Disclosure: This post is not a guide on how to find the best deal to buy bitcoin or when to buy crypto. The aim of this article is to guide the beginner among those questions and possibilities and clear out the black box you never hear about, even after you are familiar with space.
Buying and owning bitcoin should be easy, but it’s not. Although many services like ours are working hard to make it as easy as possible, it is still challenging, in particular for first-time buyers. We’re here to help you cut through the noise of classic marketing claims and honestly answer the questions you have about all things Bitcoin.
During the past 12 months at ZenGo, we have witnessed first hand the difficulties new investors face when trying to take advantage of the exploding crypto prices. If you have ever felt frustrated, we feel your pain and we’re here to give you more clarity on how things truly work behind the scenes.
The internet (in particular Amazon and Apple) has educated us to expect purchases to be simple and fast, in particular when we buy digital goods. Especially with one-click purchases, digital content like movies or music can literally take a second before it’s streaming on your screen. People coming with this expectation are often frustrated by the process of purchasing bitcoin. Buying a $5000 computer is way simpler than purchasing $100 worth of bitcoin because, with Bitcoin, there is a whole different set of rules.
When an investor wants to buy bitcoin, they have to ask themselves many questions: how do I get started? When should I buy? What method of payment should I use? How do I understand the fee structures and avoid hidden costs? How do I deal with the purchase process? Where should I store my bitcoin after the purchase?
The bottom line is that buying bitcoin can be seriously overwhelming at first and no matter what option you choose, you will have to compromise on something. We’re here to help you make sense of the whole process.
Here are the many ways consumers can buy bitcoin
You can buy bitcoin in four different ways:
- Buy bitcoin via a centralized exchange: Most exchanges require that you first sign up and provide heavy documentation before even getting started. Exchanges operate an order book (the list of people putting trades to buy and sell). When you buy on an exchange, the crypto you buy is owned by the exchange. Yes, it is attributed to your account, but you don’t have real ownership over the asset until you withdraw it and store it in a wallet. Withdrawing your crypto also incurs (sometimes high) fees.
- Buy bitcoin directly through an on-chain wallet: Wallets do not require documents or even personal information to sign up and usually ask for it only if you decide to make a purchase. Wallets do not operate an order book or manage any source of liquidity and usually operate with partners who connect them to various liquidity sources (some may be exchanges). Any bitcoin you purchase is delivered immediately and safely to your wallet.
- Buy bitcoin P2P: there are marketplaces that enable you to buy directly from other users like you. These services guarantee that a trade will happen, but the price is arbitrary and based on the demands of the sellers.
- Buy bitcoin at a crypto-ATM: Crypto ATMs are the same as regular ATM machines but they deliver you crypto instead of cash. They are equipped with scanners to read personal documentations and they provide you “instantly” with the cryptocurrency you buy. But they often charge a hefty cost for convenience.
Bonus: PayPal, Robinhood, Revolut, and more: You can purchase crypto on those popular fintech wallet services but you only buy the exposure to the price of the crypto your purchase. You cannot deposit or withdraw crypto. You do not own the crypto you purchase and the only way to sell it is through their service. This is akin to purchasing shares in a gold fund. You don’t own the gold, you are simply exposed to the value of gold indirectly.
Buying and Holding (aka Hodling) bitcoin does not mean owning
There is an important difference between the act of purchasing and settling an order and actually owning your crypto and being able to move your funds around as you please.
If you have ever used Robinhood or Cash app or PayPal, you will know what the word restricted means.
Centralized services (in particular those which do not let you move your crypto) have certain advantages because the settlement happens on the same system as the one you used to make the purchase. This makes buying and selling simple and easy.
However, if you want to move your funds, you will have to comply with their rules: they might only allow you to transfer up to a certain amount of crypto per day, or they might restrict transfers entirely. If all you want is to trade and “hodl,” then this may be good enough, but if you want to actually own the asset and be able to transfer it, then you’ll have to look elsewhere.
With self-hosted services, crypto purchases go through the same process except that, in addition, the crypto needs to be delivered to you over the blockchain. It must be sent from wherever the liquidity is available to your wallet in order to be fully settled. The advantage with these services is that once the crypto is in your wallet, you can do with it whatever you want. No restrictions or tricks are necessary to move it around (as long as you have enough funds to cover the network fees).
