What is a cryptocurrency?
Cryptocurrency is a type of digital asset used as a medium of exchange. The most famous one is Bitcoin. Other common terms for cryptocurrencies are digital tokens or digital assets. They are all stored in distributed ledgers called blockchains. Each blockchain has its own digital token. In the case of Bitcoin, it is the Bitcoin token. Other examples are Ethereum, Litecoin, Monero, Dash, Zcash, etc. Each digital coin has own properties and functions. This tutorial will focus on Bitcoin but could be used for any other cryptocurrency.
If you are new to cryptocurrency, you will need to understand some basic facts about storing and securing your money. Coins like Bitcoin are stored in the so-called “wallets”. Think of a wallet as your bank account. There is one significant difference between the two. In the crypto world, you don’t have a third party like a financial institution, taking care of your money. In the case of a capital loss or a security breach, there is no rollback. Taking the right steps is vital for securing your funds. Being your own bank takes higher caution and responsibility.
Why use cryptocurrency?
After all warnings you may be thinking, why should I even care? It sounds dangerous. Are they any benefits of using cryptocurrency like Bitcoin? Here is a list of things you should consider:
# Being your own bank is a powerful feeling. Not many people are able to enjoy this luxury
# Nobody could seize your account
# International transactions have much lower fees compared to bank transfers
# There are no third-parties managing your funds
# Cryptocurrency can be fun
# If this is the future you will have leverage over late adopters
# You could trade your coins*
# You could exchange your coins for goods
# If you are a merchant, you could accept Bitcoin as payment method
# If you are a business owner you could pay your employees in Bitcoin
# If you are a freelancer/digital nomad and you don’t have access to modern banking, you could get paid in bitcoin
# If your country suffers from hyperinflation, you can use Bitcoin as a hedge
As usability and access to cryptocurrency are improving even more merchants and companies are accepting Bitcoin. Anyone can use Bitcoin to buy or sell goods and services. Microsoft customers can buy content with Bitcoin on Xbox and Windows store. Companies like the Swiss railways(SBB) sell bitcoins at their ticket kiosks. You could purchase pizza online and pay with bitcoins. Microsoft customers can buy content with Bitcoin on Xbox and Windows store even Steam games can be bought with bitcoins.
THE FUTURE OF MONEY – NEHA NERULA – TED Talks
How and where to buy cryptocurrency?
There are different places where you can buy bitcoins(see figure). You can choose between the online exchanges, the bitcoin ATMs or buy it locally from other people(Peet-to-Peer). Most standard payment methods include bank transfers, credit cards, cash or Paypal. They all have their pros and cons. Bank transfers a slower compared to other methods; credit cards have high transaction fees, Paypal has transaction limits and cash does not get the best exchange rates. The following figure will give you the brief overview of the ways you could buy cryptocurrency and the possible payment methods.
The best way to start buying coins is by opening a wallet with one of the large cryptocurrency exchange sites. To open an account each user needs to provide an official document ID. There you can buy most of the popular coins and hold them in the same wallet. It is convenient and will save you a lot of time. The type of wallet is online wallet and people rely on the exchange to keep their funds safe. After you bought your first bitcoin or any other cryptocurrency, you should consider transferring the funds to a more secure wallet, which is controlled only by you. There are different ways you can purchase cryptocurrency. For the sake of simplicity let’s concentrate on Bitcoin.
# Coinbase is the most popular Bitcoin online exchange in the US. It operates in a number of European countries as well. It provides best in class user experience and usability. It should be pointed out that Coinbase is one of the few exchanges which insures all the funds stored on its platform. In the case of a security breach, the insurance policy should cover the losses. The company offers a mobile app as well. You can purchase Bitcoin via bank wire or a credit card.
# Anycoindirect is a European cryptocurrency exchange. It does not provide a dedicated online wallet. Customers use their bank account to send money to the provider. After the money is received, users get the amount in Bitcoin transferred to the address they have provided.
# Cex allows for buying bitcoins with credit card or bank transfer. The exchange has worldwide coverage and offers a trading* platform with the ability for margin trading as well.
