Why you should (or should not) read this
A lot of "Getting started in cryptocurrencies" posts exist, but when I started I didn’t find any that took me all the way from the basics - what is a blockchain and what is a wallet - to the more nitty gritty details (that are still very important) - what fees will I have to pay and what are the key risks? I personally believe that cryptocurrencies have a strong future and that right now the two biggest hurdles are lack of understanding and access to coins. This post is written for people who have little to no exposure to the process of buying cryptocurrency. I am writing this as someone who just recently went through the process and am relaying everything that I learned and had found confusing. I wanted to write this as something that I could give to friends and family. What better topic to be my first post on Steem!
Disclaimer: Let’s start with the most important thing... I am not an expert in cryptocurrency. I am a geoscientist by training, but have long been interested in investing and technology, but have just started investing in cryptocurrency myself within the past year. Despite that, the value I hope this provides doesn’t require me to be an expert. In the last few months I have been confused and I have not been efficient in my purchases and transfers of funds. I will try to keep the rambling to a minimum and use good sources when available. Remember to make your own decisions and always check multiple sources before you make a move on one person’s opinion.
Topics covered below:
- What is blockchain and why does it matter?
- What is your investment outlook and strategy?
- Which coins should you choose?
- Getting the coins
- Where to keep the coins
- Making your first transaction
- Bonus topics (more will be added)
What is blockchain and why does it matter?
This topic has been covered ad nauseum all over the internet. Use I recommend spending hours with Youtube to gain a better understanding. Two sources that I like for their clarity and openness:
Andreas Antonopolous - He is one of the leaders in education about blockchain, specifically bitcoin, but he tends to focus on the large scale economics and advantages of a decentralized network. - https://antonopoulos.com/
Ivan Liljeqvist - Ivan’s YouTube channel is frequently updated and gives technical insights to how blockchains work and how different algorithms may be different. Unlike Andreas, he gets a little bit more in the weeds, but has lots of videos on a range of topics that are super helpful. - https://www.youtube.com/user/LiljeqvistIvan/about
What is your investment outlook and strategy?
Everything I talk about in this post will be focused on long term investing. If you are trying to get ahold of cryptocurrency for non-investment purposes you may still find some of the later information useful. Here are some great general investing tips from a previous article on STEEM. My basic advice has a lot of overlap so I will keep it short:
- Have a clear strategy before you enter the market and stick to it - Why are you buying? Do you see upside in the market or are you buying as a hedge against the global economy? Make sure you know in general when you would buy, when you would sell, or at least what sort of allocations you want to maintain. Don’t let short-term emotions change your buying habits.
- Don’t worry too much about to time the markets - If you get to buy in a dip, great! But don’t wait to buy after a dip and risk missing out on a big gain.
- Only invest what you can afford to lose - If you ask Jamie Dimon you should invest 0% of your savings in non-fiat cryptocurrency. If you ask Mark Cuban it may be [as high as 10% of your savings] (https://www.cryptocoinsnews.com/mark-cuban-true-adventurers-invest-10-bitcoin/). I’m willing to bet that for most people reading this post you will be somewhere in between base upon your interest in the technology and the amount of risk that you can financially afford to take.
- Identify what you see as the key risk to your investment - you may not be able to do anything about it, but the last thing you want is to lose all of your money and realize that you didn’t see it coming. Some past events and more recent examples:
- Mt. Gox hack (2014) - crash of exchange that handled about 70% of bitcoin trade volume
- Bitfinex and tether (ongoing) - speculation of shady accounting at exchange that handles about 15% of Bitcoin trade volume.
- Government intervention
Before you decide to invest in cryptocurrency you need to have a clear investment strategy. What do I see as the future for the technology? Two endmember examples:
- Is blockchain an aid to the current financial system, but unrealistic to be used as a standalone global currency.
- Blockchain-based currencies will be the norm despite current government hurdles and pushback from the traditional banking systems.
How you choose to invest and what you invest in may change depending on your personal outlook.
My allocation as an example: I am sitting somewhere in the 2-5% range. I have a somewhat diversified portfolio of coins. Unless some major shifts take place and I decide to permanently change my investment percentage I plan on selling or buying coins sometime next year to keep my portfolio in line with my target percentage. This lets me buy more in the case of a large drop (unless it is associated with a fundamental change to the outlook), and also monetized potential gains without my exposure to risk ballooning.
Before we jump into the more technical talk also remember that in the US buying, selling, and exchanging cryptocurrency is recognized as a taxable event. Be sure to do a bit of reading and if possible talk to an expert, especially before making lots of trades that could incur high tax rates.
Which coins should you choose?
There are lots of places to compare different coins online. Cheddur is a nice easy to use app that has side by side comparisons of the tech specs of coins, wallets, and exchanges. There are also reviews, but they are not yet well populated. If you are looking for more detailed trading information then check out a site like CryptoCompare.
Some important factors to consider:
- Why is this coin trying to achieve? - Make sure this fits with your investment strategy. Where does this coin fit in the future that you see? Is there another coin that you should also be looking at putting some money in if it is a direct competitor?
- What are the technical specs of the coin?
- Algorithm type - some examples
- Block size and timing of block creation- transactions are written into blocks, so this is basically the supply side of transaction availability and will relate to fee prices as demand increases! This is the problem that bitcoin is currently running into with it’s high transaction fees. Bitcoin Cash tries to solve this issue by increasing the size of the blocks and Litecoin subverts this issue by increasing the frequency of block creation. Both of those currencies have much lower fees than Bitcoin currently, but it is not clear how much cheaper their fees would be given the same volume of transactions that bitcoins have.
