Did you know crypto exchanges are not the only way to get cryptos? They might not even be the best for you. They can be expensive and unsecure. In this article you will learn about crypto exchange alternatives and get introduced to established and regulated financial providers offering crypto investments.
At the end of the article you will know how to invest in Bitcoin, Bitcoin CFD, Bitcoin ETN or Bitcoin Futures.
How do we know this? We analyse financial institutions and help people to find the best stockbrokers. We understand brokerage and know the financial industry well. In the last months, readers asked us constantly how to invest in Bitcoins and cryptos. We looked into it, and compiled an easy to understand introduction.
As cryptos are extra risky, here is an extra risk warning. Only invest money in cryptos you are prepared to fully lose. Their price fluctuates like crazy. If my mom asked about Bitcoin, I would tell her not to touch it.
Still interested, ok, let’s get to it then. I reckon you want to buy Bitcoin from a cheap and secure source. Right? But what does this mean? Let’s break it down.
Buying Bitcoin means exchanging your Euro or Dollar to Bitcoin.
Cheap means depositing money to the exchange, doing the exchange and withdrawing your money doesn’t cost you a lot.
Secure is also important. When finance guys talk about security they mean:
- The service provider is not a fraud, because it is
- regulated, meaning they proved their capability to set up the business and run it.
- audited, checked by an independent auditor
- transparent, providing financial data, ownership, etc. to the public
- The service provider can manage itself, because it has good
- risk management (they are prepared to deliver when things go south)
- operation (e.g. accessing the interface, giving orders, etc. work)
- IT security from external attacks
- Investors are compensated by the state if the service providers defaults. This is the so called investor protection. Note, you will not get compensated if your investment price drops. You will get compensated if your broker was a fraud or it defaulted.
It turns out, crypto exchanges are bad at both being cheap and secure. So, what are the alternatives? There are three other ways how to invest in Bitcoins, not known by many
- Going long in a Bitcoin CFDs, abbreviation for Contract for Differences
- Investing in passive funds, namely ETNs covering Bitcoins
- Going long on Bitcoin Futures
Let’s analyse them one by one. We will be fair with crypto exchanges and give them a run for their money. And to be fair, the alternatives are not perfect either. What should you do? As a step one, understand the differences. Here we go.
How to Invest in Bitcoins on Bitcoin Exchanges
This is how most people invest in Bitcoins. As you probably know, Bitcoin is a digital currency, transacted through a distributed ledger. You can store and transact Bitcoins with a Bitcoin wallet. This method is the revolution everybody is talking about, the blockchain magic (see further resources on blockchain here). The thing is, if you do not have Bitcoins yet, you can do nothing on the blockchain. You will need to buy Bitcoin first. (Learn more about Bitcoin here.)
And this is where Bitcoin exchanges come into the picture: they let you change your money to cryptos. (A good guide on how to do this on one of the biggest exhcanges can be found here.) Note, changing your money to crypto does not happen “on the blockchain”. This is merely a brokerage service provided by the crypto exchanges.
Bitcoin exchanges are the best to try out crypto and play around
Here is the good news. It is as easy as 1-2-3 to set up an account, deposit money, and trade on a Bitcoin exchange (see a good overview here). On the flip side, crypto exchanges are bleeding when it comes to being secure, and can be very expensive. As such, we we would encourage you to either use them for fun only, or really wisely.
Opening a Bitcoin exchange account is easy
Brokerchooser is a stockbroker comparison site primarily. As such, we have not tested all of the Bitcoin exchanges. But, here are a few names for you to check:
The process steps are easy. You go to the exchange, sign up, validate your email address, take a picture of your ID and provide your credit card details or make a bank transfer.
Revolut is a European debit card startup where allowing converting money on interbank rate
Robin Hood is a zero fee and commission stockbroker.
Both of Revolut and Robin Hood entered the crypto word as crypto exchanges.
Crypto exchanges issue “I owe you” on your cryptos
At a crypto exchange, you do not really own Bitcoins. Surprised? Let me explain. When you invest in Bitcoin on a Bitcoin exchange you have an “I owe you” (IOU) from the exchange on your Bitcoins. You only truly own Bitcoin if you know your private key. You do not know the private key at an exchange and as a result you do not own Bitcoins, just the IOU.
