Buying and Securing Cryptocurrency: A Complete Beginner's Tutorial
A Walk-through Guide to Safely Entering the Cryptocurrency Market.
Disclaimer (because I’m a lawyer and I like you people)
This is not financial advice. This is not legal advice. This is barely advice at all. I am 100% a lay person and have been in this space for barely more time than Anthony Scaramucci held a job in the White House. These are merely my opinions and analyses as I understand it. I may be very very wrong, and you should recognize that.
A word of warning: know what you are buying.
Blockchain (the underlying tech for cryptocurrencies) really is a powerful invention, but there is a lot of ignorant hype around it right now. I feel that a basic working understanding is proper before throwing your money at it. A blockchain is a ledger. It does what ledgers do—keeps a continuous and linear list of transactions. Ins and outs. In this case, the ledger is digital and constantly updated. Not Heath Ledger:
There is but one ledger for the totality of each currency. There are numerous copies of this one ledger that are networked and constantly checked against each other for accuracy and validity. Most blockchains (but not all) are fully decentralized, meaning there is no privileged entity or group that has priority influence over deciding the accurate state of the ledger. The process of adding every transaction to the ledger involves a competition between all of the nodes—networked computers that hold a copy of the ledger and check for accuracy, called miners—to solve a complex set of mathematical computations. There is an incentive structure built in that rewards miners. This helps ensure that there is enough community buy-in to keep the network strong.
Most cryptocurrencies can be subdivided. For instance, you can divide a bitcoin down to 8 decimal places (.00000001 BTC). So while there is a limited supply of Bitcoin, you can have a substantial investment without even holding 1 BTC.
You're ownership claim to any bitcoin is merely an accounting reality. You own bitcoin if there have been bitcoin sent to you that have not subsequently been spent by you (e.g. 'A' was sent 2 bitcoin. 'A' subsequently sent .5 bitcoin to 'B'. Therefore, 'A' has 1.5 bitcoin). Makes sense. People can get tripped up by wanted to know exactly where their bitcoin is stored. But like I said, it is an accounting reality and nothing more. The coin is not stored in the files of your computer. The record of and tabulation of transactions exists on the public blockchain (i.e. the ledger). This accounting is confirmed by the network. You have bitcoin if the sum of ALL of the transactions ever created on the blockchain say that you own bitcoin.
You might be asking, "How do I get a transaction added to the ledger?" Understanding the value figure of a transaction is straightforward enough—e.g. “A sent B 1 Bitcoin.” But how do you get an identity on the blockchain? In other words, how do you become A or B in the above example. For that, you need a wallet.
We will talk a little bit about wallet options below. What you need to know for now is that it operates similarly to a user-account on a traditional internet site (the technology and background processes are very different, but the user experience is similar). Creating a wallet gives you two keys. One public, one private. The public one is essentially the address. It is what you use to get money "into the wallet." It is your identity on the blockchain. It is a long string of random characters generated for you.
Your private key is more properly a key. This is what gives you permission to access the bitcoin that is attributed to your public key. There are several methods of implementation for utilizing a private key (e.g. online, software , hardware, and paper). A software wallet is probably the most widely used method right now. With a software wallet, your private key is stored in a file on your device. That file is accessed when you initiate a transaction through the software. This file can be imported to a new device if you have created a backup. Unlike a traditional internet user account, you can only use a device that has your private key stored on it to access your coin. The private key should never ever be shared with anyone. Don’t take screen shots of it, don’t send it to a networked printer. Don’t. The private key is essentially the keys to the metaphorical Bens. Treat it right and keep it private. There is no centralized database to store user login information. This puts all of the burden on you to make sure that your wallet is adequately backed-up.
So, is it secure?
There is a myth that blockchains are immutable: https://www.coindesk.com/blockchain-immutability-myth/ but that is not true. They are extremely tamper resistant. In order to change a transaction that has already been approved or creating a "double-spend" transaction, thereby altering the validity of the ledger, you would need to coordinate (or commandeer) computer power significantly greater than the sum of the computing power being used to constantly validate the ledger. And even then, it has other important security features. This arguably makes it the most secure network in the world. How is the Bitcoin track record? In almost 10 years of existence, it has never been hacked. Not once. Really. You’ve likely heard of major bitcoin hacks in the popular media (Mt. Gox was the big one), but the reporting on these misses a very important fact. It has always been the 3rd-parties being hacked. Whether that is individual miners, wallet software, or online exchanges, which allow people to buy and sell bitcoin and other currencies. Online exchanges are only ever as secure as everything else on the internet. More on this later.
