A quick guide to cryptocurrencies
- What are cryptocurrencies?
- How to get started if I want cryptocurrency.
- Acronyms and terms used and what they mean.
- Scams and risks to watch out for.
- How to spend and use cryptocurrency.
- Some ways to get free cryptocurrency.
- General description of cryptocurrency cycles
- Should I invest in cryptocurrency?
- Staking – what is it and why stake.
- Best way to keep your cryptocurrency safe.
- Potential strategy to cash out profits.
(1) What is cryptocurrency
The simplest definition of cryptocurrency is that it is “digital money”. So it could replace bank accounts in theory. However it is much more than that. Bitcoin has been described as digital gold because each bitcoin (BTC) is worth quite a lot of fiat money (roughly $20,000 at time of writing).
Other cryptocurrencies are tokens which raised funds for platforms where other cryptocurrency applications could be built (e.g. Ethereum which is the 2nd biggest cryptocurrency after BTC and is being used as a platform for creating other cryptocurrencies, for DEFi (Decentralised finance where no one person or company has control) environment and the latest craze of NFTs which is something to do with digital art. There are also some projects which have built virtual worlds and others that are linked to gaming, so to just define cryptocurrency as digital money is too simplistic.
(2) How to get started if you want to invest in cryptocurrency.
Since cryptocurrency is in essence money (whether you look at it as similar to shares or pure money) so you initially have to go through similar procedures of KYC (know your customer) that you would to open a bank account. There are now some ways round this through Defi (Decentralised finance) applications but even then you obviously will have to somehow provide bank details to make your initial purchase.
Once you open an account on a Cryptocurrency exchange such as Coinbase or Binance (among others) you can link your Bank account and make a purchase of Bitcoin or Ethereum (or some other cryptocurrency the exchange offers trading on).
Please note that when you buy cryptocurrency on exchanges these exchanges usually hold your crypto in their wallets in trust for you. If they get hacked you are depending on them honouring your funds and this is not always guaranteed e.g Cryptopia Exchange in New Zealand is an example – they got hacked with millions of funds being stolen causing it to go into receivership. Clients are waiting several years on the official receiver repaying some of their funds that remained.
(3) Acronyms and terms used and what they stand for.
HODL – Hold on for dear life. This is a term used to describe the activity whereby crypto holders keep their precious cryptocurrency and do not part with it. They are long term investors looking to make long term gains just by holding what they have accumulated.
FUD – Fear, uncertainty and doubt. This term is used to describe a situation where there is general Fear uncertainty and doubt about how the market is heading and it is usually mentioned in a negative way when thing are not going so well. It is often used to describe how millionaires and banks try to get smaller investors to part with their crypto by spreading negative rumours to push fear and get smaller investors to sell their crypto (often at a loss) so that they can buy up more.
FOMO – Fear or missing out – this is usually the opposite of FUD where there is lots of positive news (again some might be real and others fake) intended to get smaller investors to buy when prices are high with the intention of millionaires and banks to dump/sell at a profit and dump the price so that they can buy more when prices drop.
ATH/ATL – All time high/all time low – This is just as it appears the cryptocurrency’s all time high price and all time low price.
Whale – person/s who holds large quantities of BTC or other cryptocurrency and can band together in small group to affect price for their own gain.
Satoshi – BTC can be broken down into very small fractions of a BTC and these are called satoshis. You dont need to own a full BTC, you can own hundred or thousands of satoshis. 100,000,000 satoshis make up 1 BTC.
(4) Scams and risk to watch out for
Cryptocurrency is a risky investment in the first place but what makes it worse is the number of scammers out there trying to steal your cryptocurrency. Here are just some of the pitfalls.
- Dodgy startup projects. The biggest profits usually come from investing in a project from the outset (usually referred to as an ICO or initial coin offering) but often there are smart scammers who make up a project which can look legitimate, collect the funds and then make off with them leaving investors with nothing e.g.Titanium (TBar) – the imposter not only got the funds but was listed on some exchanges and still he made off with peoples funds. He was caught and jailed but I dont know if anyone ever got their funds back.
- Hackers on Telegram or other crypto social media sites impersonating Admin/support staff (very effectively) persuading you to transfer crypto to wallets to supposedly help and stealing your crypto. Never share info with anyone. This of course makes it very difficult if you encounter problems and need help.
- Exchanges getting hacked. If you are going to use an exchange try to stick to the most reputable ones such as Coinbase and Binance who often cover any losses in the event of their site being hacked. Smaller exchanges often do not have the cover if they get hacked.
- People trying to persuade you on crypto social media (Telegram/Reddit) to invest your BTC or other crypto in Bitcoin mining schemes that offer ridiculous returns. If it sounds too good to be true it probably is.
- Projects that go to zero value. This can happen several ways. It could be the idea for the project wasnt a good one to begin with or was just started at a bad time e.g. just before a market collapse or bear market e.g. Fantasy Cash (FANS). Alternatively many crypto projects start well but either make bad decisions or succumb to competition e.g.Substratum (SUB) which went up 100s if not 1000s of % but then eventually over time went to zero due to some bad decisions by the project originators.