Here is why purchasing crypto is still complicated
There is a misconception that because Bitcoin is digital, everything is fast and cheap. However, Bitcoin doesn’t work like this because, even though crypto is indeed digital, there are complex human-powered processes that strictly regulate how crypto is purchased. This process involves many eyes and organizations approving the purchase before it gets delivered. The complexity can be explained in 2 processes that introduce friction and delays: compliance and settlement.
You will experience these first hand the first time you make a purchase on a new service that requires you to provide documents and profile details.
Nothing happens before your profile is fully approved by a compliance team which requires your personal documentation to be scanned, verified, and analyzed by compliance software and compared to databases of criminal records. This verification process can fail for a thousand reasons including software or human error:
1. You’re trading in a higher tiers: Depending on how much bitcoin you are buying, additional verifications and documentation may be required. All crypto services have caps and tiers and different compliance rules. Even if you were approved for purchase in the past, a higher purchase may trigger a new set of verifications.
2. You must deposit before you buy: Most centralized crypto services require you to first make a cash deposit before you can even make a purchase. This deposit has to 1. be approved and not blocked by your bank (read more below), 2. arrive to the bank account of the exchange, and 3. be recognized (with a special origination code) and accepted by their compliance team (this proves the funds are legit, of the same amount, and associated with the same name as the account…)
3. Your order must be settled: Once the cash arrives, your order may not be filled instantly because it will have to be matched on an order book (meaning that someone must be willing to sell at the price you want to buy). If Bitcoin is at 50,000 USD and you want to buy it at 49,000 USD, you’ll have to be very patient.
If you are of the “less-patient” type, then you can have the purchase settled “instantly”, but this will cost you an extra fee (called a “taker” fee) and it does not necessarily mean that you will be able to move your funds instantly (see above).
If you buy through a self-hosted wallet, once your purchase is accepted, you will have to wait for the crypto to be delivered to you from the liquidity provider and be routed via the blockchain. The advantage of centralized services is that they save you from this process (that is, until you want to move funds to another service). If the blockchain is saturated, your order may take some hours to arrive or it may cost a considerable amount.
Mission impossible: Buying bitcoin with a credit / debit card:
This is one of the most common sources of frustration. Even with a valid credit card and the intention to buy, something is likely to go sideways at no fault of your own.
Why do credit card purchases often fail?
1. Your bank might reject your purchase: The number one reason why credit card transactions fail (after fraud…) is because many banks (including the most prominent ones) block your order simply because they have decided to. They have no particular reason to block it. Buying crypto is not illegal, but banks’ anti-fraud and security systems have decided to label crypto transactions as high-risk, either because there is a track record of complaints or scams or just because some managers in the bank have determined it’s not worth the risk. Yes, banks can decide how you legally spend your money.
2. You have to pass complicated 3DS verification: The second reason is more technical and very painful: it’s called 3DS. This is the security verification code that many banks send to make sure that you are the one making the transaction. Sadly, the UX for this code verification is often buggy and deeply confusing to users. It is particularly bad on mobile devices and may require several trials before success.
3. You might need to pass extra compliance: The third reason is because additional compliance verifications are often required. Let’s say you make a successful 500 USD purchase. Now, you want to buy an additional 5,000 USD and you think everything is ready, except for one thing. You are now required to provide additional documentation because you have passed into a new “tier” which demands additional verification in most services (usually proof of address, source of funds ….). This obviously slows down the process and makes things more cumbersome.
4. You have to take a damn selfie: Many services will ask you to upload a verification selfie of you holding your payment card. Some will even ask you to take a selfie holding a scripted paper with the date written on top. This is annoying and confusing but, with so many fraud attempts, this is often the only way to confirm that you are the real owner of the card. This gets challenging when you use your own card but only have a digital version of it with you (e.g. Apple pay). We honestly could write a whole blog post just on this topic.
Bonus: human errors. With this process, there can be many different types of human errors. Perhaps you entered the wrong address or zip code or even mistyped your name or country. It’s also possible that the compliance team made an error and thus rejected your valid profile (which happens too)…
All of this complexity explains in part why it is so much more expensive to buy with a credit card than via a bank wire. Any of the reasons for failure listed above can also happen randomly even if you successfully purchased in the past. This can be extremely frustrating given that with Bitcoin’s volatility, the window for buying or selling at a certain price may be small. The advantage however is that settlement via credit card is much faster than with a bank wire or deposit, assuming that your transaction is approved.
