Should You Buy Bitcoin With Your Credit Card?
By AnnaMaria Andriotis and Paul Vigna
Some banks and credit-card companies have begun restricting customers' purchases of bitcoin, shutting down a popular way to buy the volatile digital currency.
This month, Capital One Financial Corp. decided it would no longer let its customers use credit cards it issues when buying bitcoin or other cryptocurrencies such as Ethereum "due to the limited mainstream acceptance and the elevated risks of fraud, loss and volatility." The bank said it would "regularly evaluate the decision as cryptocurrency markets evolve."
The firm's decision followed Discover Financial Services' move in 2015 to effectively prohibit purchases of digital currencies with its cards.
Bank of America Corp. allows bitcoin purchases with the credit cards it issues. "At this point there is nothing that would block a transaction, but we are carefully reviewing our policy," said a bank spokeswoman.
Citigroup Inc., which allows bitcoin purchases with its credit cards, is also reviewing its policy, according to a person familiar with the matter. TD Bank, the U.S. unit of Toronto-Dominion Bank, said that as a result of security measures some bitcoin transactions aren't being processed.
The moves could put a crimp in an increasingly common way to buy bitcoin, which soared 1,375% last year and attracted widespread new interest from individual investors before falling about 20% so far this year. Despite bitcoin's growing popularity, some card companies are expressing concerns about consumers using their credit cards to buy the volatile currency and about taking on exposure to those purchases.
Funding investments with credit cards isn't usual in traditional markets. Among brokerage firms, Charles Schwab Corp. and TD Ameritrade Holding Corp. don't allow it, and E*Trade Financial Corp. lists several funding methods it accepts on its website, but doesn't mention credit cards.
With bitcoin, some 18% of buyers funded their purchases with a credit card, according to a survey released in December from lending marketplace LendEDU. Of those, 22% said they didn't pay off their credit-card balance after the purchase. Nearly 90% of that group expected to eventually pay off their balance using profits from the investment, the survey found.
Funding those investments with debt only adds to the risk of investing in bitcoin. The volatile asset -- bitcoin fell more than 50% between its December peak and January low -- could result in card holders being underwater before their bill comes due.
Investors need to cover what often are double-digit interest rates on credit cards if they don't pay the bill in full, in addition to fees on the bitcoin transactions. To offset those costs, borrowers need bitcoin to rise substantially in value. That can increase the chances of borrowers not paying their credit-card bills if they owe more on the asset than it is worth.
Fraud losses are also a concern for card issuers. As more cryptocurrency exchanges emerge, some card companies say there is an elevated risk of consumers purchasing bitcoin from a fraudulent exchange. Card holders typically aren't responsible for fraudulent purchases charged to their credit card, raising the risk that card issuers could be stuck with the loss.
Card companies have also cited worries around the lack of transparency with bitcoin purchases that could subject them to legal risk around anti-money-laundering obligations. That can include concerns that the seller of the item is using the funds for illegal activities.
"There's a host of issues," said David Nelms, Discover's CEO. Among others, "we don't want to be responsible if someone buys bitcoin and it drops 50% the next day."
But the move to crack down has raised the ire of bitcoin investors. James Kinslow of Tucson, Ariz., earlier this month was trying to buy about $100 worth of bitcoin through Coinbase, which operates one of the largest bitcoin exchanges.
Mr. Kinslow said he already had an account with Coinbase, and had previously used his Capital One credit card to buy bitcoin. This time, however, he was blocked. "I think part of the agreement is, you guys provide me with money, and I use it as I see fit," Mr. Kinslow said.
Coinbase, which has allowed credit-card purchases since 2016, said it is looking into Capital One's decision.
Visa Inc. and Mastercard Inc., the two largest U.S. credit-card networks, generally don't allow card issuers to reject all purchase transactions from a certain merchant unless it is illegal or the issuers have concerns that include fraud or significant legal risk.
American Express Co. allows card users to buy bitcoin, with some restrictions. Consumers have to link their AmEx card to a specific bitcoin wallet where they can load up to $200 a day and no more than $1,000 a month.