How to Buy Bitcoin in 2021

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Alright. I finally broke down and bought into Bitcoin earlier in the year. My journey into cryptocurrencies was far from smooth. I’m now speculating the cryptocurrency through direct ownership using Coinbase Pro and through the Grayscale Bitcoin Trust (GBTC), and I can confidently say that I now know how to speculate in the space reasonably well.

My Initial Problem with Coinbase

At first, I wanted to buy bitcoins directly through Coinbase but then I ran into an issue with their ID verification. Signing up an account and linking my bank account was easy enough through, but my ID verification would fail for some reason. The process wasn’t complicated at all either. You take a picture of the front and back of your driver’s license, and another through your website with your face and a piece of paper stating the date and that you are trading through Coinbase.

The process is similar to depositing a check electronically, so it’s not exactly rocket science. I reached out to customer service through their messaging system, but the representative was unhelpful. He misunderstood my issue with the ID verification process and just forwarded his canned response on the need to verify my ID.

I then got sidetracked for a few weeks, and the delay turned out to be pretty costly. When I first decided to finally buy, Bitcoins were priced at roughly $35,000 a coin. By the time I first got exposure, the price already zoomed up to like $45,000, which was basically 30% more expensive.

And I didn’t even get started until I totally abandoned the idea of direct ownership.

Speculating Through the Grayscale Bitcoin Trust

You can actually participate in the value of Bitcoins with money in your brokerage account. Grayscale Investments, the company behind the Bitcoin trust, set up a publicly quoted investment vehicle that tracks the price of Bitcoins. You can buy and sell the trust in your brokerage account. In fact, you can look up the price of the trust through its ticker symbol GBTC right now. That’s how I finally got started.

One of the main advantages of investing with the trust is that you can do it through your broker. This means that it’s extremely simple to include it as part of your overall investment. You also don’t have to worry about how you are going to store the coins. With direct ownership, you either have to leave them on an exchange or you have to move them onto your own crypto wallet. These carry risks. Exchanges somehow lost them (it’s happened before when the infrastructure wasn’t as mature as it is today) and people have lost their passwords to their crypto wallets.

Hardware wallet risks are even more newsworthy. Someone in the UK threw out his hard drive that stored 7500 Bitcoins he mined when they were worthless and he claims to know the specific landfill site that his hard drive is probably buried in. He’s been trying to get his government to allow him to excavate the landfill to recover his drive for years and he’s still unsuccessful even after offering to donate tens of millions (25% of the value of the bitcoins he owns) to the local jurisdiction.

Then there’s this guy, who simply forgot the password needed to access his Bitcoins worth hundreds of millions. The blockchain analysis company Chainalysis estimates that 23% of all Bitcoin available are inaccessible, or lost. With the Bitcoin market worth $1 trillion or thereabouts at the time of writing, the hundreds of billions of dollars lost are nothing to sneeze at.

Finally, you can buy GBTC in your retirement accounts. This means that even if your Bitcoins continue it’s incredible run, you won’t have to pay capital gains on the investment. Of course, if you bought it in a pre-tax IRA and the value of your investment shoots up a hundredfold, then you still need to be prepared to pay a ton of taxes at your ordinary tax rates for decades to come. You probably won’t be complaining too much though!

Disadvantages of Using GBTC for Bitcoin Exposure

There are some pretty big downsides to investing in the trust. First of all, there’s an annual fee of 2%. With an asset that’s this volatile, 2% hardly seems to matter. Still, 2% year in and year out is a major drag on returns, especially when you consider that you can buy a Bitcoin directly and hold it without any cost.

Second of all, you are putting your trust that Grayscale isn’t going to pull something shady on your investment, nor is Grayscale going to get scammed themselves and lose the Bitcoins stored on your behalf. With over $30 billion assets under management and some major investment firms investing in the trust, this isn’t a small company though. I consider the chance of this happening very low. Still, it’s a risk worth considering.

Third of all, the trust can trade at a premium or discount to the actual Bitcoins that it holds. In the past year alone, the premium fluctuated between a high of 40% to a low of -14%. That’s a 50% move on top of the volatility of the cryptocurrency itself.

When I bought into the trust, the value of each Bitcoin was worth $45,000. It’s now at $60,000. 30% gain right? Nope. The premium crashed to a discount and I only have a 10% gain. It’s still a spectacular return in a short couple of months, but it’s far from how much I could’ve made if I just bought the coins directly. It’s farther still from being able to buy from Coinbase directly when it was $35,000 if I were just able to verify my ID successfully the first time I tried. Argghh.

Back to Coinbase

I got the itch a few days ago to try Coinbase again after I talked to a friend who was heavily invested in cryptocurrencies. For whatever reason, the ID verification went through this time around. The rest of the platform was easy enough to use. I just specify the dollar amount I want to buy and then the platform will just buy on my behalf, calculating the number of coins I’ll own once my order goes through.

I ended up canceling my first order though because the fees were higher than I thought they would be. I knew about the 1.49% fee, but I noticed that the price Coinbase says I’ll buy the Bitcoins at is higher than the price that’s being traded on the exchanges. I looked online, and it seems like Coinbase inflates the prices a little when you buy and deflates the prices a little when you sell. I’m not sure if they do it to make more money or to simply give themselves more room so they can group buy and sell together. I’m guessing both. Either way, I didn’t like a middleman taking a cut with such a high margin.

