Personal Finance

How to Invest in Bitcoin

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Buying bitcoin or other cryptocurrencies can be a fun way to explore an experimental new investment. But it’s also true that any investment in cryptocurrency should carry a warning label like cigarettes: “This product may be harmful to the health of your finances. Never buy more than you can afford to lose.”

The value of bitcoin — the world’s first and most popular cryptocurrency — has risen from recent lows but is still trading far below 2017 highs. Like all cryptocurrencies, bitcoin is experimental and subject to much more volatility than many tried-and-true investments, such as stocks, bonds and mutual funds.

NerdWallet advises investing no more than 10% of your portfolio in individual stocks or risky assets like bitcoin. If you’re new to investing, find out more about how to invest money.

Buying bitcoin and other cryptocurrency in 4 steps

  1. Decide where to buy bitcoin. Cryptocurrency exchanges like Coinbase and a few traditional brokers like Robinhood can get you started investing in bitcoin.
  2. Think about how to store your cryptocurrency. Are you going to keep your bitcoin in a hot wallet or a cold wallet?
  3. Make your purchase. Figure out how much you want to invest in bitcoin.
  4. Manage your investment. Determine your long-term plan for this asset.

1. Decide where to buy bitcoin

There are a few different ways to buy bitcoin and other cryptocurrencies, including exchanges and traditional brokers.

Cryptocurrency exchanges

You can purchase bitcoin from several cryptocurrency exchanges. Many charge a percentage of the purchase price. Do your due diligence to find the right one for you. Some of the more popular exchanges include:

  • Coinbase: This is a popular choice for U.S. bitcoin buyers, in part because you can easily link your bank account. Coinbase also offers access to etherium, litecoin and other cryptocurrencies. On each transaction, Coinbase charges a spread (an adjustment in the purchase or sale price of an investment) of about 0.5%, plus a fee. The fee is the greater of a variable percentage based on region and payment type — for example, 1.49% for a purchase funded by a U.S. bank account — or a flat fee that ranges from $0.99 to $2.99, depending on the amount transferred.
  • Binance: The world’s largest exchange by volume for all cryptocurrencies, Binance charges a 0.1% fee for all crypto trades (some discounts are available), plus a withdrawal fee. Generally, you can only make purchases using cryptocurrency, though Binance did recently add the option to pay by credit card for an additional fee (this option is unavailable in some U.S. states).
  • Gemini: This U.S.-based crypto exchange trades bitcoin, ether, bitcoin cash, litecoin and zcash. Transaction fees range from $0.99 to 1.49% of your order, depending on the size of the purchase or sale, plus a fee of about 0.5%.
  • Coinmama. This exchange trades in eight cryptocurrencies, including bitcoin. Coinmama requires a minimum $60 purchase and charges a transaction fee of 5.9% (plus an additional 5% fee for credit card purchases).

Traditional stockbrokers

The choices among traditional brokers that give customers a way to buy and sell bitcoin are few right now — really, just one: Robinhood. It is the first mainstream investment broker to offer bitcoin (Robinhood Crypto is available in most, but not all, U.S. states). Like its stock-trading platform, Robinhood charges no fees for bitcoin trades.

Robinhood may be the first mainstream broker for bitcoin trading, but it’s likely not the last. Fidelity, Sofi Wealth, TradeStation and Motif Investing have announced plans to offer cryptocurrency trading in the near future.

Other ways to buy or invest in bitcoin

  • Bitcoin ATMs. These work like normal ATMs, only you can use them to buy and sell bitcoin. Coin ATM Radar shows more than 3,000 bitcoin ATMs around the U.S.
  • Peer-to-peer bitcoin owners. You can buy bitcoins directly from other bitcoin owners, much like you would buy items on Craigslist, through peer-to-peer tools like Bisq, Bitquick and LocalBitcoins.com. Use extreme caution if buying bitcoin directly from individuals.
  • Bitcoin futures. TradeStation offers a way for investors to trade on bitcoin futures, but this is pro-level stuff, not for amateurs. Here’s how to get started trading futures.
  • Grayscale funds. Grayscale Investments is a digital currency asset manager. Two of its investment trusts — Grayscale Bitcoin Trust (its ticker symbol is GBTC) and Grayscale Ethereum Classic Trust (ETCG) — are publicly traded over the counter, which means you can buy them through many discount brokers. There are fees, and GBTC often trades at a premium, that is, GBTC shares often cost more than bitcoin, even though bitcoin is its only holding. The thinking is that some investors are willing to pay extra to buy bitcoin through a traditional exchange, without needing to worry about wallets and storage.

