How to invest in Bitcoin on cryptocurrency exchanges
Do you know that cryptocurrency exchanges are not the only way to acquire cryptocurrencies?
Perhaps they can not even be called the best choice for investors. They may be too expensive and unsafe.
In this article, you will learn about alternatives to cryptocurrency exchanges and get acquainted with several reliable and regulated financial services that offer the opportunity to invest in cryptocurrencies.
By the end of the article, you will learn how to invest in Bitcoin, Bitcoin CFD, Bitcoin ETN or Bitcoin-based futures.
How do we know that? We analyze financial institutions and help people find the best stock brokers.
We are well versed in brokerage and know the financial industry from the inside.
In recent months, readers have often asked how best to invest in Bitcoin and other cryptocurrencies. We studied this issue and made an easy-to-understand guide.
Since cryptocurrencies are very risky, it will not be superfluous to leave an additional warning here.
Invest in cryptocurrencies only the money that you can safely lose. The price of cryptocurrencies fluctuates like crazy.
If our parents asked us about the opportunity to invest in Bitcoin, we would tell them not to even touch it.
If you’re still interested, okay, let’s get to the bottom of the matter. Surely you would like to buy Bitcoin in an inexpensive and safe place. Right? But what does it mean? Let’s figure it out.
Buying Bitcoin is an exchange of euros or dollars for cryptocurrency.
The concept of “inexpensive” means that depositing money to the exchange, making an exchange and then withdrawing funds will not cost you very much.
Safety is also important.
When finance guys talk about security, they mean that
- The service provider is not a scam because he
- Regulated, that is, he has proved his ability to create a business and manage it;
- Audited by independent auditors;
- It is transparent, that is, it provides the public with data on finances, ownership, etc.
- A service provider is able to do business because it employs effective
- Risk management systems (ready to fulfill obligations when the market goes down);
- Provides operational moments (for example, access to the interface, placing orders, etc.);
- Provides IT protection against external attacks.
- Investors receive compensation from the state if service providers do not fulfill their obligations. This is called Investor Protection. Please note: you will not receive compensation if the price of the instrument in which you invested is reduced. You will receive it only if your broker is a fraudster or goes bankrupt.
It turns out that cryptocurrency exchanges do not meet the criteria of cheapness and security. And what alternatives do we have?
There are three more ways to invest in Bitcoin, unknown to most people.
- Long positions on Bitcoin CFDs (contract for price difference).
- Investing in passive funds, or rather ETNs that work with Bitcoin.
- Long positions on Bitcoin futures.
Let’s analyze them all in order. Let’s be honest about cryptocurrency exchanges – they also have a right to exist.
In addition, the alternatives are not perfect either. What should you do? The first thing to do is figure out what the differences are. This is what we will do now.
How to invest in Bitcoin on cryptocurrency exchanges
This is how most people invest in Bitcoin. As you most likely know, Bitcoin is a digital currency whose transactions are carried out through a distributed registry.
You can store and transfer bitcoins using a Bitcoin wallet.
This method is the revolution everyone is talking about.
The fact is that if you do not have bitcoins yet, you can not do anything on the blockchain.
First you need to buy Bitcoin, and also think about how to ensure the security of your wallet.
And this is where cryptocurrency exchanges come in handy: they allow you to exchange your money for cryptocurrency.
Please note that the exchange of your money for cryptocurrency is not on the blockchain. This is just a brokerage service provided by cryptocurrency exchanges.
Bitcoin exchanges are the best place to find the right cryptocurrency and test it
First about the good. Everything is extremely simple: create an account, deposit money and exchange them for Bitcoin.
Cryptocurrency exchanges, on the other hand, are flawed in terms of security, and can be very expensive.
Therefore, we recommend that you use them only for entertainment or very carefully.
Here are a few items worth checking out.
The steps in this process should not be difficult.
You go to the exchange, register, confirm your email address, photograph your ID and provide your credit card details or make a bank transfer.
Before moving on, we’ll mention two more famous fintech companies that entered the cryptocurrency market: Revolut and Robin Hood
- Revolut is a European startup that issues debit cards that allow you to convert money at interbank rates.
- Robin Hood is a zero-commission exchange broker.
Both companies – both Revolut and Robin Hood – entered the cryptocurrency market as cryptocurrency exchanges.
The problem with ownership of cryptocurrency exchanges
On the cryptocurrency exchange, you actually do not own the bitcoins you bought. Surprised? Let me explain.
When buying bitcoin on an exchange, you get something like a “debt receipt” (IOU) for the amount you have purchased from that exchange.
You become the real owner of bitcoins only if you know your secret key. However, on the exchange you do not know this secret key, that is, you do not own bitcoins, but only a receipt.
Good parallel. A cryptocurrency exchange is like storing gold in a bank. The exchange gives a certificate that you have bitcoin (like a bank gives a certificate that you have gold). Keeping bitcoin in your own wallet is like storing gold at home.
What to do? Transfer your bitcoins from the exchange to your own wallet if you do not plan to exchange them for money in the near future.
