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Lesson 4: Buying Cryptocurrencies

Lesson 4: Buying Cryptocurrencies

There are hundreds of exchanges you can use to buy cryptocurrency online, but if you're looking to trade a variety of crypto assets under the same roof you should choose an online broker.

Cryptocurrencies are digital assets that trade on a 24/7 global market. If you're thinking about adding cryptocurrencies like bitcoin, ether, or dogecoin to your investment portfolio, you have several options for doing so. 

A cryptocurrency is a unit of measure. It is a digital token that can be transferred from one party to another, but not duplicated.

Unlike physical fiat currencies (e.g., the US Dollar), cryptocurrencies are decentralized, virtual currencies that are typically used to purchase goods or services. These assets utilize blockchain technology to ensure that transactions between each party are secure.

If you buy cryptocurrency like bitcoin, you don't really own anything physical. You just own a key that allows you to move a record or a unit of measure from one person to another, without a trusted third party. And that's really all the cryptocurrency is.

Here's how to buy cryptocurrency — along with an outline of where you can buy it and the different types of investment vehicles you can use for exposure to it.

How to buy cryptocurrency

  1. Choose a broker or crypto exchange
  2. Research and select your cryptos
  3. Choose your order type and open your position
  4. Decide how long you hold your crypto-investment

Step 1. Choose a broker or crypto exchange

Before buying cryptocurrency, the first thing to do is research and choose the best trading platform for you. You will find many services online to help you buy, sell, and trade cryptocurrency, including crypto exchanges and online brokers.

  • Online brokers: There are a few online brokers that offer ways to buy and sell cryptocurrency, in addition to other assets like stocks, currencies, and ETFs. These trading platforms tend to offer lower trading costs but fewer crypto features.
  • Cryptocurrency exchanges: You'll have many cryptocurrency exchanges to choose from, each with varying offerings of cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.

As you're comparing different platforms, it's wise to consider things like supported cryptocurrencies, security features, fees, storage and withdrawal options, and educational resources.

What is a cryptocurrency exchange?

A crypto exchange is a platform dedicated to facilitating the buying and selling of cryptocurrency. Each exchange has its own rules when it comes to the trading of cryptocurrency. It should be noted that not every exchange offers every cryptocurrency.

Using an exchange to buy cryptocurrencies will usually come with higher fees which may affect the overall outcome for crypto investors. Before buying cryptocurrency, an investor should know exactly the fees he is expected to pay for each operation, (deposits, withdrawals, transfers, trades). Some of these fees can be percentual, while others are flat fees. There can be also a minimum amount required for deposits and transfers, which vary from platform to platform.

Over the years, the community has witnessed numerous hacking attacks, that left millions of accounts empty. While some of these funds were later traced and returned to the owners, the threat still exists. Other concerns to pay attention to when using a crypto exchange may be the available liquidity and complicated fee structure. Most crypto exchanges do not have a central office and exist in a legal grey area.

The best exchange for you depends on your needs, but beginners should start with solid research and look for exchanges that offer a higher security level, simple web and mobile interfaces, educational resources, and readily available customer support.

What is an online broker?

An online broker is a trading provider that allows its clients to open and close positions using a trading platform and/or a trading app. Online brokers have come to replace the traditional brokers, which used to talk to their clients on the phone to secure trades.

As an alternative to exchanges, online brokers remove some of the complexity of buying crypto by offering easy-to-use interfaces that interact with an exchange on your behalf.

Online brokerages that offer cryptocurrencies are few, but more options are becoming available for crypto-oriented traders. 

Usually, they don't offer as many cryptocurrencies as crypto exchanges.

So why should you choose a broker?

Using a brokerage may be a suitable variant for higher amounts of money due to several reasons such as security and bigger liquidity. After depositing your collateral, you have various trading opportunities including leverage positions and a variety of assets under the same roof, depending on the services provided by the specific broker. Crypto exchange on the other hand is the simple way to trade cryptocurrencies by using the order book of the trading pair according to the deposited cryptocurrency or fiat money – this is the way a buyer meets a seller, for which the crypto exchange charges a fee.

