People have been asking me how to get started putting money in Bitcoin and other cryptocurrencies so I want to share what little I know. Keep in mind, in addition to not being a financial consultant, I am also not a tech expert.
Take this into consideration when reading this. You should get multiple opinions from different people, do some of your own research, talk to professionals, and most importantly….DO NOT PUT MORE IN CRYPTOCURRENCIES THAN YOU CAN AFFORD TO LOSE.
Cryptocurrency guide compiled by @btc313
I believe that this technology will change the world, as this is the future of money- but it could all collapse at the drop of a hat. That being said, here are my thoughts on cryptocurrencies:
What are cryptocurrencies? What is Bitcoin?
In short, Bitcoin is an electronic currency with a finite and defined money supply that uses an open ledger on a global, decentralized network. This means all transactions that occur are public and confirmed on a network of “mines” and “nodes”.
This network – or blockchain – of millions of computers exist in diverse places from massive “mining farms” to personal computers in apartment closets.
These computers are incentivized to confirm transactions by receiving a small fee, and by randomly generating new currency while confirming current transactions. This is how new Bitcoin enters the market- by generating new coins as it processes current transactions.
Currently, there are over 16 million Bitcoins in existence; however, there will only ever be 21 million Bitcoins total. The amount of Bitcoins entering the market has been decreasing and will continue to diminish.
With rewards for mining Bitcoin halving every 4 years, it is predicted that the last Bitcoin will be mined in the year 2140. With no “federal reserve bank” to control the money supply, there is no monetary policy that can be manipulated or controlled to give one user of this currency an advantage over another.
This lack of a central bank is a very important factor for some Bitcoin users and somewhat irrelevant to others. What is interesting about this lack of a central bank is that no one can inflate, or hyperinflate the money supply. This is advantageous to parts of the world where inflation, money controls, and bank withdrawal limits hurt consumers and workers- especially those with limited access to banking.
We saw this recently in Greece and Cyprus, where the government placed limits on the amount of Euros individuals could withdraw per day from ATMs while branches were closed. In India, when the government eliminated all high denomination bills, families who could not reach a bank branch saw their savings turned into worthless pieces of paper. And in Venezuela, with a currency dependent on the declining cost of oil, hyperinflation caused financial ruin, economic panic, and social unrest.
In all of these cases, some people turned to Bitcoin as a safe place to store their hard-earned money. While the number of people who used Bitcoin as a safe alternative was relatively small compared to the population as a whole, as this technology evolves and becomes more accessible, users will have more opportunities to protect themselves from future financial crises. This is important to note: the greatest future success stories of this currency, and similar currencies, will likely occur outside of the United States.
Another popular feature of Bitcoin is that it stores your currency using cryptography by generating public and private “keys” for your money. For example, if you purchase 1 Bitcoin (or half a bitcoin or .00001 bitcoins), the blockchain generates one of each key to represent your purchase.
The public key is represented on the public ledger, whereas the owner of the Bitcoin only knows their private key. Think of the public key as the key to your house, and the private key as your title. You can give the key to your house to someone so they can look around, but they do not own the house until you transfer the title.
This may sound confusing but I can assure you, it is far easier than explaining how central banks generate and circulate currency, let alone how money moves between bank accounts! Unlike your bank account or your atm card, the cryptography behind these keys makes it impossible for your money to get stolen – unless you give someone else your keys.
When you hear about people losing their BTC, it is because their money was stored on an account where their private keys were shared. This most famously occurred when an early Bitcoin exchange – Mt. Gox – was hacked.
It is important to keep in mind that Bitcoin, unlike many currencies, whose smallest denomination is .01 (or with currencies like the Chinese Yuan or Japanese Yen, 1), is divisible to one hundred millionth of a BTC (or .00000001 BTC). One hundred millionth BTC is called a “Satoshi” – named after the unknown creator (or creators) of Bitcoin who went by the name “Satoshi Nakamoto.”
