I remember a few years back when I first tried to invest in cryptocurrencies. Bitcoin had exploded a few months before, and although the hype was over and the coin was back to $300USD, in my head the fun was only beginning.
After walking out of one my university classes, I began speaking about it with a friend who I knew was very involved in the Bitcoin community. I asked him how I could buy a Bitcoin, and he began to explain the concept of ledgers, wallets, and coins.
I didn’t understand a single thing.
It did not take long for him to realize that I was not understanding the concept, and he simply offered to sell me one of his bitcoins, at 5% more than market value to make things easier for me.
Today I look back at this experience and realize that it was much more complicated than it should be for beginners to invest.
So today, I want to share with you the basics of how to invest in your first cryptocurrency, in a safe and secure manner.
Table of Contents
- How cryptocurrencies work
- Why cryctocurrencies?
- Choosing your wallet
- Setting up your wallet
- Investing in a cryptocurrency
- Alternative cryptocurrencies to explore
- Monitoring your investment
- What does the future hold?
How cryptocurrencies work
While I will not go into the nitty gritty about how this technology works, I want to give you a basic understanding of what it is you are planning to invest in.
Whether it’s Bitcoin, Litecoin, Etherum, or one of the hundreds of altcoins that are now on the market, the concept of all these digital currencies remains the same. There is a set amount of coins available.
Any computer can become a mine for cryptocurrencies, which in turn becomes one of the many gateways for any transaction to go through. As your computer keeps on mining, it is also a gatekeeper to all the transactions happening around that cryptocurrency. For a buy or a sell to go through, more than 50% of the all the so-called gatekeepers must approve the transaction simultaneously. This transparency and security is one of the main reasons that cryptocurrencies have gained fame.
Rather than simply having a third-party approve a transaction between two people, as it was usually the case when dealing with banks and centralized currencies, the entire system must approve and document the transactions.
Another important reason that makes cryptocurrencies so interesting is the fact that they are decentralized. While all of the world’s currencies are either manipulated – or pegged to a manipulated currency – cryptocurrencies have no centralized system. Therefore the value of the coin is 100% based on the supply and demand.
And as the supply is mostly constant, the only main factor determining the value of a coin is its demand. This explains why Bitcoin skyrocketed from being worth less than 1 cent to over $1000.
This also explains why you can make (or lose) a lot of money investing in these coins.
Why cryptocurrencies?
While I am not a professional cryptocurrency broker, I do understand some of the hype behind investing in some of the digital currencies.
Speculatory reasons – First and foremost people are investing for speculatory reasons. Let’s say you invest $50 in 10 different altcoins (altcoins are all the other coins other than the most known ones like Bitcoin and Litecoin). If even one of these explodes to the extent that Bitcoin did, you will make your money and much much more. Hence, a lot of people are diversifying their investments in hopes that one of these currencies explode.
Financial reasons – In this day and age, many people believe that currencies should not be centralized, and would rather invest their money in a decentralized currency like Bitcoin. When financial markets crash, we can expect a run for their money in Bitcoin and other cryptocurrencies.
Transactional reasons – Changing large sums of money from one currency to another is much easier to do with cryptocurrencies than through a bank. And also much cheaper!
As for Bitcoin, one of the primary reasons people are still investing is that there are only 21 Million coins that can be mined. This is nothing when you think of major stocks that have 100s of million of stocks on the market, or when you think of any major centralized currency which has a market cap of trillions of dollars and emits new fiat money on a regular basis. There are a set number of coins, which means there are no possible inflation rates.
Choosing your wallet
Think of trading cryptocurrencies like trading stocks or regular currencies. In both cases, you need a place to keep your money right?
In the case of cryptocurrencies, rather than placing your money in a bank, you keep it in a wallet.
The wallet can be online or offline. You can place it on a specially encrypted USB like Ledger, on your desktop like Electrum, or keep it online.
If you choose to keep it online, then you could place it in a company that only serves as a wallet like Blockchain.info, or you could keep it on an exchange platform like Bittrex.
