- Jul 29, 2015
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I figured there were people that wanted something cohesive enough to follow to understand cryptocurrencies so I pulled this guide together. If you find this valuable let's get this stickied.
Let's start at the beginning.
You may have heard many things about what a cryptocurrency is, but you may still be searching for an understandable definition. I come from a competent background so it wasn't hard for me to know about this stuff. However, there was a learning curve which essentially put me in the same boat as most of you for a long time.
Instead of getting to technical, here's the easiest way to think about cryptocurrencies:
Yes and No.
The goal of cryptocurrencies is usually to improve on some type of existing software system or network. When you send money via PayPal, Fedwire or Western Union, you are basically sending fiat money electronically, similar to Bitcoin.
But that's where the similarity ends.
Platforms like PayPal have severe limitations on what you can and cannot do. For example, you cannot send/receive money from certain countries (like Nigeria).
Cryptocurrencies like Bitcoin want to make financial transactions more open and accessible to everyone around the world.
Other cryptocurrencies solve other problems, which we will explore later in this guide.
Is Cryptocurrency Real Money?
Yes.
However, some will debate you to the end about this, so it depends on who you ask. For convinence, I will address this quickly. This is an original section I added because we're a bit far from when the post I transferred over was written.
What is money?
- A current medium of exchange in the form of currency, banknotes, or property.
I believe this is the strongest objection and it would be as valid as I say if the world were still on the gold/silver standard. But the world abandoned the gold standard in the 70s-80s so really there's nothing backing the paper or digital money issued by banks but the belief there's value in it.
A lot of our belief on money relies on the belief of scarcity or effort. Because metals were not easy to come by, it was a standard to measure effort and manpower. If you had a lot, you did a lot to get it. Now that we're stripped of that aspect, we still believe the value of money is in power which I lazily demonstrate by this formula:
With cryptocurrencies, there's models of "mining" or "minting" new coins, modeling after how we mined gold and other precious metals in the real world. Solving a problem (finding a location that had the gold), and getting some reward for solving it (obtaining the metal). Just like the gold rush that happened in the US, the miners here compete for these block rewards. This is, in very layman terms, Proof of Work. Now we have several methods based on that core concept like proof of Stake, Proof of Concept, etc. But these all constitute what we've determined what money is and what gives value to money, but are falsely believing still exists in our pre-existing monetary system. We'll talk about the risks in the next section but know that if you don't understand this, you should not touch this market. At all, ever. Watch others get rich/wealthy/broke from it before you consider touching it again. There's a million other great opportunities out there. But no other one will be this one.
End of my little rant there. Back to the post
Since this is a new concept to most people, it will understandably take some time to become widely accepted. This is where Bitcoin has been instrumental in paving the way for this new technology.
Websites like Newegg take Bitcoin, along with the other traditional payment methods. Here's what the checkout screen looked like after I added a drone to my cart.
Payment processor Stripe also allows online merchants to accept Bitcoin.
Notice that other coins like Ether or Litecoin are not accepted. However, the fact that Bitcoin is accepted, is a big step towards the adoption of other cryptocurrencies.
Risks of Cryptocurrency Trading/Investing
Now that you understand the basics, what are the risks of trading these cryptocurrencies? There are quite a few, but here are the top three.
Some Technologies Will Fail
Remember that cryptocurrencies are basically software, created by people or companies. So just like Webvan or Pets.com in the dot-com bust, some of these technologies will fail.
…and they will fail spectacularly.
Right now, there is a lot of buzz around certain cryptocurrencies increasing several thousand percent, in a few months. This has a lot to do with ignorance and hype.
Just like when people found out that this new thing called the “internet” would change the world of business.
Did it change the world?
Of course.
But was there a lot of dumb money that overhyped the first wave of internet companies?
Totally.
So just remember, trading cryptocurrencies is kind of like trading a software stock. Some of the software will change the world.
Others will explode in a giant ball of fire.
There are also a lot of scam coins out there, so be careful. Like penny stocks that are just a company on paper, almost anyone can create a new cryptocurrency.
Learn how to separate the scams from the deeply underpriced currencies. Then use proper risk management and play the odds.
It Requires Technical Savvy
Let's face it, cryptocurrencies were created by super nerds. Like with Linux, there is still quite a bit of technical know-how that is required.
You don't need to know how to code, but if you are “not good with computers” you may want to stay away from cryptocurrency trading, at least until they start building more user friendly interfaces.