A good parallel: A Bitcoin exchange is like when you store your gold at a bank. The Bitcoin exchanges issues a statement that you have the Bitcoin (like the bank issues a statement that you have the gold). Having Bitcoins in you Bitcoin wallet is like taking your gold home.
What to do? Transfer your Bitcoins from your exchange to a Bitcoin wallet if you do not want to change it back to money in the short term. This enables you to access your Bitcoin address and private key. Once you have that, you really own it.
How Bitcoin exchanges work and main parties
We established you can invest in Bitcoins and other cryptos with your USDs at crypto exchanges.
When we say an exchange, we mean two things. Here is a question to you: what is the fundamental difference between The New York Stock Exchange and a currency exchange at the airport? The answer is NYSE merely pairs buyers and sellers and does not trade. The airport exchange trades against the customers. Both are called exchanges though with a huge difference.
Let’s see Bitcoin exchanges. Are they like stock exchanges or like the airport exchange? Do they trade with you, or do they pair buyers and sellers. Well, here is the catch:
no one knows.
We think some, like Coindesk or Kraken trade with you. They have their own pile of money and crypto and they act like the airport exchanges. For others, It is almost impossible to know. But why does this matter? Simple, if it is like a stock exchange, you will get the best price. If it is like the airport exchange, it is less sure. Unfortunately, so far I could not figure out, if there is a major Bitcoin exchange which only pairs buyers and sellers. So, feel free to comment.
There is more to it. Bitcoin exchanges claim that all client funds (both money and crypto) are in separated accounts, and they do not do margin trade. (Margin trade means if you buy Bitcoin at an exchange the exchange simply tells you they changed your money to Bitcoin, but in reality they changed only part of it.) When you want to withdraw your Bitcoin, it is fine, because the exchange has cryptos on an aggregate level. But if everyone wanted to withdraw, they would be in a problem. This is how banks work, and it is all fine with them. However, operating such a business needs good risk management and it is the best, if a regulator looks into it. Crypto exchanges claim they do not do margin trade, but we are sceptical, as there is a huge financial benefit for a crypto exchange to do this, and regulators are not checking.
Fees, risks and how you are protected
Bitcoin exchanges are expensive. They have a huge incoming customer flow and they can charge extraordinary fees. You can end up paying 3-4% trading fees when buying Bitcoin with your credit card or 1.5% when receiving a bank transfer. Simply put, these fees are very high.
Bitcoin exchanges are also risky. Let’s say, you go to a bitcoin exchange, deposit €200, and you convert €100 to Bitcoin. So how are you exposed?
The bitcoin exchange is a fraud or defaults: All your Bitcoins are lost, as you do not have them in a wallet. You will have the Euros most likely, as the better exchanges are regulated for handling money and fall under the investor protection scheme of the specific country. How to mitigate the risk on your Bitcoins? Transfer them to a wallet.
The market moves big time and freezes: Most likely the bitcoin exchange will not work technically. If you ever tried logging in when the price was moving, you know what I am talking about. If it works and if you are with broker which is like the airport exchange you are exposed to the liquidity of the exchange (e.g. will they have enough money if you want to sell your Bitcoin). There is no current regulation (or not that we know of) which regulates how a Bitcoin exchange should manage their liquidity.
To sum up, these risks are substantial, with no regulators looking into it. But, if you want to try out crypto trading, crypto exchanges can be an easy option. If it is a larger investment, use a wallet.
How to Invest in Bitcoins by Betting Bitcoin CFDs
CFDs stand for contract for differences. This is basically a bet between you and a broker. If you want to bet on Bitcoin price going up, you open an account at a CFD broker and go long on the Bitcoin CFD. If Bitcoin price increases, you win against the broker.
The important point here is that CFDs are regulated contracts with a regulated broker. As such, if the broker defaults, you will get compensated up to a certain amount by the financial regulator.
(Important note: CfDs are regulated in Europe, but not in the US and some other countries. Check with your regulator)
Bitcoin CFDs are great to trade Bitcoin
CFDs are good for trading Bitcoins and other cryptos. You can long and short Bitcoin easily and can effectively bet on the price movement. Plus, you are protected by the government from the Bitcoin CFD broker defaulting up to the investor protection amount.