# Shapeshift is a different type of exchange. The platform is aimed at users who hold a portfolio of different cryptocurrencies. The idea behind the exchange is to swap easily coins for other coins, without even needing to register an account. It offers a high degree of privacy. If you own already bitcoin this is a great place to buy other cryptocurrencies.
# LocalBitcoins is a P2P(Peer-to-peer or Person-to-Person) Bitcoin exchange. Buyers and sellers agree on trade terms. The exchange connects local people who want to trade bitcoins. Payment methods are determined by the sellers, you can buy coins with Paypal, via bank wire or even with cash. The platform can offer high degree of privacy.
# Kraken is US based cryptocurrency exchange and trading* platform. It operates in Europe as well. It offers bitcoin margin trading. Bank transfers are the only way to buy bitcoins from Kraken.
# Bitstamp is the first regulated and licensed virtual currency exchange in the EU. Users can depisit their funds via bank transfer and buy bitcoins. Bitstamp is also a trading* platform.
Exchanges and platforms worth mentioning:
# OkCoin is one of the biggest Chinese exchanges and trading* platforms
# Bitfinex is a Hong Kong based cryptocurrency exchange and trading platform. Currently(01.2017) has the highest Bitcoin trading volume in the world.
# Coinmama is a Bitcoin broker that specializes in letting you purchase bitcoin with a debit or credit card.
# Bitcoin ATMs: these are installed at public places and give people opportunity to buy bitcoins with cash. You will need to install a wallet first in order to transfer the coins to an address of your choice.
*Disclaimer: trading cryptocurrency involves high risks and it is not advised. Only high skilled people with experience should take such opportunity. Speculating on the markets could lead to a full loss of funds.
Wallets: Where to Store Your cryptocurrency?
To start using Bitcoins or other types of cryptocurrencies, you first need a crypto wallet. The wallet stores the user’s private and public keys, which allow for sending and receiving coins. Different cryptocurrencies offer their own desktop or online wallet, which can be found on their website. A common misconception is a way wallets work. A wallet does not store any coins in it. The only role of the wallet is to keep the user’s private keys safe and to connect to the corresponding blockchain. The private keys allow the movement of funds between parties. Think of you private key as your home key, if you give it to someone, he will have as much power as you. Coins never leave their blockchain; they just get moved to the different addresses. There are four types of wallets to be considered. They work almost the same. The difference between them is the security level they offer.
# DESKTOP WALLET or MOBILE WALLET
This is the most common type of wallet. An app has to be downloaded on your computer or mobile device. It will store user’s private keys on the device, that’s why it is strongly recommended to make regular backups of the wallet and store them on a different device besides your computer(USB stick, etc.). A mobile wallet could be compared to a real cash wallet. People don’t keep their entire wealth in their back pocket, and you shouldn’t store all of your crypto funds on your smartphone. Mobile wallets can be compared to real cash wallets. Desktop/mobile wallets: Copay.io(Desktop/Mobile), Jaxx.io(Desktop/Mobile), Mycelium.com(Mobile), Electrum.org(Desktop)
# ONLINE WALLET
Online wallets are web based wallets, which are hosted on a server. Every online wallet requires a password for login. The upside of these wallets is the usability. They ‘re the most user-friendly because they require as little setup as possible. The downside is that the wallet owner is dependent on a third party that could be a victim of theft or revoke access to the wallet. It is recommended not to store large values in an online wallet. Enabling 2-factor authentication(2FA) at login is strongly advised. There have been reports of stolen coins from users, despite having 2FA enabled. Hackers are using social engineering techniques to hijack the phone numbers of victims from their carriers. These phone numbers were used as 2FA for their online wallets even for their online banking. Apps like Google Authenticator offer greater security for 2FA and are the preferred way by many people for securing their online profiles. Online wallets: Blockchain.info, Coinbase.com
# HARDWARE WALLET
A hardware wallet is a special type of wallet which stores the user’s private keys in a secure hardware device (e.g. USB stick). Hardware wallets work by installing a dedicated application on the computer or mobile phone and connecting it with the physical device via USB. This way the private keys are stored offline and are therefore not exposed to viruses or attacks from the internet. The downside is that you have to buy the device first. Hardware wallets: Ledgerwallet.com, Bitcointrezor.com, Keepkey.com
# PAPER WALLET
In this case, people can generate their own private and public keys and print them on a paper for offline storage. This way avoids storing digital data on any device, offering the strongest security possible, but sacrificing usability. Once printed on paper, these wallets have to be kept in a safe place. Losing the piece of paper renders the funds in the wallet unusable. . Bitaddress.org
Backups: How to secure you cryptocurrency?