Don't get me wrong, I'm not calling anyone dumb. I'm just saying that if you don't possess a certain skillset, then you shouldn't get involved in that area. This could cause you to lose a lot of money, very quickly.
For example, I don't know how to sew, so I don't make my own clothes. If I did try to make my own clothes, everyone who meets me would think I'm a weirdo for wearing fucked up pants.
You get the picture.
So if you aren't so tech savvy, but still want to get involved, find someone you trust to trade for you.
There's a Lot of Broker and Technology Risk
Since this is emerging technology, there are still a lot of unknowns with trading at scale and how brokers and the software will react to certain surprise events. If you think that Forex brokers are risky, then you should consider cryptocurrency brokers at least twice as risky. Not just because they could be shady, but there a still so many unknowns with the technology.
However, I would still trust the bigger cryptocurrency exchanges over a lot of offshore binary options brokers ?
So the lesson is: Don't keep too much of your coinage at the brokers. Move them off to your own wallet as soon as possible.
I'll get to wallets later in this guide.
Simply put, a blockchain is a database.
However, there is one huge difference between how you probably currently think of a database and how a blockchain database works.
In most cases, a traditional database sits on one computer or in one location.
Even if a company has redundant servers around the world, the data might only be backed up between 3 to 5 locations. On top of that, these companies collectively spend billions of dollars a year on cyber security, to protect this data.
With a blockchain database, the data can be backed up on potentially thousands of computers all over the world, for a much, much lower cost. The information in these databases is heavily encrypted and sometimes files are broken up into pieces, so even if one piece is exposed, it will not expose the entire file.
If the information on one server does become compromised by hackers, the other copies of the databases have to “agree” that the compromised data was a legitimate change to the data. If the other copies do not agree, then the change is rejected and it is changed back to match the others.
Obviously, this is an oversimplified explanation of the technology, but I hope that you are starting to see the benefits.
Instead of just one point of failure, like on a single server, you now have multiple copies of the same database all over the world that is almost impossible to crack and will “fix” itself in the case of a hack. This can also save a ton of money on cyber security software and services.
Here's an example:
Let's say that a hacker gets into your bank's computer tomorrow and transfers all of your money to his account, then deletes any trace of the transaction. With today's technology, you would probably be screwed.
But with a blockchain currency like Bitcoin, if one server was hacked and a fake transaction was inserted into the database, then it wouldn't match the transaction record on the hundreds other copies of the database. This transaction would be seen as a fake and rejected.
Your money would be safe.
This is one of the many reasons why blockchain technology is so exciting.
The Characteristics of a Currency to be Aware of
Although cryptocurrencies are all based on blockchain technology, they are not all created equal. Here are some differences that you need to understand to make informed trading decisions in no particular order:
- Transaction processing speed
- Total supply currently available
- Will there ultimately be a limit on the total number of currency available?
- Will there be an unlimited supply of currency?
- Is there a real-world need for this software/currency?
- Real world adoption of the technology
- Any big investors in the project?
- Does the use of the software make sense?
- Do the founders have a reputable background?
These are just a few of the characteristics that you should look at. But once you start digging into these details, you will begin to see which projects could work for their intended purpose and which ones are probably scams.
This understanding will also allow you to assess the long-term viability of these different currencies and which ones will be more desirable in the future.
Example
Tether is a cryptocurrency that wants to be the proxy for fiat currencies. So there is a Tether USD version, EUR version, etc. But each one is pegged to the value of the currency, so you can never make any money trading it.
It is purely to provide stable and liquid transactions. So one USD Tether will always be worth about $1.
(Editors Note: This is probably not the best example to date because Tether still has a lot more questions than certainty in the eyes of the consumer. Refer back to what money is and what makes money valuable. This is only for illustration purposes that I keep this example)
If you didn't know this and bought a bunch of it, thinking that it's cheap compared to Bitcoin, you will tie up your money in an asset that will never appreciate. Sure, you won't lose money either, but you would have lost out on other opportunities.
So understand the nuances of each crypto, it's very important.
What are the Different Cryptocurrency Use Cases?
Almost every currency software has a different intended purpose and individual implementation, with inherent strengths and weaknesses.
It's like Windows vs Mac.
…or iOS vs Android.
Here are a few examples of the different types of cryptocurrencies and what they are designed to do. This is not an exhaustive list, just a sample.