Fees: the anatomy of a crypto purchase cost structure:
How much does it cost to buy Bitcoin? There is no simple answer to that question because there are many different fees and considerations associated with them. Buckle up for some complexity:
- The processing fee: this is usually related to the payment method you use. Credit cards are usually a lot more expensive than a bank wire or ACH. Blame Visa and Mastercard for the expensive network (and fraud activity) which charges merchants by default anywhere from 2 to 3% (…if you needed another reason to buy bitcoin). Payments by banks are usually cheaper (sub 1%) in particular in Europe and Asia. However, the real cost is usually more expensive because most companies will use a payment processing company which also adds their own fees.
- Spread/margin: bitcoin transactions rarely execute at the spot price (meaning market price). Newcomers think the price of bitcoin is the same in every trading service and are usually surprised when they compare what they purchase with the market value in USD. A spread is a margin any seller will apply to cover the risk of volatility. Why do they need to do that? Because the purchase of cryptocurrency is not instantaneous (see above). When you make your purchase, a few things need to happen first, including: verifying your identity, checking the availability of the currency you want at the price advertised, executing the payment with your bank, and delivering the cryptocurrency. This can take between a few hours to a few days. During that time the price of Bitcoin can fluctuate widely. To account for this, a spread can vary from 1 to 3% on top of the market value at the moment the purchase is settled.
- Partner/Business fee: wallets and exchanges alike want to make a profit on the transaction. No one is working for free. This fee also covers the operational cost related to the support of such transactions (customer support, compliance, technical wallet operation). This can vary widely depending on the company. Some services charge no fees because they don’t mind losing money while others will charge up to 5%.
- Network fees: Most wallets will charge you a network fee. The network fee is paid to the network of miners who process the delivery of the crypto to the buyer. Network fees can vary widely depending on market conditions – from simple cents to tens of dollars during crazy times.
- National currency conversion fee: Most services support natively popular national currencies (USD, EUR) without any additional fees. But if you use a non-supported national currency, you will have to pay a national currency conversion fee (usually to USD). This will either be charged by the service you use to purchase or by your bank. This can easily add 1 to 3% to the purchase price.
- Withdrawal fees: Centralized services do not have to pay network fees to transfer your purchased crypto because the crypto stays within their central system. However, once you want to move your crypto outside the exchange, you will often pay a withdrawal fee which is added to the network fee. This is a delayed cost that you do not see when you make your purchase and this is often overlooked when comparing fees between platforms.
Most services will simplify their fee structure by blending all these fees under one single fee. This however, is opaque for the buyer, (and often advantageous for the service) because the buyer cannot compare fees eye-to-eye between all the options and must wait until after the purchase to see the real fee spread. At times, only by comparing how much bitcoin was actually delivered can a buyer truly ascertain all the hidden costs. With so many moving blocks, this process can often feel overwhelming and even force buyers to think twice before adding bitcoin to their portfolio.
The bitcoin you pay for is not what you get (in $)
The most common error people make is that they try to compare the $X of crypto purchased (price with fees) vs the $Y (market price) received and ignore all the fees/spread described above.
A good rule of thumb to remember in order to keep your sanity is to understand that you are purchasing a quantity of crypto and that quantity is *precisely* what will be delivered to you. The price is what changes. Do not try to compare the USD value which changes every second. Do not try to compare the total cost of what you paid for (including trading fees and commissions) to what is delivered to you in USD because you will miss the big picture.
The formula is simple: You buy X quantity of bitcoin and get delivered X quantity of bitcoin for a total cost of Y USD.
Beware of the “zero commission” claims when buying bitcoin
Some services may lure you in with claims like “buy bitcoin with zero fees” which may seem attractive at first glance. Make sure to really understand what they mean by “zero-fees.” It rarely means ZERO.