This means that you can buy and use miniscule amounts of Bitcoin and other currencies for your transactions. This also means that its price is relative. As demand for BTC increases, and supply – as previously stated – is predictable and diminishing, the price of Bitcoin remains relative, so there is still an opportunity to make a profit, as even small amounts may see modest and beneficial increases in value.
While Bitcoin was the first currency to use both cryptography and a decentralized blockchain, there are hundreds, maybe even thousands of other electronic currencies that use some of these ideas behind bitcoin. It is important to note that these “cryptos” have varying degrees of decentralization, as not all are true blockchains.
Depending on how much you value decentralization, this may or may not be a good thing. Other cryptocurrencies – often referred to as “alt coins” or “alts”- have developed functionality that goes beyond that of a currency. Many of these alts have commercial, financial, and technological components. While many of these alts and their ideas are exciting, others are simply cashing in on a new fad. Remember: cryptocurrencies are simply that – just currencies, NOT shares. When a software company develops an in-house currency, the value of that often-speculative currency does not mean you have any equity in the company, nor does it mean that you are entitled to any of that company’s profits. When evaluating an altcoin, it is important to think about how the currency is integrated into technology. This is especially important when reading about “ICO’s” or “Initial Coin Offerings”.
How do I buy and store Bitcoin/Altcoins?
Cryptocurrencies can be bought on an exchange and stored in a “wallet.” Many wallets have exchanges, and most exchanges have wallets, but different websites have features that provide differing levels of access and functionality. While in theory, you do not need an online exchange to purchase cryptocurrencies, using exchanges are often the most practical way to enter the market when starting out.
Below are some popular exchanges, with my thoughts (and again, it is good to get different opinions) on the pros and cons of each:
Pros: This is perhaps the most common exchange in the United States that functions primarily as a wallet. It is considered a “light” (user-friendly) wallet, and very simple exchange.
It is relatively safe, and perhaps one of the easiest to use. When first starting out, I highly recommend it as it is very straightforward.
The company claims that all of their data is backed up daily in “cold storage” (see below), so if the site were to crash or get hacked in theory your money would be safe.
It is important to note that unless you store your money in their “vault” feature, they own your private keys, making them function more as a “bank.”
Crypto.com is an exchange where you can earn interest on your cryptocurrency balance.
It’s a great option for those who want to use crypto for passive income.
They also offer a mobile app so you can make trades on the go.
Pros: This site gives you the ability to purchase and trade popular currencies including Bitcoin, Litecoin, Ethereum, Ripple, Ethereum Classic, ZCash, etc. You can also “spot” buy and sell currencies. This means that if Bitcoin is trading at 1 BTC to $3,000 USD, but you think the price will dip to $2,900 USD, you can put in a market order at that price. If a seller wishes to sell you BTC at that lower price, then you can potentially get your BTC cheaper. This site is more for active trading than it is for storing.
Cons: It does not function as “light” portable wallet. While Kraken does have an app, it is full of bugs and really only for trading, without a wallet feature. If you wish to spend your cryptos, you need to store your currency elsewhere. Its functionality is also not as intuitive as Coinbase.
Pros: This exchange has perhaps the widest variety of altcoins available, and functions similarly to Kraken.com. For some currencies, it may be your only option.
Cons: Be careful when trading on this site, as it is commonplace for “whales” (people who own large amounts of cryptos) to “pump and dump” various currencies. This is in part because it also allows for a great amount of trading on margin (or credit) more than other exchanges do.
This can be great if you are an experienced trader, but for the novice, it is difficult as the high volume of margin trading on this site causes the greatest fluctuations of prices. Don’t be rattled by this as this could mean some of the highest (and other times lowest) prices for buying and selling currencies.
Unfortunately, Poloniex is no longer open to U.S. users.
Pros: This is a very simple and easy way to exchange a variety of different cryptocurrencies in one simple transaction. This is great for using your bitcoin to buy altcoins in one big transaction, rather than trading across multiple exchanges.
Cons: You need to have a wallet or wallet address from both the currency you are trading from and to the currency you wish to acquire. You cannot hold any currency on this website. Also, many popular altcoins may suddenly become unavailable for transfer.