Note: I don't necessarily support these currencies, I'm just using them as examples of the different use case niches within cryptocurrencies. THIS IS NOT INVESTMENT ADVICE
Worldwide Financial Transactions
Bitcoin
Litecoin
Tether
Ripple
Stellar Lumens
Application Platforms
Ethereum
Storj
Siacoin
MaidSafe
Private Financial Transactions
Monero
Dash
Zcash
PIVX
Specialty Currencies
GameCredits (Basically Steam on blockchain)
ReddCoin (Social Tipping)
Dogecoin (Legacy coin of happiness and community... Not much other than that)
Nexium (Cross platform In-game & Cross-game asset ownership)
Basic Attention Token (Advertising Platform via the Brave Internet Browser)
Take a look at these different use cases and figure out which ones make the most sense to you. Then understand how each software implementation works and think about what will probably do well in the future.
How Do You Store Cryptocurrencies?
With fiat currency like US Dollars, you can store them at the bank or in your wallet. It's pretty straightforward.
But with digital currencies, there are a few wrinkles that you need to get your head around, but the idea is similar. Let's take a look at how cryptocurrency storage works.
You store your cryptocurrencies on the blockchain in a “wallet.” This is simply an address on the blockchain. It's like how the website address tradingheroes.com directs you to my website, on the internet.
Each wallet has a public address and a private address. The public address is the address that people send funds to. The private address is the “password” that you use to access and send your funds.
Never expose your private key until you are ready to spend your funds, otherwise you will probably lose all the money in your wallet.
Here's an example from a Bitcoin paper wallet:
Now that you understand the basics of cryptocurrency wallets, let's look at the different wallet options out there. Here are the different ways that you can store your loot:
Online wallet: This is probably the easiest way to store your money. But it is also the least secure. So it's not a good long term storage solution, but it is fine for buying things and funding your trading accounts. Exchanges like Coinbase also have their own wallets built in.
Mobile wallet: You can download a mobile app like Mycelium to store your spending money. It is more secure than an online wallet, but if your phone ever breaks or it gets hacked, everything in your wallet will be gone.
Desktop wallet: Similar to a mobile app but just for desktop computers.
Hardware device wallet: These are hardware devices that are built especially for storing cryptocurrency keys. They are safer than the options above, but they are still susceptible to the things that can damage all electronic devices.
Paper wallet: You can also store your private key on paper, like in the picture above. This is the most hacker proof, but it is also the least convenient. If you are going to go this route, be sure to store them in a safe place (like a safety deposit box) and don't actually use paper. Use something like this to make sure that your money isn't lost to something as simple as a spilled beer.
Exchanges
Now we get to trading. Here are some of the exchanges that you can trade on:
Poloniex
Kraken
Coinbase
Bitfinex
ShapeShift
Bittrex
Binance
KuCoin Exchange
Each exchange has it's own nuances and rules, so be sure you understand them before trading any significant amount of money. For example, you don't even have to setup an account at ShapeShift. It feels weird in the beginning, but after the first transaction, it makes total sense.
Edit: For a more detailed look at trading specifically look at @elavmunretea 's guide here to actually buy and trade cryptocurrency.
Cryptocurrency Tracking Apps
Before I wrap it up, you will probably need an app to track cryptocurrency prices on your phone. So here are a couple of apps that might work for you.
Blockfolio: A simple app that allows you to add a watchlist and add trades so you can track your portfolio, ala stock trading apps. The most useful thing about this app is that it displays all currencies on your watchlist in the currency of your choice. Some apps insist on displaying the value in Bitcoin, which is annoying.
Coincap: This app allows you to display currencies by market capitalization, volume and other ranking factors. They also have cool charts. Very useful for seeing what is being actively traded. Also displays prices in your currency of choice.
What Can Affect the Price of a Cryptocurrency?
There are many things that can affect the price of a cryptocurrency…sometimes very quickly.
Here is what you need to be aware of when you trade cryptocurrencies.
Of course, there is no guarantee that these things will move the market. But based on what we have seen so far.
Exchange Listing
This is a big one.
When Coinbase added Litecoin to their already limited list of cryptocurrencies that can be bought, they made it easily accessible to the average person.
Their interface is the best I've seen so far. It makes it so easy for the non-technical person to buy Litecoin.
Soon after the Coinbase launch (marked with the arrow, in the chart below), the price of Litecoin started to skyrocket and it has never looked back.
Now, you might be thinking that this could simply be a coincidence.
…and it could.
But it is very, very likely that exposing Litecoin to Coinbase's user base helped boost the price.
So when a large exchange announces that they will start listing a cryptocurrency that you are trading, take notice.
It could give it the boost you have been looking for.
Software Upgrades
Over the past few years, there has been a lot of discussion in the Bitcoin community about upgrading the core software functions of Bitcoin. The primary discussion has been around the transaction speed of Bitcoin.
