How to Buy Fractional Shares of Crypto

What Are Fractional Shares of Crypto?

Fractional shares of crypto represent a partial ownership in a single coin. The concept of fractional crypto ownership is different from stocks. Fractional stock trading is relatively new, but cryptocurrencies are already fractional by design. That’s why you don’t need to buy 1 Bitcoin costing $20,000 or more. You can buy as little as 0.001 BTC or smaller. Fractional coins make it possible to own a portion of a larger cryptocurrency investment without spending a fortune. Owning fractions makes it possible to purchase smaller amounts of various cryptocurrencies that match your budget. Fractional investing opens the door to micro-investing and makes it easy to divide up your budget and reduce risk.

Why Buy Fractional Shares of Crypto?

Fractional investing opens the door for investors with limited funds to explore crypto without breaking their bank accounts. High coin prices are a significant barrier to entry for many investors, but fractional trading removes that obstacle. It also eliminates the need to select the specific coins with smaller prices, because you can invest as much or as little as you want. Fractional shares allow you to easily diversify your crypto portfolio by spreading your investments across different cryptocurrencies. Diversifying your investments across coins reduces your exposure to a single asset, which can be more volatile. Fractional investing also allows for dollar-cost averaging (explained later).

Popular Platforms for Buying Fractional Crypto Shares

Several popular platforms allow you to buy fractional shares of crypto. The good news is that major exchanges and platforms now make it simple to trade fractions of cryptocurrency. Coinbase, Binance, Kraken, and Gemini support fractional crypto investing, as do popular fintech platforms like Robinhood, Cash App, and eToro. Fractional crypto trading is possible without technical expertise, complex sign-up requirements, or minimum buy thresholds. Before you sign up and deposit your funds, research platform fees, security, user experience, and supported coins.

Understanding Wallets: Custodial vs. Non-custodial

Crypto wallets are like bank accounts for your cryptocurrency investments. Once you purchase fractional shares of crypto, you can use a custodial or non-custodial wallet to manage them. Custodial wallets are held by a trusted third party such as your crypto platform. The trade-off is convenience over security and control. Non-custodial wallets give you full control over the private keys and private data of your investments, so you own your crypto outright. You assume complete responsibility for the security of your assets. Your choice of wallets will depend on the tradeoffs between security, user-friendliness, and your own investment goals (trading or holding for the long-term).

Step-by-Step Guide to Buying Fractional Crypto Shares

Buying fractional shares of crypto is similar to buying whole coins. The first step is to create an account on a crypto exchange or fintech platform. Follow the sign-up and identity verification steps, then complete the funding of your account. After that, search for the desired cryptocurrency and use the buy/sell tool to select fractional shares. The site will ask how much you wish to invest. You can buy shares of up to a dollar or a hundred dollars at a time. After confirming your purchase, the investment will go to your exchange wallet.

Fees and Costs to Consider

Transaction fees and costs can take a toll on small crypto trades. You should consider the trading fees and the different transaction charges when buying fractional shares of crypto. Trading fees include network fees (aka gas fees), deposit fees, and withdrawal fees. Network fees vary depending on the platform and blockchain involved in processing the transactions. Withdrawal and deposit fees are charged to move your funds in or out of an exchange. Fees are the key differentiator between platforms, and you’ll want to shop around for the lowest charges or wait for promotional periods.

Security Measures for Fractional Crypto Investments

Security should be a priority for all investments. Set up 2-factor authentication (2FA) for your trading account, and beware of phishing scams. Make sure to store your account details in a secure place, and don’t click on unknown links. If you choose to use a non-custodial wallet, keep your seed phrase and private keys offline and well-secured. Losing access to your account could mean losing your crypto investments forever. Choose reputable platforms with a history of security and insurance in the unlikely event of a compromise.

Advantages of Fractional Crypto Ownership

Fractional crypto investing has multiple advantages, starting with the lower barrier to entry. Fractional ownership also makes it possible to purchase smaller quantities of various cryptocurrencies to match your budget, which enables diversification. Fractional shares also allow for dollar-cost averaging and disciplined investing. Smaller amounts make it possible to buy and sell quickly, which enhances your liquidity. Fractional trading is also more accessible than whole coins, giving you access to top cryptocurrencies. Fractional investing is democratizing crypto investments in countries with high economic diversity.

Risks and Limitations of Buying Fractional Crypto Shares

Fractional investing comes with risks, such as market volatility that can quickly erase your investment. Trading fees for small transactions can make it difficult to generate positive returns. Fractional shares on custodial exchanges put all your funds at risk, and you don’t own the private keys. A hack or insolvency could cause you to lose all of your cryptocurrency holdings. The regulatory uncertainty also puts exchanges at risk of going offline or finding it more difficult to access certain markets. All these factors need to be considered before investing.

How to Use Dollar-Cost Averaging with Fractional Crypto

Dollar-cost averaging (DCA) involves investing a fixed amount of money in a cryptocurrency or a group of crypto assets over a period of time. By investing small amounts of money consistently, the average cost is reduced over time, and the effects of market volatility are mitigated. You can automate the process with most of the platforms, and regular automated buying reduces emotional reactions to market volatility. Over time, the average buying price could be lower than if you invested a lump sum. DCA is easy to do with fractional crypto shares and makes for a great investment strategy, especially for beginners and busy investors.

Tax Implications of Buying and Selling Fractional Crypto

Buying fractional shares of crypto is not tax-free in most countries. Crypto taxes work differently depending on your country of residence. For example, in the US, every purchase, sale, trade, or transfer of cryptocurrencies is taxable by the Internal Revenue Service. In most other countries, cryptocurrencies are taxable as property or financial assets. In all cases, crypto transactions require diligent record-keeping of amounts, prices, dates, and platforms. Your gains may be taxable as short- or long-term capital gains, and losses can offset your taxable gains.

Future Trends in Fractional Crypto Investing

Fractional crypto investing is still in its early stages, but several developments will likely impact it in the future. DeFi platforms and the fractionalization of NFTs (non-fungible tokens) will bring fractional crypto beyond regular cryptocurrency shares. Blockchain scalability solutions such as layer-2 networks and sidechains will likely reduce transaction fees and increase speed. In the long run, regulations will play a role in wider adoption of fractional investing. However, for now, there are many opportunities to trade fractions of popular cryptocurrencies.

Conclusion

Buying fractional shares of crypto can help anyone get started in a growing market that was once the domain of only the most committed investors. Fractional trading is an excellent way to start trading, as you can easily invest as much or as little as you like to suit your budget. Fractional shares allow you to take advantage of the world’s most popular cryptocurrencies and make it easy to create a diversified portfolio of digital assets. Fees and risks exist, so keep those in mind as you manage your cryptocurrency transactions. Buying fractional shares of cryptocurrencies is just one of several steps you can take as you enter the crypto investing world. Armed with the knowledge from this guide, you can confidently explore the possibilities of fractional shares, invest, and get started in this exciting market.