Pros: If you are reading this in a part of the world where there is no exchange setup to buy or sell Bitcoins, this might be your only option. This website is essentially a global Bitcoin classified ad space where potential buyers and sellers can trade with each other directly. Because you can localize your trading, buyers and sellers could even in theory, meet in person and transact face to face. In areas where Bitcoin is in high demand or in short supply, this site has the potential to sell Bitcoin at a premium or when exchanges crash, buy at a discount.
Cons: You usually have to buy or sell your cryptos with a traditional “fiat” currency- or government issued paper currency- and often exchange your money using something like PayPal or the Western Union which have very high service charges. Also, while buyers and sellers are rated, you run the risk of getting scammed.
Storing Your Crypto Currencies:
Once you purchase your bitcoin (or altcoins) you have the ability to store them in a wallet outside of your exchange. Keep in mind that if you do not intend to spend your bitcoin and are using it as an investment, you can keep it on your exchange. The same is true of other cryptocurrencies.
Remember- however, while the currency itself cannot be hacked, your account on an exchange can be, so I recommend that you research storing your coin in wallets. You can always keep your money on an exchange until you find a wallet you are most comfortable with.
There are two types of wallets: soft or hard (also known as a “cold” wallet). A soft wallet is an electronic one that functions similar to an Apple Wallet, Android Pay, etc. While a soft wallet is easy to use, portable, and liquid, they run the risk of getting hacked, especially wallets who own your private keys.
One may ask, “why on earth would you trust a website to hold your private keys?” For the same reason you might trust a bank, credit union, or debit card company to hold your money – you give up security for greater utility.
Hard wallets, or cold storage, give you far more security but may be more difficult to use or trade. Cold storage can include modified USBs, specialized USBs like Ledger and Trezor, pieces of paper you can print, or something as simple as remembering as a string of 12 words.
The important thing to remember is that soft wallets are online, hard wallets are offline. Below are some examples of wallets you can use:
Type of Wallet: soft
Pros: Very user-friendly, easy to use, uses internal cold storage backup.
Cons: Like a bank, Coinbase “owns your keys” unless you store your currency in their “vault” feature.
Type of Wallet: hard
Pros: All the advantages of cold storage. It comes in two versions, including the nano, which is the size of a USB- with the bonus of a digital Ledger also supports altcoins such as Bitcoin, Litecoin, Ripple, Ethereum.
Cons: Like all cold storage devices, your money is not liquid. Also, demand is so strong for these devices that orders are backed up at the time I am writing this.
Type of Wallet: hard
Pros: Cold storage, and considered the industry standard.
Cons: Illiquid like Ledger. Only supports Bitcoin, Litecoin, Ethereum, Ethereum Classic, Z Cash, and Dash.
Type of Wallet: hard, paper
Pros: The site creates a paper “bill” like a dollar bill containing a printout of public and private keys as well as QR codes. You can literally create “bitcoin bills” in the denomination of your choosing- whether they are worth $1 US Dollar or $1 million USD. Scanning your public key confirms the amount of money stored there, while the private key can be used to spend or transfer your money.
Cons: It is literally the keys and deed to your house in one simple sheet of paper. Or similarly, it is the equivalent of a large denomination bill. If you have $20,000 on one paper bill, losing it is like losing a $20,000 bill.
Type of Wallet: hard. Sorta. In your head?
Pros: You encrypt your money into a string of 12 words. If you can memorize 12 words, you can store your coin
Cons: Obviously, if you forget your words you lose the money with no way to get it back. More often than not, people write these words down- but then those words on a sheet of paper become your private key. Whoever knows it, owns your money.
If you start to accumulate or posses a large amount of bitcoin or other currencies, it is probably wise to diversify your storage, for example, keep the money for trading on an exchange, money for buying on your soft wallet, and money for saving in cold storage.