One thing to look out is that CFDs can be leveraged, and that can be put extra risk on you (more on this later). Also, do not use CFDs, if you would like to benefit from the crypto inherent features, e.g. staying anonymous. You will not own coins, just bet on the price movement.
CFDs are very widespread financial instruments in Europe for retail clients. There are CFDs on equities (e.g. Apple share), commodities (e.g. oil price), and a lot of other assets. CFDs are widespread in Europe, but it is banned in the US.
Opening a Bitcoin CFD broker account is easy
To start with trading Bitcoin CFDs, you need a CFD broker providing cryptos. There are secure CFD brokers, meaning they are listed on a stock exchange, they report their financials transparently and they are overshought by financial regulators.
Opening an account with them is easy. You need to go through a digital ID verification, and fund your account. Bank transfers and credit card payments work.
A few CFD brokers offering crypto CFDs and we liked:
Also eToro, but their long, 1:1 leverage crypto is for some reason is not a CFDs, as such no investor protection. Be careful with this.
An important thing to do is to check the leverage level before you start to trade. It should not be higher than 1:5, but we would recommend to set it to the lowest possible. It depends on the broker, whether you can set the leverage on the platform. If not, ask customer service.
Leverage at Bitcoin CFDs are highly risky, be careful
Probably you have figured, if you bet on a price movement, you will not need to own the specific asset. That is correct.
When you do a Bitcoin CFD at a CFD broker, you will not own Bitcoin, you just going to be in a bet about the Bitcoin price.
Let’s say you are long Bitcoin CFD. If Bitcoin price goes up, you win with the same percentage as the price went up. if Bitcoin goes down you lose with the same percentage. This is easy to understand, now comes leverage. With Bitcoin CFDs you can invest in more Bitcoin than your money. You can e.g. trade with €100 on a five time leverage, which is the same as you had €500 worth of Bitcoin. If the price goes up 1%, your investment will go up 5%. Be careful, this is true to the other direction too. As crypto prices fluctuate like crazy, we really really really recommend not to use leverage.
When investing in crypto CFDs you might pay a daily fee
If you are doing leverage you basically borrow from the CFD broker. They will charge you a fee for lending you which is called overnight fee. You only pay this if you use leverage, so no leverage, no overnight fee. However if there is a leverage you will get charged on the notional (in our previous case €400). If you hold it for one year this can be ~5%, for one day this is 5% divided by 365. This fee can go up to 20%, so keep an eye on this.
How Bitcoin CFDs work and main parties
CFD brokers list the assets they provide CFDs on and this is their choice. E.g. they provide Bitcoin and Ether, but not Ripple, or whatever.
They quote you a buy and a sell price for the asset. The difference is the spread they win, and this is how they make money.
Now, imagine there are a lot people buying Bitcoin CFDs, which means the broker will need to pay out a lot of money if the Bitcoin price goes up. How do they do it? They hedge themselves. There are a few ways for do it for them. They can buy coins from crypto exchanges, or they make a bet with a so called liquidity provider, or they do Bitcoin futures on the Chicago Mercantile Exchange. One more note on the liquidity providers. They have access to multiple crypto exchanges and this is how they can bet with CFD brokers. Brokerchooser has heard some rumours that at the steepest crypto increase times, even liquidity providers were having difficulties to provide trade to CFD brokers. This means to you, that your CFD broker might default being short on Bitcoin against a lot of customers, and at this case you would be compensated by the investor protection scheme up to a certain amount. Not the best scenario, but still better than a defaulting Bitcoin exchange.
Fees, risks and how you are protected
Fees can be less with CFDs brokers than with Bitcoin exchanges. But, if you apply leverage it will be more risky and a hefty overnight fee can be applied.
When trading, most important fee is trading fee. This can be spreads and commissions.
Spreads are the differences between the buy and sell price. This can be ~1% with some CFD brokers. This compares with the ~4% fee per trade for some coin exchanges. Plus the ~1% is for buy and sell and the 4% is twice, once for buying and once for selling. Yes, there are Bitcoin exchanges with far smaller spreads, than 4%, so also keep an eye on spreads at exchanges.
Commissions are also applied at some brokers on top of the spread. Check our comparison table. Additionally, there is the 5-20% overnight fee per year for the leveraged amount, if there is any. Also keep an eye on inactivity fee, withdrawal fee, and account fee, some brokers apply these.
