Popular methods to buy bitcoins online

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Popular methods to buy bitcoins online

This article gives a quick rundown on the most popular methods to buy bitcoins online, listing their positive and negative aspects and contrasting them against one another. If you’re looking to get hold of your first units of bitcoin, this article will help you decide on the purchase method which best fits your circumstances.

Before diving in, there are few useful concepts which we should first define:

Market: the purpose of any exchange is to provide one or more markets, in which cryptocurrency trading may take place. Virtually all crypto exchanges support Bitcoin but support for other cryptocurrencies varies widely.

Ticker Symbol: this is a short code, usually 3 or 4 letters in length, which is used to denominate a tradable financial instrument, such as a currency or asset. Examples include USD (US Dollar), BTC (Bitcoin), AMZN (Amazon shares), and so on.

Trading Pairs: crypto markets are always comprised of two different tickers, known as a trading pair. For example, the trading pair “BTC / USD” represents a market in which Bitcoin and US Dollars are traded. In such a market, clients may exchange Dollars for Bitcoin or vice versa, at a price determined by market forces.

KYC: when trading regular “fiat” money for bitcoin through a traditional company, the rules governing currency transfers apply. Companies which deal with fiat exchanges therefore require you to verify your identity before allowing you to trade. This ID verification process is known as KYC (Know Your Customer).

The usual KYC requirements are scanned images of identity documents, such as a passport or driver’s license, and documents which prove your place of residence, such as a utility bill. This verification process takes anywhere from a day to several weeks, depending on the company’s efficiency and the volume of new registrants – expect the process to be protracted during a price bubble.

Centralized Exchanges

Centralized exchanges are usually just referred to as “exchanges.” Such exchanges provide markets in which their clients may trade seamlessly with one another. Clients entrust their funds and identities only to the exchange however, and have no direct interaction.

There are literally hundreds of Bitcoin exchanges around the world; at least 228 at the time of writing according to CoinMarketCap. Many exchanges cover multiple countries, continents, and currencies. There are also numerous small exchanges which service only their local region and currency.

There are two distinct types of crypto exchange:

  1. Fiat exchanges, which handle regular “fiat” money (such as US Dollars or Japanese Yen) deposits and withdrawals, and
  2. Crypto-only exchanges which allow cryptocurrency deposits and withdrawals exclusively. These often don’t have KYC requirements.

If you’re a new user looking to buy Bitcoin, you most likely wish to do so with regular money. This means you’ll need to send your regular money to a fiat exchange. This is usually accomplished via a bank transfer or credit / debit card. Once your money arrives, you may use it to buy bitcoin from the market.

Once you’ve purchased bitcoin, you can withdraw and store it in your personal wallet, trade it back for fiat (ideally at a profit), or trade it for other assets on the same, or another, exchange. Crypto-only exchanges often feature many more altcoins and tokens than fiat exchanges, including new, obscure, and low price or volume coins.

Tip: You can easily discover which exchanges support a particular cryptocurrency. Search for the crypto by name or ticker symbol on CoinMarketCap, select it, and then click the “Markets” tab for the full listing:


Just some of the exchanges which support Cardano (ADA) trading pairs.

Centralized Exchange Pros

  • Centralized exchanges have the lowest trading fees and order execution times out of any of the online options. If you wish trade multiple times per day, as in the case of a professional crypto trader, then centralized exchanges will be your most suitable choice.
  • Larger centralized exchanges have deep liquidity, meaning that you can buy or sell a lot of coins without moving the price significantly. This factor is really relevant only to high volume traders.
  • Price tends to be lowest on centralized exchanges.

Centralized Exchange Cons

  • The safety of any coins or fiat in your trading account depends on the honesty and competence of the exchange staff. As exchanges are such attractive targets, theft, hacks, and other costly problems are regrettably regular occurrences in the crypto exchange space. Research any exchange thoroughly before using it, and avoid the long-term storage of value in an exchange account.
  • Identity verification is required by fiat exchanges, which is detrimental to your financial privacy and even security, in the event that the exchange is compromised.
  • Although some centralized exchanges offer a simplified buy or sell interface, the standard exchange interface can be extremely confusing for newcomers. Here’s an example of a typical trading interface from Bitcoin Wisdom:


Trade interface showing: price (left) and volume chart (bottom left), order book (top and mid right), and trade history (bottom right). Not shown is the order interface used to enter trades into the market.

