Accounts on the Blockchain
To exchange cryptos, you must first have an account on the blockchain. An account is nothing more than a string of numbers and letters, but it will be yours and only yours. Every account has two components: a public address (often referred to as a public key) and a private key. To explain, we will compare these to your email account.
To send someone an email, all you need is their email address, which is public. Anyone can send an email to anyone else. In this case, a person’s email address is similar to their public address. However, to send someone an email you must first enter your password and log into your account to verify that it’s you sending the email. Passwords ensure that it’s you sending emails. Your email password is analogous to your private key.
Like emails, Bitcoin transactions require an address (public key) and a password (private key). Each time you send Bitcoin, you enter the public address of the recipient and then verify that it is you sending Bitcoin by entering your private key. When someone tries to send you Bitcoin, they enter your public key and their private key. You with us?
IMPORTANT NOTE: When someone hacks into your email account and sends emails on your behalf, they cannot be taken back. The same principle is true here. If someone obtains your private key, they can freely send your cryptocurrencies wherever they want with no repercussions. There are no refunds, which is why it is critical to keep your private key secure. Luckily, we are here to show you how to do just that.
Storing Your Assets: Exchanges and Wallets
Buying cryptocurrencies can be a strange and complex process. When learning about buying, storing, and selling cryptos, there are two major technical components you must understand: exchanges and wallets.
Exchanges are where you can buy and sell Bitcoin and other cryptocurrencies. These are essentially large companies that operate by taking the Bitcoin from those willing to sell at a given price and redistributing it to those that want to buy. Making an account on an exchange also creates an account on the blockchain (public and private key), which gives you a line with your name (public address) in the ledger. We recommend that you create accounts with the following three exchanges: Coinbase, Gemini, and Bittrex.
Crypto novices should begin with Coinbase, generally considered to be the most user friendly exchange on the market. Coinbase makes it easy to buy and sell relatively small quantities of Bitcoin, Ethereum, and Litecoin (three of the most popular coins, discussed below) with fiat currency. It features mobile access to current prices and has a good reputation in the technology community for security and ease of use. Click here to receive an extra $10 of Bitcoin when you buy your first $100 of Bitcoin on Coinbase!
Gemini is useful for large-scale buying and selling of cryptocurrencies using fiat currency, and has lower fees than Coinbase. We recommend this exchange to experienced users.
Bittrex allows only crypto to crypto trades – no fiat money is used. Advanced traders use this exchange to invest in new cryptocurrencies using Bitcoin, Ethereum, and other established coins.
Note: many exchanges place ‘limits’ on the amount you can buy or withdraw at a given time. To increase these limits, you can simply secure your account by adding more personal information (such as a photo ID) and applying for a limit change. Don’t forget!
When you create an exchange account, the company involved uses your email address and account password as temporary proxies for your public and private keys in the blockchain. Because exchange accounts store your private keys for you, they are targets for attempted hacks. Exchange accounts can be hacked because they do not use the same security as the blockchain. This happens extremely rarely, but since it is technically possible, we recommend that when using an exchange account to buy or sell cryptocurrencies, you abide by the following rule: treat exchanges like public restrooms. Use them, but don’t linger. In this case, ‘not lingering’ means transferring your money from an exchange account to a more secure, encrypted storage location called a ‘wallet.’ No, not the kind you keep in your back pocket. A wallet is where you transfer your crypto for the long term to ensure that your private key is safe.
How do wallets work?
Wallets store your public and private keys for your cryptocurrencies. In fact, when your money is in an exchange account, it actually resides in the exchange’s servers. As we mentioned, this is not the safest option. Wallets, on the other hand, are far more secure. They are not decentralized, but they do encrypt and protect your public and private keys. This means that selecting a wallet has very real implications for your user experience and for the security of your cryptocurrency. There are four main types of wallets: online wallets, local storage wallets, paper wallets, and cold storage wallets.
Online wallets are nearly exactly the same as those found in exchanges – they store your public and private keys for you. This makes them potential targets for cyber attacks. They are, however, separate from the large pools of money that exchanges operate with, making them marginally more secure. They are NOT the safest way to store your funds but are relatively easy to use. A popular online wallet is blockchain.info.
Local storage wallets keep your public and private keys on the hard drive of your computer. This makes them more secure, but also makes your funds inaccessible from other devices – consider the case where you drop and break your computer. Ouch. This also makes your funds vulnerable if your computer is stolen. However, local storage is more secure than an online wallet. Popular local storage wallets include Jaxx, Exodus, and Electrum.
Paper wallets are accounts on the blockchain with public and private keys that exist only on a piece of paper until used for transactions. If the information on the paper is lost, so is your account. Until the private key is first used for a transaction, this is the most secure option for your funds. That being said, we do not recommend this method because the paper could get lost, leaving you without access to your funds. Additionally, your public address and private key are still generated by a third party website, which could be storing your information.
Cold storage wallets best combine ease of use and safety. Several companies make portable electronic devices, roughly the size of a flash drive, that encrypt and store your private and public keys. Private keys can only be accessed by entering the correct code on the device itself, which is only functional when plugged into a computer. If the device is lost or destroyed, your account can be accessed via a string of 16 – 24 randomized words used to identify your particular information. This is the option that we recommend to all cryptocurrency investors, as it is portable, easy, and secure. The hardware is not free, but considering the other available options and the value of your peace of mind, it’s well worth it. Think of the wallet as part of your investment. The two best cold storage wallets (in our opinion) are the Trezor and the Ledger.