There are four risks you should look into when investing in Bitcoins CFDs
The CFD broker is a fraud or it defaults: It is easy to prevent fraud. Choose a regulated broker, even better if it is listed on a stock exchange or has a bank parent. Based on best knowledge, these brokers are not frauds. Now let’s say the broker defaults. In this case - and this is the huge difference compared to crypto exchanges - you are compensated by the investor protection scheme the broker is from. This is at least €20,000 per client if the broker is from the EU, but can go up to £50,000 for UK brokers.
The market moves big time and freezes: the CFD broker platform might crash technically, and you will not be able to close your positions. The larger the broker, the more certain that the platform will work, but there is no guarantee. We think CFD broker platforms will be more reliable than crypo exchanges, but this is just a guess. Let’s go further. Say, you managed to log in and place an order. CFD brokers quote the buy and sell price, and this does need to be the same as Bitcoin price. This is a risk for you, as if market starts to freeze, CFD brokers will increase their spreads significantly, meaning you might need to liquidate your position with an additional cut.
Price gets volatile and you use leverage: This is true for all leveraged trades, but as cryptos are really volatile, be extra careful. With using a five times or higher leverage your position can get closed with losing all your money, even if price goes back to similar levels.
The CFD is transformed to a non-CFD: This sounds strange, right? What we mean by this is that a broker (eToro specifically) changed its terms and conditions and stated if you do not go into leverage and you go long, your crypto is not a CFD and hence, will not be under the investor protection scheme. This is a regulatory risk, and you need to double check with the CFD broker, that your position is indeed a CFD position, and hence, it is under investor protection.
How to Invest in Bitcoin ETNs and Bitcoin ETFs
ETNs are established financial products issued by financial institutions and used by retail investors to easily invest in different products. There are crypto ETNs too, and you can buy these through traditional online brokers. Bitcoin ETNs are juvenile, issued by one institution only. Still, you can invest in Bitcoin in a regulated environment, through regulated players with governmental guarantees. Let’s see how.
Bitcoin ETNs are a great to buy and hold Bitcoins
Bitcoin ETNs does not have any fees to hold, and you will be under government guarantee if your broker defaults. It is also a fairly good product to trade, as transaction costs are relatively low.
There is one letdown. We do not have numbers here, but we assume there are far less money changing hands on ETNs than in the Bitcoin exchanges, so the depth of the market is not the best. Prove us wrong in the comment section.
You can invest in Bitcoin ETNs at a stockbroker with Swedish market access
The only well-known ETNs are issued by XBT Provider, and it is traded on the Swedish exchange. So, you need a stockbroker with access to the Swedish market. Most brokers can do this, but check with yours if you already have one.
To open a brokerage account you need to go through a more complicated process than a Bitcoin exchange. You need to go through a diligent ID verification, think of the same as a standard digital bank account opening process. When you opened and funded the brokerage account search for COINXBE, which is the ticker for the ETN by XBT Provider.
Broker providing this service and we liked:
Bitcoin ETNs and Bitcoin ETFs are practically mini funds
Probably you have heard ETFs, which are practically mini funds. Unfortunately, there isn’t any Bitcoin ETF yet, so let’s look into its cousin, ETNs.
Very vaguely said, with an ETN you buy an IOU from a financial institution. The IOU has a maturity, and at the end of the maturity it will pay an amount depending a price of an asset, in our case Bitcoin. Since the payback of the IOU depends on the price of Bitcoin, the ETN price follows the price of Bitcoin. Practically, when you buy an ETN on Monday and sell it on Wednesday your gain or loss will be the same as you would had buying cryptos.
How Bitcoin ETNs work
The most important part to understand is that you invest in an ETN through a stock exchange by a regulated online stockbroker. This is more secure than an unregulated Bitcoin exchange. The main parties involved are the broker, the exchange, the issuer of the ETN.
Fees, risks and how you are protected
ETN transaction prices depend on your broker, but it can go as low 0.1% or $1 per trade. There can be some additional fees (inactivity fee or withdrawal fee), still it will be cheaper to buy ETNs, than coins on exchanges.
