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Should you buy bitcoin with your credit card?

After more than one and a half years of being in a bear market, the price of bitcoin has been steadily rising in the last few months. Interest in bitcoin has once again sparked and you might be looking to purchase bitcoin as an investment.

If you use credit cards for the majority of your purchases or expenses (perhaps because of the extra security that a credit card offers in comparison to a debit card or other payment methods), there is a high likelihood that your first choice for buying crypto online might also be your credit card. You might be thinking that this is just another normal purchase that you make with your credit card. But is it? Should you actually buy bitcoin with your credit card? 

To answer this question, there are several key things about using a credit card to buy crypto that you might want to know.

First things first.

Where can you actually use your credit card to buy bitcoin?

At the moment, there is a relatively large number of cryptocurrency exchanges that accept credit cards from users in the UK. These include Coinmama.com, Bitstamp.net, CEX.io and CoinCorner.com. Therefore, if you are looking to purchase bitcoin and a credit card is the only means of purchase that you have, you actually have a couple of options to choose from.

The main advantage of buying bitcoin with your credit card

The primary advantage of using a credit card to buy bitcoin is that the transaction is instant. This is unlike other modes of payment like a bank transfer where you might have to wait for several days before the transaction completes. 

If you want to make a swift purchase of bitcoin, since you are speculating that its price will rise exponentially in a few hours or days, a credit card might actually be the best mode of purchase since it is instant.

However, one problem is that some crypto exchanges often apply a transaction limit when buying bitcoin with a credit card. Users on several exchanges who buy bitcoin using credit cards have a daily transaction limit that varies depending on their profile and history on the exchange. For you it could be £500, while for someone else it could be £1,000. The limits are usually put in place for fraud prevention and security purposes.

The implication here is that if you want to conduct a quick or instant purchase of a small amount of bitcoin, then a credit card might perhaps not be a bad option as long as you stick with a reputable exchange.

A reputable exchange is one that has been in operation for a respectable number of years (you can Google its history to learn more), that has well-laid-out security measures and protocol and that is backed or supported by trustworthy investors. On this front, I personally view both Coinmama and Bitstamp as excellent options.

Hefty fees for bitcoin purchases using a credit card

Bitcoin purchases made through credit cards are instant. Unfortunately, there is one major catch. Many exchanges place hefty fees on credit card transactions.

At Bitstamp, for example, this fee is a staggering 5%. Other modes of payment such as a bank transfer attract lesser fees (for example, Bitstamp’s deposit fee for wire transfers is a meagre 0.05% while the highest trading fee is 0.25%).

Bitcoin purchases using a credit card are treated as cash advances

At the moment, many credit card companies treat cryptocurrency purchases as cash advances and not product purchases. This means that when you buy bitcoin using your credit card, you will unfortunately be subjected to a cash advance fee (which is usually 3% of the transaction).

Additionally, the cash advance will also end up accruing interest from the day of the transaction, typically at a rate higher than your purchase APR.

Clearly, purchasing bitcoin with your credit card is one expensive affair!

Safety and security issues

Although a credit card is generally a safer payment option in online transactions (as opposed to providing your current account info for example), this does not mean that it is completely devoid of any security issues.

The digital gold rush that is cryptocurrency has attracted all kinds of people who are trying to cash in on the opportunity, and this unfortunately includes hackers and spammers. These hackers and spammers might try to exploit any credit card security loopholes to steal from you.

For example, hackers might create clone sites of popular exchanges with the aim of getting your credit card details.

The security of some exchanges is also often not up to par, and they can be accessed by hackers who can then proceed to steal your personal info, including your credit card details, and any bitcoin that you might have stored on the site.

To keep yourself safe, it would be advisable to conduct a thorough check of the authenticity as well as the security details and protocol of the exchange through which you wish to carry out a bitcoin credit card transaction.

Bitcoin price fluctuations

The fluctuation of bitcoin prices is another aspect to consider when deciding whether to purchase bitcoin with a credit card. For example, the price of bitcoin reached highs of almost $20,000 in late 2017 before tumbling down to lows of $3,000 in late 2018 and early 2019.

Regardless of the price at which you purchase bitcoin using your credit card, you will still have to pay interest on the money borrowed from your credit card.

Imagine if you purchased bitcoin at the price of $15,000 hoping that it would rise. What if the price proceeded to instead tumble to $5,000 with no foreseeable price increase in sight? You might be forced to sell at a loss. Unfortunately, in this scenario, you would end up with a chunk of credit card debt and associated interest if it took you a while to pay off your entire balance.

To swipe or not to swipe?

At the end of the day, the choice to purchase bitcoin using your credit card is personal. A credit card can allow you to purchase bitcoin instantly. At the same time, unfortunately, bitcoin purchases made using credit cards are more expensive and expose you to potential fraud and scamming. The fluctuating prices of bitcoin might also expose you to greater credit card debt if the price of bitcoin goes down after you have borrowed money from your credit card to buy.

Our parent company, The Motley Fool, has been helping individual UK investors invest better for more than 20 years. And at MyWalletHero, one thing we absolutely agree with is that it’s important to differentiate between what is truly an ‘investment’ and what is ‘speculation’.

We may look back 10 years from now and see that bitcoin paid off for those putting money into it today. But that can be true of any speculative venture.

As such, if you’re looking to speculate with some money that you can afford to lose, then bitcoin may be an option (though it may be wise to avoid charging it to your credit card). If, however, you’re looking to build wealth over time, investing in a diversified portfolio of shares has shown itself over a very long time to be a fairly reliable way to achieve that goal.

Are you interested in building wealth through share investing? An important first step is to pick out your share dealing broker. MyWalletHero can help you with that through our comparison of the top share dealing platforms.

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