Understanding the way crypto works is a necessary step before buying some. This article will give you an interesting insight into the important factors that should be considered before taking the plunge.
While tech giants and investors take a keen interest in cryptocurrency, it is easy to be tempted to own some yourself. And you wouldn’t be wrong. The world is warming up to the idea of adopting the money of the future. The same is apparent with Bitcoin entering Wall Street and El Salvador becoming the first nation to accept cryptocurrency as a legal tender (at the time of writing). Buying crypto does seem to be the smart decision to make at the moment.
The sector still remains a mystery for the uninitiated. There are several entry barriers in the world of crypto, the biggest of them being a knowledge gap. Novice traders and buyers find themselves in quite a pickle – trying to navigate through chunks of data and information thrown at them while figuring out which one is relevant and which one is a marketing gimmick. It may get a bit overwhelming. The sector is also marked by volatility – a feature sometimes confused as a glitch.
Developing an understanding of this modern money is not easy. However, as flag bearers of bringing about this new money revolution, CoinField feels that it is important to talk about the first few things to consider once you have decided to buy crypto.
Learn the Basics Before Buying Your First Crypto
Buying crypto can be the first step toward an adventurous journey. It is worthwhile though, to clear out some common myths. There are certain salient features that make a digital currency a cryptocurrency:
- Encryption/Cryptography – this allows privacy, pseudonymity or anonymity. This also prevents double-spend or repetition.
- Decentralisation: it has to be democratic and independent, unregulated by any governing body.
- Blockchain – the code guarantees functionalities/characteristics on a public ledger.
Santoshi Nakamoto is a famous crypto name that still has no identity attached to it apart from leaving the world in awe of his exciting framework. In the paper that introduced Bitcoin to the world, he (or they) define/s Bitcoin as:
‘a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.’
The definition still stands true and legit in understanding cryptocurrency. It is peer-to-peer. That is the textbook definition of a ‘pure’ market. It does not rely on any third parties to control operations. This is another reason why cryptocurrencies are volatile.
Traditional Money Vs Cryptocurrency
Most fiat money uses paper bills or metal coins as representations of value. In contrast, cryptocurrency uses a virtual coin, unit or token that you can buy from an exchange. That’s the catch one needs to understand before buying crypto. What you’re really buying is a digital value that may go up and down with time. You can additionally trade or sell your ‘coins’ among other people who own or want to exchange crypto, i.e, crypto traders.
Cryptocurrency may not have a central authority governing it but it does have a system that it is a part of. This system comprises companies or groups of companies that manage to sell or buy crypto and keep a track of the buyer or trader’s belongings.
The Economics of Cryptocurrency
Cryptocurrency is a non-fiat, decentralized, permission-free, mostly inelastic asset. That’s quite a mouthful, right? Let’s dumb it down a little lest our minds explode. We explain this with the example of the reigning queen of crypto, Bitcoin.
Bitcoin is usually referred to as ‘digital gold’. Apart from bringing it that essential glow up, the name also has significance in understanding how the economics of it all works. Just like gold is limited and one can only mine it to a limited extent, Bitcoin has a fixed, limited value. There can only ever be 21 Million Bitcoins. Yes, that’s all there is to mine. There is a time aspect to the mining profits too, when we consider currencies with limited supply.
Every four years, the reward for mining a block reduces by half. Halving is important to control supply and make Bitcoin, in turn, even more valuable. For example, in 2009, mining a block would give the miner 50 Bitcoins. Currently, a miner would get only 6.25 Bitcoins.
The Feature of Limited Supply
As the number of Bitcoin reaches 21 million and the flow or production (or mining frequency) reaches 0, the currency becomes increasingly valuable. The only clause is that there is more and more adoption and many transactions.
And boy, are we seeing a quick adoption? From Apple to Paypal, everyone is working on including Bitcoin and other cryptocurrencies into their payment portfolio. This is why the current times are so exciting where digital money is considered. Now is when cryptocurrency gains a socially and fundamentally undeniable advantage.
