Basics of Buying Cryptocurrency

Ever since bitcoin was launched in 2009, it has been making headlines almost every other day. The idea of an asset that people have called ‘digital gold’ and ‘a hedge against inflation is tempting. If you are on the fence about investing in cryptocurrency, you might want to look at the implications of investing and the risks involved.

Is it worth investing in cryptocurrency?

You may have heard people telling stories of how they’ve hit the jackpot and how cryptocurrency has blown their minds. It sounds too good to be true, but it is. It is possible to make a lot of money in the short run, but it is equally possible to lose all of it. 

The value of cryptocurrency is not tethered to anything but supply and demand, so you can’t tell which way the price will move. Speculation in news and social media can cause big swings in price. Additional threats include cybersecurity issues, scams, losing passwords and keys and exchanges being shut down because of government regulations. 

Perhaps the real question you should ask is ‘How much to invest in cryptocurrency?’. You might not want to put all of your money in this market. For most people, it is a side investment or an attempt to diversify their investment portfolio. Also, it is a good idea to invest if you have extra money that you wouldn’t mind losing.

How do I buy cryptocurrency?

You can buy cryptocurrency on a cryptocurrency exchange. A cryptocurrency exchange is a platform where you can exchange different cryptocurrencies for each other or buy cryptocurrency by paying in fiat currency. 

Most exchanges require you to submit identity proofs and complete a KYC (Know Your Customer) process for creating an account. These are called centralized exchanges. They act as a middleman between buyers and sellers and charge commission. They carry out transactions on your behalf and charge transaction fees.

Decentralized exchanges allow buyers and sellers to connect and trade directly. There is no KYC process for creating an account, so users remain anonymous to each other. There are fewer decentralized exchanges, but this model is highly appreciated because it fits with the concept of cryptocurrency, which is based on a decentralized philosophy. It means that there is no central authority to control the process. 

You can also go for a hybrid exchange like Legolas or Eidoo, which try to take desirable features from the two models while eliminating their flaws. For example, they offer high speed of transactions which is characteristic of centralized exchanges, plus control and anonymity, which are the strengths of decentralized exchanges.

Once you have chosen an exchange, you will have to link it to a payment option. If you are paying in fiat money, you can do so by linking your bank account, credit card, debit card or Paypal account. You need to make sure that your bank allows deposits on that exchange. You will mostly be paying a deposit fee. 

Once you have linked a payment option, you can buy the cryptocurrency you want from the ones listed on that platform. You can place a market order, i.e., you buy right away at whatever the price is, or limit order, i.e., you buy when the price drops down to a certain level. To receive your cryptocurrency, you will need a cryptocurrency wallet.

What is a cryptocurrency wallet?

A cryptocurrency wallet is like your regular money wallet, except that instead of storing money, it keeps a record of your transactions. Your wallet has a public address that you give to others when they want to send you money. It also has a private key that only you know, to be used when you want to transfer money to someone.

It is important to note that transactions on the blockchain are public, but user information is not. Disclosing the private key to anyone can put your wallet at risk of hacking and theft. 

A wallet can be custodial or non-custodial. Custodial wallets allow a third party to control your transactions. This third party also takes responsibility for the security of the wallet. A non-custodial wallet, on the other hand, is in your control. You have to remember the password and public and private keys and keep it secure.

Wallets are also classified as hot and cold. A hot wallet is usually used for storing small quantities of cryptocurrency, is connected to the internet and is used for day-to-day transactions. A cold wallet is one that is not connected to the internet and is not used for frequent transactions. It is more like a vault where you store the bulk of your wealth. You might want to maintain a separate cold wallet apart from the hot wallet that you set up on a cryptocurrency exchange.

Custodial or non-custodial, hot or cold, wallets come in four main categories. The first one is an online or web wallet, which is hosted on a server. All online wallets are hot wallets, and they are mostly custodial. You need to sign up on the concerned platform and complete a two-step verification process to set up your wallet. 

The second type is a software wallet, which is an app that you install on your phone or computer. You have to create an account on the app and get your private key. Mobile wallets are mostly hot; desktop wallets can be hot or cold.

The third one is a hardware wallet, which is a special device that resembles a pen drive, which has to be connected to software to operate. You need to buy the device and install compatible software. Hardware wallets are cold wallets, and they are non-custodial. 

Lastly, a paper wallet is software that prints out your keys or QR codes for accessing your wallet. Paper wallets are obviously cold wallets, and they are non-custodial. Now that you are clear on the basics of buying cryptocurrency and the implications of investing, you might want to weigh the pros and cons against a background of your financial position before investing.