I'm going to assume that you've already read part 1 (and your eyes haven't glazed over yet). If you haven't read it, I suggest that you do. Although I could have made this a single post, instead of splitting it into two, I felt that a single post might require including some discussion of cryptography in order to cover the next part (and make it a rather long read; this was supposed to be the shorter part, but it's twice as long). It's not exactly Teach Yourself Cryptocurrency in 10 Minutes, or Instant Expert, but it's not Teach Yourself Cryptocurrency in 21 Days, either. (As much as I love Sams Publishing's titles on various subjects, they sometimes leave a little or much to be desired. As Peter Norvig wrote, some things can be learned within a few hours, but it takes a decade or more to master them.) This is, if anything, a crash course.
Since I've already posted an introduction to cryptography and don't like repeating myself, I thought a break for those whom want to read that (entirely optional, of course) would be best. (I apologise for that break ending up being rather long; other things happened in my life and required my attention, which I didn't anticipate.) Anyway, all aboard the crypto bus and away we go! ...
Note: This post is slightly more technical than the previous one, but hopefully not too much for you to handle. Investopedia might be your friend here, for the jargon and terms.
Keys, for what Purpose?
In the "Cryptography" section of part 1, keys were mentioned as being required for encrypting and decrypting data. They have a similar use in the case of cryptocurrency.
In the prior example, Bob sends an amount of bitcoin (BTC) to Alice, resulting in a notice of the transaction being sent to George's node on the network. That's all well and good, but how does the node know that the note came from Bob (as opposed to, say, Boris) and that the crypto must go to Alice (as opposed to Natasha)?
That is achieved in two ways. Firstly, Bob's wallet software uses the private (secret) key that only it knows to "sign" the note with a digital signature unique to the wallet and an ID unique to the transaction, so that the amount can't be sent/spent again. (This is not entirely accurate from a technical perspective and the means by which it's implemented has changed since the first iteration. For the purpose of basic and simple explanation, it will have to suffice.)
The unique signature is a long string of text (collection of characters). For example: "5KRkdqPo431rexowwtdHUdtBFZQNdboeokXtkydp9UYr8TcM9Uv"
That looks a lot like a wallet address, doesn't it? That's because a crypto wallet address, in most cases, is a public key (or at least a portion thereof) that uniquely identifies a wallet.
Secondly, the transaction requires Alice's wallet's public key (wallet address) so that the BTC can be sent to it. Using Bob's private key and Alice's public key, the per-transaction key is derived (calculated) therefrom. (This is what you see when a notification for a successful transaction contains a transaction ID.) Even knowing Alice's public key and the derived transaction key, Bob's private key cannot be determined by reverse-engineering (one of the advantages of asymmetric encryption).
An example public key/address for Alice could be "1K8QRzQZUFQH3gW8aTnKmg62VKrder3HKo"
A hypothetical transaction note could look like this (obviously a lot more complex and difficult to interpret, if at all, in reality):
---------------------- Transaction Note ----------------------
--- ID: 5KRkdqPo431rexowwtdKmg62VKrder3HKoVRDF37d ------------
--- From: 5KRkdqPo431rexowwtdHUdtBFZQNdboeokXtkydp9UYr8TcM9Uv
--- Amount (BTC): 1.000000 -----------------------------------
--- To: 1K8QRzQZUFQH3gW8aTnKmg62VKrder3HKo -------------------
--- Fee (BTC): 0.000050 --------------------------------------
--------------------------------------------------------------
Again, the above is an interpretation/oversimplification of what such a note looks like; real-world transactions are not as clear/simple.
Cryptocurrency Wallets
Just as you store physical money in a wallet or purse, BTC and other cryptocurrencies are stored in wallets. (Wallets store amounts of crypto, since these are not stored on the blockchain itself. The blockchain is like a public financial ledger that keeps track of transactions.) Wallets come in various forms.
