How to buy your cryptocurrencies and tokens?
In the last articles I have covered:
1. Basic information about what blockchain is?
2. Information about different blockchain applications, payment coins and tokens.
Now that you know the fundamentals, it is time to answer the question: How can I put some money into crypto coins/tokens? The purpose of this article is to give you an overview of that.
Buying your crypto coins and tokens
There are couple of ways you can go about it. If you want to have a full control over your portfolio, you should consider starting with one of the crypto- exchanges. If you come from the world of stocks, you can think of crypto exchanges as your broker account. There are many present on the market but it’s worth to select a trusted one that has a good security track record. By the size of the volume exchanged on these portals, following are the most popular ones:
- Binance
- Coinbase
- Kraken
The last one is the most popular in Europe and since this is where I’m based I would suggest it. There is already a lot of material out there showing in detail how to create account, add money to your account, buy and sell cryptocurrencies on any of these exchanges so I will not be re-inventing the wheel, rather pointing you to user-friendly resource such as this video:
As you saw on the video, creating an account on such exchange is rather easy. Once you purchased some coins or tokens you can store them on your account and for that reason you should make sure that you keep your access password safe and enable the 2-factor authentication. Through exchange you can sell, buy (either on the spot of execute pre-defined limit orders, where you define at what price should a coin be purchased or sold automatically) but also stalk and lend your crypto currencies and tokens. I will cover those techniques of generating passive income on your crypto assets in one of the next articles.
It is worth to know that there are already ways to use your existing bank and brokerage to enter crypto world without a need for creating your account on crypto exchanges. For example 21 Shares is one of the companies that provides such services. It is still rather new space, and for instance in the Netherlands, at of the moment of writing this articles banks do not provide such services to their customers. In Switzerland such services are, however, slowly appearing. Depending on where you are based there may be an option to buy cryptocurrencies using your bank or your broker’s help.
PRIVATE/PUBLIC KEYS
Before we move to the next section it is important to understand one final fundamental concept related to buying/holding/selling your crypto assets, that is notions of private vs public key. When you own cryptocurrencies, what you really own is a “private key.” Your “private key” unlocks the right for its owner to spend the associated cryptocurrencies. As it provides access to your cryptocurrencies, it should — as the name suggests — remain private. The diagram below shows the process of sending 1BTC between 2 parties and where they keys are involved:
WALLETS
Now that you purchased your crypto currency/tokens through crypto exchange the next question that comes to mind is where should you store it? Most traditional exchanges use custodial accounts to hold their user’s funds and then provide IOUs on an internal ledger to allow for trading and exchanging funds. What it means in practice is that if you leave your cryptocurrency on an exchange, the private keys to your coins are with the exchange and your coins could be stolen in a hack. As a consequence, many people would claim that if you are actively trading your crypto assets, they should be kept on an exchange; however, any crypto holding that you don’t plan to trade shouldn’t be on an exchange. Personally I don’t think that it is so black & white. All of the top exchanges have security teams responsible for making it a safe place because their whole business depends on it. For a user that does not have much digital experience and especially experience with online security it may actually be safer to store their assets on exchange than trying to set up a wallet.
If, however, you don’t want to keep your assets on the exchange then the way to go about it is setting up the wallet. As name suggests, it is like your bank account that holds your fiat currencies. Remember the small “calculators” that were handed some time ago with a credit card? When you wanted to make a transaction online you needed to enter a code that would appear on this small physical device. Some crypto wallets come with similar device which you can you to authenticate yourself. There is a wide range of crypto wallets you could choose from and articles that compare them, such as this one:
I would like to mention that the claim as if crypto wallets would guarantee safety of your assets is something that I don’t find a substance for. To start with, if you choose for a hard wallet (the one with authentication device), and you loose it, you may recover it but provided that you kept your recovery seed (12, 18 or 24 words “password”)safe. So even with physical wallets you still need to take care of passwords/keys. Secondly, only in the end of 2020 there was a big security breach in wallets provider- Ledger, which leaked data of its users. The point I am trying to make here is- when you are walking in a crowded place on your holidays, thought by experience you would tend to keep your money close to your body to avoid unpleasant surprise by pick-pocketers. With your bank account, you take care not to share password to online banking or app with others. Similarly here, it is important to stay vigilant and no one can guarantee you 100% security unless you also take an active part in ensuring it.
BUYING BRAND NEW ETHEREUM (ERC-20) TOKENS- DECENTRALIZED EXCHANGES
Once you get deeper into crypto and token space you may notice that not all tokens you may take an interest in are available on the exchange of your choice. As discussed in previous article, Ethereum blockchain network popularity comes from the fact that it allows to develop smart contract applications. Many projects are launched on Ethereum network and those project have tokens that you may deem to be a good investment. Not all tokens, however, are that quickly listed on major exchanges. Typically exchanges ask their users to vote what tokens/coins should be added in the next month. Here is an example of such announcement:
The exchanges are centralized, which means they are governed by a single authority and they perform order book-based trading. In order to make a successful trade using this system, a buy order has to be matched with a sell order on the opposite side of the order book for the same amount and price of an asset, and vice versa. So for instance If I’d like to sell 0.5 BTC I would need to be matched with someone who wants to buy it and then the order is executed. As you can imagine, if one side of the spectrum getting heavier (for instance there are many more buyers than sellers) traders may need to wait for their trade to be executed.
We are, however, still in the blockchain world so one could imagine that sooner or later we’d see the rise of de-centralized exchanges. And that’s exactly what happened! One of the examples is Uniswap. It is a de-centralized exchange meaning it isn’t owned and operated by a single entity — and uses a relatively new type of trading model called an automated liquidity protocol. Typically, if there is a new project running on Ethereum network you can buy its tokens on such decentralized exchange. You will not buy these tokens with fiat currencies but by trading other coins (for instance Ethereum) for them. The process is easy if you have digital wallet such a Metamask. The tutorial below gives a very good overview of how to do that:
Please pay attention to critical sentence: the example of decentralized exchange, Uniswap, is limited only to Ethereum based tokens! Because it is decentralized it is also full of scam tokens that with its name and logo may resemble tokens of legitimate projects. Therefore, be careful when using any decentralized exchanges and make sure you use Etherscan.io to verify the tokens you’d like to buy as it was explained in the tutorial above.
This article concludes the intro to the series. For the next onwards I will look into more detailed topics related to investing in crypto space. Please feel welcome to leave comments and suggestions what would you like to read about next.