Cryptocurrency is the talking point of the financial world, and the credit card industry wants to be part of the conversation by offering rewards for digital currencies including Bitcoin, Ethereum, Cardano, Dogecoin, and others.
The question is, should you mix credit card rewards with the crypto market? Probably not for the greatest flexibility. Instead, separate credit card rewards and cryptocurrency purchases.
If you want to buy crypto, use the money you made with a Cashback credit card or the equivalent value that you receive, for example by redeeming airline miles. This way, you can buy any cryptocurrency you want on your terms and timing. You could also collect more rewards to invest overall.
But if you’re crypto-loving and consider credit card rewards to be extra play money to lose, go for one Crypto Rewards Credit Card if it speaks to you. This may be an easier way to get started than finding and searching for a crypto exchange service. And it’s a rare credit card reward that has a chance to grow dramatically in value.
Which credit cards earn crypto and how?
Crypto rewards on credit cards are a relatively new trend as there are a number of cards to choose from. Issuers that have introduced cards or announced such plans include:
Crypto rewards come in slightly different versions. For example, your credit card spending can be rewarded as digital currency such as Bitcoin or Ether, the currency of Ethereum. With other issuers, you will receive points or cashback that you can convert into cryptocurrency or use in other ways.
The Case for Crypto Rewards
Easy entry. Credit cards that offer crypto as a reward are usually already linked to a cryptocurrency exchange, a place where you can buy bitcoin, ether, and a variety of other digital currencies. So you don’t necessarily need another currency exchange to make crypto purchases and sales. It’s an easier way to dip your toe in the water. And if you receive crypto as a credit card reward, you may not pay commission on the purchase like you would with an exchange, although it may depend on the card.
Lottery ticket high. It’s a chance of getting oversized value on money you weren’t expecting anyway, much like buying a lottery ticket. Part of the fun is dreaming about what the money could buy, even knowing the chances of making it rich are nowhere near guaranteed. Or it is desirable, like the imagination, to use a fair number of airline miles to book a premium seat worth thousands of dollars in an exotic location.
Recognition. Crypto rewards can increase in value once they are received. In contrast, cashback is unlikely to increase in value. If you use credit card rewards to buy goods, the goods will almost certainly lose their value if you resell them. If you buy a plane ticket with miles or book a hotel room with points, you cannot resell them for a profit. So cryptocurrency is one of the few rewards that have a chance of increasing in value.
Passive investing. You can argue about whether buying crypto is really an investment, but using a crypto credit card is a way to keep value without thinking too much about it.
Arguments against crypto rewards
With non-crypto credit cards, you have more choices. An alternative is to get a great cashback card and use that money separately to invest in a cryptocurrency. That way, you can choose from many more reward cards that better suit your spending patterns. That could result in more rewards being earned overall.
The value of the rewards is uncertain. Cryptocurrency prices are volatile. If you get 2% back with a crypto credit card and the value of your chosen currency quickly drops in half, you’ve effectively only made 1% on purchases, which is an uncompetitive rate of rewards.
Timed coordination. When you imagine a market timer with crypto, you lose control of when to make a cryptocurrency purchase. For some cards, the crypto purchase may come automatically at a time when the currency you choose has a high price, which is not ideal. With other cards, you may not receive crypto rewards until the end of the credit card billing cycle. The price of your desired currency could have changed dramatically between the time the reward was earned and the time you took possession of the currency.
Flexibility. With some crypto reward cards, you may be tied to a single currency or just a handful. Instead, if you use a cashback card for rewards and use that money to buy crypto, you can buy whatever currency you want.
Spending ability. You can buy some products and services using cryptocurrencies, but most of your daily purchases must be in dollars. That means you have to sell crypto rewards to convert them back into dollars and just spend them.
Taxes. You could have more complicated tax returns when selling the cryptocurrency that you earned as a credit card reward. You will not be taxed on the crypto rewards if they are granted to you, just like you would You will not be taxed on cashback, points or miles. However, if you sell a cryptocurrency that has been upgraded, you will be taxed on the capital gain, the difference between your purchase price and the sale price. It’s the same capital gains tax you would pay if you were to buy and sell crypto for cash through an exchange.
Fees. When checking a credit card, find out about the fees that may apply when redeeming cryptocurrency. Maybe there aren’t. But things to watch out for would be a possible markup on the purchase price of the currency or possibly the inability to redeem cashback or points at a 1: 1 ratio. When buying a cryptocurrency for cash on an exchange, you are likely paying a transaction fee to the exchange. When a fee is built into the redemption of rewards, it effectively reduces the amount of money you earn on your credit card rewards compared to, say, cash.
Availability. Not every crypto reward card will be available in every US state as of May 2021.