How to Buy Cryptocurrency: What Investors Should Know

If you decide buying cryptocurrency is a smart investment for you, you’ll need to answer the following questions:

1. Which cryptocurrency will you buy? There are thousands of options, though the five with the largest market cap represent 75% of the sector’s total value.

2. Where will you buy it? Cryptocurrency was envisioned as a way to transact without any intermediaries. But working with a centralized exchange — and there are many to choose from — is the easiest way for most people to get started.

3. How will you pay for it? Common options include paying with cash or other crypto.

4. Where will you store it? Store your crypto on the exchange where you bought it, in a digital wallet managed by you or on physical hardware.

In some ways, this process is similar to buying traditional investments, like stocks or mutual funds. As with any investment, it’s a good idea to start by taking time to understand it and how it fits into your investment plan. Investing in crypto is unique in other ways. When you buy a stock, for example, you don’t need to think about how you’ll store it.

» Getting started? Read NerdWallet’s introduction to cryptocurrency investing

Choose which cryptocurrency to buy

There are many options for cryptocurrency investors:

• Bitcoin was the first successful cryptocurrency and maintains the highest price and market cap.

• Ethereum has the second-highest price and market cap. Its ability to run programs and execute smart contracts — agreements that computers can automatically execute — gives it more functionality than Bitcoin.

• Altcoin is an umbrella term that includes all other cryptocurrencies. There are thousands of altcoins. If you are interested in a particularly small or new cryptocurrency, it may not be available on major exchanges.

Before you buy, ask yourself what your goals are for this investment. Are you hoping it will increase in value? Are you interested in carrying out transactions using cryptocurrency? Are you interested in using the underlying technology via decentralized apps? These may help you make your decision.

Decide where to buy it

If you want to buy Starbucks stock, you don’t order five shares along with your morning coffee: You probably use a brokerage service. Similarly, the most straightforward way to buy crypto is using an exchange. There are three main kinds of exchanges to choose from.

» In the news: Mastercard's pilot makes it easier for banks to offer crypto services

Centralized exchange: Often for beginners

Centralized exchanges act as a third party overseeing transactions to give customers confidence that they are getting what they pay for. These exchanges typically sell crypto at market rates, and they make money on fees for various aspects of their services. Though centralized exchanges are relatively easy to use, they also can be an attractive target for hackers given the volume of crypto that flows through them.

If you're looking for an exchange that operates solely within the cryptocurrency world, look for pure-play crypto exchanges. These platforms, such as Coinbase, Gemini and Kraken, won't give you access to core assets like stocks and bonds, but they typically have a much better selection of cryptocurrencies, and more on-platform crypto storage options.

All-in-one exchanges: Trade more than crypto

If you're an investor who's more accustomed to traditional brokerage accounts, there are a few online brokers that offer access to cryptocurrencies as well as stocks. Of the online brokers reviewed by NerdWallet, these include Robinhood, Webull, SoFi Active Investing and TradeStation.

Decentralized exchanges: Competitive prices, maybe too complex for beginners

For more advanced investors, there are decentralized exchanges whose fees can be lower than those charged by centralized platforms. Those can be more difficult to use and demand more technical know-how, but they may also offer some security benefits because there is no single target for a cyberattack. Cryptocurrencies can also be traded through peer-to-peer transactions.

» Ready to invest? Here are our picks for best cryptocurrency exchanges

Choose how you'll pay

Pay cash. While there are thousands of cryptocurrencies being traded around the world, you'll find that the most popular options are widely available for purchase in fiat currencies such as the U.S. dollar. If you're a first-time buyer, you'll very likely have to use regular money to buy cryptocurrency. Depending on how you choose to pay, you may have to fund your account before purchasing any crypto.

Pay with other crypto. If you already own cryptocurrency, you can use it to trade for other cryptocurrencies. Just be sure to verify that your crypto exchange allows trading between the assets you're looking at. Not all cryptocurrencies can be directly traded for one another, and some platforms have more trading pairs than others.

Costs and fees to keep in mind

• Most exchanges allow debit and bank transfers. Some also allow you to fund a purchase with your credit card, though this can be a risky move with a volatile asset like cryptocurrency because interest costs can deepen your losses if your investments decline in value.

• Whenever you sell crypto for fiat money or trade it for other crypto, you’ll need to report cryptocurrency transactions on your taxes.

• Exchanges’ fees vary depending on what you're buying and how you're buying it, so review these details carefully.

Store your cryptocurrency

This is an important choice. Crypto assets require a private key, which proves ownership of cryptocurrencies and is necessary for carrying out transactions. If you lose your private keys, you've lost your cryptocurrency. If someone gets your private keys, they can dispense with your cryptocurrencies however they want.

Crypto owners use digital wallets to store their holdings securely. There are multiple options to consider when it comes to digital wallets.

On-platform storage: Easy to use, but it comes with risks

Some people choose to keep their cryptocurrency on the exchange or platform where they got it. This has some advantages. It outsources the complexities to a third-party that brings some expertise to the table. You don't have to keep track of your own private keys; all the information is right there when you log in.

The drawback is that if the provider has a security breach outside of your control, or if someone hacks your individual credentials, your cryptocurrency could be at risk. On-platform storage is often used by people who think they might want to trade their crypto soon, or who want to participate in exchanges' staking and rewards programs.

» Compare: Best exchanges to store your cryptocurrency

Noncustodial wallets: More effort, more security

Because of the threat of hacking, it can be risky to leave large balances on crypto exchanges for longer than necessary. The alternative: Storing your own crypto.

Self-storage options are generally divided into two categories, hot wallets and cold wallets. Hot wallets have some internet connectivity, which may make them easier to use but could expose you to some security vulnerabilities. Cold wallets are unreachable to anyone who doesn’t have the physical device, but they do take more effort to use.

» Learn more: How to choose a crypto wallet