Getting the coins
Here is a more detailed guide than I have the time or knowledge to write. “The Ultimate Guide”
I will make the point that I started out on Coinbase before realizing that you can buy on their subsidiary GDAX for significantly lower fees. Coinbase charges a whopping 1.5% fee when buying through bank transfer or 4% if buying by credit card. GDAX on the other hand requires a little more work to buy, but has fees between 0-0.25% depending on whether you make your own order or choose to fill an existing order on the market.
However, GDAX and Coinbase only support Bitcoin, Ethereum, and Litecoin. What if you were looking to buy another coin? You will need another exchange. You can either find another exchange that is more in line with what you are looking to invest in or you can use one of the two “instant” exchanges. These exchanges allow you to send to their wallet and you will receive the other coin to your wallet. Changelly requires a log-in and charges a 0.5% fee and shapeshift does not require a log in and doesn’t report a fee on top of their conversion rate. I do not know how comparable the conversion rates are between the two. I have used both with success and was able to reach Shapeshift customer support easily in the case of a failed transaction (my coins were refunded).
When you move your coins from an exchange to a wallet (we will get there next) you will have to pay a coin transaction fee. This is part of what lets cryptocurrencies work. The transaction fee serves as motivation for the cryptocurrency miners to maintain the secure network and execute the transaction. Because the highest transaction fees are preferentially accepted, transaction fees tend to increase as more people are trying to move money and there is less space on the network for transactions. For these reasons, as of right now the Bitcoin transaction fee is hovering somewhere in the range of $1-2 USD. If you are sending large volumes of money this may not be a big deal, but these fees are an order of magnitude higher than the transaction fees for some other coins. For this reason, I would suggest making your purchases in Litecoin or Ethereum if you are going to transfer your money from Coinbase to another wallet. This will depend on how much you are buying and how you will be exchanging it later, but make sure you take transaction fees into account, especially if buying in smaller volumes.
Where to keep the coins?
If you choose to buy your coins on an exchange make sure that you move them off of the exchange and into a wallet. Fortunately, if you purchase directly through Coinbase your funds will already be in a wallet, but if you buy on GDAX or another exchange you will need to transfer your coins.
Here is another area that the internet has covered thoroughly and I will refer you to them.
Frequently, each coin has it’s own wallet that would be the most trustworthy, but if you invest in many coins you will end up having to keep track of your information for each wallet separately.
An example of the current trade-off between ease and security. Coinomi is a wallet that used to be widely accepted as one of the top wallets. They recently stopped providing their code on GitHub. They have since taken a lot of grief for this. One of the strengths of the bitcoin community is the fact that everything is open source so that it can be checked for malicious intent. That said, from my experience Coinomi is one of the easiest to use and has coin support that is most in line with what I am holding. As I learn more and the technology continues to evolve I presume I will move my coins into more secure storage such as a cold wallet.
Making your first transaction
Okay, you bought your coins in an exchange. Time to move them out.
Make sure your wallet is created and you know all of your private keys and can restore the wallet. Many apps are good about making sure that you wrote this information down, but it might be a good idea to intentionally delete a wallet and make sure you know how to recover it.Send the coins from the exchange. Keep in mind that if you need are planning on exchanging to coins that aren’t supported by your initial exchange you can transfer directly to an “instant” exchange and have the output go into your new wallet to reduce the number of transactions you need to make. By doing this you only pay one transaction fee instead of paying a fee to transfer the funds to your wallet and then again for the “instant” exchange.
After you have initiated the transaction you should be able to see the transaction on both ends. If your software does not give you a link to the blockchain explorer you should at least have a transaction ID. Each coin has its own online blockchain explorer that will let you search your transaction ID and see how it is going. Depending on the coin it may take different amounts of time, but after a few minutes (or seconds) you should start seeing “confirmations” on your transaction. This means that your transaction has been placed into a block by a miner. As more miners continue to mine with your transaction listed in that block the confirmations will begin to pile up. Here is a bitcoin explorer for reference.
At this point you have officially received your funds. Keep in mind that if you are waiting for an “instant” exchange, they may not send along your converted funds until the transaction you sent them has a few confirmations so be patient.
Summary
Hopefully somewhere in this ramble and relay of my experience I have helped with some tidbit of information that makes this process seem a little more manageable. Again, please give feedback and help answer all the questions I can’t down in the comments!
Bonus topics
What is a fork? - Forks are basically a new branch of the coin that will be running a new version of the code. Because a fork by definition creates two branches that share the same information prior to the fork date you will automatically have funds in both blockchain if you hold coins when a coin goes through a fork. It is important that if a major fork is happening you know what your keys are for your wallet and you know how your wallet or exchange plans to handle the fork. I have heard many people compare a fork to a stock split, but keep in mind that your amount of coins is not being split into each branch, it is actually being doubled. As a result, there can be large price fluctuations around the fork. This could create a good buying opportunity if you are confident in one side of the fork and if you have funds available. Keep in mind that the network may become more congested and have longer transaction times and higher fees if everyone else on the network has the same idea as you. Most of the time the best move is probably just to hold both coins and wait to see how things stabilize.
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