- When transferring crypto always transfer a small amount first and check it arrives in the wallet you are transferring it to. It might cost a little more in terms of transfer fees but it would be a lot worse to transfer the crypto to the wrong wallet and lose it altogether.
- Try to keep crypto off exchanges unless you are selling it. There is a saying in crypto “not your keys not your crypto” which basically means if you are not storing you crypto in your own wallet/s then an exchange is holding it for you “in trust” i.e. it is in their wallet marked as your funds but there are no guarantees where an exchange is concerned. The safest place to store crypto is on an offline device such as a Ledger Nano but even here you MUST NEVER divulge the 24 word phrase to ANYONE (even if they say they are helping you as they shouldn’t need the phrase for any reason other than to scam you).
(5) How to spend and use your cryptocurrency
Once you know how to buy cryptocurrency and have either made some money trading it or just holding it and gaining value, you might want to cash in on some of your profits by spending it. There are any number of projects that have set up to enable spending of Cryptocurrency. I have described 2 below and how they work.
(5.1) Coinbase – You can purchase a Coinbase debit card and download their online wallet which you can link to the Coinbase exchange app where you may well hold some cryptocurrency. Coinbase wallet works on the following basis. The Coinbase wallet allows you to choose which crypto (which you have to hold on their exchange) you wish to spend. If you choose ETH then when you use the Crypto card as you would any other debit card Coinbase converts the amount you spend in fiat money into the equivalent ETH value and deducts that from your current ETH balance. If you want to change to spend BTC you simply go to your Coinbase wallet app and change your base currency to BTC and it will use that wallet. NB You can also lift money from ATMs as you would a normal debit card NB there may be a fee charged by Coinbase for ATM withdrawals.
(5.2) Crypto.com – Crypto.com is an exchange and a Crypto debit card provider. They operate slightly differently to Coinbase in that you must top up your USD/GBP/EUR wallet from your ETH or BTC funds you hold with Crypto.com before you can use the card. Again you select USD/GBP/EUR wallet as appropriate before using the card. This is quite handy for when you are on holiday. ATM withdrawals are also possible but there is a fee after the first 200 Euros per month is exceeded.
(6) Some ways to get free crypto.
Airdrops – some projects give free airdrops of different amounts of crypto to those who express an interest in their project (it can be a small amount like a few dollars to hundreds of dollars but be careful to check out the legitimacy)
Referral programs – Many exchanges give an incentive for those who successfully refer new customers to their site e.g. Coinbase give you $10 free if someone you refer uses your referral link to open an account and purchase at least $100 of BTC. Blockfi have a similar program.
Learn and earn programs – Again Coinbase give small amounts of free crypto ($3- $10) to customers who are willing to spend a few minutes learning about crypto projects by watching short videos and answering a couple of multi choice questions on same. Binance have a similar incentive via Coinmarketcap.com although it is not as simple as Coinbase’s process.
(7) General description of Cryptocurrency cycles
The Cryptocurrency market like the stock market goes through cycles. There is a downtrend (bear market) followed by an accumulation phase where prices go sideways which moves into an uptrend and then the cycle repeats. Crypto has only been around since 2008 so there isn’t a large amount of historic data but during downtrends cryptos can fall by anything between 80-95% or even more with some projects going to zero value but in an uptrend (or bull market) prices can rocket 100s or 1000s of %.
The trick is knowing when to buy and when to sell as no one knows exactly when the bear market and bull market begins and ends.
(8) Should I invest in cryptocurrency?
The answer to this depends on your risk appetite. If you are totally risk averse then stay away from crypto. Also many say only invest in crypto what you can afford to lose as it is the wild west of investment with high risk and potentially high reward but also many many scammers trying to steal your crypto.
(9) Staking – What is it and why stake.
Staking is effectively locking your crypto for a period of time (this varies between projects) to help maintain the projects network and receive interest/reward in that crypto for doing so. Returns vary from project to project.
If you are a Hodler or mid to long term investor then you might as well stake and earn some reward unless you just want to keep your crypto super safe on your offline Ledger wallet (although Ledger now link to a few cryptos for staking too) Staking is probably safer than keeping your crypto on an exchange as you are locking it in the project you are invested in. If the project fails you would lose the money anyway even if it was on an exchange as it would be worthless.
(10) Best way to keep your cryptocurrency safe.
Unless you wish to sell you crypto into fiat money (which you should probably do to cash in when you have some profit) the safest way to keep your crypto safe is to buy an offline storage wallet (such as as a Ledger or Tresor wallet device).
This is like storing your money in an offline device which you can store in your safe and connect only when you want to use you crypto. When you set the device up to transfer your crypto over to you set up a private passphrase made up of multiple words which you store in a safe place under lock and key. The only way you can lose your funds is if you give this key/phrase out to anyone else as they can use that key to restore your wallet elsewhere and steal all you funds.
(11) A strategy to cash out profits.
Dont be too greedy. Set targets at which you take profits e.g. sell 25% of your crypto at 5x, then 10x then 20x then 100x or whatever you think is suitable to you. If the crypto doesnt make the higher targets then at least you have still made some money.
If a crypto is slowly dying price wise cut you losses especially if you have made good profits elsewhere. Many projects just go to zero value over time.