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Crypto Investing// 4 min read

An Introduction to Investing in Cryptocurrencies

An Introduction to Investing in Cryptocurrencies

You’ve probably seen the headlines about people making tons of money from Bitcoin.

What’s more, one in every ten articles you see online seem to be about cryptocurrencies, and it’s piquing your interest, right? But what even is a cryptocurrency and how do you get your hands on some?

Don’t worry — I’ve got you covered.

By the end of this article you’ll by no means be a cryptocurrency expert, but you’ll be able to tell the difference between two different cryptocurrencies (e.g. Bitcoin vs Bitcoin Cash), know where and how to buy them, and be able to safely and securely store them in your own personal wallet. So, let’s start with the basics…

What is a cryptocurrency?

A cryptocurrency is a decentralized digital currency that can be used like any other form of money to buy, sell and trade.

The major difference between cryptocurrencies and fiat currency (e.g. USD, EUR, GBP, etc.) is that fiat currencies are backed and controlled by the government that issued them. Cryptocurrencies, on the other hand, aren’t controlled by a single centralized institution. Instead, they run autonomously on a blockchain.

Now, I appreciate that the above paragraph has a bit of a mouthful to get your head around. Let’s use the example of Bitcoin (a cryptocurrency) versus the US dollar (a fiat currency) to illustrate this in layman’s terms:

Bitcoin vs US dollar

The first major difference between Bitcoin and the US dollar is that there is a hard limit on the total number of Bitcoins that will ever be in circulation: 21 million, to be precise. This number cannot change, which means Bitcoin is a deflationary currency.

On the other hand, there is no fixed supply of US dollars. Through the mechanism of quantitative easing, the central bank governing the currency (in this case, the Federal Reserve) can simply print more dollars, which devalues each dollar in circulation.

The second big difference is the fact that the US dollar is backed and controlled by the state. Bitcoin is not controlled by the state, or any other centralized entity for that matter. This is one of the reasons Bitcoin is considered so secure, as well as what causes the most concern for governments (because they can’t control it as easily as fiat currencies).

The third huge difference between Bitcoin and dollars is how Bitcoin is produced. All 21 million bitcoins haven’t been pushed into circulation yet; they’re gradually released at a predictable rate. In fact, we know that the last bitcoin should be mined on October 8th, 2140.

Defining a currency: USD vs Bitcoin

 USDBitcoin (BTC)
FungibilityHighHigh
ScarcityLowHigh
DurabilityMediumHigh
TransferabilityHighHigh
DivisibilityMediumHigh
Taxed as a currency?YesNo

Buying your first cryptocurrency

There are literally thousands of cryptocurrencies you can invest in right now. Each has its own benefits, as well as a slightly different process for purchasing it. To buy a cryptocurrency, you’ll need to go through an exchange.

When you’re just starting out, you’ll want to trade in some of your fiat currency (say, USD) in for some cryptocurrency (say, Bitcoin). To do this, you need to go through an exchange that accepts fiat currency. The most popular right now is Coinbase.

You can only buy four cryptocurrencies (at the time of writing) through Coinbase: Litecoin, Bitcoin CashEthereum and Bitcoin. If you want to purchase a different cryptocurrency (for example, Monero), you’ll have to convert your fiat currency into one of the four cryptos supported by Coinbase first and then make the exchange in that currency. You can use crypto-to-crypto exchanges like Bittrex, Shapeshift and Binance to trade for other cryptocurrencies.

So, here’s how you buy your first cryptocurrency:

  1. Register with Coinbase, and then transfer money from your debit account into your Coinbase account.
  2. Convert your money into either Litecoin, Bitcoin, Bitcoin Cash, or Ethereum using Coinbase.
  3. Take a look at your Coinbase wallet, where you’ll find the cryptocurrency you now own.

Nice and simple so far.

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Transferring cryptocurrency to your wallet

Now you’ve purchased your cryptocurrency, you’ll want to store it in a safe place. If you bought it through an exchange like Coinbase, the currency will automatically be stored in your Coinbase account. However, this isn’t the most secure place to leave it long-term because if Coinbase is hacked, you’re vulnerable to losing everything.

It’s worth noting that Coinbase actually does have insurance that covers any breaches to its security. But this doesn’t cover any personal security breaches. So if someone gets your Coinbase username and password and empties your account, you won’t be covered.

Don’t panic, though — there are plenty of secure options for storing cryptocurrency. Here are the four most popular:

  1. Within an exchange like Coinbase, Bittrex, Gemini, etc. (least secure)
  2. Within an online/mobile wallet platform, like Jaxx or Bread. (more secure)
  3. Within a hardware wallet like Trezor or Ledger. (very secure)
  4. Within a paper/offline wallet that can be created via Walletgenerator.net/MyEtherWallet/MyCrypto. (most secure)

If you choose to store your cryptocurrency in a paper or hardware wallet, you’ll be given a private key (a long string of letters and numbers) that you need to keep safe. Anyone with access to this code has access to your wallet, so you’d be well advised to write it down somewhere and store it in a safe place.

Storing Crypto: Which wallet solution is the best?

 ExchangeMobileHardwarePaper
SecurityLowLow-MediumMedium-HighHigh
Ease of AccessHighHighMedium-LowLow
Own Your Private Keys?NoNoNoYes

Whenever you want to trade your cryptocurrency, you’ll need to transfer it from your wallet to an exchange like Bittrex so you make the transfer from there. Once you’ve made a transfer like this once, you’ll quickly get to grips with how it works.

It can all seem a little overwhelming to begin with (like anything new), but after you’ve spent a few days getting your head around everything it will all make complete sense.

Quick recap: How to buy cryptocurrency

Hopefully you now have a basic understanding of what cryptocurrencies are and how to invest in them. In summary, to purchase your first cryptocurrency, you’ll need to:

  1. Create an account on an exchange that accepts fiat currency, like Coinbase.
  2. Transfer your fiat currency from your bank account into your Coinbase account.
  3. Place an order for the cryptocurrency you want to invest in and wait for the transaction to process and show within your Coinbase account (this usually takes no longer than 10 minutes).
  4. Transfer your cryptocurrency from your Coinbase account to a more secure wallet.

Follow these instructions and you’ll be on your way to happily own your first batch of cryptocurrency.

Disclaimer: The contents of this article should not be taken as direct investment advice. Please do your own independent due diligence before making any investments, whether this is cryptocurrency or otherwise.

Written by:

Matt is the founder of The Coin Offering, co-host of the Decrypting Crypto podcast and a member of the team at The Litecoin Foundation.

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