Decentralized Exchanges

Decentralized exchanges are closely aligned with the design principles of Bitcoin. Rather than entrusting a third party to hold your funds and maintain a market, you trade (more or less) directly with peers. Usually the decentralized exchange (or “DEX”) exists only to introduce trading partners, via some kind of matching system, and to secure their trading, through an escrow process and / or multi-sig contracts.

One of the major advantages of decentralized exchanges is that identity verification isn’t mandatory. This allows users to keep their financial transactions private. This allows for Bitcoin trading between individuals in country where centralized exchange trading is banned, such as China. Unfortunately, the largest DEX, LocalBitcoins, recently changed its policy to require identity verification upon request, or when trading substantial amounts.

DEXes have the further benefit of being the most flexible way to buy bitcoin online. You can create a custom trade offer which features your desired payment method (and other customized conditions). This allows you to use payment methods ranging from the standard bank transfers or credit cards to more exotic payment services, including offline and in-person cash payments. Of course, success depends on a bitcoin seller willing to accept your terms.

The selection of decentralized exchanges is a lot more limited than for regular exchanges. Besides LocalBitcoins, the most popular options include the Bisq app, HodlHodl, Paxful, and Mycelium Local Trader. Depending on your location and desired payment method, you may or may not be able to purchase bitcoins through a DEX at a fair price and within a reasonable timeframe.

Decentralized Exchange Pros

  • Depending on the DEX and your trading partner, identity verification may not be required. This saves time and preserves financial privacy.
  • A decentralized exchange generally allows anyone to buy bitcoin, no matter their age or location.
  • It’s possible to create a customized bid with the payment method of your choice. This is helpful if you don’t have access to regular payment methods, but keep in mind that trading partners are under no obligation to accept your bid.

Decentralized Exchange Cons

  • A DEX is usually the slowest way to buy bitcoin online. It takes time to coordinate a deal with your trading partner.
  • A decentralized exchange is usually the least convenient of the bitcoin purchase methods covered here. The way a DEX works is inherently complex, often requiring lengthy investigation to fully comprehend.
  • Unless you live in an area where trading on a particular decentralized exchange is popular, you may struggle to find a trading partner.
  • A trading partner’s reputation score should be considered before trading with them. Although this is more of an issue for new sellers than new buyers, it’s still recommended to buy only from trusted and experienced sellers.

Brokers

A broker is similar to an exchange, except that you purchase bitcoins directly from the company, rather than other users of the company. Certain brokers will also buy bitcoins directly from their clients. As this is a much simpler structure than creating a market for clients to trade amongst themselves, brokers generally have much higher security than centralized exchanges. The average broker’s interface and buying process is also far more straight-forward and intuitive than a (de)centralized exchange.

Brokers can vary in size, from tiny one man operations servicing a specific town or city to large international companies such as this site, Coinmama, which supports millions of clients from over 200 different countries. Unless you have a longstanding relationship with a reliable small broker, it’s generally safer to stick with large companies. Large companies necessarily have solid banking partnerships in place, whereas banks routinely freeze the accounts of new, fly-by-night brokers. Banks are under considerable pressure from tax and law enforcement agencies to err on the side of caution when dealing with unusual account activity. Furthermore, small brokers are often only available for trading or support during business hours.

Broker Pros

  • Brokers are the easiest way to buy bitcoin online, making them perfect for new users. Brokers present the simplest possible way to buy bitcoin; no contending with a complex trading interface or bilateral adherence to a multi-step trading process.
  • Broker prices are far more stable than centralized exchange prices (which can change on a second-to-second basis) and generally closer to fair market value than prices displayed on decentralized exchanges.
  • With far less “moving parts” than (de)centralized exchanges, brokers can focus on streamlining and perfecting their business. For this reason, brokers generally have fewer outages or problems than (de)centralized exchanges.

Broker Cons

  • Brokers generally charge the highest fee for their services. Centralized exchanges can charge lower fees as they facilitate far more and far larger transactions for professional traders.
  • Unlike decentralized exchanges, brokers also have identity verification requirements similar to centralized exchanges.
  • Brokers often have lower purchase limits than (de)centralized exchanges. This can be an issue if you wish to buy bitcoin in large amounts.

Comparing the 3 Options

Although there’s a fair degree of variation between services in all 3 categories, the following table would probably be considered by most Bitcoiners as a reasonably fair comparison between the leading examples of each category:

Type

Fees

Privacy

Convenience

Simplicity

Support

Broker

High

Low

High

High

High

Centralized

Low

Low

Variable

Low

Variable

Decentralized

Variable

High

Low

Low

Variable

 

Coinmama is one of the easiest ways to buy Bitcoin with your credit card/debit card or bank account

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