Online brokers offer cryptocurrencies in addition to their selection of stocks, ETFs, options, bonds, and mutual funds. Crypto investors can use a diversity of investment vehicles that provide exposure to the crypto market and blockchain technology.

Another big advantage of using online brokers is that investors can trade and speculate on the value of the assets as it moves in both directions. This means that you can potentially make a profit even if the crypto prices go down if you had opened a sell position. This is not the case with cryptocurrency exchanges.

Unlike buying cryptocurrencies in the hope they increase in value, CFDs (contracts for difference) enable crypto traders to speculate on cryptocurrency prices, either “going long” if they think the price will increase or “going short” if they think the price will decrease.

CFD trading is leveraged, which means you can gain exposure to a large position without having to commit the full cost at the outset.

Say you wanted to open a position equivalent to 1 Bitcoin. With a standard trade, that would mean paying the full cost of the Bitcoin upfront. With a contract for difference, on the other hand, you might only have to put up a small percentage of the cost.

While leverage enables you to spread your capital further, it is important to keep in mind that your profit or loss will still be calculated on the full size of your position. In our example, that would be the difference in the price of 1 Bitcoin from the point you opened the trade to the point you closed it. That means both profits and losses can be hugely magnified compared to your outlay.

When you open an account with CAPEX, you will be able to:

  • Open buy and sell positions. With cryptocurrency CFDs, you can speculate on any price movement (up or down).
  • Trade multiple individual cryptocurrency CFDs at the same time.
  • Diversify your portfolio by trading CFDs on other assets (crypto, stocks, bonds, currencies, ETFs and commodities).
  • You can start off with a demo account funded with $50,000 virtual cash to allow you to practice risk-free trading before you use any real money.

What information is needed to buy Cryptocurrency?

When you open an account at a traditional brokerage or a crypto exchange, you’ll need to provide basic personal information. Of course, you’ll need to provide your name, but the firm will also require other data such as your Social Security number, your address, your phone number, and your bank account number. You may also have to detail how much trading experience you have and how comfortable you are with trading, depending on the institution.

This information allows the firm to identify you and verify who you are.

Buy Cryptocurrency: Here’s what to watch for

As you’re considering how to buy cryptocurrency, you’ll want to evaluate the following factors, since they should influence your choice of where to buy it or whether to ultimately avoid it altogether.

  • Ownership. What do you want to own exactly? You can own Bitcoin directly or a derivative such as a CFD, which offers a return on the currency’s movement.
  • Upside/downside. Your potential gain is related directly to whether you own the currency directly or via CFDs. By owning cryptocurrency directly, your profit increases by a dollar with every dollar increase in the currency. In contrast, with CFDs, you can gain much more quickly without having to front as much capital. However, you can lose more money with CFDs.
  • Cost. Commissions can vary widely depending on how you purchase Bitcoin. CFDs get you a big piece of the action relatively cheaply, while some brokers may charge you several percent to buy directly. A few percent might not sound like a lot, but if you’re trading in and out of the market, it will quickly eat away at your profits.
  • Security. One of the biggest concerns with any investment is making sure that it’s secure. Some newer cryptocurrency players have had serious problems with security. For example, Binance, a high-profile cryptocurrency exchange was hacked for thousands of bitcoins in 2019. More traditional brokers may offer better security because they’ve been dealing with the issue for much longer. Additionally, the most reliable brokers are regulated and keep your funds in segregated accounts.

Step 2: Research and select your cryptos

Thousands of cryptocurrencies exist, and literally, any number could be created using similar blockchain technology. Cryptocurrencies allow the user to move money semi-anonymously, though the FBI and IRS are getting better at tracking transactions and freezing accounts.

Cryptocurrencies can be created for many different purposes, and each may occupy different parts of the crypto universe. 

A lot of this research will involve understanding the technology behind the coin, and that’s why it’s important to know what you expect from these investments. Are you looking for cryptos that will increase in price soon, or do you want to support the technology of the coin?

Purpose of the cryptocurrency

All cryptocurrencies were created for different purposes. For example, Dogecoin was a satire on the rising popularity of Bitcoin and the doge meme featuring a charismatic Shiba Inu. Meanwhile, Bitcoin and Ethereum were created for more serious purposes, including facilitating transactions or acting as a store of value.

