Cryptocurrency Basics

Unlike many digital currency evangelists out there, I won't say that cryptocurrency (Bitcoin, Ethereum, etc.) is for everyone...yet.

It is, however, here to stay and will likely grow in popularity over the years as a medium for easy, low-cost financial transactions and its underlying technology (blockchain) will likely affect many aspects of our digital lives, from cloud storage to video streaming.  So, without further ado, let's dive in!

What is cryptocurrency?

The best quick explanation I've found is this article by Samantha Standish where she compares it to you and your friend standing in a park.  It's a great, short article that covers the basics in a very non-technical, approachable way.

Okay, I'm interested.  But how does it really work?

Most people will read that article and be satisfied but a small percentage will want to know more details.  At that stage I recommend the Ultimate Cryptocurrency Guide on Upfolio.  It's a beautifully illustrated deep-dive into the various aspects of cryptocurrency while still staying fairly non-technical.  If you can't get through it without your eyes glazing over, cryptocurrency probably isn't for you.

Is it safe?

Well, JPMorgan Chase, Overstock, the U.S. Government, and China are joining the movement so in general, yes.  However, there is still a lot of theft, fraud, hacks, and scams out there so you need to be careful, just like you would with your real bank account and wallet.  There's also a remote possibility quantum computing could break cryptocurrency, but work is underway to preempt that.

Can I get rich?

A lot of people hear in the news about overnight millionaires and want to jump into cryptocurrency so they can similarly get rich fast.  Unfortunately, the concept is still in its infancy and experiencing high market volatility so most financial advisors recommend you treat it like speculation and only devote a very tiny fraction of your financial resources toward it.  Like any highly lucrative but risky speculative venture, you're more likely to go broke than hit the jackpot.  Bottom line: keep your retirement money in stocks and bonds and spend just a trickle of "throwaway money" to dabble in cryptocurrency since the majority of investors have lost money.

Understood.  How do I dip my toes in?

1.  Pick Exchange

To buy cryptocurrency like Bitcoin, you'll need to find a website (or ATM) that allows you to purchase it.  There are lots and lots and lots of options to choose from, but the biggest things to watch out for are legitimacy and fees.

Legitimacy

Organizations that sell cryptocurrency to U.S. citizens are required to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.  This means purchasing Bitcoin (or other digital currency) will require providing pictures of a government ID (like a driver's license or passport), selfie picture, birth date, address, Social Security Number, and other personal data that makes most people uncomfortable disclosing.  This is yet another example of why it's so hard for beginners to get started!  Knowing this, if you find a site that promises you can buy cryptocurrency without asking for any personal information, it's almost guaranteed to be a scam and you should avoid it.

Fees

One of the biggest shocks for cryptocurrency beginners is how many fees exist.  There are credit/debit/ACH fees, network/miner fees, taker/maker fees, deposit fees, withdrawal fees, wallet fees, cash advance fees, spreads, gas fees...  Fees everywhere!

The most common fees are "taker" fees for paying with "fiat" (real government currency, like U.S. dollars) and "withdrawal" fees (when you cash out part of your investment or move it to an offline wallet).  Any site that sells cryptocurrency should post their fees but these are often buried in a footer link or helpdesk article so you'll need to do some research.  Other sites are more transparent about their fee impact:

source: Paybis.com

As a general rule of thumb, you'll want to find a service or exchange that charges 0.25% taker fees or less.  This often requires connecting your bank account with their service so you can pay via ACH instead of a credit card (which carry their own fees).  Fortunately, the popular services make this easy.  Also, if you plan to transfer large amounts of cryptocurrency to an offline wallet, you'll want to use a coin with low transaction fees, such as Stellar (XLM).

Top Pick

Guarda

• Advantages:
• Integrated wallet (web, desktop, mobile or shielded), exchange (powered by ChangeNOW), and fiat purchase
• Integration with Ledger Nano S hardware wallet
• Large number of coins and tokens supported
• CRUXPay integration
• Bitcoin multi-signature support
• DApp Chrome extension with developer API
• Accept cryptocurrency payments on your website using Guarda Deeplink
• Nice dark theme mode
• Disadvantages:
• High fees (5%) when buying with credit card (see Simplex note below)
• Moderate fees (0.75%) when using bank ACH but is only available for EU customers (see Coinify note below)

Honorable Mentions

Binance.US (not available in all States): the world's largest cryptocurrency exchange by trading volume.