But not all cryptocurrencies have the feature of limited supply. Some examples of coins with a limited supply are:
- Litecoin: Which will only ever be 84 million in supply
- Cardano: Max supply of 45 billion
- Stellar: Total 50 billion
- Chainlink: Maximum supply limit of 1 billion
Recently popular coins like Dogecoin are in it for the long game with an infinite supply. This explains why people like to Hold On For Dear Life (or HODL) when it comes to Bitcoin. But Dogecoin, well it is made for trade. In fact, much of the recent hype created around Dogecoin goes back to tech entrepreneur Elon Musk’s interest in it. Just like your favourite cola brand, as the social value increases with celebrity endorsements, the demand skyrockets. Adoption and social validation are important for coins with both limited and unlimited supply. This is why right now seems to be a plausible time to jump right in.
Buy Crypto Is Safe
Trust is important in all matters of money. The federal money you know comes from a dependable source: the government. You cannot create money on your own, you have to earn it – legitimate, signed cash that is recognised by an authority that governs it. You cannot pick up a stone and call it money unless the federal system says it’s money.
Money seems impossible to exist without a governing body. However, blockchain solves this problem by creating a ledger. Imagine if in the sense of having a $1 note with your name written on it. It is yours, when you give it to a shopkeeper in exchange for a pack of gummy bears, the name is still written on it. But now the shopkeeper can use the note.
What Makes Blockchain So Secure?
Transactions over blockchain are similar but with loads of security. By creating a chain of ownership, each code that appears on the blockchain is saved on a different computer, with the rightful owner. For hackers to change this data, they would have to hack all the computers that which the data is stored. This is why blockchains are so secure. The only way a change can be made in the existing code is when an owner uses a cryptographic key to change it. The code is changed in all the computers simultaneously to record a transaction or change in detail. The change is only additive. That means if you sell your coins to someone else the data change will only be an addition of a coin and not a subtraction. This is what makes this peer-to-peer network more secure than any hacker’s intentions.
Based on who can access it, blockchains are of different types. Anonymity is a feature in a public ledger. While in private ledgers, individual identities are revealed. Bitcoin and Ethereum are built on public blockchains. Anyone can own a Bitcoin without revealing their identity. However, Ripple (XRPL) and Hyperledger are examples of private ledgers.
Ready? Get Set, To the Moon!
FinTwit (Financial Twitter) is a pretty fun place to be for a newbie trader or buyer. You’d often run into memes and quirky comments that might throw you off the track. You’d find yourself wondering what some of these terms even mean. One such term is HODL to the moon. In the crypto world, mooning means skyrocketing to a new high price.
Now that we have got you acquainted with the cool stuff, let’s move on to the practical stuff. To complete your orientation and begin buying crypto, here are some steps you can follow.
Step 1. Choose your exchange wisely
Consider cryptocurrency exchanges as stock brokers: you need to choose the ones you trust. Luckily most of the popular cryptocurrency exchanges have been around for some years now and have a pretty good reputation. The key is to compare the exchanges with a practical mindset without looking at the quick gains.
Some features to consider while choosing an exchange are:
- Trading fees: An important aspect to consider is the fees. Pick exchanges that give you a good deal. Trading and buying fees is the most important factor for some people too. It is however recommended to dive a little deeper and look at what some of the terms actually mean. For example, maker and taker fees or deposit and withdrawal fees. A deeper analysis will help you actually understand which exchange actually offers you the best price.
- Demo accounts: Some exchanges let you start out with demo accounts. This means that even though you may not be a pro member, you can see and understand the exchange before you actually start trading.
- Security: Some of the salient features that make exchanges secure are 2-factor authentication, biometric authentication, transferability of funds, etc. It is important to read about them while you decide on an exchange.
- Simplicity of function: Understanding how to start buying crypto can be an overwhelming task. Most exchanges have dedicated pages and people dedicated to the cause of making people learn about their platforms. Choose a platform that makes the effort to onboard you as a trader or buyer.
