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It seems like every time you turn on the TV there is another news report about the meteoric rise of bitcoin in 2017. Many of these reports talk about whether or not bitcoin is a good investment, but few tell you how to start investing in bitcoin and the best ways to pay for your bitcoins.
For example, you might be wondering where you would buy bitcoins if they aren’t issued by a central national bank? That’s a good question! You definitely can’t go to your bank’s local branch and ask to exchange your dollars for bitcoins.
Instead, you have to go online to try and find the best bitcoin exchange. These exchanges then let you buy bitcoins using a few different methods of payment and then let you either store those bitcoins in a digital wallet or vault on their platform or allow you to transfer you bitcoins to your own digital wallet or vault.
But how do you pay for those bitcoins? Can you pay with a debit or credit card? The answer is yes you can – but it’s a bit more complicated then just imputing your credit card number into their online form at checkout. Read on and find out why you might not want to buy bitcoin with a debit or credit card even though you technically can.
What Are Bitcoins?
For those who are still confused about what bitcoin actually is – don’t worry! It’s confusing. Bitcoin is often called either a cryptocurrency or a digital currency. It earned the title of cryptocurrency because of the way bitcoin is ‘mined,’ and how it ensures its security. In order to create new bitcoins, computers must solve cryptographic mathematical problems. Once the bitcoins exist, however, they are not minted as physical coins or printed as bills – but are rather just digital goods.
Bitcoins and other cyptocurrencies are novel because they’re the first currencies that aren’t connected to a government or country. They are not issued by a central national bank and there is no government who can regulate bitcoins itself (although governments can regulate how bitcoins can be used by their citizens or within their borders).
Bitcoin, however, is a bit unique among cryptocurrencies because there are a limited number of bitcoins that can exist. Not only is the creation of new bitcoins restricted and involves solving complex math problems to create, but the total amount of bitcoins that can ever exist is fixed. When bitcoins were created it was said that there will only ever be 21 million bitcoins. That means that bitcoins are limited and for that reason many people have been speculatively buying bitcoins expecting them to go up. The more people who want to buy bitcoins, the higher the price of a bitcoin will be.
But you don’t need thousands of dollars to purchase a bitcoin. The good news is that you can buy partial bitcoins which means you can get just as much bitcoins as you need.
Why Would Someone Want to Buy Bitcoin With a Debit or Credit Card?
If you don’t know much about bitcoins, you might not even be sure why you would want to buy bitcoins with a debit or credit card. There are lots of reasons why using a debit or credit card could be beneficial with buying bitcoins.
For example, many bitcoin exchanges offer multiple ways to pay for your bitcoins with each method having different costs and drawbacks. Popular methods for buying bitcoins include your bank account, credit card, or debit card. But depending on the method of payment you choose, there could be different rules and processing times. For example, on Coinbase if you use a credit or debit card you can buy bitcoin instantly but you can only buy a limited number of bitcoins. However, if you use a bank account to buy bitcoin there can be a lag time of between 5 to 7 days but you can often buy more bitcoins.
For that reason, you might want to use your credit or debit card to instantly buy bitcoins – especially if you need them right away or if you are trying to buy them at a lower price because you expect them to go up in value quickly.
Another reason why you might want to buy bitcoins with a credit card is because you might not have enough cash to buy bitcoins or as many bitcoins as you want to buy at the moment. Just like you would put a purchase at the department store on a credit card to pay later, you might want to get your bitcoins now and pay off the bitcoins later.
Another reason why you might want to pay for your bitcoins with your debit or credit card is because it could be more convenient to use your card rather than get your bank account verified. In order to get your bank account verified you often have to send the exchange copies of your identification. If you want to sign up and start buying bitcoins immediately, a credit or debit card could be a better choice.
Why You Might Not Want to Use Your Credit Card
Despite the fact that you can use your debit or credit card to buy bitcoin, you might not want to do so. Why? Because by doing so you often have to pay a higher fee. For example, on the popular digitial currency exchange Coinbase, if you buy bitcoins using a transfer from your bank account you pay only 1.49% on top of their base 4% rate. However, if you use a credit or debit card to buy bitcoins then you’ll pay 3.99%. That’s a significant premium in order to buy bitcoins with the convenience of your credit or debit card.
But, you might be thinking that by buying bitcoin with your credit or debit card you’re able to do it instantly and that is worth the extra cost. The good news is that if you use your credit or debit card as a back-up payment method when it comes to buying bitcoins with your bank account, you can access something called an ‘instant buy’ on sites like Coinbase. That allows you to pay the low fees that comes with using your bank account and the power to make an instant purchase of bitcoins.
The downside is that this only works for smaller amounts of up to $1,000 a day on Coinbase. Want to buy more bitcoin than that per day? You might need to use your bank transfer and wait the 5 to 7 days since bitcoin restricts the amount you can put on your credit card to sometimes as low as several hundred dollars a week. If you use your bank account the limit on your purchases can be as high as $25,000.
Another downside of using a credit card to buy bitcoins is that you’re going to have to pay interest on the money that you borrow if you don’t pay it off at the end of the month. While some people might just use a credit card or debit card for the convenience of buying bitcoins online, if you are borrowing money to buy bitcoins and don’t currently plan to pay it back, you will be paying a significant amount in interest until you’re able to repay. Many credit cards will charge 15% to 25% in interest which adds up and could eat into any gains you might make on your bitcoins if you’re buying them as an investment.
Scams to Look Out For
In addition to the added cost of buying bitcoins with a debit or credit card, there are potentially some scams that you should watch out for to protect yourself against having your bitcoins stolen or against credit card fraud. While sites like Coinbase are backed by trusted investors, there are a number of sites online where you can buy bitcoin or which claim you can buy bitcoins that shouldn’t be trusted since their security isn’t ideal.
For example, Mt. Gox was a bitcoin exchange that used to be based in Japan. In 2014, it was handling around 70% of bitcoin exchanges around the world. However, that quickly came to a halt when in 2014, it announced that around $450 million of bitcoins were stolen from Mt. Gox. Other online exchanges have had similar security breaches.
Another scam to look out for is phishing scams. The scammers either create a fake site or mirror an existing digital currency exchange or digital wallet site in order to try to get you to share your bitcoin wallet key or your credit card details. Once they have your info, they steal your money. These bitcoin phishing scams are on the rise making it more difficult for you to know which sites are legitimate and which are looking to defraud you.
The other common scam is for people to pretend they’re going to sell you bitcoins via Ebay or an in-person exchange like localbitcoins.com and then to not actually send your bitcoins to you after charging your card.
If your credit card is stolen and used to purchase bitcoins then your credit card is likely to cover you, but if you are defrauded because you aren’t given the bitcoins you’re owed you might not you’re your money back. That’s because it’s very hard for your credit card company to verify whether or not you received the bitcoins since bitcoin exchanges are anonymous and can’t be tracked.
The Bottom Line
Ultimately, whether you use a credit card or debit card to buy bitcoins is up to you, but its important to realize that there are significant extra costs involved in purchasing bitcoins that way and it could open you up to fraud.
Author: Jeff Gitlen