Setting up your Wallet
These are all great options, and they all work in a similar way.
Once you have done your research and chosen which wallet to move forward with, the most important thing is your key phrase. A key phrase is usually comprised of 12 random words, which can be used to recuperate your funds should you forget your log-in credentials. A phrase looks something like this:
“Dog happen common seed cement jump chair bin atmosphere darkness mango carving”
This key is so important. Email it to yourself. Email it to your parents. Write it somewhere safe. Wherever you choose to keep this, make sure it is safe and that it has no other information like your name or which wallet you use. That way even if you are hacked the chances of someone breaking into your wallet using your key are kept at a minimum.
Once the key is safe and your account is functional, it’s time to buy some coins!
Investing in cryptocurrencies
So how does one invest in a cryptocurrency? Here are the two main ways:
- They can be sent directly from one wallet to another
- You can buy/sell from a cryptocurrency exchange, the same way you would with a stock
To keep this as simple as possible, I will only explain the buying and selling on an exchange option. Let’s say we decide to buy on an exchange like Bittrex.
After finding out which cryptocurrency you want to buy, you will place a bid to buy at a certain price, or at the market price. You will also indicate which public key you want your currency to go into.
Think of public keys as a holding account. The public key tells people which holding account to send the currency to. Then you also have a private key, which is encrypted and protects your currency that is held in that specific holding account in your wallet. This key is decrypted only at the moment where the transaction goes through, which happens behind the scenes so you don’t know to worry about it.
Alternative cryptocurrencies to explore
It seems every day there is a new currency to invest in. I haven’t looked at all of them, but here are the main ones to keep an eye on for now according to industry experts. I would strongly recommend doing further research before investing in altcoins as many may be scams, whereas founders and early-early adopters make money on the IPO and then you are stuck with a bad altcoin. On the flip side you could invest in the next big thing, and make thousands from a $50 investment. Here are some of the more famous coins.
- Bitcoin – We’ve all heard about it. It’s foundation is strong and won’t be going anywhere anytime soon
- Litecoin – Currently stable at around $4 per coin. This is a more stable currency, which can be used for international money transfers
- Ethereum – Fastest growing cryptocurrency on the market, offering other services such as ‘smart contracts’
- Ripple – This is an entirely new type of cryptocurrency, which serves as a platform to exchange currencies, rather than to use to buy goods and services. Currently, with $50 you can buy 5500 XRP (Ripples)
- Waves – With a recent IPO of 16M USD, this an example of a smaller altcoin that is trying to make a place in the market. It’s service and use is similar to that of Ripple
There is also Dash, Factom, Maid Safe, Monero, Sia, Storj, Steem, and Synerea to name a few. These are some of the coins that are currently backed by a community of developers, and that offer interesting services that go above and beyond from being a regular cryptocurrency.
Another thing you should look into before investing is the liquidity of the coin, as if the market cap and daily trading volumes are low, you may have a lot of difficulty selling the coin, especially in times of depreciation. So keep that in mind!
Monitoring your investments
Do you want to have a long or short strategy? Whatever you choose, make sure to keep an eye on your coins.
Unlike regular currencies, these currencies can soar in value, or get decimated in a matter of days. I try to check the status of my investments once every week. Some say that’s not often enough, but I can’t bring myself to check more than that.
Another thing you could do is sign up to get alerts when the coin reaches a certain price.
In any case, make sure to keep an eye on your investment, and to never lose the key phrase, which is your pass to your money!
What does the future hold
Like many others, I believe that the blockchain technology behind cryptocurrencies can only grow from here. Banks are beginning to adopt this technology, and same goes for stock exchanges.
Whether or not this will translate into various cryptocurrencies becoming universally accepted like fiat money is another ballgame. Nevertheless, I’m willing to bet a few hundred dollars on this entirely new system of global currencies and see how the market develops.
Now the question that remains is if you are too.
Photograph by Zach Copley