Ledger Nano S- Learn More
Better design: Screen/device protected by metal swivel cover and smaller profile
Ledger supports many more coins the Trezor
Helpful 3rd-Party apps can run from device
Two- Factor Authentication (verifies your identity through two layers of authentication)
Better build and User experience
Fairly inexpensive (~$65 USD)
Limit to amount of accounts you can create (but you will generally only need one)
No password manager built (can be added through 3rd party app)
Trezor- Learn more
Ability to label transactions and sync them to Dropbox
Ability to create an infinite number of accounts (wallets within the Trezor)- you will generally only need one.
Password manager available (Encrypt all of your password accounts with greater ease)
Two- Factor Authentication (verifies your identity through two layers of authentication)
Screen not protected
Uglier User interface
More expensive (~$99 USD)
Our suggestion is that you purchase a Ledger Nano S. It is secure, sleek, supports many different cryptos, and is less expensive! Please investigate options for yourself, but we have personal experience with both products and like the Ledger just a bit more. Buy one here:
Fun fact: in theory, you could memorize your public and private keys. This is known as a ‘brain wallet,’ which allows you to walk across borders with any amount of money stored only in your head! Not recommended, but still very interesting.
The Big Players
Keep in mind that each cryptocurrency is commonly abbreviated by a few letters. A market capitalization is calculated by multiplying the number of issued units (number of coins currently in existence) by the last sale price of each coin. Market capitalizations are a good indication of the size of a market.
Market Cap: 100 Billion U.S.D.
Bitcoin is by far the largest and most well-known crypto, likely because it was the first one created back in 2009. The currency has an upper limit on the number of possible coins (21 million), but you can trade as little as one 0.00000001 BTC, meaning you don’t have to worry about it becoming too expensive to buy. BTC currently has the largest market capitalization of any crypto.
Market Cap: 29 Billion U.S.D.
ETH is the second largest cryptocurrency by market cap, sitting at about 29 billion USD. ETH was originally designed to be a platform rather than a currency. Ethereum’s platform is based on the ‘Ethereum Virtual Machine,’ which processes complex ‘smart contracts’ and allows developers to build new blockchain applications on top of it. Think of it as the iOS of blockchain applications. Similar to how Instagram is an app on Apple’s OS (Operating System), Ethereum opens up the possibility for blockchain applications by providing a platform to build off of. ETH was the coin released by Ethereum (the company) to finance development. The sale of ETH was the first ICO (Initial Coin Offering), which will be explained later on.
Market Cap: 3 Billion U.S. D.
LTC was the second cryptocurrency to come into existence and the first true ‘altcoin’ (crypto that is not Bitcoin). It broke off of Bitcoin’s code in order to change some key features of the coin. The main advantage of Litecoin is transaction speed - transactions occur much quicker than BTC transactions. Since each transaction takes so much calculation, BTC transactions take upwards of 10 minutes to confirm, which is not so feasible for paying on-the-go. LTC takes the time down to about 2.5 minutes, though this is still longer than the seconds it takes for credit cards or cash. The founders of Litecoin are currently working to reduce transaction times even further.
ICOs: future cryptocurrencies
While Bitcoin was designed to be a store of value, many coins (some refer to themselves as tokens) actually have completely independent purposes. In fact, many companies are now opting to sell coins to finance the development of their product or service. ICOs (Initial Coin Offerings) have begun to shift the paradigm of capital accruement (raising money). Companies can now offer coins that represent the value of the company (however, it’s not actual stock in the company). The value of the coin rises when the perceived value of the company rises. It is a win-win for investors and the company, as the company doesn’t have to give up any equity (shares in their company) and the investors can make returns on the value of the coin rising (or falling). Often, to add value to the coin, companies make the coins redeemable for some product or service they will offer when development is complete.
These coins often use technology nearly identical to that of Bitcoin and Ethereum. Many investors make fantastic returns by picking viable companies, investing in the ICO, and selling the coins once they hit the market. These ICO coins can be stored using MyEtherWallet, an online wallet that can function in cooperation with your cold storage wallet to allow you to see your alternative coins while utilizing the encryption of your secure device. Generally, it is considered high risk investing to participate in ICOs or short term cryptocurrency buys due to the high volatility of the market. It is considered more consistently profitable to invest in the established cryptocurrencies over long periods of time, during which the overall upward trend of the market will likely be realized in your investment.
So what should you invest in yourself? How can you get involved with - and make money from - the crypto revolution? Below are some strategies that we, ourselves, have employed and that can work well depending on your investment goals.
Low Risk, positive upside
If you’re looking to invest infrequently and ride the long term upward trend in the cryptocurrency world, your safest bet is to be involved with the most established cryptos. These aren’t going anywhere soon, but have still seen astonishing growth despite the fact that only a small fraction of the world has invested. Here’s an example of what a low risk cryptocurrency portfolio might look like:
Medium Risk, high upside
If you’re a more experienced investor looking to take a little more risk, you may be interested in taking a deeper dive into some of the altcoins on the market. These are primarily purchased using crypto to crypto exchanges like Bittrex (mentioned above), and require more active trading to take full advantage of potential profits. Here’s an example of what a medium risk cryptocurrency portfolio might look like:
10% Altcoins (such as NEO, Ripple, OMG, Monero, Dash)