If you have ever funded your trading account with Bitcoin or tried to buy anything with Bitcoin, you will understand what I mean. For a digital currency, the transaction time is a little slow.
It can take about 30 minutes or more, to do a single transaction.
Upgrading this speed has been hotly debated and finally led to the creation of Bitcoin Cash. After the split of Bitcoin Cash, Bitcoin has taken off to new highs.
There will be countless other software changes across all cryptocurrencies, so make sure that you understand the implications of those changes.
Public Hype
Just like fake tweets can affect the price of a stock, any type of hype can affect the value of a cryptocurrency.
Good or bad.
So before you dismiss something as just hype, remember that hype moves markets too. But if you do trade hype, be sure to close your trade out long before the hype has a chance to cool off.
Otherwise, it could be a very expensive lesson.
Wallet Improvements
Since you are reading this post, you probably want to start actively trading cryptocurrencies. But there are many other people who are investors and want to buy and hold for the next few years.
This is where storage becomes an important part of the cryptocurrency valuation equation.
Unlike traditional fiat currency that can be stored in a bank, your trading account, or your mattress at home, cryptocurrencies need to have a compatible wallet (or cold storage solution) to be stored safely.
Remember that cryptocurrency is simply software. So the wallet software needs to be able to work with the cryptocurrency software.
It's like trying to use the Windows version of Microsoft Office on a Mac.
That simply won't work.
Therefore, if a cryptocurrency doesn't have a good wallet yet, that will prevent less technical investors from buying the currency.
But as soon as one is available, then it makes the currency much more accessible to the masses.
…and thus, more valuable.
If you find that a cryptocurrency does not have a good wallet solution yet, that could be one signal that it is undervalued.
Looking for opportunities to buy, immediately after the launch of the first high-quality wallet, could give you a nice short-term profit.
Platform Applications
Some cryptocurrency platforms, like Ethereum, host other applications. These applications, in turn, can have their own currencies or tokens.
If one of these DApps or Decentralized Apps does very well, this can have a positive effect on the underlying platform currency.
The value of the tokens should theoretically be independent of the value of the platform.
However, not everyone understands this and the success of one DApp can drive the price of Ether…at least in the short term.
So if you are trading a platform cryptocurrency, watch promising apps on the platform closely.
Government Regulation
Finally, government regulation can have a huge effect on the value of a cryptocurrency.
One example is in Venezuela, where the police have been arresting Bitcoin miners on made-up charges. This has forced miners to go underground or start mining Ether instead.
But this could happen in any country. Any decision by the NFA or SEC could affect the value of certain cryptocurrencies. The SEC has already bannedcertain Initial Coin Offerings (ICOs), due to the potential pump and "This is not a hacking forum, I should not post this crap." situation that could happen with those coins.
Be aware of current trends in government regulation and steer clear of currencies that could get red flagged by government agencies. Lately we've seen the moves by South Korea and how prices were affected. Remember what happened in September and October with China. Governments, no matter how much they may say, have their hands in this market. And it doesn't require them to actively invest, all they want is control.
But that's for another post.
Happy Trading!
Notes & Reminders: I did not write this full guide originally. I found it on another site where the OP there was just sharing it. I brought it here with a few edits. The most important ones were noted. Others were minor to keep the information somewhat current and timeless. Nothing posted here, including coins and exchanges mentioned, should be taken as investment advice. As this can incur significant risks, always do your own research before making any investments.
What is a Cryptocurrency?
Let's start at the beginning.
You may have heard many things about what a cryptocurrency is, but you may still be searching for an understandable definition. I come from a competent background so it wasn't hard for me to know about this stuff. However, there was a learning curve which essentially put me in the same boat as most of you for a long time.
Instead of getting to technical, here's the easiest way to think about cryptocurrencies:
Cryptocurrencies are basically the money on software platforms.
It's important to keep in mind that the teams/companies that are behind these cryptocurrencies are not only creating a new form of currency, but a new software platform. To demonstrate how this works, let's take a look at other software platforms that you are probably already familiar with to grasp this.
Here are a few software platforms that many people use:
Cryptocurrencies essentially replace the US Dollars (or your local fiat currency) that you use to purchase these software services. The “database” that cryptocurrencies give you access to is based on blockchain technology. We will talk more on blockchain technology in the next section of this guide.- Windows: A software platform for personal computers
- Dropbox: A software platform for storing and sharing documents
- Fedwire: A software platform that sends money between financial institutions
- Windows: You pay US Dollars (or your local fiat currency) to buy a license for Windows to use on your computer. If you buy a computer that already has Windows on it, the license fee is included in the purchase price.