- 24/7 Support: It is important to be able to get the help you need when you need it. Exchanges put in their time and effort into creating a strong, intelligent and caring support system for their customers.
Best Available Exchanges
By weighting the above factors, and understanding which things are more important to you, you can already start to look at your options. Currently, the leading cryptocurrency exchanges that you could weigh out are:
Step 2. Buy your favourite crypto!
Buying crypto is easy once you have signed up and started getting acquainted with the platform. Advisable to choose a platform that supports multiple payment options. This makes sure that you can buy digital assets smoothly, with a medium of your choice.
For example, CoinField offers 6 ways to make payments over multiple fiat currencies:
- Wire Transfer – for Canadian Dollar (CAD), US Dollar (USD), British pound sterling (GBP), Euro (EUR), Japanese Yen (JPY) and United Arab Emirate Dirham (AED).
- SEPA (Single Euro Payments Area) – only for Euro (EUR)
- E-transfer (Email Money Transfer) – only for Canadian Dollar (CAD)
- EFT (Electronic Funds Transfer) – only for Canadian Dollar (CAD)
- Credit/Debit Cards – for Canadian Dollar (CAD), US Dollar (USD), British pound sterling (GBP), Euro (EUR), Japanese Yen (JPY) and United Arab Emirate Dirham (AED)
Most exchanges should be able to offer you your favourite coins. For example, CoinField has about 20+ digital currencies available against 6 fiat currencies.
Step 3. Decide where to store your assets
It is important to know where you will be storing your assets. Storage, in fact, is the most important aspect of this whole process. There are multiple ways to store your assets. Unlike the actual wallet in your pocket, crypto wallets do not actually carry around the assets within them. They have keys or tools to interact with the blockchain and make a transaction. Most exchanges offer a software wallet already. When you first buy a coin, this is where it gets stored.
However, traders and buyers like to opt for another wallet which may or may not be digital.
In the crypto dictionary, there are two types of wallets – hot wallets and cold wallets.
Hot Wallets Vs. Cold Wallets
Hot wallets are the ones that are usually offered to you on the exchange itself. They are digital and are somehow connected to the internet. For example, if you create an account on CoinField, your assets get stored in a default hot wallet.
Whereas, cold wallets are for people who want their assets stored offline. These wallets may be hardware or paper wallets, with your key safely stored in them for you to access your assets as and when needed. But remember that these keys are all you have to prove your ownership of the assets. Not your key, not your crypto.
The difference between hot and cold wallets is like keeping your money in your bank app (hot) and keeping your money in a safelock inside your cupboard (cold).
Now that you are all set to start out with your favourite cryptocurrency, we have to make important remarks about trading and buying. All through the article, we have used these terms together, since we wanted you to warm up to the idea of cryptocurrency markets – you can buy and HODL or you can trade. Trading and buying crypto are two different means for two different ends. Buyers or investors in cryptocurrency are considered to be playing the long game – they usually hold on to the bought asset through the volatile periods. Trading, however, is more flexible. You can play both long and short since you are not required to take ownership of the asset. Traders usually make use of market volatility. If your trading strategy goes wrong, the losses are heavier.
There is no right or wrong way of investing in cryptocurrency – you can trade or you can save it, and you can be a bullish or bearish trader. It totally depends on your purpose and your belief in the currency you are buying. There are also tax considerations for both long-term and short-term investment as well as trading in cryptocurrencies.
Capital Gains Tax is charged on the amount you earn when you make a profit from selling your cryptocurrency. Depending on the time for which you hold the currency, you get charged a long or short-term capital gains tax.
Trading and buying crypto is definitely an upcoming skill to learn. While crypto is fast going mainstream, the interest in the market is still new and analysts are still discovering new nuances. However, a smart investment is very much the first step to riding the crypto wave. The first step is to choose the right exchange to start buying crypto from. Selecting the right and the most favourable currency at the right time is another handy tip. More importantly, as you learn, it is important to diversify and analyze whether to become a long-term crypto investor or be a seasoned trader.