Auteurs: David Kuiken en Linda de Vreede
In a serie of three articles, we will try to demystify the concept of cryptocurrency and explain the basic facts of the current situation. In the first blog, we explained what cryptocurrencies are and how blockchain works. Now, we want to arm you with some practical advice on investing in cryptocurrencies.
What is a wallet?
If you want to make a cryptocurrency transaction or check your balance, you need to have a wallet. Basically, every cryptocurrency has their own wallet(s). When you own five different coins, you have five corresponding wallets. There are three different types of wallets and all offer different levels of security:
- Online wallets
- Hardware Wallets
- Software wallets
Online wallets have high levels of usability, they are accessible at any moment and do not require installation of software on own devices. Wallet providers, a third party, offer a platform where you can store your cryptocurrency. It is important you choose a secure provider. Since this is an online wallet, you are not safe from hackers. If you want to be on the safe side, hardware wallets are a better choice. A Hardware wallet is a small device, not connected to the internet, where you can store your private key. Therefore, it cannot be accessed by a third party, virus or malware. If you don’t want to use an external device, you can download a Software wallet. This type of wallet is installed on the hard drive of a computer or mobile device and is secured by a password.
Whichever wallet you choose, it only stores the private key, but not the coins themselves. The coins only exist as a reference in the blockchain. If the hard drive crashes and you don’t have a backup of your private key, you lose access to all your coins.
A wallet can hold multiple addresses. An address is like a bank account number. If you would look up an address in the system, you would find all transactions made with that address. As mentioned before, every address is accompanied by a “Private Key” and a “Public key”. The private key is like a PIN for a debit card. It gives you the right to make transactions and should be kept safe.
What can I do with cryptocurrency?
Until now, there are no solid implementations to use cryptocurrencies other than investments and payment methods. There are a lot of initiatives to make Bitcoin useful as a currency. In the Netherlands, a good example of this is “Arnhem Bitcoinstad”. This is an initiative that made the city of Arnhem the city with the most merchants that accept Bitcoin. Bitcoinspot.nl lists more than 500 (web)shops (in the Netherlands) where you can spend your Bitcoins. While most of these shops are small, even big businesses like Thuisbezorgd.nl and Burger King (Arnhem) offer payment through Bitcoin.
While Bitcoin is gaining traction as a currency, other currencies are not flourishing as much. There are examples of other cryptocurrencies being supported, like Ethereum and Litecoin. Those are exceptions though and support by merchants is not great. At this moment, most owners of cryptocurrencies hold their cryptocurrencies, hoping they will accumulate in value and prove to be a lucrative investment. This is not without risk though. Nobody knows for certain where the price will go.
Where can I get cryptocurrency?
Before investing in cryptocurrencies, as with any investment, it is advised to get familiar with the specifics. Bitcoin and other digital currencies carry a significant risk, never invest money you can’t afford to lose. There are many ways to educate yourself, monitor news sites, podcasts and read articles about the current situation. As said earlier, many websites show comprehensive overviews of all the cryptocurrencies. For example, coinmarketcap.com shows over 1.300 different Cryptocurrencies. This website shows the market cap, current price, circulating supply and volume. Also for each cryptocurrency the maximum supply is indicated, this means that you can see how far the mining process is developed and how many of the currency will be created. Charts show the value for every moment, zooming in from the current day, to the entire lifespan of the coin.
Buying cryptocurrency is confusing for a lot of people, it is not like any other stock or typical investment. You don’t get shares, you buy digital coins. If you would like to buy your own coins there are many possibilities and platforms you can use. We’ll look at the three most common methods:
- Acquire from someone directly
- Buy online directly from your bank account
- Buy them on a currency exchange
You can acquire them from someone directly
Because cryptocurrencies are not managed centrally, you don’t need a middleman to setup transactions. You could walk up to someone, offer them money for their currency, and set up a transaction. No bank needed. You only need an address to send the currencies to.
Buy online directly from your bank account
If you want to buy them yourself, you can use many websites that offer cryptocurrencies. These sites do not hold the currencies for you, you have to hold the coins in your own digital wallet. The websites decide the current price. You probably pay a bit more for the currency than the actual selling rate record, this depends on the selling margin and the payment option. They (often) offer a variety of payment options, credit card has a higher fee than other methods. BTCDirect.eu is an example of a website where you can buy Bitcoins with different kind of payment methods.
Buy them on a currency exchange|
The last option to get yourself some cryptocurrencies is via an exchange. As cryptocurrencies became more popular, exchanges (trading platforms) emerged rapidly. Exchanges can be used to trade currencies with other people. You can compare them to stock exchanges like the Dow Jones, NASDAQ, etc. People place orders to buy or sell and you can respond to them. The benefit of this is that you can place an order at which price you want to buy or sell. These platforms hold your funds for you to make trading easier, but it is possible to transfer the funds to a different place if needed. Good examples of online exchanges are: Coinbase, Kraken and Bittrex. The exchanges all differ from one another. Coinbase would be the easiest option, they offer a phone application and it is really easy to use. The downfalls are that they only offer Bitcoin, Ethereum and Litecoin. If you are interested in other currencies Kraken would be a better choice. Compared to Coinbase, this is a more difficult website to get to know. Bittrex has even more options, they offer a variety of cryptocurrencies to choose from. Always keep in mind, just like the currencies, the exchange websites are still in development.
Read more about who uses cryptocurrencies in our final blog of this serie.