Bitcoin, Altcoins, ledgers, blockchains, those long addresses … what do they all mean and how do you get started with investing in cryptocurrencies or using them to buy or sell items or services? More importantly, how do you go about using crypto safely and securely?
In our previous article, Keeping your Digital Currency safe using Crypto Wallets, we examined the various types of Crypto Wallets available and how to keep cryptocurrencies safe and secure. In this article we will look at how to deposit funds, buy cryptocurrency, use Crypto Wallets, and how to transfer, trade and sell crypto.
Terminology
The world of cryptocurrency uses a lot of terminology so let’s begin with understanding some basic definitions:
- Address – this is a location where an amount of a particular type of cryptocurrency is stored. Each address is unique and is comprised of a string of numbers and mixed-case letters e.g. 3D6yakCcDRmppdB7PX94WZ8ByYY6mjtUZZ.
Crypto can be sent to or from an address. - Altcoin (aka Token) – the name given to all cryptocurrencies created since Bitcoin i.e. Alternative Coins.
- Bitcoin – the first, biggest and most well-known cryptocurrency.
- Blockchain – a distributed ledger system that consists of a sequence of blocks and forms the basis of cryptocurrencies. Each block contains digital information e.g. within the Bitcoin blockchain each block contains a number of transactions.
- Centralized Exchange (CEX) – where funds can be deposited or withdrawn via an online account. These funds can then be used to purchase cryptocurrency that can in turn be sent to other addresses. Cryptocurrencies can also be received and sold on a CEX. Most CEX sites are owned by private companies and usually support only a limited number of cryptocurrencies.
- Decentralized Exchange (DEX) – where cryptocurrencies can be traded between users on a peer-to-peer basis without the need for an intermediary as is the case with a CEX e.g. using BitCoin to buy Bondly altcoin. A DEX usually supports the trading of a greater range of cryptocurrencies compared to a CEX.
- ERC-20 – a standard that tokens must comply with to be used on the Ethereum platform.
- Fiat – the name given to legal tender issued by a central government e.g. the US Dollar is issued by the Federal Reserve. Fiat has to be deposited into a CEX in order to buy cryptocurrency.
- Gas – the computational effort of conducting transactions on the Ethereum platform. This has an associated price to be paid.
- Hash – every transaction involving cryptocurrency, such as Sending or Receiving, has a unique identifier known as a ‘hash’. This consists of a string of numbers and lower-case letters e.g. f25fd204ce0b6503c4fc39a92ce6c74360548aea0c78d394347ed4a5748924c3. A hash is generated using a Public and Private key.
- Market Cap – used for ranking cryptocurrencies.
Market Capitalization = Circulating Supply x Current Price - Miners – small dedicated computers that perform computations to verify transactions when adding blocks to a cryptocurrency’s blockchain. ‘Miner Fees’ are incurred when purchasing cryptocurrency and are a mechanism for paying miners.
- Private Key (aka Secret Key) – this is paired with a Public Key for performing encryption and decryption of hashed information.
- Public Key – used to facilitate transactions between parties i.e. the Sending/Receiving of cryptocurrency between user accounts. The Public Key is used to verify the digital signature that in turn proves ownership of the Private Key and hence the associated crypto.
- Seed – a phrase of 12 to 24 words that can be used to recover a Crypto Wallet to a new or existing software or hardware wallet.
- Stablecoin – as the name suggests these attempt to retain a stable value e.g. USDCoin (USDC) or Tether USD (USDT) which attempt to maintain a 1:1 ratio with USD.
Centralized Exchange registration
A Centralized Exchange (CEX) is usually the starting place for obtaining cryptocurrency. There are a number of considerations when choosing the right CEX that meets your needs:
- Region or country – some are geographically restricted for use.
- Crypto supported – the range of cryptocurrencies supported on each CEX varies enormously, some cover Bitcoin, Etheruem and a handful of other altcoins whilst some cover 20-30+ altcoins.
- Deposit/Withdrawal methods:
- Bank accounts – most exchanges support some form of deposit from a bank account e.g. ACH (Automated Clearing House), Bank Transfer, or Wire Transfer. These deposit native currency into the online account that can then be used to buy crypto. ACH and Bank Transfers are usually free whilst Wire Transfers incur costs.
- Other payment methods – Crypto can often be bought directly on the CEX using a Debit Card, Credit Card or the likes of PayPal. These tend to incur percentage fees in the range of 1-4%+
Note: Daily Limits are frequently applied to most deposits.
- Fees – depositing funds into an account on a CEX can be free depending on the method used. Making currency withdrawals can be free too but the buying, selling, and transferring of cryptocurrency usually incurs some form of fees. These fees tend to be percentage based so vary depending on the size of the transaction. The percentage amount can have a sizeable difference between sites e.g. buying ETH on Coinbase costs 1.5% whilst on Binance costs 0.5%.
- Offline backups – currency held in an online account within a CEX is effectively held in a Hot Wallet. Some providers offer Cold Storage (offline) which limits the exposure of users to hackers. Some providers also offer insurance on assets store on their site.
Examples of popular Centralized Exchanges include:
- Binance.com (non-US)
- Binance.us (US-only)
- Coinbase (multi-country)
- eToro (multi-country)
- Kraken (multi-country)
- Swissborg (non-US)
Registering on an exchange includes a verification process. The verification usually requires the uploading of some form of identification e.g. driving license, identity card, passport. After this address verification may also be required by providing a bank statement or utility bill.
Frequently there can be additional verification steps needed such as face recognition, email validation, confirming an SMS code, or Authenticator code such as the Google Authenticator or Microsoft Authenticator apps. There may even be a combination or all of these.
Buying Crypto
There are two methods of buying cryptocurrency – ‘Buy Direct’ and ‘Deposit then Buy’. These are described below using Binance.us as an example so steps on other sites may differ slightly.