• Advantages:
• They only charge a 0.1% transaction fee (assuming ACH) and if you pay with their BNB cryptocurrency the fee drops to 0.075%
• They're a large ecosystem with their own coin, wallet app, hardware wallet, and partnerships.
• Disadvantages:
• Verification process is cumbersome, including a live facial scan and you have to "authorize BAM Trading Services to open a Prime Trust Individual Custodial Account" on your behalf; this may make people nervous considering the service is owned by a Chinese national.
• Their international exchange was hacked in 2019.
• Slow support ticket response.
• The interface can be confusing for beginners.
• Purchases and ability to trade are relatively fast but you need to wait 10 days to withdraw as crypto or fiat ("Wallet > Buy & Sell History" tab)
• High withdrawal fees, such as 1.5 USDC and 0.0005 BTC (~$4.75).

CEX.IO [Centralized EXchange] (available in 43 States): one of the longest-running cryptocurrency exchanges.

• Advantages:
• They only charge a 0.25% transaction fee (assuming ACH)
• The Buy/Sell screen is simple and non-intimidating for beginners.
• Disadvantages:
• Verification process is cumbersome, including awkwardly holding your photo ID and an additional note while taking a selfie as well as prompting you for social media links
• You can only buy six cryptocurrencies: Bitcoin, Bitcoin Cash, Bitcoin Gold, Ethereum, LiteCoin, XRP
• Cryptocurrency withdrawal fees not published (app only)
• Unfortunate phonetic name (sounds like a scam or the dark web)

eToro 

• Advantages:
• Nice user interface showing initial investment and profit/loss
• CopyTrader feature allows you to copy buy/sell actions of the pros automatically
• Disadvantages:
• Minimum fiat deposit is $50
• High fees
• Cryptocurrency transferred from their exchange to their wallet cannot be transferred back again to their exchange
• More personally identifiable information requested than most exchanges

Coinbase

• Advantages:
• Simple, clean interface
• Fast transactions
• Earn free cryptocurrency with periodic learning opportunities
• Earn interest and lifetime rewards on some coins
• Decent referral program
• Disadvantages:
• High, complicated fees unless you're ready to tackle their confusing Pro interface

Others Investigated

• Gemini (like Coinbase) has a flat fee structure ($1 for purchases up to $10 [10% fee] and $1.50 for purchases up to $25 [6% fee])
• BitStamp and Stocks.Exchange charge a 5% fee
• Any site using the Simplex payment engine (such as CoinSwitch, KuCoin, Koinal, IDCM, CoinEx, Cryptonex, WunderBit, Guarda) will charge a Simplex fee of 5% (min $10) on top of the site fee
• BTC-Alpha charges a 4.85% fee
• MoonPay (used by Bitcoin.com) charges a 4.5% fee
• tZERO charges a 4% fee for credit cards and a 1% fee for ACH
• Any site using the Mercuryo payment engine (such as EXMO, Livecoin) charges a 4.5% fee in addition to exchange fees that use it
• Coinmama charges a 3.9% fee
• Coinify (used by Ledger Live and Guarda) charges a 3.5% fee for credit cards and 0.75% for ACH
• CoinFalcon only accepts Euros and crypto
• Smartphone-only apps, like Crypto.com, Cash.app, Voyager, and Xapo are popular but have unclear fees and I personally prefer a larger screen to conduct financial investment transactions.  If you choose to go this route, I've found Crypto.com to have low fees if you follow the somewhat complicated process to manually set up a bank ACH to deposit funds.
• ShapeShift doesn't support the Memo field so you can't send coins like BNB and Cosmos.  Also their exchange was hacked in 2016 and has fewer coin options than many others.
• Cryptocurrency marketplaces (like Paxful, LocalBitcoins, LocalCryptos, Wall of Coins, Bittylicious, and Bisq) have a lot of scams, inflated trade rates, and problematic transaction completion.
• Many sites have confusing interfaces, such as Kraken, Robinhood, bitFlyer, XCoins.io, and Bitfinex
• Due to the United States' strong-armed regulatory nature, many sites, such as DSX, HitBTC, Bitpanda, CoinFLEX, WazirX, BCBitcoin, Amplify, Digitex, Blade, DeversiFi, Bibox, CoinEgg, OKEx, and Faast, don't accept American customers

