It’s 2017 and the cryptocurrency party is in full swing with both Bitcoin and Ethereum up 400% and 5000% at one point respectively. Banks took a huge U-turn and stopped closing down the accounts of so-called “suspicious” Bitcoin traders in favor of joining the Ethereum Enterprise Alliance. Even my largely reclusive Asian tiger mom has heard of the 比特币. Yet amidst this bulging backdrop (or bubble depending on your point of view), there are surprisingly very few direct, end-to-end resources for the retail investor to take part in this speculation smorgasbord.
Investing in cryptocurrency can be very confusing as it differs significantly from how one would approach stocks. Buying Bitcoin or ether is not like buying shares; rather, you are getting digital tokens that have certain functionalities, such as a decentralized, pseudo-anonymous currency in Bitcoin’s case or fuel for decentralized apps and smart contracts for the ethereum platform. You expect increased adoption and technological innovations to translate to demand for your coins/tokens and as a result a return on your investment. Some very enterprising investors will even trade cryptocurrency pairs such as BTC/ETH or BTC/LTC (Litecoin).
In this article, I will discuss the proper and safest way to participate in the cryptocurrency market in the simplest way possible. While there is a wealth of knowledge out there, some which is extremely technical, the process itself is actually pretty simple. While it’s a little more of a hassle than signing up for a brokerage account, you can easily get set up in less than a couple days without significant technical knowledge. Don’t let unfamiliar jargon and terminology scare you off!
1. Identify your cryptocurrency of interest and a relevant exchange.
Cryptocurrencies are traded on their own exchanges. Like the NASDAQ and the NYSE’s differing offerings of equities, not every exchange will offer every cryptocurrency. It is a good practice to stick to the larger exchanges with higher volume to maximize the chance that your trades will go through. Large exchanges like GDAX, Kraken, Bitfinex, and Gemini will offer good volume to trade Bitcoin and ethereum with USD through bank transfer or credit cards. The main difference between these exchanges are fees and user interfaces. Many websites will point newer investors toward Coinbase, which provides a better UI as well as a wallet in exchange for higher fees. Personally, I choose to use Gemini as I prefer the interface and the mildly hilarious fact that it was founded by the Winklevoss twins of Facebook-suing fame.
For the many other “altcoins” out there, it gets trickier — you can check out Poloniex, a diverse exchange offering over 80 crypto coins, but you can only fund your account with Bitcoins or other altcoins.
After you’ve selected your exchange of choice, you’ll typically go through a somewhat onerous process to verify your account. You’ll be asked for identification documents such as your driver’s license or passport, and usually you’ll be verified within 1–3 business days. Since transactions on these exchanges cannot be cancelled or refunded due to the nature of blockchain, exchanges are very concerned about fraud. You might wonder why personal information needs to be provided to buy currency that decentralized. The answer is that while the cryptocurrency exchange is anonymous, the trade of fiat (USD) to crypto is not! It is important to exchanges to verify your financial information and identity so that scammers can’t buy a ton of tokens with fake credit cards or take part in other shifty shenanigans.
After you’re approved, you’re all set and can begin trading! Typically exchanges will have fee waivers or discounts if you trade at high volume or act as a market maker. After your buy order is filled, the tokens will be held in the exchange for you. At this point, unless you are a day trader, you should immediately transfer your currency into “cold storage”.
2. Choose a wallet, or “cold storage” solution.
Rightfully so, one of the greatest concerns about cryptocurrency is security. While the exchanges are far more secure than 3–5 years ago, it is foolish to believe they are impervious. As long as your tokens sit in the exchange, you don’t fully control them yourself. Let’s quickly talk about how cryptocurrency ownership works to better understand this.
Every time you buy X quantity of cryptocurrency on an exchange, that quantity is linked to a public key, or digital code indicating that amount. This is the bread and butter of the transparency of blockchain — everyone can see all public keys and the amounts of cryptocurrency to which they are linked. On the exchange side, they also own a private key that indicates ownership of that public key. If a hacker obtains that private key, your investment is gone.
This might be a weird concept, but the tokens themselves are not actually in your wallet. When you “transfer” your cryptocurrency in a wallet, you are actually storing that private key, a unique digital code that’s known only by you. This private key acts as a ledger and allows you to transfer coins that you own on the public key. If this is too much of a headscratcher, let your main takeaway be that as long as the exchange holds your cryptocurrency, you do not have full ownership of it. As such, you should store your cryptocurrency in a wallet to mitigate security risk, particularly if you are a long-term holder.
There are several types of wallets, and here I’ll quickly go over some of the most popular:
1) Hardware — these are typically USB devices that can access the blockchain. Ledger Nano S appears to be the most acclaimed.
2) Desktop — typically an installed application on your computer that will connect to the blockchain. Exodus, Jaxx, Parity
3) Web-based — convenient as you can access from anywhere. Ironically, your private keys are stored on a central server, which may prove to be a security risk. MyEtherWallet, or MEW, is very popular.
While there are definite differences in the design of the wallets out there, the general principle is the same: they house your private key such that only you can access the tokens you own. No one will be able to touch your currency unless you’ve engraved this key onto your cold, dead hands. Be aware that this is a double-edged sword — if you lose your private key and your wallet recovery phrase, your cryptocurrency is gone forever!
Wallets such as Jaxx are pretty user-friendly and will have plentiful setup documentation — I would recommend it if you just want a simple wallet. Personally, I use Parity, which was developed by a co-founder of ethereum and has additional functionality. Here’s a link to some well-illustrated install instructions if you’re interested.
3. Use the wallet to transfer and receive funds.
Now that you have your wallet, token transfers should be pretty easy. If you’re moving cryptocurrency out of the exchange, simply paste your wallet’s public key into the exchange website and send. If you’re doing the reverse, paste the exchange’s public key into your wallet’s transaction contract and confirm. On mobile wallet apps, it is possible to scan a QR code as well. Each transaction from your wallet will cost a fraction of a BTC/ETH/etc. (my last transaction cost was .00042 eth, or approximately 0.084 cents at this time of writing). Without getting too technical, this transaction cost disincentives high volumes of malicious contracts and provides an incentive for miners to confirm your transaction in a block on the blockchain. It also beats those sky-high wire fees at your bank! To read more about this process, check out this article by Collin Thompson.
Investing in cryptocurrency simply requires getting verified on an exchange that includes your coin of choice. Keep your tokens safe by storing your private key in a wallet. Use the public keys between the exchange and your wallet to seamlessly transfer your cryptocurrency.
Accessibility remains a huge problem in bringing new investors into cryptocurrency. The process described above, while not exceedingly complex, is nonetheless not very intuitive or easy to explain in 25 words or less. I look forward to the development of more user-friendly processes or UIs as the crypto-market matures. In the meantime, for those of you in the know, never invest money you can’t afford to lose and best of luck in this extremely volatile and exciting market.