Cryptocurrencies have come a long way from being speculatory assets for computer geeks to becoming legal tender in a sovereign country. While not every country is rushing to legalize crypto, most countries have adopted it as a virtual asset for investment. Today, there are more than 300 million crypto investors in the world and the number of people who buy cryptocurrencies will only go up from here.
The biggest reason behind people not entering the crypto space is a fear of being duped or cheated. Crypto scams are extremely common. Cryptocurrency scams accounted for almost $14 billion in 2021.
The number has been alarmingly high for many years and has caused a lot of friction between the regulators and crypto entrepreneurs. As a result, many people chose to stay away from cryptocurrencies owing to the supposed risk of scams.
We will be highlighting the five best practices to buy cryptocurrencies and things you should keep in mind while buying cryptocurrency.
Top 5 Ways to Buy Cryptocurrencies Safely
Nowadays, there are multiple secure methods for buying and selling cryptocurrencies. More laws are being put into effect, making cryptocurrency investment safer than ever.
Lets go over the best safety practices, how to buy cryptocurrencies in various ways, and how to keep your money safe.
Without further ado, let’s dive right in.
- Crypto Exchanges
Cryptocurrency exchanges are by far the most common way for the average person to sell and buy cryptocurrencies. Exchanges simplify the cryptocurrency buying and selling procedure for the users and make the process very convenient. Some of the most popular crypto exchanges in the world now are Binance, Crypto.com, Moonpay, and Coinbase.
While cryptocurrency exchanges are extremely convenient, they come with their share of risks and threats.
For example, Crypto.com recently became the victim of a cyberattack which led to a loss of crypto worth $34 million.
Crypto exchanges are targeted by hackers because they store huge amounts of cryptocurrencies. The reward might not be as substantial and huge if the hackers target a single cryptocurrency holder.
Crypto exchanges, on their part, take all possible safety measures. All the major crypto exchanges have an insurance fund set up to cover losses due to theft. While Crypto.com suffered a loss of millions, all the investors were reimbursed from the insurance fund. These reasons contribute to making crypto exchanges one of the safest options to buy cryptocurrencies.
When buying cryptocurrency from an exchange, you must be careful about the credibility of the platform. Reputed platforms like Coinbase, Moonpay, and Binance would be safer than lesser-known or unauthorized platforms. These platforms also have an amazing user experience.
For example, Moonpay lets users buy cryptocurrencies such as Ethereum with a credit card with just a few clicks. Before investing in a crypto exchange, assess its certifications and authorizations and go for something with a simple and straightforward UI. A little research on Google is all you need to get information about an exchange’s credibility.
- Cryptocurrency Brokers
Cryptocurrency brokers and exchanges are similar in many ways but have a few key differences. The first and most important difference is that exchanges trade between users while brokers trade between the crypto market and retail investors.
People who trade in cryptocurrencies (as opposed to investing in them) usually prefer exchanges since it provides a wide user base to trade with. On the other hand, crypto brokers would be more convenient for beginners since they can sell and buy at a price set by the broker.
Robinhood and SoFi are two of the most common cryptocurrency brokers. The advantage of brokers over exchanges also lies in the processing fees.
Crypto brokers typically charge a lot less than crypto exchanges. Some exchanges also forbid buying cryptocurrencies with fiat currencies. You would need to buy one cryptocurrency only in exchange for another. Crypto brokers, by definition, allow users to buy crypto with fiat currency.
While there are definite advantages of brokers, there is also a serious drawback. Many crypto brokers like Robinhood do not allow investors to take their holdings off the platform.
Many crypto exchanges also have this limitation, but most don’t. While it might not seem to be a huge deal for beginner investors, more seasoned investors prefer storing their coins in a hot or cold wallet (a subject we will address later).
In a nutshell, storing cryptocurrencies in external wallets is often safer since you get to directly monitor it.
If you are divided between exchanges and brokers, you need to ask yourself a few questions. If you have some experience in the crypto market, you might prefer to go for an exchange. You might also choose exchanges over brokers if you sell and buy cryptocurrencies very frequently or trade crypto. On the other hand, crypto brokers are ideal for beginners.
If you do not have a lot of money to spend, brokers might serve you better than exchanges. From a safety perspective, exchanges that allow taking out your holdings are definitely a better option.
While buying and selling cryptocurrencies from brokers or exchanges is the most common practice. Buying cryptocurrencies directly from another person used to be more common in the earlier days when exchanges and brokers were not as developed. Now it is not as common and is used only in exceptional cases.
Also Read: Best Trading Techniques to be Used During a Crypto Crash
- Peer-to-peer Crypto Purchase
Peer-to-peer (P2P) crypto transfers refer to directly buying cryptocurrencies from someone who holds the currencies you want to buy and is willing to sell. Similarly, you can also sell cryptocurrencies directly to a buyer if you want to.
However, P2P crypto transactions are arguably the riskiest way to sell or buy cryptocurrencies. It is very easy to get duped and you might not get any crypto for your money. It is very important to transact crypto directly only from people you know and trust.
Despite its riskiness, P2P crypto trading platforms exist. Bisq, Bitquick, and LocalBitcoins.com are among the most commonly used platforms. Beginners are recommended to stay away from P2P transactions. Even seasoned crypto users should be very cautious while engaging in P2P transactions.
To transact cryptos directly from another person, you need to have a crypto wallet. It is an added step for people who do not want to go through the hassle of creating and operating a wallet.
While hot wallets are easy to create and use, cold wallets come with their own set of challenges and hassles. However, cold wallets are a safer choice since they are not connected to the internet at all times.
- Crypto Exchange-Traded Funds (ETFs)
ETFs are a prominent investment vehicle in the traditional stock market. Instead of investing in individual stocks, ETFs let you buy shares of multiple stocks within a single stock. From an investment perspective, ETFs are very safe since they diversify your holdings. They work much like index funds that are a safe option for many.
The challenge with crypto ETFs is the limited availability. In the United States, the Securities and Exchanges Commission performs thorough inspection before allowing asset management houses to launch crypto ETFs.
As of now, ProShare’s Bitcoin ETF (BITO) is one of the most popular ETFs for Bitcoin. It does not invest directly in Bitcoin. Instead, it invests in Bitcoin through futures contracts.
Many investors prefer ETFs since they do not operate in the crypto space. They are much like any other stock-based ETF and investors do not need to own any Bitcoin or other cryptocurrencies.
- Grayscale Funds
Grayscale Investments is a well-known digital currency asset manager and it has two investment trusts which are referred to as Grayscale funds.
Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Classic Trust (ETCG) are the two Grayscale funds that have gained prominence in recent times. Since these funds are traded publicly, investors can buy them from any discount broker.
As with ETFs, many people prefer Grayscale funds since they do not involve the direct buying and selling of cryptocurrencies. Investors do not need to worry about wallets or any other hassles. It is also a safer way of investing since the fund manager is directly responsible for thefts or any loss of money.
Also Read: A Guide to do your own Research (DYOR) for Crypto Trading