Paper Wallets
A paper wallet is a literal piece of paper with QR codes of your keys printed on it. They are the simplest kind of wallet and come in many formats. They need to be stored in a safe place, such as a lockable vault. I'm not actually sure of the point of them. They seem like a liability/security risk to me. They can be created from/on a number of sites, including the Bitcoin Paper Wallet Generator.
Software Wallets
Software wallets are software applications (either on a computer or phone). Depending on the software, they store either a specific cryptocurrency (such as Natrium for Nano) or multiple cryptocurrencies (such as Atomic and Exodus). At minimum, they allow importing and/or generating keys, show you how much crypto you have stored in the wallet (technically, cloud-based storage the wallet accesses), the ability to perform transactions and/or exchanges to other cryptocurrencies and how much it's worth in at least one fiat currency (often USD or GBP, but this can often be configured). Some include additional functionality, such as showing your balance over time and weekly or monthly market performance charts). To the best of my knowledge, all software wallets require a password/PIN.
Hardware Wallets
These are physical devices that run minimal operating systems (likely GNU/Linux in some form) and software wallets. They look like modified USB flash drives or key fobs. Trezor is a well-known maker of hardware wallets, although not the only one. (They tend to be quite expensive for what they are; you might as well make a dedicated hardened bootable flash drive and put a software wallet on it, in my opinion.) To the best of my knowledge, all hardware wallets require a password/PIN. Make sure to store these in a safe space when not in use, since you don't want anyone else getting hold of yours.
Custodial Wallets
These are most often used by exchanges, such as Coinbase and Luno, (although not exclusively). They're also favoured by fly-by-night scammers. With these wallets, you don't actually own them or the keys to them; someone else (a third party) does. (When you come across the phrase "not your keys, not your wallet", these are the wallets to which these refer.) They're useful for short-term exchanges, but definitely shouldn't be used long term (for more time than is strictly necessary to perform an exchange or other transaction). If the third party gets compromised and/or disappears, so do(es) their custodial wallets and any crypto in them. Given the US government's Securities and Exchange Commission (SEC) having a habit of persecuting crypto and exchanges, that happens far more frequently than with which one can/should be comfortable. (I've just recently read that Gensler, head of the SEC, has declared all cryptocurrencies except BTC to be securities, based on faulty assumptions.) In short: Keep your crypto in your own wallet as much as you can or be prepared to lose it.
Which Wallet is Best?
Custodial wallets tend to be the most popular wallets for beginners, but it's important to remember that the trade-off here is between convenience (usually not having to do anything more than create an account on somebody's Website) and security/peace of mind (having access to your crypto when the site ceases to exist). Software wallets are pretty easy to set up and are recommended instead of custodial wallets. Hardware wallets are better for long-term storage (HODLing) of cryptos one doesn't intend to use regularly.
I cannot give you a more specific answer. It depends on your needs/use cases. This is one of those things where you need to do your own research and draw your own conclusions. Personally, I like Atomic and Exodus for PC. (Although they're also available for mobile phones, I find them horribly slow and am not comfortable having crypto wallets on my phone.)
Non-Fungible Tokens (NFTs)
"Non-fungible" means "not interchangeable/replaceable". The units of cryptocurrency (coins or tokens) are, generally, indistinguishable from each other. One BTC in your wallet is practically indistinguishable from one in mine; they are fungible (hence the expression "1BTC = 1 BTC"), just like dollar bills. NFTs, however, are non-fungiable. Each one (or a limited small batch thereof) is unique, having a special unique identifier (UID). Their value lies mainly in indisputably establishing and identifying the property of one or more individuals (whether it be artwork, buildings and land or anything else of which individuals might have ownership).
Their myriad applications and usefulness (or lack thereof) will not be discussed in this post, since they are a source of rather contentious opinions (some people claiming them to be scams and others to be environmentally harmful) and worth posts on their own.
Crypto Projects: Currency or Infrastructure/Platform/Software (Iaas/PaaS/SaaS)?
This section gives a brief list of some crypto-related projects. It might surprise you to know that not all of them (including Ethereum) are intended to be used as currencies.