That’s when I stumbled onto Coinbase Pro. Apparently, Coinbase has another platform for trading Bitcoins with not just lower fees but also no markup. And while your cryptocurrency portfolio between Coinbase and Coinbase Pro is separate, the kicker is that Coinbase users already have an account because using the same login registered through Coinbase populates your profile along with your linked bank account.

I ended up buying through Coinbase Pro because everything was already set up, saving myself about 1% in Coinbase fee and 0.5% markup that Coinbase wanted to charge me.

I plan to eventually move the money to my own hardware wallet, once I actually purchase one.

Square’s CashApp vs PayPal for Buying Bitcoin

Two household names, PayPal and Square, also offer ways for investors to buy cryptocurrencies. Specifically, Square allows its users to buy Bitcoin through its Cash App, while PayPal lets you buy the more popular cryptocurrencies through its mobile app. One of the reasons why I didn’t bother with these two offerings is that they are both only accessible through the smartphone. There’s simply no way to invest in Bitcoins on the desktop. In fact, PayPal has a page talking about allowing access through my browser, but clicking on any link there requires a login and then just redirects me into my PayPal account’s main page. I was disappointed with the user experience from such an established player, but it only goes to show that the offering is still being fleshed out. With real money on the line, I just don’t want to help them beta test their platform.

Furthermore, PayPal doesn’t allow its users to transfer their investments into another digital wallet. If you want to store it offline, then you will need to sell it within PayPal and buy it somewhere else, triggering capital gains.

Square, on the other hand, allows deposits and withdrawals. However, there’s currently a $2,000 24-hour limit and a $5,000 7-day limit. The amount may work for the vast majority of its user base, but the low amounts will become more and more of an obstacle if the investment rises in value. In addition, the Cash App from Square only allows purchases of Bitcoin. If you are getting into cryptocurrencies and trying to pick a platform, you might as well find a place that allows you to buy or sell more than just Bitcoin.

Then there are the fees. At anything but a token amount, Coinbase, and especially Coinbase Pro, charge less in fees than either Square or PayPal.

How About Robinhood?

Robinhood actually provides a good offering on paper. The main draw is that there are absolutely no fees to buy and sell. Furthermore, the platform will place limit orders automatically around your market orders so you don’t get surprised by the price your orders fill at. This can be limiting in a market crash and you absolutely had to get out because your order might keep getting canceled, but the feature does protect the average Joe 99.99% of the time.

The reason why I didn’t pursue the Robinhood route is fourfold. First, I plan to hold the cryptocurrencies I buy for the long term, so the 0.5% transaction fee I paid is really going to happen one time. While any fee is a drag on returns, these investments are so volatile that the fees will be dwarfed by just lucky timing. Just as an example, I’m writing this article an hour after I bought a small fraction of a Bitcoin and the price already jumped more than 1%. Second, I also didn’t want to open yet another account and take another who knows how long to get set up. Third, Robinhood also doesn’t allow its users to withdraw the cryptocurrencies somewhere else. I am still researching offline storage options, but it’s obvious to me that transferring my cryptocurrencies is something that will be important down the road. Last but not least, all the major brokerages have had outages recently due to high traffic. I wanted a platform that’s independent of stocks and bonds just in case I needed to access some funds for whatever reason.

Why I Bought Bitcoin

I’m not going to lie – the recent boom in value sparked my imagination. That’s the main reason why I bought in even after a bubble-like run of late. Still, there’s a solid chance that cryptocurrencies like Bitcoin or Ethereum can become much more valuable in the long run.

On the other hand, there’s a non-zero chance that some, or all cryptocurrencies can be wiped out. There’s also a good chance that these lofty prices will come back down to earth. Following Bitcoin’s rise to $19,834 in 2017, it came crashing down to a low of $3,263 by the end of 2018. That’s a Great Depression worthy 83.5% loss if you bought close to the high. It’s safe to say that speculating in cryptocurrencies isn’t for the faint of heart. That’s why I urge you not to stake more than what you are comfortable losing entirely.

I’m using the money I am making with my part-time freelance income to buy these cryptocurrencies. Risking anything more will be irresponsible. I might regret not buying more one day. Heck, it’s already gone up a bunch and I would be richer if I went all in. But spending my days regretting I didn’t buy more will be a good problem to have one day because it means my speculation panned out.

Do you have any cryptocurrencies? There are currently many ways to buy Bitcoin, Ethereum, and others. Where do you get exposure? If you don’t currently speculate in cryptocurrencies, do you think you ever will?

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

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{ read the comments below or add one }

  • Jürgen says:

    I agree that Cryptocurrency is the future. HODL as long as you can.

  • noroboguy says:

    Bitcoin appears to be gaining acceptance by the US Government and larger financial institutions. Add to this, Coinbase’s successful recent DPO, and you can see many people warming to the concept of digital currency, and Bitcoin in particular.

    • David @ says:

      Cryptocurrency is already here and widely available for the general public. It’s actually more irresponsible for the government to ignore it because if they keep it at arms length, they are actually further encouraging bad behavior because there’s even less oversight.

  • Joe Invest says:

    Crypto is the future and we are just getting started. There’s Bitcoin, but coins line ether will run the computing world in the next few years. Who knows how much these coins will be worth but there’s definitely value in the whole infrastructure.

  • Zoomster says:

    OMG even Moneyning is getting in. All I can tell you is to HODL buddy!

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