The first thing you should do after creating a wallet is creating a backup. Losing access to your wallet is equal to burning your money. After you launch your wallet for the first time, you are presented with a 12-word recovery phrase(The phrase may be between 12 and 24 words long). Some wallets display this phrase only once. Make sure you write down the words and keep them safe. If somebody gains access to these words, he or she may be granted access to your funds(there are different scenarios which won’t be covered in this guide, but in general the phrase should be kept secret from other people). Please consider the possibility of fire and other natural disasters. Having a fireproof storage box is a nice security add-on. If you ever need to recover your wallet from the 12-word phrase, you will only need to install a fresh copy of the wallet program on any device and enter the phrase at launch. Then magic happens, and your wallet gets restored along with the funds in it. In the case of loss of the 12-word phrase, it is strongly advised to transfer your funds to a new wallet, which is properly backed up. Storing the 12-word phrase on your computer is dangerous because there will always be the danger of a security breach.
There are scenarios in which the 12-word phrase won’t be used for backup. The first scenario is online hosted wallets. Users don’t own the private keys for these wallets. The exchange owner keeps them. If the website goes down, the keys disappear with it, and access to the user funds wouldn’t be possible anymore. The second scenario is paper wallets. The phrase is not needed because all of the information including the private key is printed on paper. Some wallets still don’t use the 12-word backup phrase for backup. These wallets are called non-deterministic (Random) Wallets. Such wallet is the Bitcoin Core full node client. These wallets require being backed up manually by the user. This works by copying the files which contain the private keys to a separate storage device (for e.g. USB-stick). It is recommended to make multiple copies of these files.
Making a transaction: Sending & receiving cryptocurrency
The most important part of your wallet is your address. You use the address for sending and receiving coins. Almost all cryptocurrency addresses look similar to this: 1KDCn9XLVu3xNyr7ox64yjLw3kvKM1bADM. Think of these as your bank account number. These strings could also be represented via QR-codes. QR-codes are widely used in the mobile wallets for better convenience. Cryptocurrency transactions have their unique transaction IDs and cannot be reversed. Once you have sent the money to somebody, there is no rollback. For a transaction to be valid, it needs to get validated by the network. This process called a “confirmation.” A confirmation could last from a couple of seconds to many minutes, depending on the load of the network. For each transaction, users have to pay a small fee. The fee could range from under 1 cent up to a couple of cents, and it gets automatically subtracted from your balance. Many wallets offer the opportunity to see your Bitcoin balance as USD or EUR equivalent. This way you can type the amount of USD or EUR you want to send to somebody, and the wallet will automatically calculate the amount of Bitcoin needed for the transaction.
How to track a transaction on the blockexplorer
A blockchain is the backbone of any cryptocurrency including Bitcoin. Almost all cryptocurrencies run on public blockchains. Furthermore, each transaction happening on the Bitcoin blockchain gets saved and can be viewed online by anybody, by visiting a so-called block explorer. These explorers are websites which show a live feed of the transactions on the network. To follow a transaction, you could paste the transaction ID in the search box. These transaction IDs are unique for each transaction and are shown in your wallet. One other way to follow a transaction to or from address is to paste the address into the search box. This way the block explorer shows all incoming and outgoing transactions associated with this address. Block explorers could be used for different statistics like for example the number of total transactions on the blockchain or number of unique Bitcoin addresses. (Bitcoin block explorer example: Blockchain.info)