Unboxing Cryptocurrencies — Getting Started
If you’re new to the cryptocurrency market you’re probably wondering, how do I even get started. How do I buy and sell coins and what coins should I buy? In this article I’ll address the former by looking at some of the tools you need to start buying and selling cryptocurrencies. Later articles will address the latter issue. The list below is by no means exhaustive. The crypto market is large and growing, and there are myriads of different projects and tools designed for them. As your involvement in the market grows you will no doubt come across many more useful tools.
Cryptocurrency Exchanges
Cryptocurrencies are traded on exchanges, and you will likely need accounts on multiple exchanges to trade. No exchange carries all coins so the ones you use will depend on the coins you trade. There are two types of exchanges: centralized and decentralized.
- Centralized Exchanges (CEX)
Centralized exchanges serve as middlemen between buyers and sellers , similar to how a bank act as a middleman between its customers. Centralized exchanges allow buyers to purchase crypto assets using fiat currencies (such as the US dollar) and also to swap cryptos for other cryptos. Centralized exchanges provide a gateway for new users to access the cryptocurrency market, because you cannot use fiat currencies to trade cryptos on a decentralized exchange. Unless someone sends you some crypto, you would need to start by purchasing your first coins on a CEX. Many CEXes allow customers to purchase coins directly through their bank accounts. Read the fine print carefully before purchasing directly because some CEXes hold on to your purchased cryptos for a while before you can move or swap them.
KYC (Know Your Customer) procedures are usually required when opening an account with a CEX. Depending on the exchange, you may be asked to provide an ID card, social security number, proof of address in the form of a utility bill or bank statement, and other documents. This is necessary to meet anti-money laundering regulations in most countries where CEXes operate. The US is notoriously strict in regulating its financial markets, and some exchanges restrict US residents from using their platform to avoid running afoul of US regulations.
Centralized exchanges take some of the burden of safeguarding crypto assets out of the hands of the customer, instead relying on the exchange to keep their assets safe. On a decentralized exchange, crypto owners are responsible for safeguarding their private keys. Private keys are digital addresses which allows access to cryptocurrencies. Whoever controls the private keys controls the assets. The flipside is that CEXes are susceptible to hacks and customers could lose their assets this way. Some of the more established CEXes have created “digital vaults” which offer a higher level of security for assets.
Popular centralized exchanges include Coinbase, Kraken, Binance and FTX. They facilitate billions of dollars in crypto trades every day.
2. Decentralized Exchanges (DEX)
Decentralized exchanges operate quite different from centralized exchanges. There is no central authority that controls decentralized exchanges. They operate as peer-to-peer systems, in what is called a “trustless” system. Trustless here means there’s no one entity or person that the system depends on to function, unlike a bank in the traditional monetary system.
You do not open an account on a DEX in the way it’s done on a centralized exchange. All is needed is the internet to connect to the exchange and conduct your trades. Not all exchanges have all coins so you might need to use multiple exchanges. You are in complete control of your crypto assets on a DEX. Your private key allows you access to your coins, but you must safeguard it as anyone who gets possession can steal your crypto assets. The onus is on you to keep it safe, but there are tools available to help.
Popular DEXes include Uniswap, PancakeSwap and Sushiswap, but there are many others to choose from. Even the popular meme coin Shiba Inu has its own DEX called ShibaSwap.
Cryptocurrency Wallets
If you’ve decided to take the plunge into the crypto market, you will need to keep your coins safe. If you use a CEX for trading you can keep your coins on the exchange and trust it to keep them safe. However, exchanges can be hacked, and you could lose your coins.
Crypto wallets allow you to store your coins for easy access whenever you need them. When it comes to using wallets, safety is paramount. If you deposit your money into a bank, insurance protects you from losing a portion of that money should the bank misappropriate your funds or worse, fails. There is no such protection for cryptocurrencies, so safeguarding your coins is very important. There are different types of wallets you can use to safely store your cryptocurrencies.
