Ted Stevenot
Stephen Hall
How does the bitcoin source code define its 21 million cap?
Many of bitcoin’s staunchest critics have expressed doubt about its 21 million cap, but perhaps the most mindless criticism relates…
,Since bitcoin’s introduction in 2009, the infrastructure for trading has grown substantially. Initially, there were no platforms on which to buy bitcoin as it didn’t even have an exchange rate in other currencies. Today, there are hundreds of options, with more becoming available each day.
While the methods of buying bitcoin can be generalized, the platforms—and their features—within those methods differ considerably. Our intent is not to compare the exact details of specific platforms or vendors but rather to provide a top-down view of the ways to buy bitcoin while offering a sense of the trade-offs.
- Cryptocurrency exchanges
- Cryptocurrency brokers
- Payments apps
- Over-the-counter (OTC) trading desks
- Peer-to-peer trading platforms
- Bitcoin ATMs
- Bitcoin vouchers
- Bitcoin by proxy
Cryptocurrency exchanges
E.g., FTX, Coinbase, Gemini, Kraken, Binance, and others
Cryptocurrency exchange platforms facilitate the trading of cryptocurrencies by matching buyers and sellers. Exchanges typically offer both novice-friendly and expert-ready interfaces. Most make a wide variety of cryptocurrency trading pairs available—with all offering bitcoin. Most exchanges also offer custody services.
| Pros | Cons |
| Accessible to a broad audience | Typically require identifying information |
| Generally the best exchange rates | Custodial risk |
| Generally low trading fees | Order book imbalances can move prices |
| Withdrawals usually available | Risk of slippage on large orders |
Ease of use
Exchanges span from easy to use to more intimidating, most offering access via both browser-based platforms and mobile apps. Some exchanges prioritize accessibility for novice users, while others build their user experience for professional traders. Most exchanges provide a broad set of trading tools–buy, sell, limit orders, etc.—as well as detailed price history charts and educational resources.
Interacting directly with the order book can be complex and requires learning about maker-taker fees, limit orders, market orders, etc.). Caution is necessary when buying large amounts to avoid errors (i.e., fat-finger mistakes, unexpected price fluctuation due to slippage, etc.).
Exchanges are incentivized to encourage their customers to trade because they take a cut on each trade. Trading is one of the most common ways people end up losing bitcoin.
Fees & limits
Exchanges typically offer bitcoin exchange rates with the least spread and the lowest fees due to their high liquidity and volume. Exchanges charge fees as a percentage of your trade, usually tiered depending on your trading volume—the more you trade on the platform, the lower the fees. Another common way that exchanges make money is through payment for order flow—charging you little or no fees while charging market markers for access to their order flow.
Exchanges, being centralized services, can suffer outages and limitations during high-volume trading events. Most exchanges also place daily limits on purchases.
Most exchanges are glad to keep custody of your bitcoin for no fee.
Privacy
Cryptocurrency exchanges, like all regulated sellers of bitcoin, are “money services businesses” (MSBs). As such, exchanges in any jurisdiction typically must comply with local AML (anti-money-laundering) and KYC (know-your-customer) regulations. AML/KYC rules require that exchanges collect and store your personal information, including name, phone, email, ID numbers, photographs/scans of government photo ID, personal address, source of funds, trading history, withdrawal addresses, and more.
It’s possible that exchanges possessing this information could be compelled to share it with government agencies, if required. Personal information held by exchanges is also potentially put at risk from fraud, hacks, or other malicious behavior.
Security & custody
While most exchanges offer solutions to help with security (such as two-factor authentication), bitcoin held on an exchange are subject to a range of counterparty risks. These include employee fraud, compromised account access (i.e., due to stolen or compromised login credentials), insolvency risk, and censorship (freezing or confiscating funds).
Exchanges are attractive targets for attackers, and large numbers of bitcoin have been lost through exchange hacks, theft, or exchange failures. USD balances are sometimes covered by FDIC insurance. Exchanges also sometimes carry insurance for catastrophic or criminal events affecting their own cold storage. Check with the particular platform you’re considering for details.
Regardless of the protections in place, the timeless maxim remains: “Not your keys, not your bitcoin.” Thankfully, all popular exchanges allow you to withdraw your bitcoin to a wallet that you control.
Cryptocurrency brokers
E.g., eToro, Robinhood, Revolut, River, Wyre, SoFi, InteractiveBrokers, BitPanda, WeBull, and others
A cryptocurrency broker is an intermediary between you and a cryptocurrency exchange or OTC desk/liquidity provider. Many are traditional brokers that sell stocks, bonds, mutual funds, and other financial services, while also offering limited cryptocurrency products. Cryptocurrency brokers generally cater to traditional financial services customers desiring to purchase bitcoin, but who have limited or no experience with cryptocurrency.