What to know before you buy

Have information you may need handy. Setting up a cryptocurrency account takes minutes, but you’ll need to provide some information, including your Social Security number and the number to your bank account, debit card or credit card to fund your bitcoin account. Some providers also may require you to have a picture ID. Record and safeguard any new passwords for your crypto account or digital wallet (more on those below).

Don’t use a credit card. Although some providers allow you to purchase bitcoin by credit card, making investments by borrowing from a high-interest product like a credit card is never a good idea.

Bitcoin and other cryptocurrency investments are not insured by the Securities Investor Protection Corporation for exchange failures or theft, a protection that traditional stock brokerage accounts enjoy up to $500,000. Some exchanges like Coinbase provide private insurance, but that doesn’t protect against individual online breaches like someone stealing your password.

Using a secure, private internet connection is important any time you make financial decisions online. Buying bitcoin while at the coffee shop, in your hotel room or using other public internet connections is not advised.

2. Decide how to store bitcoin

Bitcoins can be stored in two kinds of digital wallets: a hot wallet or a cold wallet. With a hot wallet, transactions generally are faster, while a cold wallet often incorporates extra security steps that help to keep your assets safe but also take longer.

Hot wallet

With a hot wallet, bitcoin is stored by a trusted exchange or provider in the cloud and accessed through an app or computer browser on the internet. Any trading exchange you join will offer a free bitcoin hot wallet where your purchases will automatically be stored. But many users prefer to transfer and store their bitcoin with a third-party hot wallet provider, also typically free to download and use.

Why choose a wallet from a provider other than an exchange? While advocates say the blockchain technology behind bitcoin is even more secure than traditional electronic money transfers, bitcoin hot wallets are an attractive target for hackers. As Bitcoin.org warns: “Many exchanges and online wallets suffered from security breaches in the past and such services generally still do not provide enough insurance and security to be used to store money like a bank.”

There are many hot wallet providers, offering a range of wallet types. Here are a few:

  • Coinbase: Also a popular bitcoin currency exchange, Coinbase offers free online hot wallets and insures losses due to security breaches or hacks, employee theft, or fraudulent transfers.
  • Electrum: Software that allows your bitcoin to be stored on your laptop or desktop computer.
  • Blockchain: Like Coinbase, Blockchain is an online hot wallet; unlike Coinbase, Blockchain isn’t a currency exchange and is considered a less attractive target for hackers.
  • Mycelium: A mobile-only bitcoin wallet, with versions available for Android or iPhone users.

Although some hot wallet providers offer insurance for large-scale hack attacks, that insurance may not cover one-off cases of unauthorized access to your account.

Cold wallet

A cold wallet is a small, encrypted portable device that allows you to download and carry your bitcoin. Cold wallets can cost as much as $100 but are considered much more secure than hot wallets.

Cold wallet providers include:

  • Trezor: This company offers small, key-size cold wallets ranging from about $80 to $170.
  • Ledger Nano: Designed like a thumb drive, Ledger Nano has cold wallets ranging from about $60 to $120.

When creating accounts for your digital wallets and currency exchange, use a strong password and two-factor authentication.

3. Make your purchase

After linking your bitcoin wallet to the bitcoin exchange of your choice, the last step is the easiest — deciding how much bitcoin you want to buy. While bitcoin made news in May by cresting to $8,000 for the first time in a year, bitcoin (trading symbol BTC or XBT) can be bought and sold for fractional shares, so your initial investment could be as low as, say, $25.

4. Manage your investment

If you like the idea of day trading, one option is to buy bitcoin now and then sell it if and when its value moves higher. But if you see a future for bitcoin as a digital currency, perhaps your investment plan is to buy and hold for the long haul.

Whatever your plan, know that owning bitcoin creates a complex tax situation.

Should you buy bitcoin?

Bitcoin is an incredibly speculative and volatile buy. Stock trading can give you a similar thrill — and picking stocks of established companies is generally less risky than investing in bitcoin. (NerdWallet recommends devoting less than 10% of your overall portfolio to individual stocks or speculative assets like bitcoin.)

Read our top picks for best online stock brokers

This article originally appeared on NerdWallet