This will provide you access to your Bitcoin address and secret key. After that, you will truly be considered their owner.
How Bitcoin exchanges and the main parties work
We found out that you can buy bitcoins and other cryptocurrencies for dollars on cryptocurrency exchanges.
Speaking of exchanges, we have in mind two things. Here’s a question for you: what is the difference between the New York Stock Exchange and the currency exchange at the airport?
The answer is that the NYSE simply brings buyers and sellers together rather than trading. Currency exchange at the airport itself sells currency to customers. It seems the same thing – but the difference is huge.
We believe that some of them, such as Coindesk or Kraken, themselves trade with customers. They have their own stocks of money and cryptocurrencies, and they act like exchangers at the airport.
In the case of other exchanges, it is almost impossible to determine. Why does it matter? It’s simple, if the exchange works on the basis of stock, you will get the best price.
If it looks like an exchanger at the airport, this cannot be guaranteed. Unfortunately, we still cannot understand if there are large cryptocurrency exchanges that only bring buyers and sellers together.
Therefore, do not hesitate to leave comments on this topic.
You can talk a lot about this. Cryptocurrency exchanges claim that all client funds (both fiat and cryptocurrency) are on dedicated accounts, and they are not involved in margin trading.
(In margin trading, if you buy bitcoin on the exchange, you simply receive a statement from the exchange that the money was exchanged for bitcoins, although in reality the full exchange has not yet occurred.)
When you want to withdraw your bitcoins, no problems will arise, because the exchange has a large cumulative cryptocurrency reserve.
But if all customers want to exit, the exchange will have problems. That is how banks work, and so far everything is in order with them.
Nevertheless, the operation of such a business requires good risk management, and it is best if it is controlled by some regulator.
Cryptocurrency exchanges claim that they are not involved in margin trading, but we are skeptical of such statements, since there is a huge financial gain for the exchange, and regulators do not control them.
Commissions, risks and how you are protected from them
Bitcoin exchanges are quite expensive. They have a huge incoming customer flow, and they can charge high commissions.
You can pay a commission of 3-4% when buying Bitcoin with a credit card or 1.5% when receiving a bank transfer. Simply put, these commissions are very high.
In addition, these exchanges are very risky. Suppose you go to a cryptocurrency exchange, deposit 200 € and convert 100 € to bitcoin.
So what are you risking
- The exchange may be fraudulent or go bankrupt: all your bitcoins will be lost because they are not in your wallet. Most likely, you will save the euro, since the best exchanges are controlled by financial authorities and fall under the protection scheme of investors in a particular country. How to reduce the risk for your bitcoins? Transfer them to your wallet.
- The market makes a big move and freezes: most likely, the cryptocurrency exchange will not work for technical reasons. If you ever tried to log in when the price moved, you know what we’re talking about. If it still works, but your broker acts like an exchanger at the airport, you are at risk of a drop in liquidity (for example, they will not have enough money if you want to sell your bitcoins). Currently, there are no laws (or we do not know about them) that regulate how a cryptocurrency exchange should manage its liquidity.
As a result, the risks are quite significant, while regulators do not consider them.
But, if you want to try cryptocurrency trading, an exchange will be the easiest option. If you have quite a large amount of investment, use a separate wallet.
How to invest in Bitcoin using Bitcoin CFD
CFD is a contract for differences. In essence, this is a bit of a bet between you and the broker.
If you want to bet on the price of Bitcoin, you open an account with a broker offering CFDs and take a long position in Bitcoin CFDs. If the price of bitcoin increases, you win against a broker.
An important point here is that CFDs are regulated contracts with brokers that are controlled by supervisors. Thus, if the broker goes broke, you will receive compensation up to a certain amount from the financial regulator.
Important Note: CFDs are regulated in Europe, but not in the USA and some other countries. First check how your financial authorities relate to this asset class.
Bitcoin CFDs Great For Bitcoin Trading
CFDs are good for trading bitcoins and other cryptocurrencies. You can quickly and easily take both long and short positions in bitcoin and effectively place bets on price movements.
In addition, you are protected by the government from the bankruptcy of a brokerage company offering Bitcoin CFDs with a special amount of investor protection.
You need to pay attention to the fact that CFDs are traded using leverage, and this may expose you to additional risk (more on this later).
In addition, do not use CFD if you need some characteristic functions of cryptocurrencies, for example, anonymity. You will not own coins – you just bet on price movement.
CFDs are very common financial instruments for retail customers in Europe.
There are CFDs on stocks (like Apple), commodities (like the price of oil), and many other assets. CFDs are common in Europe, but are banned in the United States.
Opening an account with a broker trading Bitcoin CFDs is very easy
To start trading Bitcoin-based CFDs, you need a cryptocurrency CFD broker.
There are many reliable CFD brokers who are listed on the stock exchange, report on their financial performance, and are controlled by financial regulators.
Opening an account with them is very easy. You need to go through the digital procedure for checking ID cards and replenish your account. Bank transfers and credit card payments are available.
Among all the brokers offering cryptocurrency CFDs, we liked the most.