Types of Cryptocurrencies:
I have discussed how to buy and store various currencies, but what distinguishes them from each other? The following are the currencies that I am following, though it would be wise to get other opinions and do your own research. Ultimately, the questions I ask are:
- Is there a demand for the currency? Also, what is the real world application for the currency? Can you see yourself or others using it in the future? Keep in mind that prices now are very speculative, with very few currencies being implemented or utilized to their advertised potential.
- How is the currency supplied? Is it mined, “pre-mined”, is it a currency or a token of a parent currency, how big is the supply, etc. Currencies with larger supplies can be slower to rise in price. However, they can provide more stability long term. Conversely, rare currencies can be more volatile but may have greater short-term potential. How does the currency’s money supply go up and down over time?
- What is the total value of the currency or its market capitalization (cap)? Simply put the market cap is the total circulating supply of the currency’s units multiplied by the currency’s value.
- What are your goals? If you are a beginner or novice, my advice is to buy and hold large-cap cryptos or maybe even just Bitcoin. Don’t get rattled by the volatility of the market. Remember, cryptocurrencies are still a very new way to invest, spend, and track money. That said, I believe greater adoption is imminent- it is just a question of which currencies will become the market leaders.
- Who is developing the currency, and what are their motives? More importantly, if a currency is tied to a type of software, how is the currency used in the application?
The “Big 3”: Bitcoin, Ethereum, and Ripple.
Approx Market Supply*: $16.7 million
Market Cap*: $67 billion (Rank: 1)
Why it may succeed: This is the currency that started the crypto revolution and for all intents and purposes it has already succeeded. While I have discussed many of the merits of why the currency has value, there is still great potential for it to continue to rise. First off, its value is relative. If 1 BTC is worth $10,000 or 100,000 USD, it doesn’t really make anything less affordable. While we may be a long ways away from using bitcoin in similar ways that we use Apple/Android wallet apps on your phone for everyday purchases (and some argue we never will), Bitcoin has proven itself valuable as a “reserve currency” for crypto trading. Many online crypto exchanges don’t trade in traditional currencies and rely on using Bitcoin to purchase other cryptos. Others treat Bitcoin as “digital gold”, using it as an efficient digital store of value that users can easily access globally. For more information, check out Andreas Antonopoulos’s book, “The Internet of Money”, or at least watch his Bitcoin 101 video on YouTube.
Why it may not: Bitcoin is going through a difficult time scaling as the currency becomes more popular, and as the blockchain that supports it gets more traffic. This is causing big rifts in the community, as with no centrality, it is difficult to get consensus on how to make the improvements that are needed. While it appears that recent modification to the blockchain’s software are effective, it will be interesting to see how the network scales as the currency becomes more popular. Also, while the currency is supposed to be decentralized, its mining has become very centralized, as the 5 biggest mining pools account for 57% of all mining and transaction processing. Because many of these pools have ties to large-scale and capital-intensive server farms, small home mines do not generate enough currency to pay for their own electricity to run the mine. Another challenge with its large-scale implantation is its volatility, which creates a problem of high “menu costs”. This is the cost of businesses changing their prices to reflect the change in the value of the currency. It is these challenges that have made altcoins popular in the past year.
Approx Market Supply*: Approximately 94 million
Market Cap*: Approx $28 billion (Rank: 2)
Why it may succeed: Ethereum is a cryptocurrency based on smart contracts- which are computer protocols that ensure all parties who enter into the contract are accountable to their terms. Computers that mine Ethereum, create a powerful and vast network that can be more or less “rented” by programmers and developers to distribute their data in a decentralized system. The currency “Ether” or ETH monetizes this access. Whereas bitcoin’s focus as a cryptocurrency was to become a store of value, Ethereum’s focus is more on the blockchain network itself and geared for business applications of the technology. There is a lot of potential with this currency- hence its recent rise in value.
Why it may not: Ethereum’s smart contract system was compromised- or very intelligently executed (depending on your point of view) by an entity or individual when it tried to codify its structure and rules. This resulted in a forked, or splintered currency called “Ethereum Classic”. You can learn more about it from CoinDesk, CryptoCompare, and I am sure countless other sources. While this “DAO Attack” hurt the currency at the time, ETH has since recovered. Also, while this currency has a great deal of potential, since its launch, there have been very few successful applications launched using Ethereum outside of online Casinos.