2.  Buy Coins

Finally, we get to buy something!!  Most cryptocurrency advisors will tell you buying Bitcoin (BTC) is a safe long-term bet.  After that, you're sort of on your own to decide...and there are lots of options

Once you've decided which coin to buy and have verified your exchange supports it, you'll need to be aware ACH bank payments sometimes take 3-5 business days to settle.  Additional lag could also be incurred by the cryptocurrency technology itself.  For example, Ethereum (ETH) can only process about 15 transactions per second whereas regular banks and credit cards can easily process 24,000+ transaction per second.

After the necessary waiting period you should see your new cryptocurrency balance in the exchange dashboard.  Congratulations and welcome to the future! (now go brag to your friends)

3. Pick Wallet

Most exchanges allow you to keep your cryptocurrency in their 'custodial' online servers but that's quite risky since some exchanges have been hacked, others have acted unethically, and many go out of business.  Keeping your money on someone else's server means you have less control so best practice is to move your cryptocurrency off their servers and into a personal digital wallet once you've purchased it.

While the name "wallet" is a handy visualization, a more accurate name would be "vault" since, like a bank, it protects your currency with a variety of high-tech security mechanisms.  The most important thing to remember is you must follow their setup instructions carefully or you can potentially lock yourself out of your own vault (and the money it contains) permanently!  This process typically involves writing down 12-24 words and storing them in a safe place.  If that sounds complicated and uncomfortable then you're probably better off with traditional banks and cash.  Don't feel bad...you're in the large majority  :)

Still ready to dive in?  Cool!  There are many wallets to choose from.  When picking a wallet, the most common types (listed in order of ease of use and inversely with level of security) are:

• Paper, e.g. Bitaddress
• Web-based, e.g. MetaMask
• Smartphone app, e.g. Trust Wallet
• Desktop app, e.g. Coinomi (they also have mobile apps)
• Hardware 'cold storage' wallet, e.g. SafePal

Note: hardware wallets don't actually store your cryptocurrency, they store your private key that is needed to access your cryptocurrency.  They still need to be paired with an application that will manage your cryptocurrency.

Do your homework and find a wallet that you like.  A popular option is to link a hardware wallet with a software wallet.  The hardware wallet is like your savings account where you store funds long term and the software wallet is like your checking account where you initiate frequent transactions.  You can move funds between these two wallets as needed, just like between a checking and savings account.  Popular options include:

• KeepKey / ShapeShift Beta + MyEtherWallet (MEW)
• Trezor / Trezor Beta + Exodus
• Ledger / Ledger Live + Guarda (currently only Nano S supported)

For beginners and non-techies, you can just go with a non-hardware option.  Popular options include:

• Edge - broad coin support
• Dapper - saves you on Ethereum gas fees but limited to 10 free transactions per week
• Argent - saves you on Ethereum gas fees but limited app partnerships currently

Other useful tools include Delta (for tracking your portfolio), CoinTracker (for tax preparation), Nomics and Coin360 (for tracking the market), CryptoMiso (for tracking development), CoinPayments (for eCommerce integration),  Blockfolio Signal and CryptoPanic (for the latest news), and other pro tools.

Nerd Tip: pick a wallet that supports SegWit for faster transactions and lower fees.

4. Transfer Cryptocurrency (if using a custodial exchange)

Guarda's exchange is great because it's "self-custody", meaning your cryptocurrency is never stored on their servers so this step isn't needed for that service.  However, if you're using Binance, Coinbase, Coinmama, etc. you'll want to move your cryptocurrency off their servers and into your wallet.  The process is slightly different for each exchange so you'll want to follow their help guides.  Here's an example from Binance.

5. Celebrate

So there you have it.  In four long, arduous steps you've purchased a few bucks of cryptocurrency.  Whew!  Doesn't it feel great?!  Now just sit back, relax, and wait for the market value to skyrocket so you can cash out and buy your own private island  ;)