Types of Wallets
There are two broad categories of wallets: hot wallets and cold wallets. “Hot” wallets are connected to the internet and are susceptible to hacking. “Cold” wallets are offline which almost eliminates hacking. Your private keys could still be stolen if you are careless with your cold wallet and someone gets access to it. CEXes use a combination of hot and cold wallets for storage. They will keep some of the crypto assets in hot wallets to allow for trading and withdrawals and keep the remainder in cold storage. This offers you some protection in case of a hack as all your assets are not likely to be lost.
Metamask is probably the most well-known hot wallet. Other popular hot wallets include Trust Wallet, Coinbase Wallet (separate from Coinbase CEX) and Exodus. There are myriads more wallets out there so you can research and choose one that’s best for you. Remember, safety and security of your coins is the main consideration when it comes to choosing a wallet.
Cold storage wallets (also called hardware wallets) are the best way to safeguard your assets. Hardware wallets store your private keys offline so hackers can’t get to them. Once you link your hardware wallet to your exchange account, your crypto assets can only be accessed via the hardware wallet. Nothing related to crypto is 100% safe, but hardware wallets do a pretty good job of safeguarding assets. These wallets are inexpensive and easy to set up and use. You can access hundreds of coins with these wallets.
Two popular hardware wallets are the Ledger Nano and Trezor, but there are several others, like Titan and SafePal. I’ve used the Ledger Nano for some time, and it has proven to be very reliable.
Probably the safest cold wallet is the least technologically advanced: a paper wallet. Simply writing down your private keys on a piece of paper and putting it in a vault. There is zero chance of hacking, but of course you would be exposed to theft or damage. If you choose to go this route, make sure you have a water and fire resistant vault to store your keys. Cryptocurrency transactions are immutable: they can never be undone. If you lose your private keys your coins are lost forever.
It is very important that you get your hardware wallet from trusted sources. Buy only from the official manufacturers of these wallets. Never buy from a third-party source! A wallet bought from a third party could be encrypted with malicious code that steals your private keys and drain your assets. So be very careful where you get your hardware wallet.
Market Information
There are many places to find crypto prices and other information on the market. Exchanges will have data on crypto prices, but the data is in some cases restricted to the coins the exchange supports. Websites dedicated to providing market data cover nearly all cryptocurrencies and is a good place to start research on a particular coin.
Popular data aggregation sites include Coinmarketcap, Coingecko, Nomics, OnchainFX and CryptoCompare. In addition to market data, these sites offer analyses, statistics, news, research and more. These are good places to start your crypto research.
Messaging Services
To a newcomer a messaging service might not seem relevant to the crypto market. But messaging services play an outsized role in the crypto market. Pretty much every project has a Telegram or Discord group where the developers engage with followers, and followers engage with each other. Crypto enthusiasts also form their own groups, where they discuss anything crypto related. There’s probably a messaging group for anything you can think of related to cryptocurrencies. Many good and not so good ideas can be found in these groups, so one has to be careful about which advice to act on from these groups. Scammers also target these groups so never give out your private information to anyone.
The messaging groups I have found most useful are those created by a project’s developers. Here you can get useful information about a project, but sometimes you have to sift through a lot of junk to reach useful information.
Portfolio Trackers
As the name suggests, portfolio trackers help you keep track of the coins you own. It is likely you will buy coins from several platforms, and keeping track of them could be cumbersome (who wants to use a spreadsheet?). Portfolio trackers allow you to have all your coins in one place and helps you to see how your coins are performing. Some of them offer other services such as trading and market data. This is a very useful tool if you own several coins and wants to keep track of how they are performing.
Popular trackers include FTX (formerly Blockfolio), Cointracking and Coinstats.
Research, Research, Research
An exchange account (CEX/DEX or both) and a hardware wallet to safeguard your coins are the basic tools you need to get started in crypto land — and of course some cash to start investing. That’s the easy part though. There are thousands of coins in existence and deciding which ones to invest in is not an easy task. There are many resources out there to help, but you will need to spend some time to sift through all this information to make the right decision about which coins to invest in. A word of caution is to always do your own research and never invest what you cannot afford to lose. There are many opportunities in cryptos and with careful steps you can make a lot of money investing. So happy investing!
In future articles I will do a deep dive into some of the coins I find interesting with a goal to help with your investing journey.
