Before investing, it is important to have the right tools to manage your investments. When it comes to buying and trading cryptocurrencies, the investor has to have a basic understanding of what are cryptocurrencies and what are blockchains. This article covers the basics, and gives step by step guides on how to begin your investment.
- What is Blockchain Technology?
- Cryptocurrency vs Fiat
- Setting Up Your Wallets
- Setting Up Your Exchange
- Trading Cryptocurrency
- Storing Cryptocurrency
What is Blockchain Technology
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” — Don & Alex Tapscott
While it sounds complicated, the sentence can be broken down into a couple of key words.
By definition, a ledger is ‘an account book of final entry, in which business transactions are recorded.” A digital ledger is one that is not written on paper, but is instead digitally recorded. Instead of just business transactions, any kind of transaction can be recorded in the ledger, from ownership of property to lunch orders.
It is a bold statement, but can be justified based on how the blockchain works. Rather than having a single ledger that is kept by one person, everyone who is in the network has a copy if the ledger. Every ledger is constantly being updated every time there is a transaction, and having these multiple ledgers of identical information across a network results in several main benefits.
1. Decentralised: since every ledger is identical and constantly updates itself at regular intervals, there is no need for a master copy of the ledger to exist.
2. Transparency: the ledger is available for all those in the network, meaning that the information is made public at all times.
3. Anti-Fragile: This means that not only is the model resistant to stressful situations, it actually becomes stronger. As more and more people join the network, to change or corrupt the data in the ledger would take an astronomical amount of computational power. You can find out more about the mechanics here.
This blockchain technology is the underlying mechanism of cryptocurrencies today. With that in mind, it is time to move on to what cryptocurrencies are.
Cryptocurrency vs Fiat
Digital vs Physical
Cryptocurrencies exist purely as lines of code online, and these codes have monetary value. Fiat money can be stored digitally (eg. Online banking), but a person is able to withdraw money out in physical form.
Decentralized vs Centralized
With cryptocurrency, there is no such thing as a central authority who oversees or controls the transactions. Any changes made to a cryptocurrency requires the majority vote of the miners. Compared to a centralized authority currency, such as fiat money, there is an overseer that controls and monitors all transactions made. A good example would be banks, who record how much each of their accounts have. This is one of the key appeals of cryptocurrency; a means to obtain greater freedom from government involvement and making transactions without barriers or surveillance.
Trustless vs Trust-based
Taking the example of the bank from the above paragraph, the amount of money each person has is recorded by the bank, who updates their own ledger. If I want to pay a vendor online, I trust that the bank takes the appropriate amount and transacts it on my behalf.
A trustless system has no need for a person to trust another entity to perform on his/her behalf: money that is transferred goes straight from the consumer to the vendor. Verification is done on the blockchain, and once confirmed, it is immutable.
If this has piqued your interest and you wish to find out more, you can read more in detail at CryptoGrinders. Here we provide an in-depth explanation of the mechanics behind it all, such as hashing and mining, and the role it plays in crypto-market.
Step-by-Step Guide For A First Time Investor
By following these steps in order, you will be all ready to invest with peace of mind.
Setting Up Your Wallet
Just like a physical wallet helps you to keep your physical fiat currency, a cryptocurrency wallet is a way for you to keep your cryptocurrency. There are several kinds of wallets, each with its own characteristics. I will list 3 basic types here, along with how to create them.
It is a wallet that is accessed through your browser via the internet. These wallets are provided by third parties. It is not recommended to store large amounts of currency inside, as is susceptible to hacking and phishing.
Coin Base Set-Up Process
1. Head to www.coinbase.com to sign up for an account.
2. Fill in the information in all the fields.
An email will be sent to you for verification, click on the link to continue.
3. Enter in a valid handphone number to continue.
Enter the code that will be texted to you, and you’ll be brought to the main site.
4. Click on ‘Verify your Identity’.
Select the type of ID that you wish to use.
Choose an upload method.
It will take about 2–3 minutes for confirmation once you have taken a photo of your ID.
5. Link a Payment Method.
Alternatively, you could use MyEtherWallet (MEW).
MEW Set-Up Process
1. Go to www.myetherwallet.com
Enter a strong password (alpha-numeric, longer than 8 characters and preferably with a symbol inside it as well. This password is required to enter the wallet, so write it down and do not forget it!
2. Save the JSON key to unlock your wallet.
The JSON key should be saved in your computer, and backed-up in a hard drive as well. This JSON key is required to unlock your wallet to send/receive funds! Do not lose it, as the cryptocurrency inside will no longer be accessible to you.
Your Web Wallet is now ready for use.
It is a wallet that is accessed through your mobile device. It is easier to accept/receive payments while on the go using your mobile, and it has handy features such as QR code scanning to facilitate accurate and fast transfer to addresses. However, there is a higher risk as the phone could be lost, as well as hacked by malware.
Jaxx Set-Up Process
1. Download the Jaxx Wallet App from the Apple/Play Store.
2. Choose the currencies which you are interested in. Jaxx will create a wallet for each of them.
Select ‘Create New Wallet’ and press to continue.
3. Back Up Your Wallet.
Unlike other accounts where you can click ‘I forgot my password’, this does not fly with cryptocurrency. Security is of utmost importance.
