Is a Bitcoin Credit Card Right for You?

Bitcoin has soared in value recently, rising from roughly $10,200 in early September 2020 to $46,000 five months later. With that meteoric increase, you may be curious about incorporating Bitcoin into your financial life, but still wondering how practical it really is to use. Bitcoin might be a type of currency, but it’s much less accepted by merchants than cash is.

That’s where a Bitcoin credit card or debit card comes in. These cards can make managing Bitcoin simpler, especially when it comes to spending it on everyday transactions.

Bitcoin is a cryptocurrency that was created in 2009. Here’s how it works: Users send each other digital tokens, and transactions are verified using extensive computing power. There are no actual coins involved.

Bitcoin is not issued or backed by financial institutions or the government, so it’s not considered legal tender. Even so, Bitcoin is valuable; 1 BTC was worth about $46,000 as of Feb. 9. Bitcoin is notoriously volatile, so prices can fluctuate wildly.

There are two categories of Bitcoin cards. Here’s a closer look at what each one does:

The first type of Bitcoin card allows users to spend the cryptocurrency they own, similar to a prepaid debit card. “(These) cards essentially give cardholders the ability to convert their crypto assets – Bitcoin and other cryptocurrencies – into fiat currencies,” says Steven Kalifowitz, chief marketing officer at Crypto.com. Most Bitcoin and other cryptocurrency debit cards use global payment networks like Visa, which enable customers to use their cards to shop anywhere these networks are accepted. However, for these cards to work, users must already own Bitcoin.

“From the end-user perspective, Bitcoin cards work almost exactly the same way as traditional” cards, says Shidan Gouran, CEO of Gulf Pearl, a management consulting and technology firm. Behind the scenes, however, the mechanics are a bit more tricky, he says.

A traditional debit card would transfer funds from your checking account to the merchant’s account. “By comparison, the issuer of a (debit) card backed by a cryptocurrency such as Bitcoin would hold the crypto assets on behalf of the cardholder as a custodian,” Gouran says. “When the time comes for the cardholder to make a payment using the card, the crypto asset will be converted into the applicable currency for the actual transaction.”

For example, at the current Bitcoin price, a $500 purchase would require approximately 0.01 BTC to be converted. Say you had 1 BTC on a debit card and went into an electronics store to buy a tablet for $500. You would swipe your card, and there would be a near-instant deduction of 0.01 BTC from your Bitcoin balance. That would convert to $500, which would then be remitted to the merchant. Walking out of the store, you would have a new card balance of 0.99 BTC.

Gouran says this practice is similar to foreign currency exchange. “If a cardholder of a U.S. card goes to Canada and pays for a restaurant meal using that card, the restaurant would receive the total amount of the bill plus tip in Canadian dollars, and the converted U.S. dollar amount would be billed to the cardholder as usual.”

The main difference with Bitcoin debit cards is in the type of currency transacted.

Bitcoin rewards credit cards

Rewards credit cards that offer Bitcoin instead of points or miles are the newest products on the market. There are two Bitcoin reward credit cards set to launch in 2021.

“Bitcoin credit cards that will soon be released to the public will function like your typical credit cards, except you get cash back and rewards with cryptocurrency,” says Paul Sundin, a certified public accountant and CEO of Emparion, a retirement services company.

The BlockFi Bitcoin Rewards Credit Card is a Visa card offered by the crypto trading firm and crypto-asset-backed lender. The card will be available to clients who have funded BlockFi accounts. Every card purchase earns 1.5% cash back, which is converted to Bitcoin and added to the cardholder’s account each month.

The card will come with an annual fee of $200, though new cardholders can earn a $250 sign-up bonus after spending at least $3,000 on the card within the first three months. BlockFi says it plans to add features in the future.

The second Bitcoin rewards credit card will be available from Gemini, the cryptocurrency exchange. Gemini acquired Blockrize, a financial technology startup that was preparing to launch a crypto rewards credit card. The upcoming Gemini card will allow users to earn up to 3% back on every dollar spent in the form of Bitcoin and other cryptocurrencies.

There are waitlists for both cards, which are expected to launch later this year.

Whether you use a debit card that allows you to spend your existing Bitcoin or plan to try a card that pays Bitcoin rewards, there are a few pros and cons to keep in mind.

Widespread availability. Crypto debit cards are now widely available across the globe, just like traditional debit and credit cards. “Tight regulatory frameworks ensure their security,” Kalifowitz says. “(The cards’) embracement from major global payments processors like Visa ensure users can pay almost anywhere.”

User-friendly platform. Most crypto card companies have mobile apps, just like traditional banks, but they’re usually much more user-friendly, Kalifowitz says. “Unlike traditional banks, many of which were established a century or more before the internet, crypto card issuers are modern firms built on and for digital platforms,” he says.

An easy way to explore. Sundin says that Bitcoin rewards cards are a good choice for people who are “crypto-curious” but don’t want to actually shell out cash to get started. “This is a good way to get into the game without using your own money to enter,” he says.

Rewards could go up or down in value. What’s also good about Bitcoin rewards cards is that you earn points and rewards in the form of bitcoins, which have the potential to increase in value over time. Of course, there is also the possibility that the currency loses value.

Risk of hacking. Because these cards are custodial, meaning that the issuer holds the cryptocurrency assets, Gouran says there is an inherent risk of the issuer getting hacked or going bankrupt. In that case, recovering your assets may prove difficult or impossible.

Potential tax consequences. Since cryptocurrencies need to be swapped for cash before they’re used to pay for something, Gouran says that all such transactions will likely incur a capital gain or loss. “Even if the tax consequences to the cardholder are negligible, it will create an accounting nightmare,” he says.

So the question is: Should you get a Bitcoin debit or credit card? It all comes down to the relevance of cryptocurrencies to you as a consumer, Gouran says. If you have already bought Bitcoin and you’re looking for a way to spend some of your investment, this is a good reason to use a Bitcoin debit card.

If you want to diversify the types of credit card rewards you are earning, consider a Bitcoin rewards card.

Ultimately, Bitcoin cards allow a fairly seamless on-ramp to learning more about cryptocurrencies. “The cards look, feel and act like the traditional cards we’re all familiar with,” Kalifowitz says. “The world of Bitcoin and crypto can look confusing and unfamiliar to many, preventing them from ever acting on their curiosity – but crypto cards were designed to appeal to anyone.”