A cryptocurrency broker offers customers the ability to buy and sell bitcoin at a stated price. This is in contrast to exchanges, which run the risk of price changes due to slippage. Cryptocurrency brokers often take a spread and/or fees on their bitcoin sales, so their prices may not be as good as from an exchange.
| Pros | Cons |
| Beginner-friendly | Typically require identifying information |
| Fees vary widely | Custodial risk |
| First-time buyers can use existing accounts | Withdrawals not always available |
Ease of use
Cryptocurrency brokers make buying bitcoin easier for less experienced buyers and prevent you from having to go it alone or interact with another company you don’t yet trust. To make the process more turn-key, brokers generally offer fewer advanced trading options when compared to cryptocurrency exchanges.
Fees & limits
At present, cryptocurrency broker fees vary widely across services. Typically, fees are derived from both fees and spreads. With fees, you’re charged either a simple percentage of the total purchase, hidden fees in the form of spreads (the difference between the “bid” and “ask” price), or a combination of both.
Privacy
Just like exchanges, brokers are money service businesses that are required by the laws of most countries to take your personal information as defined by anti-money-laundering (AML) and Know Your Customer (KYC) rules. One benefit of using a broker may be purchasing bitcoin through a financial services provider with whom you’ve already shared personal information.
Security & custody
Because cryptocurrency brokers interact with cryptocurrency exchanges on their customer’s behalf, they are susceptible to third-party custody risk. Many cryptocurrency brokers restrict the availability of bitcoin withdrawals or don’t offer them at all. Since taking custody of your generational wealth is essential to what bitcoin is, it’s ill-advised to use any service that doesn’t let you withdraw funds. An IOU for bitcoin that you can’t withdraw is not bitcoin.
Payments apps
E.g., Cash App, Strike, Venmo, PayPal, BitPay, and others
Payments apps help you make payments while bypassing legacy payment channels (i.e., such as credit cards, bank wires, or checks), but have lately also become home to financial products that help you save and invest. These mobile phone apps often let you buy and sell bitcoin as well as other cryptocurrencies.
| Pros | Cons |
| Very easy to use | Typically require identifying information |
| High fees hidden in spreads | Custodial risk |
| First-time buyers can use existing accounts | Sometimes unable to withdraw |
| Low limits for purchases and withdrawals |
Ease of use
Payments apps are some of the most user-friendly ways to purchase bitcoin. They generally have intuitive interfaces and provide basic price history information, but paired with this they often have limited trading functionality. They commonly have introductory education on bitcoin, but the quality of the information in these apps varies widely.
Payments apps often support convenient payments to friends, family, and merchants within the app’s payment network by allowing you to send bitcoin IOUs between different user accounts.
Fees & limits
The fees for purchasing bitcoin through payment apps are usually high, but often hidden in spreads. Payment apps typically generate revenue on bitcoin purchases through a mix of transaction fees and difference between “bid” and “ask” prices for bitcoin. Some payment apps–like Strike–charge users solely by passing on the market-spread execution cost charged to them by their order execution partners.
Payment apps generally have low minimum purchase requirements and are best suited for purchasing smaller amounts of bitcoin.
Privacy
Payments apps are subject to the same KYC/AML requirements that full-featured cryptocurrency exchanges and brokers require. As with other methods of buying bitcoin, the amount of information they collect can change based on your transaction amount and volume.
Security & custody
Mobile phone passcodes and two-factor authentication generally secure any bitcoin you hold on payment apps. Until you withdraw your bitcoin to a wallet you control, bitcoin balances custodied on payments apps run the same risks as exchanges.
The biggest drawback with payment apps has historically been their limited support for withdrawing bitcoin to self-custody, but the trend is toward improving their capabilities in this regard (i.e., Cash App and even Paypal have added the ability to make withdrawals). Even with the ability to withdraw bitcoin to a personal wallet, withdrawal times may take longer when compared to other options on this list.
Over-the-counter (OTC) trading desks
E.g., Cumberland DRW, Jump Trading, Genesis, Unchained Capital, Swan Bitcoin, SFOX, and most major cryptocurrency exchanges
Technically, OTC could refer to any trading that occurs outside of an exchange, but here we are specifically referring to professional over-the-counter (OTC) trading firms that support large bitcoin purchases and sales. OTC trading offers you higher liquidity and lets you negotiate a fixed price with the desk and agree on settlement terms directly.
OTC trading works much the same as two parties exchanging directly in a bitcoin trade—with the two parties instead being an individual (or institutional) buyer/seller and the trading desk. When making a trade through an OTC desk, you can negotiate a fixed price and settlement terms before executing the trade.
