How to Buy Bitcoin with Credit Cards Safely

It is no longer news that there is a cryptocurrency trading craze sweeping across the world. The mania is simply beyond imagination. Who would have thought that an asset that started the year 2017 at a price of slightly above $820 would not be pushing steadily close to the $19,000 mark heading into Christmas? Well, in the financial world, anything is truly possible.

Many people all over the world are trying to cash in on the Bitcoin rush. The only way to do this really is by participating in the trading of Bitcoin. Bitcoin can be traded across 170 exchanges all over the world. Some of these exchanges offer traders numerous means of getting access to Bitcoin, one of which is the use of a credit card.

In order to be able to trade Bitcoin, there is a need to open an account with an exchange, create a Bitcoin wallet and fund the exchange wallet with fiat or digital currency. It is this currency that can be used to acquire Bitcoin and get it stored in a wallet. One of the means of transferring currency to the wallet in a digital manner is via the use of a credit card. Now that it has been established that the credit card plays an integral role in Bitcoin trading, what are the critical issues involved in this process?

Matters Arising

• Security

Probably the number one consideration concerning the method of choice for depositing your Bitcoin trading funds is the issue of security. When using a credit card to buy Bitcoin, you have to be sure that this is done in an environment which provides security for your card details and your wallet. This is a very tricky step. One of the commonest ways that card and wallet details get compromised is when they are used on phished websites. This presents a double jeopardy because a phished website can fraudulently collect credit card information, as well as Bitcoin wallet information, causing loss of both credit card funds and Bitcoin.

One of the major challenges that are being seen today is that hackers have swarmed over the Bitcoin market like a herd of locusts. They are prowling exchanges, trading portals and mining sites looking for where there are vulnerabilities in the security of these portals. You must therefore do your due diligence before you use your best credit cards on any portal or website that claims to offer Bitcoin for trading or for sale.

• Cost of Transactions

Transaction costs are another consideration. Trading of Bitcoin is a profit-oriented activity, and transaction costs will eat into any profits that have been made. Usually, this is the channel through which money flows in the Bitcoin market.

It can be seen very clearly that there are transaction costs at almost every step in the process. For instance, Bitcoin trading exchange Coinmama collects a 6.3% fee on all fiat currency to Bitcoin transactions. Even before the trading process, Coinmama’s card processor, Simplex, will charge 5.65% to process transactions. Furthermore, the exchange rate of BTC/USD displayed on the site is about 105% of the average market rates. This ensures that the trader is effectively paying transaction charges of 16% when everything is put together, just for the convenience of using your credit card to purchase Bitcoin. This means that if you are trading Bitcoin for money, your profits must surpass 16% for you to actually walk home with any money. This scenario is replicated in various dimensions across all Bitcoin exchanges. So you have to consider if the use of a credit card to purchase Bitcoin would be worth the trouble, or whether it would be cheaper using some other method.

Please note that when it comes to credit card transaction charges, some exchanges offer a staggered system while others may offer a fixed charge regime.

• Accessibility

Then there is the issue of accessibility. Not all countries are included in the global financial system. This means that there will be Bitcoin traders in some countries that will be unable to use their credit or debit cards for Bitcoin transactions. Even for those who can, there may be geographical or IP-specific restrictions.

The Process

So how does buying Bitcoin with a credit card work?

You have to buy Bitcoin on an exchange which offers it for sale. You can buy Bitcoin (BTC) with a whole range of fiat currencies (i.e. your everyday legal tender). Although the commonest currency used is the U.S. Dollar (USD), you can actually use other currencies on a cryptocurrency exchange such as British Pounds, Euros, etc. Some countries have local exchanges where it is even possible to use a credit or debit card which is denominated in the local currency to buy Bitcoin. Even though it is also possible to use other cryptocurrencies to buy Bitcoin, the world’s credit cards are denominated in fiat currency, so that is the only option to use in terms of a credit card’s monetary unit of purchase.

Buying Bitcoin can be done using a market order (i.e. buying at market price), or by using a pending order (i.e. order is setup in such a way that it is only when prices have hit a certain level that the orders are executed).

Any Bitcoin that has been bought is kept in a Bitcoin wallet. A Bitcoin wallet has a unique Bitcoin address. The wallet and address are like a bank and an account number with that bank. The wallet address is a unique combination of characters which is where you and other people can send Bitcoin to so that it enters or leaves your wallet. Some exchanges can keep an account for you so that you can keep your Bitcoin there after purchasing with your credit card.

Usually, those who want to use a credit card to buy Bitcoin have to undergo some form of verification to prove that they are who they say they are and also to prove their ownership of whatever card they are using.

Pros and Cons

Pros

• The use of credit cards to purchase Bitcoin enables the trader to purchase Bitcoin on demand. This means that credit cards enable the trader to take advantage of trade opportunities as they are happening, as card deposits are usually processed instantly.
• The use of credit cards to buy Bitcoin is gaining increasing acceptability on a wide range of exchanges.
• It is possible to earn cash back rewards when you use your credit card to purchase Bitcoin.
• Using a credit card to buy Bitcoin gains the user financial leverage. Bitcoin trades are treated as purchases rather than cash advances, and purchases tend to get a larger credit than cash advances.
• You could qualify for a bonus reward from your card company if you order a new card specifically for Bitcoin purchases.

Cons

• Use of credit cards to purchase Bitcoin can lead to a lowering of credit scores.
• Some countries have a specific tax that is charged on proceeds of trading carried out with credit cards.
• There is always the risk of having your card details compromised.
• You will always incur card processing fees in addition to the Bitcoin trading fees. This can nullify the profits from your trading activity.

Conclusion

This article has highlighted the different issues that are involved in the purchase of Bitcoin using credit cards. There are benefits and risks to the practice. The most important take away from this article is that it is good to use credit cards to purchase Bitcoin, but it should be done in a responsible manner.