Approx Market Supply*: Approximately 38 billion in circulation, and 62 billion in reserve
Market Cap*: Approximately $6 billion (Rank: 3)
Why it may succeed: When I heard of the idea of a currency without borders that can move all over the world in a short amount of time, I thought of specific applications that would be most beneficial. My first thought was remittances, and that led me to Ripple and XRP. Ripple’s focus is specifically creating software that can move money globally, in seconds, and they have actively sought out banks to sign on to their protocol. Ripple claims that they can save banks 60% on their international financial transactions, and at the time of publication, over 75 banks– including Bank of America, BBVA, Santander, and UBS have signed on to use their service. To give you an idea of how much money is transferred around the world, Western Union’s annual revenue in 2016 was $5.42 billion (this does not account for the amount of money they moved, just how much they made), the Foreign Exchange market saw $5.1 trillion a DAY change hands in 2013, and the SWIFT network – the current standard in bank money transfers- recorded over 6.5 billion transactions in 2016. All of these transactions have high costs associated with them relative to Ripple, giving the currency a big opportunity to change and quickly gain a large share of this market.
Why it may not: One important thing to know about Ripple, is that there are two sides to it- the company and the currency. The company has a software network that can provide many of these transactions without using the currency. Apparently using the software without the native currency is more expensive than using XRP, but still cheaper than current systems. While many of the banks that have signed on with Ripple are testing transactions with XRP, they may choose to not do so in the future. Also, what is to stop SWIFT and ForEx from developing their own systems- with our without a cryptocurrency component? Finally, unlike most other cryptos, all of the currency was “premined” in advanced, with over 60% of the currency currently held in reserve. Contrary to bitcoin, this makes Ripple, a centralized currency, with the company able to act as a “Virtual Reserve Bank”. Finally, only approximately 5-7% of Ripple traded currently is on its network- the rest of the activity around ripple is a speculative investment on the online exchanges. Still- it is important to note that this currency is currently implementing commercial applications. With so much of its currency in supply and circulation, it will take MUCH more significant changes in the market to reach, say $10, $50, or even $100 dollars. If Ripple had the approximate market capitalization of Ethereum, its value would rise to only $.65. At a $40 billion market capitalization, it’s value would be approximately $1.05/XRP. For Ripple to reach $10, it would need a market cap of around $380 billion. While this is theoretically possible, it would require an almost revolutionary shift in the global banking system.
Other Currencies to Watch:
NEO (Rank: 5) – Some people refer to NEO as “Chinese Etherium”. It is a smart contract based crypto that offers programmers a wider variety of coding languages to interface with it. With the Chinese becoming more aggressive adopters of crypto tech, this coin could easily match Ethereum in market cap- or even surpass it.
Iota (Rank: 8) – This currency has created technology that goes “beyond the blockchain” through a process they call the “the blockless tangle” that results in zero-fee transactions with limitless transactions per second. There seems to be a lot of potential here.
Sia (Rank: 33) – What is interesting about Sia, is that it allows users to use the free space on their computer hard drives to “mine” Sia Coin by joining their cloud server network. This network becomes far more decentralized and impervious to attack than traditional server farms. They have the potential to become big players in the cloud server market-however I feel like while the technology seems solid, they seem to slow to attract a client base. This may be because the currency and platform is still in the early stage of its development.
Golem (Rank: 28) – Golem is an “Ethereum token” with a market cap at around $419 million. I am very cautious of cryptocurrencies that use the Ethereum token “ICO” (initial coin offering) as an alternative to raise capital- remember- these tokens do NOT give you equity, or ownership in these projects. That being said, Golem is a fascinating idea- attempting to create a decentralized supercomputer with direct applications. Its current project, “Brass,” will “distribute the task of rendering CGI”.
