Buying Bitcoin is usually very simple, especially in North America and most of Europe. There are multiple types of venues for buying Bitcoin, each focused on different clientele.
Bitcoin Exchanges vs. Brokerages: What Are the Differences?
Exchanges and brokerages are the most popular venues for individuals or small institutions who wish to purchase bitcoin.
Bitcoin Exchanges
Exchanges are used mainly by traders engaged in complex trading strategies, wherein the exchange matches buyers and sellers.
Because exchanges do not hold any assets themselves, the liquidity available is dependent on traders, which can prevent trade flexibility, and make it difficult for short-term trades to be executed. The exchange makes money by charging a fee for each transaction completed.
Bitcoin Brokerages
On the other hand, a brokerage is always engaged in at least one side of the trade. The brokerage either buys the asset from a seller or sells the asset to the buyer. A brokerage can also engage in trades to manage their portfolio, and a brokerage determines the price of the asset on their platform. Because the brokerage determines liquidity, they are better positioned to handle short-notice trades.
Brokerages make money by charging a spread, which is the difference between the price of the asset when the brokerage purchases the asset, and the price at which they are willing to sell. Brokerages provide a much simpler experience for people who want the easiest way to buy Bitcoin as a long term investment or for usage as a currency.
River is a brokerage for individuals buying moderate to very large amounts of bitcoin. It takes about 2 minutes to sign up and buy your first bitcoin.
Most brokerages and exchanges, including River, allow you to securely custody Bitcoin on their platform after purchase. The custody solutions and features offered tend to significantly differ between institutions.
Bitcoin OTC Desks
Over-the-counter (OTC) desks transact with institutions or individuals looking to buy very large amounts of bitcoin. Most OTC desks require the buyer to take physical delivery of the bitcoin within 24-48 hours of purchase. OTC desks focus on trading large amounts of Bitcoin between large sellers (e.g. miners) and buyers (e.g. hedge funds).
Peer-to-Peer Bitcoin Trading
People also trade bitcoin for fiat currency peer-to-peer either in person or online. In practice, platforms that enable peer-to-peer trading are set up like an order book where participants create offers to either buy or sell bitcoin.
The participant who creates an offer is known as a “maker.” Alternatively, a participant can take the other side of the offer to buy or sell—they are the “taker.” Note that the trading volumes on peer-to-peer platforms are much less than that of an exchange or brokerage.
The table below outlines some reputable peer-to-peer trading platforms:
| Platform | Educational Resource | On-Chain or Lightning? | Additional Notes |
|---|---|---|---|
| Bisq | Guide by theBTCcourse | On-Chain | Bisq is open-source desktop software; best practice is to verify the software before installing onto your computer. |
| Hodl Hodl | Guide by BTCSessions | On-Chain | Browser-based marketplace, so no software downloads necessary. The escrow is a 2-of-3 multisig transaction where each trade counterparty controls a key and Hodl Hodl controls the final key. |
| RoboSats | Guide by theBTCcourse | Lightning, On-Chain is also possible for payouts. | It is recommended that participants access RoboSats through the TOR browser. Certain LN Wallets are more compatible with RoboSats than others. |
In the early days, this was one of the few ways to buy or sell bitcoin. Today this is a less common method due to the convenience offered by brokerages and exchanges, on top of the fraud and safety risks associated with buying from untrusted sellers or interacting with people in person.
➤ Learn more about Bitcoin scams.
Bitcoin ATMs
Bitcoin ATMs provide a way to purchase bitcoin at a physical kiosk, often located in a gas station or grocery store. Bitcoin ATMs often require you to scan an ID to fulfill compliance obligations. A buyer then inserts cash and gives the ATM an address to which to send bitcoin.
The following websites locate ATMs near you (specific to the manufacturer of the terminal):
Bitcoin Derivatives
Derivatives are tradable securities that derive their value from an underlying asset like stocks, currencies, bonds, and commodities. The most common types of derivatives are futures, forwards, and options. Bitcoin derivatives are a good option for traders who are wary about being directly exposed to the Bitcoin price.
However, Bitcoin derivatives do carry added counterparty risk because they are associated with a specific company. In addition, derivative products cannot be transacted on the Bitcoin network. In 2017, the growing demand for Bitcoin futures prompted major exchanges such as CME Group Inc and Cboe Global Markets Inc. to launch Bitcoin futures contracts.
➤ Learn more about Bitcoin derivatives.
Opening an Account at a Bitcoin Brokerage or Exchange
Before you open an account at a brokerage or exchange, examine its verification levels, withdrawal and deposit waiting periods, order and withdrawal fees, and other variable factors that differ for each brokerage. Be prepared to submit personal information in the form of a photo of your government-issued ID and more.
Once you’ve created an account, you may notice that the brokerage provides its own wallet. Many third-party exchanges have wallets — called “custodial wallets” — built into the platforms themselves. Custodial wallets allow you to send and receive cryptocurrency; however, they are controlled by the exchange, which holds your coins “in custody” on your behalf. This means you do not have actual control of the funds stored on these wallets. In order to assume total control and ownership of your bitcoin, you must withdraw your funds to your own wallet.
➤ Learn more about Bitcoin wallets.
If you’re looking to purchase a large amount of bitcoin, consider storing it in a hardware wallet or other cold storage option, which provide greater security than hot wallets and internet-connected storage devices.
➤ Learn more about Bitcoin cold storage.
Choosing Your Purchase Method
The best method of purchasing bitcoin depends on the size and urgency of the order and other factors such as privacy. If you plan on placing a very large order ($1M+), you may want to reach out to a service like River’s Private Client.
For most people, purchasing bitcoin through an exchange or brokerage is the most ideal method. This is sometimes called “spot” buying, and consists of purchasing bitcoin by linking a bank account, debit/credit card or other payment method like PayPal to the exchange account.
If you want to learn more about purchasing bitcoin in the United States, read about how River’s bitcoin brokerage services are tailored to suit bitcoin investment needs for the long term.
Notice: River does not provide investment, financial, tax, or legal advice. The information provided is general and illustrative in nature and therefore is not intended to provide, and should not be relied on for, tax advice. We encourage you to consult the appropriate tax professional to understand your personal tax circumstances.Key Takeaways
- Most individuals buy Bitcoin through a Bitcoin brokerage, although there are a number of ways to accumulate Bitcoin.
- The financial institutions that sell Bitcoin can be categorized as Brokerages, Exchanges and OTC desks.
- When weighing your purchasing options, consider the size of your order, your jurisdiction and how you wish to pay.
