Buying Bitcoin? 4 things beginners always overlook
You might have heard that buying Bitcoin is quick and easy, but that’s not an excuse to cut corners.
Paying the lazy tax can result in high fees, missed opportunities and even losing access to all of your crypto.
Do you have an investment plan? Do you know what the spot market is? Can you use a non-custodial wallet?
If any of these things are new to you, then keep reading to make sure you get the most out of your investment and avoid unnecessary mistakes.
1. Use a FinCEN-registered exchange
When it comes to buying Bitcoin, the first step is to find a reputable cryptocurrency exchange.
But not all exchanges play by the same rules.
In the USA, cryptocurrency exchanges are required to register with FinCEN, the Financial Crimes Enforcement Network.
Using a FinCEN-registered exchange is important because it means the exchange complies with local laws and regulations. This helps protect you from scams and fraudulent activity. Depending on your state, it might also entitle you to legal recourse, should something go wrong.
Some popular FinCEN-registered exchanges include Coinbase, Gemini and Kraken.
You might notice that FinCEN-registered exchanges typically have fewer coins and features than their overseas competitors, but this isn’t necessarily a bad thing. Often these features are high-risk financial products that could amplify your losses.
Before you choose an exchange, be sure to do your research and read reviews from other users.
2. Make an investment plan
Before you buy Bitcoin, it’s important to have a plan in place.
That means thinking about your goals and actually writing them down – not just fantasizing about what might happen if you get lucky.
At the very least you should consider how much you’re willing to invest, your purchase price, how much you are willing to lose and your desired exit price.
Writing these things down will help you stick to your plan when the market gets volatile and help mitigate emotional decision making.
Also consider learning about specific investment strategies.
For instance, dollar-cost averaging is a simple strategy which involves investing a fixed amount of money at regular intervals, regardless of the price.
This can help smooth out the ups and downs of the market and reduce your risk.
And remember that cryptocurrency is a volatile and risky investment, so never invest more than you can afford to lose.
3. Use the spot market for lower fees
When buying Bitcoin on an exchange, you’ll typically have two options: the spot market or an instant purchase feature.
The instant purchase section of an exchange is designed to make buying crypto instantaneous and effortless.
Usually you just connect a debit card and specify how much you want to spend.
But this convenience often comes at a cost, with fees as high as 5% on some exchanges. When you’re buying large amounts of crypto this can really add up.
Instead, look for something called the spot market.
The spot market is where traders can set their own buy and sell prices and wait for their order to fill.
The fees here are much cheaper – often less than 1% on leading exchanges like Kraken, Coinbase and Binance.US.
The spot market also allows you to place a market order, which instantly purchases the asset at the current market rate.
So this is like using the instant purchase feature, but with much lower fees.
Another thing to be wary of is payment methods. Credit cards usually attract the highest deposit fees while bank transfers are often free in the US.
It’s important to compare fees and features across different exchanges to find the best option for you.
4. Learn about self-custody
One risk associated with Bitcoin is leaving it on an exchange.
If the exchange gets hacked or goes bankrupt, you could lose all of your funds.
That’s why it’s important to learn about self-custody, which involves storing your Bitcoin in a hardware or software wallet that you control the private keys to.
This reduces counter-party risk and gives you more control over your investment. Although it also comes with added responsibility, such as keeping your private keys secure.
Before you start using a wallet, be sure to do your research and choose a reputable and secure option.
Look for one that doesn’t hold the private keys on your behalf, has a long track record of security and supports the assets you need to store. Hardware wallets like Ledger and Trezor are typically considered the safest, although they will cost you some money.
Don’t pay the lazy tax
While buying Bitcoin is more convenient than ever, you still need to approach it responsibly.
- Start by using a FinCEN-registered exchange to ensure compliance with local laws and regulations.
- Create an investment plan that outlines your goals, strategies and risk management.
- Use the spot market to save on fees and avoid instant purchase features that charge high fees.
- Lastly, learn about self-custody to reduce counter-party risk and have more control over your investment.
Following these guidelines will help reduce your risk and help set you up for a successful journey into crypto.