Some Currency Projects
The following are intended for use as digital currencies:
- Bitcoin (BTC): Open-source peer-to-peer money
- Bitcoin Cash (BCH): Peer-to-peer electronic cash, an improvement on BTC, with lower fees
- Nano (XNO): Digital money, a fast, scalable DAG-based currency with zero fees
- Monero (XMR): A privacy coin, for which it's impossible for a human to determine both the sender and recipient addresses from the transaction details alone (according to Atomic Wallet's XMR FAQ).
- Dai (DAI): A stablecoin (soft-pegged to the US dollar) that operates on the Ethereum and Polygon (MATIC) chains/networks (making it an ERC-20)
Some Non-Currency Projects
While nothing prevents you from using the coins/tokens created by these projects as currency (since they typically have a trading price within the financial ecosystem), the intent behind them is not inherently for them to be such. (The intent of technology is often misunderstood/unknown and often used in ways of which the developers couldn't even conceive. For example: Thanks to including a scripting language for customisation, the emacs
text editor can be used as an email client, of all things!) Think of these coins/tokens more like stock shares in a tech company, or, better yet, the fuel for various machines that provide digital/tech infrastructure. That might be worth considering before/when acquiring one or more of them.
- Ethereum (ETH): Yes, ETH is not actually a cryptocurrency. If anything, it's a development environment/platform and means to power the EVM (smart contracts coded in Solidity, which is apparently like TypeScript). Sorry (but not sorry), cryptobros who insist in "only HODLing real cryptocurrencies" (BTC and ETH) as opposed to "shitcoins" (everything else).
- Solana (SOL): Scalable Blockchain Infrastructure
- Cardano (ADA): Coded in Haskell (a functional language), for great good!
- Polkadot (DOT): Decentralised Web 3.0 Blockchain Interoperability Platform. Use it to build blockchain-based/backed Websites. I certainly want to.
There are, of course, tens of thousands of other projects that fall into these two broad categories (as well as others). To list them all (and their intended purposes) would make this piece unreasonably long. They can be found on Coin market Cap (CMC) and Coin Gecko, along with links to their Websites, whitepapers and popular exchanges from which they can be acquired.
Why Should I Care?
OK, so you can continue to use your PayPal or bank-issued credit/debit card for online shopping and international money transfers and that suits you fine, right? Why would you want to give up that and transition to crypto, especially when many retailers and online stores don't even accept it as a valid means of payment?
Those are valid questions, to be sure. The key thing is that you don't have to make a complete switch from one to the other (at least not yet, while waiting for more merchants and service providers to get with the program and move into the twenty-first century, which is actually quite easy to do). You can still use fiat to deal with parochial tradfi dinosaurs, while using crypto with those that support it.
Pros and Cons
Unlike some introductions, I'm not going to highlight the pros and omit the cons; that wouldn't be fair or reasonable. Like all technologies, crypto has its strengths and weaknesses, some of which can doubtlessly be improved upon. In short, I'll leave it at this:
Pros
- Crypto is more secure than tradfi (No CV numbers or bank account details provided to online retailers).
- Using crypto is often cheaper than using tradfi. (For example: PayPal charges me ~5-8% for international transfers to/from the USA and up to 50% for the UK. XNO, on the other hand, charges me 0%, while BCH charges me ~0.1-1.0%. ETH, in contrast, charges me anywhere from 20-300%, depending on various factors. The difference is that costs are calculated and shown prior to the transaction, not after, giving me opportunity to refuse them.)
- Cryptocurrency offers a viable currency option for the bankless/unbanked, even if they don't have an Internet connection.
- Crypto typically operates faster than banks and/or traditional retailers (seconds to hours, as opposed to days).
- Privacy coins offer you privacy for your transactions and don't require your personal identification (Name, ID/social security number, street address, etc).
