As interest in cryptocurrency grows, the options for buying it get simpler. Though this is positive for first-time buyers, that simplicity can come at the expense of higher transaction fees. So if your ambitions go beyond infrequent purchases it will pay to understand what it costs to buy cryptocurrency.
The most successful online businesses reduce complex processes to just a few simple clicks, as the consumers prioritise time-saving convenience and are happy to pay a little more for it.
This is true for buying cryptocurrency, with a growing number of recreational users. The most popular ways to buy Bitcoin, for example, reduce what can be a complex process to a few simple clicks. It just happens that this comes at a higher cost, but because the amounts involved are quite small, the process happening in the background is difficult to fathom, users are happy to pay and move on.
Let’s assume you just want to buy €100/$100 of Bitcoin; we can rank the options in terms of ease.
The easiest way to buy that amount of Bitcoin will be through a payment/banking App that you already have on your phone that enables the option. Popular payment and regular share trading apps like Venmo, Paypal and Robinhood have all added the option, and many more are following.
You won’t have the hassle of needing to connect a source of funds - your bank account, bank card or eWallet - so the process might be just a few taps of a simple widget - spend €100 and get X amount of Bitcoin and require no specialist knowledge.
This is obviously appealing to newbies who want to invest, but want simplicity comes at a price:
You pay higher transaction fees and get a worse deal on price because you’re not actually buying Bitcoin from Paypal or Revolut. The same is true from any number of intermediaries that allow you to buy Bitcoin or other cryptocurrencies:
These businesses are offering what is called a ‘value-added’ service and often take the opportunity to charge you more than where they are actually buying it. So where are they buying the bitcoin from?
The key feature of cryptocurrencies like Bitcoin is that they have no central authority behind them, like a head office or staff, they are what is known as decentralised.
In effect this means that bitcoin circulates among users of its decentralised network, so the only way you can buy it is from someone who already has it. Cryptocurrency exchanges provide that service. They bring together bitcoin holders who want to sell with those who want to buy.
Think of exchanges as marketplaces for different cryptocurrencies. You can just make a straight-forward purchase but exchanges mostly for trading, with complex tools and interfaces that can be intimidating for newcomers, hence the preference for the simpler, but more expensive broker style approach.
When you buy cryptocurrency using an exchange they are just facilitating the transaction between you and another user who is selling, charging a commission for the service which is applied as a percentage of the size of the trade you are making.
The commission rate isn’t fixed but is normally on a sliding scale, decreasing as the amount you trade increases, because exchanges goal is to generate volume of trade more than volume of user.
On an exchange you can have far more control over the process, which is a trade rather than a purchase, and means you are more likely to buy at closer to true price.
In order to place a trade yourself you have to first associate a payment method with your exchange account and add funds. Funding your account can add fees, depending on the method used, which are in addition to the transaction fees. And you’ll need to create and verify the account with proof of identity before you can do any of this.
In general depositing funds with an exchange using a Bank Transfer is the cheapest option - often free - so long as you are not making an international transfer. In the US local transfers are known as ACH, Faster Payments in the UK and SEPA in Europe.
You simply need to associate your bank details with your cryptocurrency exchange account. The issue with bank transfers is they aren’t always instant, can present a bit more hassle to set up and can be a nightmare if things go wrong.
Bank transfers tend to be preferred by customers transferring larger amounts, and not people buying crypto for the first time who want the path of least resistance, which is normally using a card/convert option. Bank Transfers do however, tend to be limited by the maximum amount you can send and within a specific region.
If you want a deposit to arrive immediately you can use a Bank Wire, though this will incur a cost for the sender and the receiver, can only be initiated by the sender and are less secure than ACH as they don't go through a clearing house.
Exchanges have realised that many newbies are petrified by the thought of placing a trade, which is why many offer the option of simply converting your €100 for Bitcoin with one click.
In fact if you use a debit card the whole fund/purchase process is combined into one easy widget style process - insert card details, spend X, get Y, hit the ‘Purchase’ button.
This is the same user experience as buying through an external app - as described above - but slightly cheaper because you are buying at source.
It is, however, likely to be more expensive than placing the trade directly yourself because you’ll pay a card fee for every transaction and though you are an exchange customer, you may still be giving you a worse deal on the purchase price, because you aren’t taking the direct trading route.
This is actually how the world’s largest exchange, Coinbase, functions. It is designed specifically for easy user experience, and acts as a broker for transactions which are actually processed in the underlying exchange - Coinbase Pro.
Every user of Coinbase is free to use Coinbase Pro, but given the desire for simplicity, most stick with the simple convert function, but pay high fees for the privilege.
Not only do you pay a hefty transaction fee, the higher of a fixed or variable charge which you need a maths degree to understand, but they also charge something called a Spread.
This what we’ve been referring to when we talk about getting a worse price on the Bitcoin you buy. The Spread is the gap between the best price to buy, and best price to sell. We’ve got a separate blog article explaining the concept in detail but in relation to Coinbase, the add a spread which means you get an inferior price for bitcoin than if placed the trade directly on Coinbase Pro.
You can only really understand the costs of buying crypto when you understand the difference between brokers and exchanges. When you buy through a simplified broker style process, the costs are largely hidden but the whole experience painless, as opposed to placing a trade directly with an exchange, which is a more involved, cost-effective and progressive process, because it also gives you more control of the bitcoin you have bought and forces you to think a bit more about how bitcoin works.
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