How to Buy Bitcoin
Table of Contents
- 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.
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.
Exchanges and Brokerages
Exchanges and brokerages are the most popular venues for individuals or small institutions who wish to purchase bitcoin. Exchanges are used mainly by traders engaged in complex trading strategies, wherein the exchange matches buyers and sellers. Exchanges do not take part in trades themselves; they never buy or sell the asset being traded on their platform.
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.
On the other hand, a brokerage is always engaged in at least one side of the trade. The brokerage either buys the asset an individual is looking to sell, or sells the asset to the buyer. A brokerage can also engage in trades to manage their portfolio, and determine the price of the asset. 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 Financial 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.
Over-the-counter (OTC) desks transact with institutions or individuals with their own custody solutions 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 blocks of Bitcoin between large sellers (e.g. miners) and buyers (e.g. hedge funds).
People also trade Bitcoin for fiat currency peer-to-peer either in person or over the internet. In the early days this was one of the few ways to buy or sell bitcoin. However, today this is a less common method due to the fraud and safety risks associated with buying from untrusted sellers or interacting with people in person.
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 Bitcoin ATM an address to which to send bitcoin. Bitcoin ATMs typically charge a significant premium over online brokerages.
Derivatives are tradable securities that derive their value from its 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.
Opening an Account at a Bitcoin Exchange
After your wallet has been set up and is ready to send and receive bitcoin, it is time to choose your purchase method. Before you open an account at an exchange, examine its verification levels, withdrawal and deposit waiting periods, order and withdrawal fees, and other variable factors that differ for each exchange. 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 exchange 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.
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 Financial’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’re looking to purchase a large amount of bitcoin, consider a hardware wallet or other cold storage option, which provide greater security than hot wallets and internet-connected storage devices.
If you want to learn more about purchasing bitcoin in the United States, read about how River Financial’s bitcoin brokerage services are tailored to suit bitcoin investment needs for the long term.