- Dropbox: You pay US Dollars (or your local fiat currency) to buy a subscription to use the software for a month or a year, depending on which plan you buy.
- Fedwire: You pay a transaction fee to use the system and you send fiat currency itself.
- Windows: Database is stored on your local computer
- Dropbox: Database is stored on the Dropbox servers
- Fedwire: Database is stored on the Fedwire servers
But wait, what are the software services that you are getting? Isn't a cryptocurrency like Bitcoin just a currency, like US Dollars?
Yes and No.
The goal of cryptocurrencies is usually to improve on some type of existing software system or network. When you send money via PayPal, Fedwire or Western Union, you are basically sending fiat money electronically, similar to Bitcoin.
But that's where the similarity ends.
Platforms like PayPal have severe limitations on what you can and cannot do. For example, you cannot send/receive money from certain countries (like Nigeria).
Cryptocurrencies like Bitcoin want to make financial transactions more open and accessible to everyone around the world.
Other cryptocurrencies solve other problems, which we will explore later in this guide.
Is Cryptocurrency Real Money?
Yes.
However, some will debate you to the end about this, so it depends on who you ask. For convinence, I will address this quickly. This is an original section I added because we're a bit far from when the post I transferred over was written.
What is money?
- A current medium of exchange in the form of currency, banknotes, or property.
One common objection to Cryptocurrencies: But this is not backed by anything.
This is probably the strongest valid objection I've heard. For the everyday end user, how would they know their new "money" isn't going to drop to worthless tomorrow? Most think it's easy to assume that everyone should "get it" but we're quick to forget, people are barely surviving and can't afford to put their hopes in something that won't safely go up in value. Anything they do is inherently more risky, so they need safer options. If your new money isn't backed up by anything, how can you reasonably ask someone who can't even afford to do so to even consider giving up their money backed up by something they can understand?
I believe this is the strongest objection and it would be as valid as I say if the world were still on the gold/silver standard. But the world abandoned the gold standard in the 70s-80s so really there's nothing backing the paper or digital money issued by banks but the belief there's value in it.
A lot of our belief on money relies on the belief of scarcity or effort. Because metals were not easy to come by, it was a standard to measure effort and manpower. If you had a lot, you did a lot to get it. Now that we're stripped of that aspect, we still believe the value of money is in power which I lazily demonstrate by this formula:
{(effort x manpower) + rarity of what we value} / time = value
The power of money is in it's value to society. For there to be value, you must believe it has value for some reason. Again, we use to have a tangible reason to believe so when money was backed by precious metals. Now that it's gone, regardless of why it was done, it can be printed to the end of time without any effort.
With cryptocurrencies, there's models of "mining" or "minting" new coins, modeling after how we mined gold and other precious metals in the real world. Solving a problem (finding a location that had the gold), and getting some reward for solving it (obtaining the metal). Just like the gold rush that happened in the US, the miners here compete for these block rewards. This is, in very layman terms, Proof of Work. Now we have several methods based on that core concept like proof of Stake, Proof of Concept, etc. But these all constitute what we've determined what money is and what gives value to money, but are falsely believing still exists in our pre-existing monetary system. We'll talk about the risks in the next section but know that if you don't understand this, you should not touch this market. At all, ever. Watch others get rich/wealthy/broke from it before you consider touching it again. There's a million other great opportunities out there. But no other one will be this one.
End of my little rant there. Back to the post
Since this is a new concept to most people, it will understandably take some time to become widely accepted. This is where Bitcoin has been instrumental in paving the way for this new technology.
Websites like Newegg take Bitcoin, along with the other traditional payment methods. Here's what the checkout screen looked like after I added a drone to my cart.
Payment processor Stripe also allows online merchants to accept Bitcoin.
Notice that other coins like Ether or Litecoin are not accepted. However, the fact that Bitcoin is accepted, is a big step towards the adoption of other cryptocurrencies.
Risks of Cryptocurrency Trading/Investing
Now that you understand the basics, what are the risks of trading these cryptocurrencies? There are quite a few, but here are the top three.
Some Technologies Will Fail
Remember that cryptocurrencies are basically software, created by people or companies. So just like Webvan or Pets.com in the dot-com bust, some of these technologies will fail.
…and they will fail spectacularly.
Right now, there is a lot of buzz around certain cryptocurrencies increasing several thousand percent, in a few months. This has a lot to do with ignorance and hype.