Buy Direct
This is the simplest method which involves depositing funds and buying crypto in one transaction:
- Log into your CEX account.
- Select Buy Crypto.
- Choose the type of crypto to be purchased e.g. BTC (Bitcoin).
- Specify the amount of crypto to be purchased in your default currency or the amount of the crypto itself.
- Setup, if necessary, and select the Payment Method.
- Complete the Buy screens which may include two-factor authentication (2FA).
Deposit then Buy
This involves depositing funds into your account then using them to buy crypto:
- Log into your CEX account.
- Select Wallet -> Deposit.
- Choose the Fiat currency you are depositing e.g. USD.
- Specify the amount you wish to deposit.
- Setup, if necessary, and select the Payment Method.
- Complete the Deposit screens which may include two-factor authentication (2FA).
- Once funds have cleared, which may vary depending on the payment method used, follow Steps 2-6 under Buy Direct to purchase your chosen crypto.
Sending & Receiving Crypto
To buy all but the most common crypto it is usually necessary to do this via a Decentralized Exchange (DEX). As most CEX sites cannot be connected directly to DEX sites it is necessary to send our common crypto to an intermediate wallet.
This is a multi-step process shown below using Coinbase and Coinbase Wallet as an example:
- Install the Coinbase Wallet app on your smartphone. There are plenty of WalletConnect compatible alternatives available.
- Click Send within your CEX account.
- Select the type of crypto (common or stablecoin) to be sent.
- Specify the amount of crypto or select Max.
- Open your wallet app and click Receive then the crypto type to be received which should show your address. If you have a Hardware Wallet and are sending to the associated app then you will have manual confirmation steps on the device too.
- Copy & Paste this address from your wallet app into the Send screen in your CEX account.
- Complete the Send screens which may include two-factor authentication (2FA).
- A confirmation of the transaction may be sent to you via email. Within your wallet app there will also be a record of the receipt, plus within your account on the CEX there will also be a record of the Send transaction.
Note: Verifying the ‘to’ address is extremely important because if this is the wrong one or incorrectly entered then the crypto can be lost!
Trading Tokens
In order to purchase other types of altcoins, that are not available to buy on your CEX of choice, there are a few steps involved. The example scenario to be covered here is as follows:
We will be trading some Ethereum (ETH) cryptocurrency, residing in our Coinbase Wallet, for SuperFram (SUPER) tokens using the Uniswap DEX.
The steps involved are as follows:
- Navigate to the Uniswap online app.
- Click the ‘Connect to a wallet’ button.
- Select the ‘Coinbase Wallet’ option which displays a QR code.
- Open the Coinbase Wallet app and click the QR Scanning icon next to the Send & Receive buttons. Use this to scan the QR code which will connect the wallet to Uniswap. Once connected the start & end of the address of the ETH account in the Coinbase Wallet with be displayed together with the current balance.
- Back on Uniswap click ‘Select a token’ and search for ‘SuperFarm’.
- Click the ‘Import’ button.
- Underneath the name of the token is an Address. Clicking this link opens the associated Contract on Etherscan.
Note: This is a very important check to verify that this token is not a fake or scam! If it is a warning will be displayed on this webpage.
- After verifying that the token is genuine, tick the box then Import.
- Back in the Swap box you can specify the quantity of the SuperFarm token you wish to purchase or you can specify the amount of ETH you want to spend. The Liquidity Provider Fee will be quoted together with the price per SuperFarm token in ETH.
- Once the form is completed click ‘Swap’ to proceed. You will be asked to Confirm Swap.
- Within the Coinbase Wallet there will be a prompt to review and either Cancel or Pay (proceed with the swap). This may be accompanied by 2FA e.g. Facial Recognition to confirm.
Note: There needs to be sufficient funds of ETH remaining in your wallet to pay the Mining Fees for the transaction. These are not included in the quoted exchange.
- Once the transaction has been submitted Uniswap will confirm this and have a link ‘View on Etherscan’. Click this link to view the progress and details of the transaction.
The Transaction Details shows a lot of useful information which is permenantly retained on the blockchain such as:
- Tx Hash – a unique 66 character encrypted string.
- Status – goes from Pending to Failed or Success.
- Timestamp – when the transaction was mined.
- From / To – addresses the transaction was between.
- Value – how much the purchase cost in ETH and USD.
- Tx Fee – amount paid to miner for processing the transaction.
- Gas Price – the cost of the transaction being added to the blockchain.
- Providing the transaction was successful then the purchased tokens should now be visible in your Coinbase Wallet.
Selling Crypto
In order to sell any of our crypto back into Fiat currency (e.g. USD, GBP, EUR) it is necessary to send the coins to our account on the CEX if they are held in a wallet. This is carried out using the procedure outlined in the ‘Sending & Receiving Crypto’ section above but performed in reverse.
Once complete we can now sell the crypto as follows using Binance.us as an example so steps may differ on another site:
- Log into your CEX account.
- Select Buy Crypto then the Sell tab.
- Choose the type of crypto to be sold e.g. BTC (Bitcoin).
- Specify the amount of crypto to be sold in your default currency or the amount in the crypto itself.
- Select the Payment Method e.g. USD Balance.
- Complete the Sell screens which may include two-factor authentication (2FA).
- Once complete the amount from the sale will now be in the relevant Fiat balance.
- Click Wallet -> Withdraw.
- Select the Fiat currency in the Coin dropdown.
- Specify the amount or select Max.
- Choose the Payment Method to Withdraw To.
- Complete the Withdraw screens which may include two-factor authentication (2FA).
Do you have experience in dealing with cryptocurrencies? Have you had any issues with transacting safely? If so please share any tips in the comments below.