There are several ways one can invest in cryptocurrencies. The following are 4 common channels for acquiring crypto:
1.1 OTCs and Brokerages
Investors can acquire cryptocurrencies through over-the-counter (OTC) desks offering cryptocurrencies. OTC desks can eliminate price slippage and provide liquidity for large trades. Some established OTC desks are Blockchain, Genesis Global Trading, Cumberland, Susquehanna and itBit. Most major cryptocurrency exchanges such as Coinbase, Binance, Bittrex, Bithumb and Poloniex, also offer OTC trading services in addition to electronic trading. Minimum trade amount varies from desk to desk and typically ranges from $25,000 to $75,000 (1).
There is also a growing number of companies offering more sophisticated ways to trade cryptocurrencies. For instance, exchanges such as Kraken, Bitfinex and TradeZero operate dark pools, and Tagomi, a prime brokerage company, surveys the markets for liquidity and uses algorithms to break up large orders and smart route them to various market, filling large orders at the lowest cost.
A faster and more hands-on way to acquire cryptocurrencies would be through cryptocurrency exchanges. Because the crypto market never closes, these exchanges operate round the clock. Exchanges vary in fees for trades, deposits and withdrawals, user interface, and geographical restrictions due to regulations – for instance, exchanges without BitLicense cannot service New York residents. Some major exchanges are Binance, HitBTC and Kucoin, and ones with BitLicense are Gemini, itBit and Coinbase.
Established exchanges typically require users to clear KYC and AML procedures upon registering and there is a growing trend among exchanges to provide educational resources on their website for their users. Coinbase even offers up to $50 worth of cryptocurrencies to users who complete courses on specific cryptocurrencies in supported locations. Exchanges which have established themselves to be highly concerned with complying with regulations also tend to have stricter listing process and consequentially lists fewer but only well-established cryptocurrencies. For instance, Gemini exchange only offers Bitcoin, Ether, Bitcoin Cash, Litecoin and Zcash, whereas Binance, the exchange with the highest trading volume, lists hundreds of different cryptocurrencies – few which have been delisted in the recent market downturn.
Crypto exchanges also vary in the level of security they offer. Exchanges which lack insurance or capital to cushion against cyberattacks can go under water after hackings or from operational failures in the past. For example, MtGox, an exchange which was responsible for 80% of the global Bitcoin trading volume, was hacked and subsequently declared bankrupted. More recently, the Canada-based exchange QuadrigaCX also declared bankrupt following their CEO’s demise, who was the only person with the private keys to their customers keys. (2) It is important to understand that most exchange hackings are exploits of security of the exchanges, not that of cryptocurrencies. In order to trade on an exchange, users have to deposit cryptocurrencies into their accounts on the exchanges. Lay users typically leave their funds on the exchange, leaving their funds vulnerable to hackers. However, this risk can easily be eliminated by withdrawing the funds to a secure wallet or entrusting it to third-party custodians such as Xapo, which was recently acquired by Coinbase, and BitGo.
Exchanges are always at the risk of being attacked by hackers. Therefore, it is highly recommended that investors exercise prudence in trading on exchanges and conduct their own due diligence on exchanges before opening up an account on one. Depending on the exchange, funds stored on exchanges may or may not be insured. U.S. based exchanges typically have FDIC insurance on U.S. dollar funds up to $250,000. Major exchanges such as Coinbase (3) and Gemini (4) also maintain insurance coverage for the cryptocurrencies stored on their exchange.
A close alternative to centralized exchanges is decentralized exchanges (DEXes), which allow users to trade on centralized order books without having to surrender custody of their cryptocurrencies. However, DEXes presently lack liquidity, providing little utility for trading.
1.3 Mobile Apps
An increasing number of crypto exchanges are launching their own apps, which allow users to trade crypto and transmit them on the go. Coinbase was the most downloaded app in the winter of 2017. (5) Since then, other major exchanges such as Gemini, Bitstamp and Bitfinex have also launched their own apps. In addition, FinTech and banking apps like Robinhood and Cash app making inroads into cryptocurrencies, allowing users to purchase cryptocurrencies with no fees, albeit at a small premium. (6) Other interesting apps on which one can purchase cryptocurrencies include Crypto.com, which complements the MCO visa cards, (7) and Abra, a non-custodial wallet that allows people to purchase cryptocurrencies and supports multiple fiat currencies.
Setting up accounts on these apps typically involve KYC and AML compliance and first-time users are required to scan a photo ID and upload a selfie. These apps have built-in custody features but the level of security they offer varies. However, deposits can be withdrawn and moved to other addresses. Apart from the convenience and intuitive user-interface these apps offer unique features. Coinbase app for instance has an option that allows users to automate periodic purchases, which can be handy in implementing a dollar-cost averaging strategy for personal investments.
1.4 ATMs and Other Means
Bitcoin ATMs can dispense cash in exchange for bitcoin or deposit bitcoin to a specified address for cash. ATM companies which are compliant of regulations require users to clear KYC and AML procedure when opening an account.
Although conventional ATMs have offered great convenience to the banked population since their invention, cryptocurrency ATMs at their current state are a far from offering convenience to their users. Reviews of Bitcoin ATMs online have been overwhelmingly negative, with most of them citing long transactions times. Because Bitcoin transactions need to be relayed and then confirmed on the Bitcoin network, users of Bitcoin ATMs will have to wait around for the transaction to be confirmed on the Bitcoin blockchain. Although the confirmation time for Bitcoin is 10 minutes, in any transaction involving bitcoin, the receiving party has great incentive to await at least three confirmations to security reasons. Additionally, if there is high traffic on the Bitcoin network, transactions may not be included in the current block if it has low transaction fees attached to it relative to other transactions being processed. Presently, Bitcoin ATMs also charge extremely high fees – an average of 8.93%. (8)
Despite the long wait times and high fees, the cryptocurrency ATM industry has been growing steadily over the years, even though 2018 when bitcoin prices fell by 73.56%. Continued growth in this subsector may spur new innovations and increase the convenience cryptocurrency ATMs have to offer. Investors who wants to purchase bitcoin through a Bitcoin ATM can visit https://coinatmradar.com/bitcoin-atm-near-me/ to locate a Bitcoin ATM near them.
There are also other informal means of acquiring, such as through LocalBitcoins.com and even Craigslist, which are platforms where users come together to arrange to buy and sell cryptocurrencies through private arrangements.