Just like when people found out that this new thing called the “internet” would change the world of business.
Did it change the world?
Of course.
But was there a lot of dumb money that overhyped the first wave of internet companies?
Totally.
So just remember, trading cryptocurrencies is kind of like trading a software stock. Some of the software will change the world.
Others will explode in a giant ball of fire.
There are also a lot of scam coins out there, so be careful. Like penny stocks that are just a company on paper, almost anyone can create a new cryptocurrency.
Learn how to separate the scams from the deeply underpriced currencies. Then use proper risk management and play the odds.
It Requires Technical Savvy
Let's face it, cryptocurrencies were created by super nerds. Like with Linux, there is still quite a bit of technical know-how that is required.
You don't need to know how to code, but if you are “not good with computers” you may want to stay away from cryptocurrency trading, at least until they start building more user friendly interfaces.
Don't get me wrong, I'm not calling anyone dumb. I'm just saying that if you don't possess a certain skillset, then you shouldn't get involved in that area. This could cause you to lose a lot of money, very quickly.
For example, I don't know how to sew, so I don't make my own clothes. If I did try to make my own clothes, everyone who meets me would think I'm a weirdo for wearing fucked up pants.
You get the picture.
So if you aren't so tech savvy, but still want to get involved, find someone you trust to trade for you.
There's a Lot of Broker and Technology Risk
Since this is emerging technology, there are still a lot of unknowns with trading at scale and how brokers and the software will react to certain surprise events. If you think that Forex brokers are risky, then you should consider cryptocurrency brokers at least twice as risky. Not just because they could be shady, but there a still so many unknowns with the technology.
However, I would still trust the bigger cryptocurrency exchanges over a lot of offshore binary options brokers ?
So the lesson is: Don't keep too much of your coinage at the brokers. Move them off to your own wallet as soon as possible.
I'll get to wallets later in this guide.
What is a Blockchain?
Simply put, a blockchain is a database.
However, there is one huge difference between how you probably currently think of a database and how a blockchain database works.
In most cases, a traditional database sits on one computer or in one location.
Even if a company has redundant servers around the world, the data might only be backed up between 3 to 5 locations. On top of that, these companies collectively spend billions of dollars a year on cyber security, to protect this data.
With a blockchain database, the data can be backed up on potentially thousands of computers all over the world, for a much, much lower cost. The information in these databases is heavily encrypted and sometimes files are broken up into pieces, so even if one piece is exposed, it will not expose the entire file.
If the information on one server does become compromised by hackers, the other copies of the databases have to “agree” that the compromised data was a legitimate change to the data. If the other copies do not agree, then the change is rejected and it is changed back to match the others.
Obviously, this is an oversimplified explanation of the technology, but I hope that you are starting to see the benefits.
Instead of just one point of failure, like on a single server, you now have multiple copies of the same database all over the world that is almost impossible to crack and will “fix” itself in the case of a hack. This can also save a ton of money on cyber security software and services.
Here's an example:
Let's say that a hacker gets into your bank's computer tomorrow and transfers all of your money to his account, then deletes any trace of the transaction. With today's technology, you would probably be screwed.
But with a blockchain currency like Bitcoin, if one server was hacked and a fake transaction was inserted into the database, then it wouldn't match the transaction record on the hundreds other copies of the database. This transaction would be seen as a fake and rejected.
Your money would be safe.
This is one of the many reasons why blockchain technology is so exciting.
The Characteristics of a Currency to be Aware of
Although cryptocurrencies are all based on blockchain technology, they are not all created equal. Here are some differences that you need to understand to make informed trading decisions in no particular order:
- Transaction processing speed
- Total supply currently available
- Will there ultimately be a limit on the total number of currency available?
- Will there be an unlimited supply of currency?
- Is there a real-world need for this software/currency?
- Real world adoption of the technology
- Any big investors in the project?
- Does the use of the software make sense?
- Do the founders have a reputable background?
These are just a few of the characteristics that you should look at. But once you start digging into these details, you will begin to see which projects could work for their intended purpose and which ones are probably scams.
This understanding will also allow you to assess the long-term viability of these different currencies and which ones will be more desirable in the future.
Example
Tether is a cryptocurrency that wants to be the proxy for fiat currencies. So there is a Tether USD version, EUR version, etc. But each one is pegged to the value of the currency, so you can never make any money trading it.
It is purely to provide stable and liquid transactions. So one USD Tether will always be worth about $1.
