How does one go about buying Bitcoin or any other cryptocurrency? What should someone know before buying or selling a digital currency?
To buy Bitcoin or other cryptocurrencies, or to sell (or to avoid them altogether)? As digital currencies and the blockchain technology underpinning them move into the mainstream, it’s a natural question many individual investors and traders are surely asking themselves these days.
But learning how to buy Bitcoin is just the tip of the due diligence iceberg. Investors should preface any cryptocurrency purchases with several other questions, considering how rapidly cryptocurrency markets are growing, the rapid price flucuations and the absence of hard rules and regulations governing these instruments.
Before trading or investing in Bitcoin, Ethereum or other cryptocurrencies, know what you’re getting into and research the vast array of options (which seem to be increasing every day). Let's look at a few basic questions.
Cryptocurrencies, also referred to as coins, are virtual currencies secured through one-way cryptography. Many are based on public blockchain technology, a distributed ledger of all transactions that is decentralized and can’t be changed under most circumstances. Unlike traditional currencies, such as the U.S. dollar, they are not controlled by any central government or authority.
As of early February, there were more than 1,500 cryptocurrencies and tokens worldwide, according to CoinMarketCap. The list starts with Bitcoin, by far the most actively traded, and also the most publicized. In January, an average of $8.2 billion Bitcoin changed hands each day, according to CoinMarketCap, and the overall value of all Bitcoin (or market cap) totaled $173 billion at the end of January.
Bitcoin and others like it are considered by many to be alternative payment mechanisms, yet they are also highly speculative and subject to sharp daily price swings.
In contrast, other cryptos, such as Ethereum, are designed to facilitate transfer of ownership through so-called smart contracts, in which a token is attached to, and thus verifies, legal documents and other agreements.
Ethereum proponents aim to replace Internet third parties and see the currency as a “world computer” that decentralizes, and some would argue, democratizes, existing client-server models, according to CoinDesk, Inc., a digital publisher devoted to the crypto and blockchain community.
There are several thousand digital or online platforms on which you can buy and sell Bitcoin and other cryptocurrencies, including about 400 alone for Bitcoin, according to CoinMarketCap.
You can buy Bitcoin with a credit card or through an online payment system, and you can sell Bitcoin for cash. But whatever exchange or method you choose, proceed with caution.
The largest Bitcoin exchange currently is Bitfinex, where recent trading volume averaged about $828 million a day, or slightly more than 8% of overall Bitcoin trading. Other higher-volume cryptocurrency exchanges include Bitmap, Coinbase, OKEX, Binance, and GDAX.
To trade on these exchanges, you typically need set up a “wallet” (similar to an account) where you store your cryptocurrency. Payment options range from credit and debit cards, to wire transfers, to hard cash. So, yes; you can buy Bitcoin with a credit card or through an online payment system such as PayPal, and you can sell Bitcoin for cash. But whatever exchange or method you choose, proceed with caution, the pros warn.
“Cryptocurrency speculators should know where an exchange is based, how long it has been around, what sort of security is in place, and who is running it,” says Jim Sinegal, a financial services analyst with Morningstar. “And that’s really just the first step in purchasing some basic, well-known cryptocurrencies.”
Additionally, some of the traditional, established exchanges—including CBOE and CME Group—offer futures contracts linked to Bitcoin.
ICOs offer another route into the crypto world. An ICO, also known as a token sale, can serve as crowdfunding means, where a company offers a new coin in exchange for fiat currency (U.S. dollars, for example) or a digital currency (such as Ether or Litecoin). Typically, the funds generated are used to develop a new concept or service, and the tokens issued are used to transact on the network post-launch.
ICOs often involve a new company with new technology, each of which can carry unique risks, and the ICO process is “a little more complicated than buying a simple cryptocurrency,” says Sinegal. Some ICOs require investors to be accredited, “and a degree of financial sophistication is definitely helpful when evaluating extremely speculative investments.”
To date, there have been more than 1,000 ICOs worldwide that have raised nearly $4 billion, most of which was generated during the second half of 2017, according to CoinDesk.
There are many risks, professionals caution, and authorities are still getting the regulatory infrastructure in place regarding cryptocurrencies. Nothing exists, yet, to back you up, as the Federal Deposit Insurance Corporation does for U.S. bank customers.
“The most important thing to remember is that you are 100% responsible for the security of your [cryptocurrency] holdings.”
In December, U.S. Securities and Exchange Commission Chairman Jay Clayton noted that “a number of concerns have been raised regarding the cryptocurrency and ICO markets,” and that there is “substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.”
“The most important thing to remember,” Sinegal says, “is that you are 100% responsible for the security of your holdings.” He likens cryptocurrency markets to “venturing into a bad neighborhood with a pocketful of cash to spend. You might get robbed at any time; you could end up with counterfeit goods.”
Plus, the prices of Bitcoin, other cryptocurrencies, and any related securities, can be quite volatile. It's possible the entire value of your investment may be lost. If you don't think you can handle the price swings—financially or emotionally—you may want to steer clear of such investment.
Cryptocurrencies hog a lot of the financial media headlines, but it’s the underlying technology, blockchain, that may hold the most longer-term possible benefit for businesses and consumers, some analysts say.
When it comes to blockchain, banks and other financial services companies in particular bear watching, analysts say, and there are businesses in other niches or industries that are exploring how blockchain or some other form of distributed ledger technology could reduce costs or improve efficiency. The global market for blockchain-related products and services is expected to grow to $7.7 billion by 2022, a 32-fold increase from 2017, Bloomberg recently reported.
In terms of blockchain applications, “we are seeing the most activity in financial services,” Sinegal says. “The procedures for moving money around the world, settling transactions, and tracking holdings are slow and costly. Banks, exchanges, and payment companies are already experimenting with blockchain as a way to improve their operations.”
As with most any new technology, there is tremendous potential, but also risks at every stage. “I don’t think we are likely to see customers taking their money totally ‘off the grid’ anytime soon,” Sinegal adds.
JB Mackenzie, Managing Director of Futures and Forex Trading at TD Ameritrade, joins TD Ameritrade Network to explain the differences between bitcoin futures contract products, focusing on tick size, trading hours, exchange fees, and margin requirements. For more, watch Futures with Lichtenstein & Hincks every market day at 7:00 AM CT on the TD Ameritrade Network.
TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Bitcoin and other cryptocurrencies are very speculative investments, involve a high degree of risk and are not suitable for all investors. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment.
Futures and futures options trading is speculative, and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products.
Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).
Futures and futures options trading services provided by TD Ameritrade Futures & Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.