWallet, these include Robinhood, Webull, SoFi Active Investing and TradeStation.
Decentralized exchanges: Competitive prices, maybe too complex for beginners
For more advanced investors, there are decentralized exchanges whose fees can be lower than those charged by centralized platforms. Those can be more difficult to use and demand more technical know-how, but they may also offer some security benefits because there is no single target for a cyberattack. Cryptocurrencies can also be traded through peer-to-peer transactions.
Choose how you’ll pay
Pay cash. While there are thousands of cryptocurrencies being traded around the world, you’ll find that the most popular options are widely available for purchase in fiat currencies such as the U.S. dollar. If you’re a first-time buyer, you’ll very likely have to use regular money to buy cryptocurrency. Depending on how you choose to pay, you may have to fund your account before purchasing any crypto.
Pay with other crypto. If you already own cryptocurrency, you can use it to trade for other cryptocurrencies. Just be sure to verify that your crypto exchange allows trading between the assets you’re looking at. Not all cryptocurrencies can be directly traded for one another, and some platforms have more trading pairs than others.
Costs and fees to keep in mind
Most exchanges allow debit and bank transfers. Some also allow you to fund a purchase with your credit card, though this can be a risky move with a volatile asset like cryptocurrency because interest costs can deepen your losses if your investments decline in value.
Whenever you sell crypto for fiat money or trade it for other crypto, you’ll need to report cryptocurrency transactions on your taxes.
Exchanges’ fees vary depending on what you’re buying and how you’re buying it, so review these details carefully.
Store your cryptocurrency
This is an important choice. Crypto assets require a private key, which proves ownership of cryptocurrencies and is necessary for carrying out transactions. If you lose your private keys, you’ve lost your cryptocurrency. If someone gets your private keys, they can dispense with your cryptocurrencies however they want.
Crypto owners use digital wallets to store their holdings securely. There are multiple options to consider when it comes to digital wallets.
On-platform storage: Easy to use, but it comes with risks
Some people choose to keep their cryptocurrency on the exchange or platform where they got it. This has some advantages. It outsources the complexities to a third-party that brings some expertise to the table. You don’t have to keep track of your own private keys; all the information is right there when you log in.
The drawback is that if the provider has a security breach outside of your control, or if someone hacks your individual credentials, your cryptocurrency could be at risk. On-platform storage is often used by people who think they might want to trade their crypto soon, or who want to participate in exchanges’ staking and rewards programs.
Noncustodial wallets: More effort, more security
Because of the threat of hacking, it can be risky to leave large balances on crypto exchanges for longer than necessary. The alternative: Storing your own crypto.
Self-storage options are generally divided into two categories, hot wallets and cold wallets. Hot wallets have some internet connectivity, which may make them easier to use but could expose you to some security vulnerabilities. Cold wallets are unreachable to anyone who doesn’t have the physical device, but they do take more effort to use.
FAQs
How much money do you need to buy cryptocurrency?
How much money you need to buy cryptocurrency depends on where you’re buying it and the policies in place. It’s possible to buy crypto coins with as little as a dollar, although there might be different minimums for different coins.
Do you have to pay taxes on cryptocurrencies?
Yes, you pay taxes on profits you make by trading cryptocurrencies. The IRS treats cryptocurrencies as property for tax purposes. If you sell a cryptocurrency for more than you paid for it, you will be subject to capital gains taxes. Additionally, if you receive cryptocurrency in exchange for work, you need to report it as income on your taxes.
Is buying cryptocurrency illegal?
Whether or not it’s illegal to buy and sell cryptocurrency depends on your country. In the United States, it’s legal to buy cryptocurrency.
Why is cryptocurrency so popular?
Recent headlines involving celebrities have pushed cryptocurrencies into public consciousness. Many people are likely excited by the prospect of something new and don’t want to miss out on what they might perceive as an opportunity to strike it rich.
What are the risks of buying cryptocurrency?
As with any investment, there’s a potential that you will lose your initial investment when you buy cryptocurrency. The coin may not take off, or it could lose value rapidly. Additionally, cryptocurrencies can be illiquid, meaning it can be difficult to turn them back into fiat currency readily, especially if you buy an altcoin that isn’t frequently traded. Finally, crypto prices are highly volatile, and this contributes to the uncertainty and risk of loss.