(Editors Note: This is probably not the best example to date because Tether still has a lot more questions than certainty in the eyes of the consumer. Refer back to what money is and what makes money valuable. This is only for illustration purposes that I keep this example)
If you didn't know this and bought a bunch of it, thinking that it's cheap compared to Bitcoin, you will tie up your money in an asset that will never appreciate. Sure, you won't lose money either, but you would have lost out on other opportunities.
So understand the nuances of each crypto, it's very important.
What are the Different Cryptocurrency Use Cases?
Almost every currency software has a different intended purpose and individual implementation, with inherent strengths and weaknesses.
It's like Windows vs Mac.
…or iOS vs Android.
Here are a few examples of the different types of cryptocurrencies and what they are designed to do. This is not an exhaustive list, just a sample.
Note: I don't necessarily support these currencies, I'm just using them as examples of the different use case niches within cryptocurrencies. THIS IS NOT INVESTMENT ADVICE
Worldwide Financial Transactions
Bitcoin
Litecoin
Tether
Ripple
Stellar Lumens
Application Platforms
Ethereum
Storj
Siacoin
MaidSafe
Private Financial Transactions
Monero
Dash
Zcash
PIVX
Specialty Currencies
GameCredits (Basically Steam on blockchain)
ReddCoin (Social Tipping)
Dogecoin (Legacy coin of happiness and community... Not much other than that)
Nexium (Cross platform In-game & Cross-game asset ownership)
Basic Attention Token (Advertising Platform via the Brave Internet Browser)
Take a look at these different use cases and figure out which ones make the most sense to you. Then understand how each software implementation works and think about what will probably do well in the future.
How Do You Store Cryptocurrencies?
With fiat currency like US Dollars, you can store them at the bank or in your wallet. It's pretty straightforward.
But with digital currencies, there are a few wrinkles that you need to get your head around, but the idea is similar. Let's take a look at how cryptocurrency storage works.
You store your cryptocurrencies on the blockchain in a “wallet.” This is simply an address on the blockchain. It's like how the website address tradingheroes.com directs you to my website, on the internet.
Each wallet has a public address and a private address. The public address is the address that people send funds to. The private address is the “password” that you use to access and send your funds.
Never expose your private key until you are ready to spend your funds, otherwise you will probably lose all the money in your wallet.
Here's an example from a Bitcoin paper wallet:
Now that you understand the basics of cryptocurrency wallets, let's look at the different wallet options out there. Here are the different ways that you can store your loot:
Online wallet: This is probably the easiest way to store your money. But it is also the least secure. So it's not a good long term storage solution, but it is fine for buying things and funding your trading accounts. Exchanges like Coinbase also have their own wallets built in.
Mobile wallet: You can download a mobile app like Mycelium to store your spending money. It is more secure than an online wallet, but if your phone ever breaks or it gets hacked, everything in your wallet will be gone.
Desktop wallet: Similar to a mobile app but just for desktop computers.
Hardware device wallet: These are hardware devices that are built especially for storing cryptocurrency keys. They are safer than the options above, but they are still susceptible to the things that can damage all electronic devices.
Paper wallet: You can also store your private key on paper, like in the picture above. This is the most hacker proof, but it is also the least convenient. If you are going to go this route, be sure to store them in a safe place (like a safety deposit box) and don't actually use paper. Use something like this to make sure that your money isn't lost to something as simple as a spilled beer.
Exchanges
Now we get to trading. Here are some of the exchanges that you can trade on:
Poloniex
Kraken
Coinbase
Bitfinex
ShapeShift
Bittrex
Binance
KuCoin Exchange
Each exchange has it's own nuances and rules, so be sure you understand them before trading any significant amount of money. For example, you don't even have to setup an account at ShapeShift. It feels weird in the beginning, but after the first transaction, it makes total sense.
Edit: For a more detailed look at trading specifically look at @elavmunretea 's guide here to actually buy and trade cryptocurrency.
Cryptocurrency Tracking Apps
Before I wrap it up, you will probably need an app to track cryptocurrency prices on your phone. So here are a couple of apps that might work for you.
Blockfolio: A simple app that allows you to add a watchlist and add trades so you can track your portfolio, ala stock trading apps. The most useful thing about this app is that it displays all currencies on your watchlist in the currency of your choice. Some apps insist on displaying the value in Bitcoin, which is annoying.
Coincap: This app allows you to display currencies by market capitalization, volume and other ranking factors. They also have cool charts. Very useful for seeing what is being actively traded. Also displays prices in your currency of choice.