Over-the-counter trading is available from a variety of outlets, including firms specializing in higher value transactions and exchanges that offer OTC trading as a separate service.
| Pros | Cons |
| Small client base means higher-touch support | Typically require identifying information |
| Direct settlement terms often available | High minimums |
| High liquidity, low fees, and good spreads | |
| Purchase direct to self-custody often available | |
| Post-funding execution often available |
Ease of use
Setting up an account with an OTC desk requires due diligence to help establish the identity and reliability of participants. However, once an account is established, purchasing bitcoin OTC is relatively easy. Simply contact the desk by phone or another agreed-upon communication channel (messaging apps are often used) and place an order.
Fees & limits
With OTC trading, the cost for buying bitcoin varies depending on the volume of trades, with trades getting cheaper as volume increases. Many OTC desks make money on the spread between the bid and the asking price and do not charge separate fees. If they do have fees, they’re typically lower than other options on this list.
OTC desks tend to have higher minimum purchases (often $50k or higher), so they’re not usually the right place to start if you’re looking for somewhere to buy bitcoin for the first time. Trades may sometimes take longer due to settlement logistics, but in doing so you usually avoid the waiting period typical for withdrawing funds from bitcoin exchanges and payments apps.
Privacy
OTC trading with registered institutions typically requires full provision of AML/KYC information.
Security & custody
When making a purchase, coordination is required between bitcoin being delivered and the purchase being funded (i.e., payment transfer). There is no counterparty risk for the bitcoin you are buying as long as it is sent to a self-custody wallet. But there is settlement risk—because you pay first.
Peer-to-peer trading platforms
E.g., Bisq, Hodl Hodl, LocalBitcoins, Paxful, and others
Peer-to-peer (P2P) trading platforms help bitcoin users coordinate trading bitcoin on a purely peer-to-peer basis. Each peer-to-peer exchange operates differently, but broadly they enable buyers and sellers to list offers while setting their own preferred exchange rate, deposits, and payment methods.
Most peer-to-peer exchanges provide some kind of escrow facility. Some exchanges provide mediation services themselves (e.g., Hodl Hodl), and others provide a platform for third parties to provide mediation services for a fee (e.g., Bisq).
| Pros | Cons |
| Purchase directly to self-custody often available | The buy and sell coordination process can be slow |
| Often little or no identifying information required | Higher bitcoin prices when buying |
| A variety of different payment methods available | Dependent on platform reputation systems to assess counterparty reliability |
| Often can sell bitcoin at a premium | Mediation processes can be slow and stressful |
| Low platform fees, but high spreads for buyers |
Ease of use
Buying bitcoin P2P is uncomplicated, but the ways to do so vary widely. On one end of the spectrum, two individuals connect locally and trade with each other on an informal basis. On the other end, you can download a software or intermediary protocol—such as Bisq—which enables you to discover and connect with others interested in trading bitcoin online.
Fees & limits
Fees are generally lower with P2P trading, but the price of bitcoin versus posted exchange rates may vary—sometimes significantly to the upside.
Privacy
With P2P trading, individuals generally keep control over the amount of personal information they wish to reveal. Sellers generally have little or no AML/KYC requirements for buyers, which minimizes the risk of centralized data breaches associated with large exchanges. Services that facilitate P2P trading protocols may collect as little as an email and password from participants.
Security & custody
When engaging in P2P transactions, some platforms have custodial risk while funds are in escrow (Ibc, Paxful) while others don’t (HodlHodl, Bisq). In either case, you must take more responsibility for assessing the reliability of trading partners. You can mitigate risk by trading only with partners with good reviews and breaking larger trades into smaller amounts.
Custody trade-offs are minimal or non-existent when bitcoin transfers directly between parties.
Bitcoin ATMs
E.g. Lamassu, Genesis Coin, General Bytes, BitAccess, and others
Bitcoin ATMs are a convenient way to trade cash for bitcoin via tens of thousands of kiosks worldwide. Some of the most frequent users of bitcoin ATMs are unbanked populations and those without access to traditional financial services.
When you buy bitcoin from the ATM, bitcoin is exchanged directly between the operator’s wallet and your personal wallet. Transactions typically settle within minutes on the bitcoin blockchain.
| Pros | Cons |
| Easy to use | Typically require identifying information |
| Can accept and/or dispense fiat cash | High fees |
| Direct to self-custody often available | Often no sell options |
| No internet connection required at point of sale | Physical security risk at ATM location |
Ease of use
Bitcoin ATMs are convenient and easy to use—their UIs mimic traditional ATMs, with which new users are already familiar. Some machines are “two-way” and exchange “cash for bitcoin” and “bitcoin for cash”.