Market capitalization

The market capitalization of each consists of the total extant coins multiplied by the current trading price, and there’s a wide divergence. Bitcoin is the largest, with Ethereum trailing a distant second, according to CoinMarketCap. Traders cluster around the most popular cryptocurrencies and volume drops significantly below the top 20.

While these currencies may be among the most popular for traders, Bitcoin is the one that’s emerged in the mainstream. It’s becoming easier to access Bitcoin, with multiple ways to purchase or trade the currency that piggybacks on existing crypto apps.

Coin issuance

It’s also useful to note how many coins can be issued in each cryptocurrency. Many traders have flocked to Bitcoin because of its hard limit on issuance, just 21 million. If money continues to flow into Bitcoin and demand rises, this fixed limit virtually ensures that the price will rise over time. While that may be good for traders, the volatility makes Bitcoin harder to use as a currency.

In contrast, Ethereum and other crypto issuance are unlimited, but it has a fixed issuance schedule, which may slow the production of new coins.

Step 3: Choose your order type and open your position

Buying and selling cryptocurrency or trading cryptocurrency CFDs involves setting orders. These orders can be market orders, limit orders, and stop-limit orders.

At first, it may seem daunting to master all these concepts, but with enough training, you will get more familiar with them and get used to navigating them with confidence. Remember that choosing adequate tools, can help you along with your online trading experience.

As there is no need to own a digital wallet, once you have opened your account with CAPEX, you can start trading CFDs on cryptocurrencies straight away.

All you need to do is open the deal ticket for your chosen cryptocurrency, and you’ll see both a buy and a sell price listed. You’ll be able to decide the size of your position, and then select buy to open a long position or sell to open a short position. Remember, you can add stops or limits to close your trade once it hits a certain level.

How to buy Bitcoin cryptocurrency
Source: CAPEX WebTrader

Entry orders

Market orders are the most simple and rapid way to open a position for a cryptocurrency asset. When you set a market order, you effectively tell your broker that you are willing to buy/sell your CFD position at the current market rate and do not want to wait. Market orders get executed immediately.

Let’s say you want to open a buy position for 1 Bitcoin CFD. Consider the price of Bitcoin at $38,000. If you want to open a buy/sell position immediately, you need to set a market order, which will be executed at the current market price.

CFDs are traded with leverage, which means you’ll only have to put a deposit – known as margin – to get full market exposure, $19.000 in this case.

With us you can trade 0.01 Bitcoin CFDs, meaning you can open a fractional position with as low as 190$ (considering the price from our example).

Limit orders are useful to set if you want to buy or sell your CFDs at a certain price. Traders can choose to use this type of order to either open or close CFD positions, but the broker cannot guarantee that the order will be executed. The limit order gets executed only when the market price meets the price set by the trader.

Step 4: Decide how long you hold your crypto-investment

As detailed in step 1, you can buy cryptocurrency intending to hold it for the long term, or you can just open a buy position through CFDs intending to speculate on short- and medium-term price movement.

After you’ve devised your personal strategy for buying cryptocurrency, you won’t make a profit until you sell the digital asset. Of course, investors should also be prepared to sell their cryptocurrency with a loss when the market goes in the opposite direction to their predictions.

After you've purchased your cryptocurrency, you'll need to store it in a safe place to protect it from hacks or theft.

This is where cryptocurrency wallets come in. A crypto wallet is a physical device or online software used to securely store the private keys to your cryptocurrencies. Some exchanges offer built-in wallet services, making it easy for you to store directly through the platform. But all exchanges don't automatically provide wallet services for you.

There are quite a few wallet providers to choose from, where you'll have the choice between two custody options: 

  • Hot wallet storage: The phrase "hot wallet" describes a form of crypto storage that utilizes online software to protect the private keys to your assets.
  • Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.

With online brokers, you do not have to worry about storing cryptos. There is no delivery of physical goods or securities with CFDs, you are just entering into an agreement that if the price goes in your favor, you make money, and if the price goes against you, you lose money

You can monitor the profit/loss of your position in the ‘open positions’ section of the trading platform. And when you have decided that it’s time to close your position, you just need to place an equivalent trade in the opposite direction.