What Can Affect the Price of a Cryptocurrency?
There are many things that can affect the price of a cryptocurrency…sometimes very quickly.
Here is what you need to be aware of when you trade cryptocurrencies.
Of course, there is no guarantee that these things will move the market. But based on what we have seen so far.
Exchange Listing
This is a big one.
When Coinbase added Litecoin to their already limited list of cryptocurrencies that can be bought, they made it easily accessible to the average person.
Their interface is the best I've seen so far. It makes it so easy for the non-technical person to buy Litecoin.
Soon after the Coinbase launch (marked with the arrow, in the chart below), the price of Litecoin started to skyrocket and it has never looked back.
Now, you might be thinking that this could simply be a coincidence.
…and it could.
But it is very, very likely that exposing Litecoin to Coinbase's user base helped boost the price.
So when a large exchange announces that they will start listing a cryptocurrency that you are trading, take notice.
It could give it the boost you have been looking for.
Software Upgrades
Over the past few years, there has been a lot of discussion in the Bitcoin community about upgrading the core software functions of Bitcoin. The primary discussion has been around the transaction speed of Bitcoin.
If you have ever funded your trading account with Bitcoin or tried to buy anything with Bitcoin, you will understand what I mean. For a digital currency, the transaction time is a little slow.
It can take about 30 minutes or more, to do a single transaction.
Upgrading this speed has been hotly debated and finally led to the creation of Bitcoin Cash. After the split of Bitcoin Cash, Bitcoin has taken off to new highs.
There will be countless other software changes across all cryptocurrencies, so make sure that you understand the implications of those changes.
Public Hype
Just like fake tweets can affect the price of a stock, any type of hype can affect the value of a cryptocurrency.
Good or bad.
So before you dismiss something as just hype, remember that hype moves markets too. But if you do trade hype, be sure to close your trade out long before the hype has a chance to cool off.
Otherwise, it could be a very expensive lesson.
Wallet Improvements
Since you are reading this post, you probably want to start actively trading cryptocurrencies. But there are many other people who are investors and want to buy and hold for the next few years.
This is where storage becomes an important part of the cryptocurrency valuation equation.
Unlike traditional fiat currency that can be stored in a bank, your trading account, or your mattress at home, cryptocurrencies need to have a compatible wallet (or cold storage solution) to be stored safely.
Remember that cryptocurrency is simply software. So the wallet software needs to be able to work with the cryptocurrency software.
It's like trying to use the Windows version of Microsoft Office on a Mac.
That simply won't work.
Therefore, if a cryptocurrency doesn't have a good wallet yet, that will prevent less technical investors from buying the currency.
But as soon as one is available, then it makes the currency much more accessible to the masses.
…and thus, more valuable.
If you find that a cryptocurrency does not have a good wallet solution yet, that could be one signal that it is undervalued.
Looking for opportunities to buy, immediately after the launch of the first high-quality wallet, could give you a nice short-term profit.
Platform Applications
Some cryptocurrency platforms, like Ethereum, host other applications. These applications, in turn, can have their own currencies or tokens.
If one of these DApps or Decentralized Apps does very well, this can have a positive effect on the underlying platform currency.
The value of the tokens should theoretically be independent of the value of the platform.
However, not everyone understands this and the success of one DApp can drive the price of Ether…at least in the short term.
So if you are trading a platform cryptocurrency, watch promising apps on the platform closely.
Government Regulation
Finally, government regulation can have a huge effect on the value of a cryptocurrency.
One example is in Venezuela, where the police have been arresting Bitcoin miners on made-up charges. This has forced miners to go underground or start mining Ether instead.
But this could happen in any country. Any decision by the NFA or SEC could affect the value of certain cryptocurrencies. The SEC has already bannedcertain Initial Coin Offerings (ICOs), due to the potential pump and "This is not a hacking forum, I should not post this crap." situation that could happen with those coins.
Be aware of current trends in government regulation and steer clear of currencies that could get red flagged by government agencies. Lately we've seen the moves by South Korea and how prices were affected. Remember what happened in September and October with China. Governments, no matter how much they may say, have their hands in this market. And it doesn't require them to actively invest, all they want is control.
But that's for another post.
Happy Trading!
Notes & Reminders: I did not write this full guide originally. I found it on another site where the OP there was just sharing it. I brought it here with a few edits. The most important ones were noted. Others were minor to keep the information somewhat current and timeless. Nothing posted here, including coins and exchanges mentioned, should be taken as investment advice. As this can incur significant risks, always do your own research before making any investments.
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