The backup recovery phrase is a list of 12 words in order. This is the key to all the money within the wallet, if ever your phone is stolen, broken, or just upgraded to the latest model. If the recovery phrase is lost, so are all assets within the wallet. It is strongly recommened to write it down, and store it safely.
- Save a photo of your recover phrase as a screenshot
- Save as a text file on your computer, or any device with access to the internet
- Save it in any digital form
4. Set Up a PIN
A PIN is a 4-digit code used every time you transfer currency out of your wallet, as an added measure of security. We do not recommend using easy to guess PINs, such as 1234 or 000.
Tap the top right of the Jaxx App to open up the Menu, and enter the Settings to Set up the PIN.
Your Mobile Wallet is now all set for use!
Hardware wallets are cold-storage devices that have to be plugged into a computer to make a transaction. They are more secure than both the Web Wallet and Mobile Wallet because they generate the private key offline, meaning that it is impossible to hack. They also come equipped with a password, to prevent physical theft and usage.
Trezor Set-Up Process
1. Head to trezor.io to purchase the wallet.
Choose your colour, shipping and payment method, and wait for your Trezor to arrive.
2. Set-Up Trezor
Download the required software from wallet.trezor.io, and connect the Trezor to your computer using the USB cable. You will then be required to choose a PIN for your Trezor.
3. Back Up Trezor
There will be a 24 word back-up phrase generated. Save the phrase on paper, as it is your only way to access funds should your Trezor get lost or damaged.
Your hardware wallet is now set-up and ready for transcations.
Cryptocurrency Exchange Platform
What is an exchange?
Now that your wallet has been set up, its time to put some funds into them.
An exchange is a platform where you are able to convert your fiat or cryptocurrency into other forms of cryptocurrency, while the wallet is intended for storage of your currency.
Registering for an account on the exchange platform allows one to convert fiat into a cryptocurrency of their choice. As each exchange trades different alt currencies, it is likely that a person will be required to sign up for multiple exchanges.
Without further ado, let’s go into a more detailed step-by-step.
How to get on an Exchange
There are several exchange platforms right now, and each one trades slightly different sets of cryptocurrencies. All exchanges follow similar sign-up processes, and in this tutorial we will be going through Gemini.com.
Gemini Account Set-Up
Go to www.gemini.com and click ‘Register’.
2. Fill up your details.
3. Check your email and key in the activation code.
4. Click on ‘Get Started’.
5. Key in your phone number, and use the activation code.
6. Verify your Identity.
7. Upload proof of identity.
Once that has been done, Gemini takes up to 3 working days to verify your identity, upon which an email will be sent to you, and you can begin trading!
You now have an account on an exchange platform! Moving on...
The Gemini Dashboard shows your current balance, your account value, and a chart of recent prices. While it can be confusing, the first step is to Transfer Funds by clicking on the tab at the top of the site.
Once the funds have been transferred in, you can begin trading by clicking ‘Buy’ or ‘Sell’.
As a first timer, do be sure to test it out with small amounts first. Take some time to get used to reading the charts, getting familiar with the process of trading, and ensuring that you only invest more when you have become comfortable and confident in trading.
The crypto-market is still very new. While the stock exchange market has been around for hundreds of years (1792), crypto has emerged in less than a decade. As such, there might be issues with the website, and you might find your funds locked up for periods of time. Never invest money you cannot afford to lose.
There is still no Standard Operating Procedure (SOP) with regard to crypto-trading, and the community is still sharing information and tips. Keep up to date with the news at CryptoGrinders, where the community updates each other on various cryptocurrencies.
Now that you have begun trading, you likely are holding some cryptocurrency on the exchange along with some fiat. Cryptocurrency like ETH and BTC can also be traded on the exchange for other alt coins.
However, the exchange platform is meant for exactly that: exchange. As a website, it is not as secure as wallets such as Trezor or MEW. As such, it is strongly recommended that you keep only what you intend to trade, rather than all your currency, on the exchange platform.
To start off, click on the ‘Transfer Funds’ tab at the top of the dashboard. From there, you are able to withdraw funds from the exchange. Its simple enough for fiat: draw it out via bank transfer or wire transfer to get back USD into your bank account.
If you wish to store your cryptocurrency, you would need to transfer it out to the wallet that you have set up.
Simply tap on the cryptocurrency you wish to draw out, and fill up the destination address. This destination address is the public address your wallet has, and will look something like this:
Copy and paste that into your Destination address, and your cryptocurrency will be transferred out!
Why not just transfer out to fiat, and buy back in when necessary?
Transferring funds out into fiat entails a transaction fee, which is could cut into your profits. Moreover, many alt coins can only be purchased with other cryptocurrencies. It is much simpler to keep a store of ETH and BTC to buy into ICOs and other alt coins that only accept crypto in exchange for their tokens.
If you have made it to the end of this article, congratulations! You are fully equipped to invest and trade in cryptocurrencies.
 Dictionary.com: www.dictionary.com/browse/ledger
 McGlynn, supra note 14 at 798: To illustrate, it would take 51,000 of the world’s fastest supercomputers to compromise the Bitcoin blockchain.