Basic Attention Token (Rank: 32) – This is another “Ethereum token” that has potential. BAT is an attempt to change how Internet advertising works, by taking “middlemen” out of the equation and attempting to link advertisers with customers directly- paying them both with the amount of money the advertising marketers would have collected. This is accomplished through the release of their “Brave” browser. If the Brave browser catches on, and people find value in collecting BAT for their data, this currency could be worth something.
Litecoin (Rank: 6) – The “little brother” to Bitcoin might be the oldest “altcoin”, and operates very similarly to Bitcoin with a few key differences. First off, there is far more Litecoin in circulation than bitcoin currently, with a greater amount of minable coins available in the future. Its price surged in popularity, as it was the first to successfully implement the SegWit protocol that Bitcoin just implemented. It is also popular in China, which accounts for a large percentage of crypto trading. While it is struggling at times to find an identity in this asset class, it always seems to come around from time to time as a solid currency with utility, security, and demand.
Steem (Rank: 22) – Not to be confused with Steam, the computer game company, Steem is an interesting concept that links cryptocurrencies to social media. Its website, SteemIt.com allows users to “upvote” or “downvote” articles with micro-contributions to the source material. This could be a valuable resource for bloggers and news curators. If Steemit can use this model as a currency on other websites- or if Steemit can someday attract a wider audience this currency may really break out.
Dash (Rank: 9) – Dash sells itself as digital cash, and claims to be a form of cryptocurrency designed specifically to use as an everyday currency. With Bitcoin taking so long to transfer, Dash’s transfer time is almost instant, anonymous, with much lower transaction fees. It works like a much cheaper and safer PayPal. While its value has skyrocketed in recent months, if widespread usage becomes even a fraction of PayPal’s it could grow more.
Monero (Rank: 12) – This currency has become popular with somewhat nefarious transactions on the dark web (think Alphabay and Silk Road). While its ability to engage in completely anonymous crypto transactions are interesting, and enticing to current users, I think the market of people who want this feature is somewhat limited- as its popularity in these circles could also be a liability.
*All prices and ranks are as of August 13th, 2017; prices in United States Dollars
Like with all investments, one should not pour all of their savings into cryptocurrencies – it is important to diversify your investments with advice from a professional. In addition to the scaling issues previously discussed, this new asset class is going through other growing pains as it becomes more popular. Its regulation is very loose and inconsistent across national and state borders.
With that in mind, as institutional investors, businesses seeking more efficient applications, and everyday users become more aware and more comfortable with this technology, I believe this sector will grow aggressively in the coming years. I think that within the next decade, the most successful currencies will be used without consumers even knowing they using them. This is like the dawn of the tech boom- lots of coins and currencies will come and go, offering a wide array of functions and utility (or lack thereof). There will be BIG bubbles coming, and when those bubbles burst, you will see stronger survivors that may even become household names.
My advice to newcomers to this technology is to focus your investing on the “big 3” – Bitcoin, Ethereum, and Ripple – or even just Bitcoin, then ride out the volatility. Once you are more comfortable with trading, research a couple of altcoins you believe in, and put smaller amounts of money there.
- I said it before and I will say it again, do NOT trade more than you can afford to lose!
- Keep your private keys and account information in a safe place. If you use a cold storage device, make sure your device and private key are in separate locations.
- If you do use cold storage- don’t move all of your money over at once on your first try. Try it first with a small amount of money, make sure that it works, then try it again.
- Make sure that you are sending your money to the right wallet address! Wallet addresses are long and easy to confuse. If you accidentally send your money to the wrong address, you will likely lose it forever.
- In order to assure that you are actually logging into your exchange, and not a scam website that is stealing your account info, make sure you type it in.
- If you have any insights, suggestions, or edits, please send them my way! You can email [email protected] or tweet @btc313
- Finally- if you find this helpful and make a few bucks, feel free to send a few Satoshis of BTC to my address: 1FkEaMS9g5iQPB7FmbC8gkxMGpRc18jRMy
This guide is written by Reddit user /u/stos313… Thank you!!!