- Crypto frees you from reliance on government-issue fiat currency (and, in many cases, is immune to inflation and devaluation; 1 XNO = 1 XNO)
- Many cryptocurrencies (such as Chia and Nano) are green (are committed to reducing/minimising the environmental impact of their use).
- Cryptocurrency is a realisation/solidification of crypto-anarchist (cypherpunk) ideas about how a cryptographically-secure digital money system should operate, free from central banks/financial institutions and governmental control, for great justice.
Cons
- As with all digital/online technology, it is subject to risk of scams and/or nefarious activity. Keep your wits about you and assess the risks.
- Governments tend not to like it (with a few exceptions). They may attempt to ban it and/or prosecute you for having/using it. (Check your government's crypto/financial policies, if they have any.)
- Both governments and banksters realise that it signals the end of tradfi (which is why they are trying to fight it with legislation/regulation, fear, uncertainty and doubt). Persuading others to get involved, in the face of FUD and interfering government, can be difficult and frustrating. Not everybody's going to get on the crypto bus, but those that don't will be left behind when it really picks up speed (which many believe it will).
- Many retailers still don't accept it as a form of payment. Fortunately, the barriers to entry are remarkably low, with some credit card companies (such as Crypto.com, MasterCard and Visa) offering crypto credit cards so that you can use crypto to pay for items, just as you would regular plastic. (This has its own problems, chiefly high fees and KYC.)
- Until such time as it is widely adopted and used, the crypto markets are still highly volatile (only in terms of fiat, though) and the future of specific projects uncertain. This is not a problem specific to crypto, though; it applies equally to fiat and other technologies in their infancy.
- While the user base is still so small (~4.9% of people with potential access to crypto), crypto is still highly centralised.
I could likely list more pros and cons as I think of them, but that should suffice for now. I expect you'll find more the longer you participate in this space.
How to get Started
I assume that if you're still reading, then you're interested and want to get your feet wet. Good; you've made the right choice for your future! I hope I've given you enough information (brief and simplistic as it is) for that. My recommendation, based on experience and past reading, is to get yourself a multi-wallet (such as Atomic or Exodus, but it's up to you) and join an exchange (such as Luno, since it's probably the simplest, or KuCoin, since it doesn't require KYC for your first $1000 worth of exchanges/transactions).
For some cryptos, you might need to "open your account/wallet" by first receiving some crypto coins/tokens into it before dealing with larger amounts. This is probably a good idea to be on the safe side. There are various "faucets" (such as the once-off nano-drop) that "drip" a small amount into a specified wallet, given its address. (While some faucets offer repeat drips after certain time periods, they're generally not worth the effort required to use them.)
Then, exchange your fiat for the following:
- Bitcoin (BTC): At least $110 - $200 worth of it. It should represent at least 51% of your portfolio
- Ethereum (ETH): At least $100 worth of it (about 40% of your portfolio), if you intend to develop dApps (not covered here), collect/trade NFTs or otherwise involve yourself with ERC-20 tokens (also not covered here).
- A mixture of other cryptocurrencies/tokens to make up the remaining 9% (or more if not including ETH). Personally, I like BCH, Cardano (ADA), Civic (CVC), DOT, Polygon (MATIC), Solana (SOL), Help the Homeless (HTH), XMR, XNO, Ziliqua (ZIL) and ZEC, mainly for privacy and because I'm interested in taking part in developing the cryptosphere, as well as social justice and humanitarian efforts.
Some might disagree with my choices here. That's fine. Considering that there are tens of thousands of cryptocurrencies, all with particular problems they're aimed at solving, it's unlikely that any two people will completely agree.
Standard Disclaimer
As usual, none of this is intended to be taken as financial advice. I am not an authorised financial services provider and you shouldn't take my opinions as fact. This piece is written for educational/informative purposes only. Do your own research (DYOR) before becoming involved with anything (and always read the whitepaper). All risk (yes, getting involved with crypto is risky) lies with you, the reader. All errors, inaccuracies and omissions remain my own. Yada yada, blah blah fish paste and so on.
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