Fees and limits
Fees for bitcoin ATM purchases can be steep, running as high as 15%. Fees are high in part due to costs associated with operating a bitcoin ATM business (i.e., upfront capital to purchase kiosks, rent to pay machine hosts, ongoing machine maintenance, cash handling services, etc.).
Privacy
Requirements for AML/KYC vary depending on jurisdiction. Most bitcoin ATMs “tier” their data collection levels based on the size of a transaction. A bitcoin ATM might use SMS verification or deploy the machine’s camera to take photographs to establish “liveness“. Since they directly accept cash in most cases, bank account information is not usually required to transact with a bitcoin ATM.
Security & custody
Typically, users take immediate custody of funds upon payment—in other words, bitcoin transfers directly from the operator’s wallet to the customer’s personal wallet or paper wallet with no intermediary.
When buying from a bitcoin ATM, it is important to consider security at the machine’s location, as you may be carrying significant amounts of cash in public. Apply situational awareness and look for machines located in safe, well-lit, and secure areas.
Bitcoin vouchers
E.g., Azte.co
Another way to buy bitcoin is with a voucher. Bitcoin vouchers are similar to “pay-as-you-go” mobile-phone vouchers and you can use them for buying and sending small amounts of bitcoin. Bitcoin vouchers are compatible with most popular bitcoin wallets and you can redeem them by scanning the QR code on the voucher. Vouchers can be redeemed on your own time, but be mindful of voucher expiration dates to avoid loss of bitcoin.
| Pros | Cons |
| Easy to buy & redeem | Only supports smaller purchases |
| High fees depending on vendor and region | Must be redeemed within specified timeframe |
| Generally little or no personally identifying information required | Counterparty risk until redeemed |
| Bitcoin redeemed directly to self-custody | No sell options |
Ease of use
Vouchers are available from thousands of locations (Azteco is currently available at over 10,000 locations worldwide) in amounts ranging from $20 to $1,000. You can purchase vouchers with cash or via debit card. Vouchers are redeemable in minutes on-chain or almost instantly via the Lightning Network via the voucher provider’s website. Scan the QR code from the voucher and bitcoin is sent directly to your personal wallet.
Fees and limits
Fees range from 2–10% depending on the vendor and the region, but with spreads taken into account, it can get significantly higher than this.
Purchasing bitcoin via voucher platforms like Azteco only allows you to buy bitcoin in smaller amounts.
Privacy
No user account is required to sign up, and no personal information is needed for voucher delivery. This means you can enter a retail store, pay via cash, and be provided a paper voucher without any other personal details necessary.
Security & custody
Assuming a reputable vendor, security is excellent because there is no custodial risk–with bitcoin being transferred directly to your personal wallet upon transaction completion. Generally, vouchers must be redeemed within a set timeframe and cannot be replaced if lost, stolen, expired, or destroyed.
Bitcoin by proxy
E.g., GBTC, BITO, BTFD, BTF, XBTF, BITS, VBB
Bitcoin can be purchased by proxy through financial products such as trusts, derivatives, and exchange-traded funds (ETFs). Share prices in these entities can sometimes be bought at a discount or a premium depending on market conditions.
Purchasing bitcoin by proxy offers the advantage of exposure to bitcoin price action through conventional markets and traditional brokerage accounts. This can be an attractive option for pension funds, family offices, and individuals that want to gain bitcoin exposure via more traditional market mechanisms or who have their investment options limited by regulatory pressures.
| Pros | Cons |
| Easy to buy and sell through existing brokerage accounts | Annual management fees |
| Can be used to buy bitcoin with retirement funds | Always require identifying information |
| Multiple layers of counterparty risk | |
| Can’t withdraw bitcoin |
Ease of use
If you already have a traditional brokerage account, buying bitcoin by proxy is generally easy. It involves logging into your account, typing in the ticker symbol for the bitcoin proxy you wish to purchase, and submitting an order.
Fees and limits
Traditional brokerage account fees apply to purchases. Internal expenses in ETF shares tend to add cost relative to bitcoin’s spot price. For example, annual management and custody fees for GBTC and BITO are high, as much as 1-2% annually.
Privacy
Standard AML/KYC policies for traditional brokerage accounts apply.
Security & custody
With proxy purchases, it isn’t possible to take self-custody of the bitcoin, which means you’re exposed to multiple layers of counterparty risk. Like cryptocurrency exchanges, proxies make attractive targets for attackers and are susceptible to many of the same security concerns.
Bitcoin knowledge is power
Bitcoin is a unique asset class, and how you purchase it can impact the fees you pay, the amount you can buy at one time, privacy trade-offs, and your self-custody options. Learn more about best practices for taking self-custody of your bitcoin along with ways to eliminate single points of failure when securing it by attending one of Unchained Capital’s free educational webinars.