The cryptocurrency has known only one direction since the frenzy surrounding bitcoins, tied to highs around $60,000 in October or November 2021: down. Bitcoin has fluctuated around the $20,000 mark since June, but with a market capitalization of nearly $400 billion, its popularity has not broken through. There is no longer a problem for people who want to invest in cryptocurrencies because more and more brokers offer the option to buy cryptocurrencies.
Buying Bitcoin: the basics in a nutshell
Bitcoin is the oldest and largest cryptocurrency by market capitalization. It is based on blockchain and provides secure, decentralized payments outside the fiat system. Along with trading platforms, more and more online brokers are giving people the chance to buy bitcoin. In addition to bitcoin itself, investors can also buy bitcoin ETPs (exchange-traded bonds) or bitcoin CFDs (highly speculative; most investors lose money).
Registration on the trading platform requires proof of identity with an identity document. Once registered, you can buy bitcoin through the app or web interface. You only need a wallet if you want to use bitcoins to pay for goods or services.
You will usually be charged a fee for purchasing bitcoins. The fee will vary according to the bitcoin provider.
Bitcoin trading is tax-free if at least one year has passed between the purchase and the sale. But the tax exemption is limited to $600 for one year so that profits from other speculative transactions can be used to offset losses.
Buying Bitcoin: all options at a glance
With cryptocurrencies, a whole new field of investment has emerged, in which there are not only pioneering investors but also private and even institutional investors. If you want to buy bitcoin or invest in another decentralized digital currency, you have 3 options:
Buy bitcoin from a broker
Investors with a securities account do not have to go far to buy bitcoin. Classic securities brokers are increasingly offering cryptocurrencies to their clients. This saves investors the trouble of having to open a wallet and figure out how the blockchain works. You buy bitcoin as a stock or ETF. But most brokers do not let you move the bitcoins you buy to a wallet outside of their site. This method is only suitable for investors who have a purely speculative interest in cryptocurrencies.
Buying bitcoin on a cryptocurrency exchange
Cryptocurrency trading platforms were the first to allow cryptocurrency trading. They function like a classic marketplace. Traders advertise their products (bitcoins) at a certain price. Buyers can take advantage of the offer, and the coins will be credited to their accounts. The process is largely automatic.
CFD stands for “Contracts for Difference.” These are highly speculative derivatives that track the price of bitcoin. When you buy a CFD on bitcoins, you do not own the bitcoins; you only benefit from the price change, as long as it is positive. If the price falls, there is a risk of total loss. CFDs are especially popular because of the leverage option, which allows investors to trade a multiple of their own position and further increases the risk of total loss. If you decide to go down this route to make money with bitcoins, you can trade through CFD brokers.
Meanwhile, the financial industry has responded to the demand for cryptocurrencies and issued securities that allow investors to participate in the cryptocurrency market without buying bitcoin directly. These ETPs or ETCs work in the same way as gold securities. They are obligations backed by a physical deposit of cryptocurrency. However, ETPs have two disadvantages compared to direct purchases. On the one hand, they have issuer risk: the issuer could run into financial difficulties. On the other hand, the profits derived from bitcoin-ETP trading are subject to taxation.
Buying Bitcoin: step-by-step instructions
A few years ago, buying cryptocurrencies was a relatively daunting task. Today, you don’t even need your own wallet to buy bitcoins. Use our guide to buy bitcoin by following these simple steps:
1. choose a platform and sign up
To buy bitcoins, you will need to register your personal details with both online brokers and cryptocurrency trading platforms. Register on the platform with your email address and account. As part of the registration, the provider asks you for information about your previous experience with cryptocurrencies and other speculative financial products. Providers are required by law to take this step.
2. verification and deposit of money
Once you’ve signed up, you’ll need to prove who you are using PostIdent or VideoIdent. You will need a valid ID and a smartphone with a camera for the VideoIdent procedure. Once your account has been activated, you can fund your account to purchase bitcoins. The payment methods available depend on the provider. Payment by bank transfer is always possible, and often also by direct bank transfer or credit card top-up.
3. Buy Bitcoin
After making a deposit, you can buy bitcoin, bitcoin-ETP, a derivative, or another cryptocurrency. Depending on the provider, there is an application, a web interface, or both for this purpose.
4. Transferring bitcoins to a wallet
If you buy bitcoins on exchanges, you can send them to an external wallet. However, you will have to pay a high network fee for this. This step is therefore not recommended for investors.
5. Selling bitcoins and paying taxes
Cryptocurrencies have a distinct advantage over stocks and other securities. After a holding period of 12 months, the gain on the sale is not taxable. You only have to pay tax on bitcoins that you bought during the year and sold at a profit. You could, however, use the profit to make up for losses from other speculative gains. There is also a tax exemption limit of $600. Many brokers provide documentation of transactions with an automatic assessment. On your tax return, you must declare the profits under “other income.”