Over the past few weeks we’ve covered some of the basic aspects of blockchain technology. By now, you are hopefully eager to get started and become part of the blockchain community. The easiest way to do this is to get some cryptocurrency or tokens of your own. In this blog post we will step through how to purchase, transfer and store cryptocurrency and tokens.
Before diving into it, let’s go through a few definitions to avoid any confusion down the track.
- Blockchain: A computer protocol that allows a network of computers to share and maintain a digital information ledger. There are many different blockchains; the most famous of which are Bitcoin, Ethereum and Ripple. Each blockchain has its own protocol, network and user base.
- Cryptocurrency: The native currency of a blockchain. Cryptocurrencies are used to interact with the blockchain (either transferring cryptocurrency or interacting with an embedded smart contract) or as payment for real world goods and services.
- dApp (decentralized application): An application whose backend code is embedded into a blockchain in the form of a smart contract.
- Token: A digital asset native to a dApp. Tokens usually represent some form of value within the dApp, most commonly the right to interact with its smart contracts or share in its revenue.
- Coin: A common term for cryptocurrencies and tokens.
- Altcoin: Any coin that is not Bitcoin.
- Fiat: Regulated, centralized money like USD, Euro or AUD.
- Exchange: An online marketplace for buying and selling coins. Fiat exchanges allow you to trade between coins and fiat while coin exchanges only allow trading between different coins.
Lets have a look at how these terms fit together in the Ethereum blockchain:
Disclaimer. it is actually quite difficult to find consistent definitions for the blockchain terms above. There seems to be some inconsistency in how different communities use these terms and tokens are frequently referred to as cryptocurrency in many online forums. For the purposes of this blog, we will continue to use the above definitions.
There are 3 steps to purchasing your own coins.
- Purchase coins from an exchange
- Create a wallet to store your coins
- Transfer your coins from the exchange to your wallet
Purchasing coins from an exchange
Unless you’re planning to dedicate your computer to mining, there is only one way of getting your hands on some coins; you have to find someone who is willing to sell you their coins for fiat. Luckily for you, all you need in order to find someone to trade with is an internet connection. The vast majority of people purchase their coins through online exchanges. There are hundreds of exchanges around the world and they all have their pros and cons. Most people who want to purchase coins with fiat use domestic exchanges to avoid international transaction fees and long waits. A quick google search will tell you which exchanges accept your local currency. Alternatively, you could have a look through cryptocompare’s extensive list to find an exchange that suits your needs. If you are after Bitcoin, bitcoin.org also has an extensive list of recommended bitcoin exchanges on their webpage. If you are after a specific coin, Coinmarketcap allows you to check where each specific coin can be traded (just select the coin you want to buy and click “markets”). Most smaller coins are not traded on fiat exchanges so if you’re after a smaller coin then your best bet is to purchase Bitcoin at a fiat exchange first then use a coin exchange to trade your way into the coin you’re after.
There’s a few key things to look for when you’re selecting an exchange
- Safety: By far, the largest contributor to stolen coins over the past 6 years have been hacked exchanges. Because exchanges facilitate thousands of transactions every day they need to have automated solutions for moving coins around. As a result, exchanges are inherently less secure than your own private account which can be maintained completely offline if you so choose. My advice if you’re just starting out is to pick a large, reputable exchange with a proven track record.
- Market spread: There is no official exchange rate for cryptocurrencies. Instead, the purchase price is simply the lowest price anyone on your exchange is willing to sell for. As a result, there is always a spread between the buy and sell price of any given coin. The more users an exchange has and the more popular the coin is, the lower its spread. Picking an exchange with a large user base is therefore likely to give you a more fair price.
Note. if you’re not familiar with the Arbitrage Flat Fish and other aquatic block characters in this post you may want to go back to Post 3 and familiarize yourself with the blockchain ecosystem.
- Fees: Trading fees, deposit fees and withdrawal fees can all eat into your starting capital. Transaction fees vary widely between exchanges and typically range from 0.25% to 3%.
Once you’ve picked an exchange you’ll likely have to go through a sign-up procedure including identity verification. Don’t worry, it’s usually just a matter of taking a few pictures of yourself holding up your driver’s licence/passport to comply with local anti-money laundering policies.
Cryptocurrencies are pseudo-anonymous. Every single transaction is logged in the blockchain and is publicly available. You will still have to pay your taxes…
If revealing your identity doesn’t sound appealing to you for one reason or another you basically have two options.
- Use an exchange based in a country with more relaxed anti-money laundering laws.
- Find someone who is willing to sell their coins for cash in hand using a service like localbitcoin. If you go for the second option, I recommend reading up on other people’s experience and doing some research before meeting up with anyone in person. This thread from bitcointalk.comhas some excellent information.
After you’ve finished the registration process you’ll have to transfer some money into your new account. Most exchanges offer a variety of ways to do this including wire transfers, credit card purchases and PayPal. These methods typically have different deposit fees so make sure to read and understand your exchange’s fee system before making your first deposit.
Once your money is in your exchange account you’re ready to start trading. If you picked an exchange with a large spread, you need to make sure you know what a fair price is before you put in your order. Coindesk.com will give you reliable and real-time information on current average trading prices for Bitcoin and Ethereum. As stated previously, you can also use Coinmarketcap to check the going rate for each coin at different exchanges. Once you know what price you’re targeting you can place your first buy order.
Note. some exchanges have different fee structures for market “makers” and “takers”. A market maker in this context is an order that is not immediately matched (i.e. a buy order with a lower price than the lowest sell order). Market takers on the other hand are orders that match an existing order and are immediately executed. Fees are typically higher for market takers so take this into consideration when placing your order.
The vast majority of exchanges have percentage based trading fees as opposed to fixed fees. You can therefore start off slow and place a few smaller orders to get used to the system before placing your main order. Once your orders have been executed you’ll be able to see your coins in your exchange account.
Congratulations, you are now a cryptocurrency owner!