Exit orders

A market order is used to close a position immediately. This type of order guarantees that the order will be executed but does not guarantee the execution price.

Stop Loss and Take Profit are used to exit a position and ensure a profit or limit the potential losses of a trade. This pre-set stop-loss order is only triggered when the desired price target is reached.

If the price of Bitcoin is above $38,000 and you want to limit your loss in case the market moves against you, you can set a stop order to trigger when the price of BTC falls below $38,000.

When deciding to sell your cryptocurrency or effectively close a CFD position, you should ensure that you’re not making that decision based on emotions. Financial markets can be defined by bull and bear markets, and each asset can be affected by specific news and technology developments. That’s why it’s crucial to stay up to date with the latest news and don’t let your personal emotions get in the way of your investment goals, even when the market isn’t what you had hoped for.

How to invest in cryptocurrency without buying crypto

Cryptocurrency investing has a steep learning curve. And as a volatile, highly speculative investment, many investors are appropriately cautious. But for those who are interested in crypto but not in buying and holding actual cryptocurrencies, there are still ways to invest, albeit indirectly. And you might already have exposure to cryptocurrency without even knowing it.

The easiest way to get investment exposure to crypto without buying cryptocurrency itself is to purchase stock in a company with a financial stake in the future of cryptocurrency or blockchain technology. 

But investing in stocks can bear similar risks as investing in cryptocurrency. Rather than choosing and investing in individual stocks, experts recommend investors put their money in diversified index funds or ETFs instead, with their proven record of long-term growth in value.

Overall, you'll have so many options for exposing your portfolio to crypto assets. The best option for you, however, depends on your goals and risk tolerance.

Cryptocurrency and Blockchain-linked ETFs

Exchange-Traded Funds (ETFs), are investment funds that allow you to buy exposure to hundreds or more individual investments in one go. They offer instant diversification and are less risky than investing individually.

ETFs are often grouped by what sort of investments they hold, so one way you can indirectly invest in cryptocurrency is by putting money into an ETF focused on its underlying technology: blockchain. A blockchain ETF will include companies either using or developing blockchain technology. 

Many people who are skeptical about cryptocurrency but believe in the “transformative” blockchain technology behind it see blockchain ETFs as a much more sound investment.

Here are a few blockchain ETFs currently available to investors:

  • BLOK (Amplify Transformational Data Sharing ETF). BLOK is the largest blockchain ETF by total assets. It’s largest holdings are PayPal, MicroStrategy, and Square.
  • BLCN (Siren Nasdaq NexGen Economy ETF). BLCN’s top holdings are Coinbase, Accenture, and Square.
  • LEGR (First Trust Indxx Innovative Transaction & Process ETF). LEGR’s top holdings are NVIDIA, Oracle, and Fujitsu. 

For would-be crypto investors who are deterred by exchanges or buying and holding actual coins, one simpler way to invest — via crypto or Bitcoin ETFs — has remained out of reach until recently.

The first Bitcoin-linked investment product, the BITO Bitcoin ETF, launched in October 2021 after much anticipation.

BITO is Bitcoin-linked, but it’s still not a fund that directly holds the currency, but instead holds Bitcoin-futures contracts. While BITO is a major step in bringing cryptocurrency to conventional U.S. investment portfolios, many enthusiasts want to see an ETF that holds cryptocurrencies directly.

Companies connected to cryptocurrencies and blockchain

If you are used to investing in stocks, you could also get some crypto exposure by purchasing stocks from public companies that have an interest in the crypto space and blockchain technology. Here are a few more examples of publicly traded companies that are adding Bitcoin or blockchain technology to their business. These are not the only companies involved, and more are joining the list every day.