They are secure, but that does not mean they are immune to bad actor influence: https://techcrunch.com/2018/01/15/researchers-finds-that-one-person-likely-drove-bitcoin-from-150-to-1000/ Also, because of the decentralized nature of a blockchain, there is no door you can knock on to lodge your complaint. There is no tech support to help you recover the password you set while high but just can’t seem to remember now. THERE IS NO WAY TO CANCEL A TRANSACTION. If you send your Coin to the wrong address, you’re screwed. If you send Bitcoin to an Eth address, you’re screwed. ETH and BTC sit on different blockchains and there is currently no functioning interoperability between different blockchains. Fingers crossed.
Okay, you’re convinced enough to throw a few dollars at it. Now what?
If you have a benevolent and oddly tech-savvy uncle who wants to gift you his Bitcoin, then great! Just create a wallet, give him the public key, and have him send it over. If you’re like the rest of us, you need to find a way to trade in your boring, Federal Reserve backed dollars for some fancy new imaginary money. There are actually only a handful of companies that currently exchange USD for BTC.
Coinbase is a very popular and user friendly on-ramp for buying crypto with USD. It is US based, which is somewhat rare in this space and the team has actually been doing a decent job at keeping up with the explosive increased demand lately. I recently heard good things about a site called Gemini, but have not used it. It apparently has slightly lower fees, quicker processing time for transactions with USD, and more crypto pairings than Coinbase.
Coinbase currently offers four major cryptos that are some of the oldest and most time-tested, with the exception of Bitcoin Cash, which is a hard fork of bitcoin (google if you're interested) and came about in August 2017. They will likely be adding more in 2018. You can buy crypto by linking your bank account, initiating a wire transfer, or with a credit/debit card. Getting verified to used credit or debit is an additional step and carries with it an increased fee. I have only ever used the linked account method. It can take up to 10 days at times for that transaction to be fully processed, but it locks in the exchange rate at the time that you initiate the trade.
Here is my referral link to Coinbase:
https://www.coinbase.com/join/5a2cd258d759a100d65116c6
if you use it and buy at least $100 of crypto, we both get $10 of free bitcoin.
If you're looking to try your hand at some of the more obscure or "up and coming" cryptos, then you'll need to get your Bitcoin (BTC) or Ether (ETH) or Litecoin (LTC) to a proper exchange. There are a bunch, but I've been mostly using Binance. It is a Chinese company, but has a good reputation and that's what I picked. Many of the exchanges have been unable to keep up with increased demand and have been closed to new users. Binance did that as well for a period in late December and just reopened. Please take the time to look into a few options and know that many have country restrictions, and some even vary by state as well.
And here is my link to Binance: https://www.binance.com/?ref=12760278
If you use this one you get a 50% reduction of trading fees (which is already set pretty low at something like .05%) and I get 20% commission on your trading fees. Also, if you plan on day-trading, I recommend buying a little bit of BNB (Binance’s native currency) and enabling fees to be paid from your BNB reserve.
Here’s the problem though, Binance does not exchange USD. So you’ll need to do this in stages. To get your coin from Coinbase to Binance you'll want to go through GDAX.com. Gdax is a sister company/subsidiary of Coinbase and allows fee-less transactions between the two. You also use only one account to control both sites. You can watch this guy’s video of how to do it (there are a bunch of others too if you look around):
After that, you can look through the available currency pairs, DO YOUR RESEARCH, and make a trade. There are plenty of videos about how to use the Binance exchange, so put your eyes on one of those to orient yourself. Binance has set .002 BTC (about $30 right now) as the minimum trade amount for all BTC pairs. I’m not sure what the minimum is for Eth.
Seriously, do your research. Any reputable currency will have a functional website, development team, a white paper outlining why the world even needs another cryptocurrency and what problems this will address. Look if they have published a timeline and whether they are tracking it. Look at marketcap (https://coinmarketcap.com/), and amount of circulating currency (this is highly variable, and principles of inflation should still apply to fake money). Check to see if it is truly a decentralized network. Read yourself some Reddit, Steemit, or Medium. These people are smart. Take a look at the price chart. Would you be buying in at an all time high? If so, probably not the safest bet.
