Introduction to Investing in Digital Currencies and Assets
** This is an older article that I wrote and posted elsewhere but I think it is perfect to share here. **
There are essentially four parts to investing in the digital world - entering the digital market, researching the available opportunities, making your investments, and storing and protecting those investments.
Entering the Digital Market
To first get started, you need to acquire some digital currency, and you do this through a gateway (while technically an exchange, in order to prevent later confusion, I’m going to call these services “gateways”). A gateway is a service that allows you to purchase digital currencies with non-digital assets and there are several different types. These include hosted gateways like Coinbase, debit card gateways like Changelly, and peer-to-peer gateways like LocalBitcoins. If you’re in the US, the easiest and most reliable gateway is probably Coinbase. With Coinbase, all you do is create an account and then link it your bank account. Once you’ve done that, you can start buying and holding both Bitcoin and ethereum. However, if you’re concerned about privacy, you may want to look at the other gateways I mentioned as you can purchase digital currencies through them anonymously. Coinbase and other gateways that connect to traditional banking services have to follow KYC/AML (know your customer / anti-money laundering) laws which require these services to validate your identity and make that information available to the government.
https://www.coinbase.com
https://changelly.com/
https://localbitcoins.com/
Researching Available Offerings
Now that you’ve procured some bitcoin, you have a couple of options. Your first choice is to do nothing and just hold on to your bitcoin and/or ethereum, and that’s a perfectly fine decision (though I wouldn’t leave your holdings in Coinbase; I’ll explain below). Bitcoin and ethereum, along with Dash are my “big three” - the currencies I have the biggest investments in. However, if you’re interested in potentially massive returns, you need to start looking at the many other currencies and assets available. At the time of this writing (04/16/17), coinmarketcap.com has 690 coins and assets listed as available for trading. Most of them will never succeed and many of them will be outright scams, but that’s risk that needs to be taken to get the big rewards. Also, unlike fiat-based trading platforms such as the NASDAQ, the digital trading realm is completely unregulated (which is a good thing), so buyer beware. In order to improve your odds, you need to research.
The first place to start your research is the general coin listing sites. Here you will find a list of all currencies and assets currently being traded, their market cap, basic price chart, links to their websites, exchanges, and more. I would start learning about the top 10 in market capitalization first. However, don’t assume that just because something is in the top ten in market cap that it’s automatically a good investment. There are few in that group that I have no plans to invest in.
https://coinmarketcap.com/
http://coincap.io/
https://www.cryptocompare.com/
If you really want to get in on the ground floor, you’re going to want to learn about ICO’s. ICO stands for Initial Coin Offering and is similar to an IPO. It’s a where a new project pre-sells coins before being listed on an exchange in order to raise funds to develop their project. However, even though the potential gains are incredible, when you first get into the digital currency market, I would stay away from ICO’s and concentrate on the already established offerings.
https://tokenmarket.net/
http://www.icocountdown.com/
https://tokenhub.com/
It’s also a good idea to read several of the popular websites dedicated to digital currencies. You will find information about new projects, updates to existing projects, and all sorts of other important information. Listed below are three of the most popular websites dedicated to digital currencies and assets. Also, Youtube is a great resource, especially the interviews and presentations with the founders and lead developers of a project.
https://cointelegraph.com/
https://www.cryptocoinsnews.com/
http://www.coindesk.com/
Making An Investment
After you’ve spent some time researching and have selected the coins and assets you are interested in, you need to go out and buy the tokens. To do this, you need an exchange. An exchange facilitates the trading of one one currency for another. Virtually all cryptocurrency exchanges use bitcoin as their base currency. There are lots of exchanges out there with differing fees, options, available coin offerings, etc. To some degree, the asset you are wanting to acquire will dictate which exchange you will use. Most exchanges are quite similar to traditional exchanges like the kind used for trading stocks, but some, like Shapeshift, eschew the bids and asks, charts, etc and offer a very simple method of converting one currency into another. Some of the more popular exchanges include:
https://www.poloniex.com/
https://www.bittrex.com/
https://shapeshift.io/
Storing and Protecting Your Investment
Fundamentally, there are three ways to store your digital currencies and assets. The first method is with a hosted wallet. A hosted wallet is an online service that provides you access to your coins with any browser and internet connection. They are very convenient but you do sacrifice the security of your holdings quite significantly as the host of your wallet holds the private keys used to protect your wallets. With hosted wallets, your assets are only as safe as the security of the service holding them. Since a number of hosted wallets have been hacked over the years, I don’t consider it prudent to keep any significant holdings in these types of services. Something to keep in mind is that many hosted wallets only hold one or two currencies, so don’t assume that the coins you’d like to purchase have a hosted wallet available. Also, while exchanges are technically hosted wallets, they tend to be even less secure than dedicated hosted wallets. I strongly recommend that you do not leave your holdings on the exchanges. Lastly, some hosted wallets are now offering vaults that keep your coins offline. While these are safer than hot wallets, the host still has your key. Three popular hosted wallets are:
https://www.coinbase.com/
https://blockchain.info/wallet/#/
https://xapo.com/
The next type of wallet is a software wallet. A software wallet is an application that you install on your computer or smartphone and where only you have the private keys. This option is much more secure than hosted wallets but the responsibility of protecting your holdings rests squarely with you. If you lose your private key, you lose access to your wallet and coins - period. Please note that hosted wallets may have apps for your smartphone. These are not software wallets, these are just an interface to your hosted wallet - the host still has your private keys. If you decide to use a software wallet, it is very important to save your passwords, private keys, etc in a secure location. I save all of mine in either LastPass or Keepass. Another option would be to save your information in a text file and then encrypt it with 7-Zip or a similar program. A third option would be to simply print out the information and save it in a safe or some other secure location. It’s really important to understand that your software wallets are only as secure as your computer. If you don’t have passwords set on your computer and wallets and someone gets access to your computer, they can get all your coins. If you’re going to hold any sizable volume, you need to take the time to learn about securing your computer and software.
While most coins offer their own software wallet, and in many cases that will be your only option, there are some software wallets that allow you to store multiple coins in them, which is very convenient. I currently use Exodus and Coinomi, but there are options available as well.
https://www.exodus.io/
https://coinomi.com
There is also a hybrid wallet. It’s a software wallet that’s hosted online for you. Only you have the keys to your wallets so even if the site gets hacked, they won’t able to access your coins, but you don’t have to actually install any software for these hybrid wallets. There are several different hybrid wallets available and some of these hold many different types of coins. The only ones I have any experience with are https://myetherwallet.com/ and https://mymonero.com.
The last way to protect and store your digital holdings is with a hardware wallet. A hardware wallet holds the keys t your coins in that device and makes it so that your coins are only available when the device is connected to your computer. The idea is that if your wallet is not connected to the internet, it can’t be hacked. Hardware wallets are the most secure way of storing your digital currencies, but just like the other types of wallets, you need to make sure that the hardware wallet you want to use is capable of storing the assets you plan on investing in. I wouldn’t worry about hardware wallets too much yet. Get your feet wet with hosted and software wallets and don’t move on to hardware wallets until you’ve begun to accumulate some volume in your holdings.
https://wallet.trezor.io/
https://www.ledgerwallet.com/
https://www.keepkey.com/
That’s about it. You now know how to buy digital currencies, research the different coins, how to procure them, and how to store the. I hope you’ve found this article to be helpful in your journey into the blockchain.