  • Tesla (TSLA). Tesla’s founder Elon Musk is a proponent of cryptocurrency, and the company holds over a billion dollars worth of Bitcoin. It temporarily accepted Bitcoin payments in early 2021 before ending the program, but Musk recently said Tesla will “most likely” restart Bitcoin payments.
  • Nvidia (NVDA). This technology company builds and sells GPUs, which are the main equipment needed to mine cryptocurrency.
  • VMWare (VMW). VMware Blockchain is the digital foundation that helps you run business-critical, multi-party applications.
  • Square (SQ). Since October 2020, Square has purchased over $220 million worth of Bitcoin. As of February 2021, this payment services provider stated that 5% of its cash is stored in Bitcoin. Their app, Square Cash, allows clients to buy, sell, and trade crypto.
  • MicroStrategy (MSTR). MicroStrategy offers business intelligence and cloud services and invests its assets into Bitcoin. 
  • Marathon Digital Holdings (MARA). Marathon Digital Holdings aims to be the largest bitcoin mining operation in North America.
  • Riot Blockchain (RIOT). Riot Blockchain is a Bitcoin mining company.
  • Coinbase (COIN). Coinbase is a cryptocurrency exchange that allows consumers, financial institutions, and businesses to transact between fiat and cryptocurrencies and securely store and use cryptocurrencies.
  • Intel (INTC). Intel is actively working with Hyperledger, an open-source blockchain project that aims to advance cross-industry Blockchain technology implementations.
  • CME Group (CME). CME is a financial derivatives exchange that offers trades in cryptocurrencies as well. In Q3 2021, the company reported a 14% year-over-year increase in its average daily volume (ADV) at 17.8 million contracts.

Rather than buying shares in any single crypto-forward company, it’s better to maintain a balanced portfolio by identifying companies with crypto interests and making sure their shares are included in any ‘basket’ you put money into. Not only does that allow you to invest in the companies where you see potential, but it also helps you keep your investments diversified.

With CAPEX you can trade most of these companies' shares as a single CFD product with the Blockchain Future ThematiX. The weight of each share (percentage allocation) to the ThematiX is determined based on their Market Capitalization.

Blockchain Future ThematiX is comprised of a group of shares as below:

  • IBM 4%
  • NVIDIA 21%
  • CME 3%
  • Square 4%
  • MasterCard 11%
  • DocuSign 2%
  • AMZN 55%

What’s the difference between buying cryptocurrencies and traditional shares?

Buying shares in a company means you own a tiny piece of the corporation concerned. Shares also confer on the holder the right to vote on key decisions that a company makes.

If a company folds, shareholders may be entitled to compensation once creditors that are higher up the pecking order have been paid off.

In contrast, buying a cryptocurrency only grants the holder ownership over the token itself. If a cryptocurrency loses value, that is it. There is no extra layer of compensation for the holder.

There are several key differences between shares and cryptocurrencies worth bearing in mind:

  • Trading hours: traditional stock exchanges such as London and New York are only open for set periods daily, five days a week. Cryptocurrency markets never close, however, enabling participants to make transactions 24/365.
  • Regulation: stock trading is subject to strict regulation, and the reports and accounts of publicly listed companies are matters of public record. Cryptocurrencies are unregulated. Unlike other parts of the financial services marketplace, there is no financial safety net for customers in the event a cryptocurrency company goes to the wall.
  • Volatility: Investing in both shares and cryptocurrencies involves risk. Investors can lose money from both and, in extreme cases, end up with nothing. While share prices tend to rise and fall based on company performance, cryptocurrency prices tend to be more speculative. This can make price moves in the latter extremely volatile, sensitive to something as seemingly insignificant as a celebrity’s tweet.

Final words

You'll have several options — such as crypto exchanges, online brokerages, and even payment services — when it comes to buying cryptocurrencies or speculating on the price movements. And in most cases, you can fund your account with credit or debit card deposits, or wire transfers.

But it's important to choose the right place to buy your crypto. From online brokerages to crypto exchanges, the list of avenues for purchasing crypto is vast. 

After you've set up and funded your crypto account, be sure to familiarize yourself with the different types of trading orders as these can influence the final price you'll pay for different assets. And although storage for crypto assets isn't mandatory, it can be useful in securing your holdings against cyber-attacks or other threats.

Not sure how to get started?

Start with a CAPEX demo account. This is a risk-free trading account, which allows you to test your trading skills. Before you risk your own money, submit trades in a virtual setting. You can practice crypto trading strategies to ensure you have the experience you need when you are ready to trade in the real world.

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