If you have ever purchased a foreign currency at a Forex desk in an airport you know what I mean when I say that it is very easy to hide fees in the price of the asset you are buying. Services that advertise as “feeless” often just bake all the fees into the price you pay and leave you under the impression that you paid no fees. For example, imagine that the market price of bitcoin is at $50,000. The “zero-fee” service will sell it at $57,000 with “no fee” indeed, but with a $3,000 “margin” baked into the purchase price.
Some services will make you pay when you withdraw the cryptocurrency or will require you to own their own crypto-coin to enjoy “zero-fees” or will have drastic additional fees and restrictions when you decide to close your account or move your funds outside, if possible at all. Be careful of these.
Finally, if trading is really free (meaning no spread, no commission, no side fees) it likely means one of two things: either the time or amount you are allowed to trade is limited, or they sell your data, making you the product.
“Zero fees” comes with a price. Always.
The bottom line when buying bitcoin: stay Zen
I wish there was a more optimistic way to conclude but the bottom line is that buying crypto is not simple. Some services certainly make it simpler but you need to be ready for a learning experience. There are just too many complex processes that cross each other which can lead to all sorts of painful cases of slowness or failure.
There is no doubt that over time things will change and that banks will become more accommodating and may even themselves begin to provide this service. But we’re still a ways away from that. When you buy crypto you need to consider the entire cost of the trade, not just the price of the asset but also all the related direct and indirect fees and most importantly, your time.
There are also many ways to get exposed to crypto and “buying” does not necessarily mean “owning” (i.e. controlling). Choose the formula that works for you and make sure to do some research before you jump in.
Finally, we would like to share this quick-fire FAQ to help you along with your first steps:
=======
The stress-free FAQ to the crypto buyer:
Why is it so hard to buy bitcoin?
Buying a digital good should be simple, but there are many constraints imposed upon trading services and banks by regulatory authorities and anti-fraud requirements which translate into a burdensome number of verifications for the buyer.
Why is the amount of cryptocurrency I received different from what I purchase?
When you purchase crypto, you purchase a quantity of cryptocurrency (e.g. 0.02 BTC) at a given price augmented by the margin and certain fees. You always receive the exact quantity of crypto you purchased (e.g. 0.02 BTC), but the actual fiat value can differ due to these additional margin costs and fees.
Add to that the fact that the price of cryptocurrency is volatile which makes the price change by the second.
Why is purchasing bitcoin not instant?
There are several reasons that your purchase isn’t instant. Every purchase needs to be approved by the trading service, the funds have to be received and approved by your bank (even if you have the funds), and the crypto has to be delivered over the blockchain which is non-instant. Any one of these, or a combination of all three, delays the delivery of your crypto.
Why might it be better to buy bitcoin via a wallet vs an exchange?
Exchanges allow you to trade instantly but you will have to first make a deposit of cash and then place an order that has to be matched and then withdraw your funds to a wallet which costs a flat fee.
With a wallet, your purchase is sent directly to your wallet and you do not have to place an order in a complicated order book: you purchase at a fixed price and buying via a credit card does not require you to lock up your cash in advance. You can buy exactly what you want.
Why does buying bitcoin require so many verifications?
There are a number of reasons:
- Crypto purchases are heavily regulated and require the operator to know who the customer is to avoid money laundering and other fraud risks.
- If you want to buy large(r) amounts, additional documentations are required.
- Finally, if your purchase triggers suspicious activity flags, your bank or preferred platform may ask for a 3DS code or a selfie.
When is it better to use a credit card vs bank wire to buy bitcoin?
Credit cards are more expensive but enable you to settle your purchase fast (usually within hours).
Bank wires are cheaper but require manual processing which is generally much slower because the money needs to move at “bank speed.”
What tips can you give me to make things easier when buying bitcoin?
- Have at hand all your ID documents and a recent proof of address.
- Make sure you know how to easily contact bank customer service in case they block your order.
- If you buy on mobile, it’s better to have your banking app installed on your phone, in case a security verification is asked.
- Make your purchase in an area with good internet connection so the upload of documents is smooth.
- Avoid VPNs and ad-blockers that interfere with the purchasing and identity verification processes.
- If you use a card, make sure to physically have it with you as a selfie may be required and using a virtual card may not be enough.
- Even if your card is set on Apple pay/Google pay, make sure you have the physical card next to you, in case a selfie verification is required.
