What to know about investing in crypto
Cryptocurrencies are virtual currencies you can use to pay for goods and services, just as you might use dollars, euros or pesos. They fluctuate in value, so buying crypto one day doesn’t mean you’ll have the same amount the next day, week or month.
For example, in the first half of 2021, one Bitcoin – the most well-known cryptocurrency – was worth more than $64,000. Today, the price hovers around the $38,000 range. When you buy cryptocurrencies, they’re typically stored and tracked in a digital wallet until you’re ready to sell them. A “blockchain” is a record of all cryptocurrency transactions that are made.
Unlike other currencies, cryptocurrencies aren’t backed by any governments – nor are they regulated by financial institutions. Cryptocurrencies also lack the protection of FDIC insurance, which protects cash you keep on deposit with traditional banks. Some governments have warned their citizens about the risks of investing in cryptocurrencies for that very reason.
Some disagree, however, pointing out that the speculative nature of cryptocurrencies makes them an appealing component of a long-term investment strategy.
“Cryptocurrencies are very volatile; however, this also means they have a good chance to appreciate,” said Kirill Bensonoff, a crypto advocate and entrepreneur who has been an active member of Boston’s blockchain community, in a previous interview. “If you have an appetite for risk, crypto should be in your portfolio.”
If you decide to buy cryptocurrencies, you’ll need to find an exchange, many of which let consumers pay with a credit card. If you’re thinking of going that route, here’s what you should know.
How to buy cryptocurrency with a credit card
Research your credit card to determine if it allows crypto purchases and what fees it charges. (See cash-advance penalties above.)
Find an exchange that allows crypto purchases with a credit card. Some major ones don’t.
Fund your crypto account by inputting your credit card information and linking the card to your exchange account. It’s similar to the familiar process of filling out the checkout payment form at online merchants when buying a product or service.
Pros and cons of using a credit card to buy cryptocurrency
• It is an easy and quick payment option especially for people who start their adventure with crypto.
• Thanks to the speed of transaction execution, this form of payment is more secure for users.
• The possibility of using margin trading. Additionally, if the crypto exchange platform has the option of leveraged trading, a leverage effect can be achieved. This potentially allows you to earn more money.
• High trading fees. Often above 5%.
• Limits for buying digital assets.
• No anonymity.
• Impact on creditworthiness.
The fees can really add up, especially if your bank treats it as a cash advance
If you use a credit card to buy crypto, you could be hit by a double fee whammy: Both the exchange and your bank may charge you. Crypto exchange fees can be as high as 5% on credit card payments. Most exchanges allow you to deposit money via a bank transfer for free, making it a much more cost-effective option.
Plus, many banks treat crypto exchange deposits as cash advances, which are a very costly way to withdraw money — there’s often a fee of 3% to 5%. In a worst-case scenario, you could lose 10% of your money to fees before you’ve even bought any crypto.
That’s before you factor in the interest fees. Unlike normal credit card transactions, which don’t start accruing interest until your statement’s payment due date, some cash advances start accruing interest straight away. As if that’s not bad enough, the interest rate may be higher on a cash advance than your normal rate.
It may not count towards your credit card rewards
If you planned to use your credit card to buy crypto so that you could qualify for an introductory bonus offer or get spending rewards, think again. Check the terms and conditions to find out what type of payments count towards that introductory bonus offer. In many instances, credit card rewards are aimed at actual spending, rather than things that could be construed as cash withdrawals.
Borrowing money to spend on a high-risk asset isn’t recommended
One of the major drivers behind last year’s crypto frenzy was the fear of missing out. As headlines of dramatic price increases and crypto millionaires filtered into mainstream consciousness, people felt like this could be their chance to get in on the next big thing. But some people didn’t have cash to spare, and may have either borrowed or taken money away from other financial goals to use for crypto investments.
The trouble is that crypto is an extremely risky asset — many people who bought it last year are now underwater. Being underwater is when your investment devalues so much it’s now worth less than you originally paid for it. The hope is that Bitcoin’s price will eventually recover. But if you’ve borrowed to make the initial investment, it may be difficult to wait out that drop in prices.
Imagine if you’d bought $500 of Bitcoin last year when it was worth $60,000, and used a credit card. If you weren’t able to pay off the balance immediately, it would start accruing interest — potentially at around 20% APR or more. Given that the value of Bitcoin then began to fall, you could have quickly found yourself in a position where you were paying high rates of interest on an asset that was no longer worth what you paid for it. If you tried to sell that Bitcoin today to pay down the debt, you’d only cover part of the original $500 — it would now be worth around $170.
If all the negative sides mentioned above have made you want to postpone your Bitcoin purchase using a credit card directly from the exchange, one of the alternatives is to use your eWallet from a regulated payment provider. This process is slightly longer than a direct purchase, but offers many more benefits. You can use your card to deposit money into your wallet in a few minutes – bypassing traditional bank waiting times.
Sometimes providers do not charge for this process, which is a very good option compared to banks, which charge high commissions for each operation. Connect your e-wallet to the exchange of assets in the form of a FIAT/script, you can use it to buy, sell and store Bitcoin. Currently, the choice of e-wallets is huge. The most popular are PayPal, which boasts over 200 million users in 190 countries, Skrill or Neteller.
Buying crypto with a credit card may be a real possibility, but that doesn’t mean it’s a smart move. The fact is, cryptocurrency can go up or down in value over time, yet you’ll owe whatever you charge to your credit card – including credit card interest and transaction fees – no matter what.
If your goal is building wealth through crypto, you’re probably better off saving up the cash to invest upfront. While paying for crypto with plastic may be convenient, the added costs make this move overly costly and way too risky for the average consumer.