Most of these sites have an extensive verification process that can take a few days to get approved. For Binance you have to submit front and back pics of your license and a selfie of you holding a piece of paper with the date on it and the word "binance.com" written on it. So pencil in the extra time to go through the hoops.
A quick note about security
Almost all internet crypto exchanges offer (and some require) two-factor authentication, or 2FA. This involves linking your account to an app (either Authy or Google Authenticator) on your phone. These apps generate random 6-digit codes every 30 seconds that you will need in order to login. This means someone would have to steal your phone and know your password to get into your account. I highly recommend this step. When linking an account, there will be a QR code and a "secret recovery key." You scan the QR to link, but make sure to write down the secret key. Again. Share with no one. Don’t save as a picture on your computer. I recommend writing it down, pen on paper. Then writing it on a second piece of paper and storing those two pieces in secure places in different buildings. Without this code, you'd have no way of accessing your account if you lost your phone.
You now have a handful of different currencies and don’t know what to do
Some people like to day-trade Crypto. It is a remarkably volatile market and some people have attempted (some successfully, others not so much) to capitalize on the peak-valley patterns showing up all over the place. Really, the average bear should stay away from this. If you have experience day-trading stocks or are dedicated enough to research almost daily and understand what you want your short, mid, and long term positions to be, then knock yourself out.
If you do not plan on day-trading and just want to throw a few bucks at it and check back in a year, then I recommend taking your assets off of the exchange. When your money is just in an account on Binance or Coinbase, you do not actually have control of your private key and have pretty much zero recourse if the site goes down or skips town or is hacked—Coinbase is somewhat of an exception bc they are US based, but still, nobody wants to go to court (not even lawyers). To get your money offline, the easiest way is to send it to a software wallet. I picked Jaxx. It is free, supports a good range of currencies and has a strong reputation. Technically, Jaxx is a piece of software that hosts several different wallets for you. If you’ve bought currencies that are not supported by Jaxx, then you’ll need to research for one. Odds are, if it’s not on Jaxx, then you’ll need to have at least two applications to hold all of your wallets. You download the wallet software to your computer and use the public key to deposit money into it essentially the same way that the above video describes transferring funds from Coinbase to GDAX. Also, you will need to back up this wallet. If your computer stopped working or got stolen, you would have no way of accessing your assets. Jaxx has a pretty cool back-up system and is described in the video below. You know the rigmarole: Write your seed words (the 12 random words) on a physical piece of paper. Then do that again. Store them in difference places.
If you want to go an extra step, get a hardware wallet. It is an additional investment, but keeping your money safe is always worth it. I've heard good things about the Ledger Nano, but there are others. https://www.ledgerwallet.com
A note about risk tolerance
These assets saw ridiculous growth in 2017 (some more than 3000%) and I don't think any serious crypto investor would be surprised to see a major 60-70-80% correction. For a lot of these guys and gals, they got in so early that they could weather that storm and not even have their initial investments threatened. Long-term investors also tend to believe that the market would rise like a Phoenix after something like that. I genuinely think blockchain technology is here to stay and will shape the next few decades, but none of the cryptocurrencies in existence right now are inseparable from blockchain technology. There is no backing. There really is no stored value and there is nothing but a fragile crowd psychological acceptance keeping it up. They could crash and burn magnificently and you could be caught holding a bag of 100 Bitturds.
Pretty much everything I've said here is heavily blogged about/youtubeable if you want to dig further into it (@cryptovestor is a favorite of mine). Also, let me know if you have any questions that I might be able to answer. I know I don't have to tell you again, but it is always a nice reminder to not invest any amount of money that you are willing to lose. I think crypto is probably better described as a gamble than an investment at this stage. Almost none of the currencies have a product that is launched, and many don't even have a proof of concept. Good hunting my friends and please kindly correct my mistakes in the comments.
Cheers,
Sam
All pictures were sourced from pixabay.com and labeled as not requiring attribution
I am new to Steemit and appreciate any Upvotes, Resteems, and Follows. A little bit about me if you're interested: My Introduction Post: Husband, Father, Friend, Lawyer, and Woodworker--In That Order
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