There are a three risks when using Bitcoin ETNs:
The ETN issuer defaults: An ETN is an IOU from a financial institution. Generally, ETNs are issued by big financial institution with good credit ratings. In case of Bitcoin ETNs, there is only one issuer, XBT Provider, which is a small financial firm. We could not find any credit rating about them. Remember, it is an IOU, so if the ETN issuer defaults, you have a problem. However, XBT Provider is regulated by financial authorities, in contrary to crypto exchanges
The market moves big time and freezes: Bitcoin price movement does not put a big pressure on a stockbrokers. Their platforms will be up and running, and you will be able to place your order. A problem could be that there is no price. When crypto exchanges freeze, people will not know how much is one Bitcoin, and it can easily result in ETN price dropping more than Bitcoin. This is a big risk, and it is worth to consider when deciding.
The stockbroker defaults: Yes, this can be a risk, even if it is unlikely. In that case it very much depends on where your broker is from, and you will be protected up to the country’s investor protection scheme.
How to Invest in Bitcoin Through Bitcoin Futures
Futures are contracts traded on an exchange. Currently there are two exchanges allowing Bitcoin futures, the Chicago Mercantile Exchange and the Chicago Board Options Exchange. Note, CME and CBOE are not crypto exchanges, but established, long running, financial derivative exchanges.
Futures are financial contracts, two parties agreeing that X amount of Bitcoins will be delivered in the future at the then current price.
The price of the Bitcoin future changes as the current price of Bitcoin changes. Bitcoin futures are aimed at professional and institutional traders, so we keep our introduction short. Let us know in the comment section, if you want to know more.
Bitcoin futures are great to trade large Bitcoins positions
Bitcoin futures are great for trading. You can have a large leverage, and if you are professional this is the best instrument to trade. It has a large minimum trade size, so you can use it if, you can afford it.
For Bitcoin futures you need a broker access to CME or CBOE
You need an online broker providing access to CME or CBOE. In most cases you can open an account with the broker digitally. The broker will request a test proving you know what you are doing. Brokerchooser fully agrees with this method. Futures are only for people knowing what they are doing, for them it is great though.
Three brokers we tested and we know they are good:
If you are not a US citizen, you can additionally
Bitcoin futures are standard financial derivatives
If you are not familiar with futures, we would recommend to start to trade with non-Bitcoin futures first. Bitcoin futures have by month maturities. The initial margins are quite high, ~40%, so this means you need to have multiple thousands of dollars for one contract (~$5,000 at the beginning of January, 2018).
How it works and main parties
CBOE or CME will pair you with the best buy/sell offer on the market. When the price of the future changes and you potentially lose, you need to deposit more to your margin. If you lose to much, your position will be closed. The price of Bitcoin is determined by CBOE and CME with averaging multiple crypto exchange prices.
Fees, risks and how you are protected
Trading futures can be super cost efficient. One contract can cost you as low as ~$5, having a $10,000 Bitcoin notional exposure. Let’s see risks and how you are protected:
The broker defaults: Yes, this can be a risk, even if it is unlikely. In that case, it very much depends where your broker is from. Normally, US brokers are safer, because they have higher governmental investor protection amounts. But, since cryptos are not “securities”, and as such, not under the SIPC protection. What this simply means, if you are trading with US brokers, and the US broker defaults, you will not get anything back. If you are trading with a European broker, you will be compensated up to the broker country investor protection amount.
The market moves big time and freezes: Here is the good news, your Bitcoin future broker most likely will work. Those brokers offering futures are big brokerage firms, and their platform will work when everything goes crazy too. However, both CME and CBOE Bitcoin futures exchanges have a maximum price change for a single day, currently 20%. So, at a big sell off, you might not be able to close your position that day.
Price gets volatile: Since you are in a leveraged trade, major Bitcoin price movements can easily eat into your margins, and make you close the position, even when the price movement was temporarily.
And that’s it, you made it.
You understand Bitcoin exchanges, Bitcoin CFDs, Bitcoin ETNs, and Bitcoin futures and have an overivew of how to invest in Bitcoin in more secure ways. You are free to choose among these alternatives, and also to combine them if you want to.
- We think Bitcoin exchanges can be expensive and unsecure, so it is worth looking aroud for alternatives before making an investment decision and make sure to combine them with a wallet.
- Bitcoin CFDs are good for trading, but be careful with leverage.
- Bitcoin ETNs are great for buy and hold, but right now there are only second tier issuers.
- And Bitcoin futures are the best for professional traders.
Let us know what you think in the comment section.