Over the past weeks, several friends have asked me for advice on cryptocurrencies. They wanted to learn about the easiest way to buy some, which coins to get, how to safely store them, and what my predictions are for the future of cryptocurrencies in general. Then I thought, why not make a somewhat comprehensive introduction post? So here’s my ‘How to start with cryptocurrency.’
Simply put, cryptocurrency is a digital currency that uses cryptography to secure, verify, and create transactions and coins.
A decentralised ledger stores transactions in a network called a blockchain, while cryptographic algorithms create consensus in this network. Miners verify the transactions by a method called proof-of-work, and as a reward for securing the network they receive newly minted coins. This way the network is secure, transactions are being verified and stored in the blockchain, and new coins are mined.
I’ll write another post which will go more in depth on these basic principles of blockchain technology soon. But if you’re eager to learn more about cryptocurrency, I suggest watching this video by Andreas Antonopolos, the jesus of Bitcoin:
The fact that cryptocurrencies are decentralised, is perhaps its most important characteristic. Because before cryptocurrencies, the power to ‘create’ money was entirely concentrated at state level insitutions or monarchs. Most of this top-down money stayed firmly at the top. But now, anybody can start a cryptocurrency: it is as easy as going to github and forking Bitcoin or Ethereum. These forks can have different rules, different fees, or for example different incentive systems. So if you don’t agree with the current policy, you can just fork your own.
This way, the distribution of money is designed in such a way that the incentive is to add value to the network and not just to create wealth at the top. No more cash for the monarch and his friends, but value from and for the commons. Many different alt-coins (forks of Bitcoin) and tokens (smart-contract currencies on the Ethereum network) are currently trying to figure out the best way to achieve this.
As a result of decentralised cryptocurrencies, you no longer need a centralised banking system to keep your money, to transfer your money, and to hopefully give back your money when you ask for it (they have proven to be untrustworthy, expensive and outright irresponsible). With cryptocurrency YOU are in control of your own funds. This is amazing and terrifying at the same time.
At its core, cryptocurrencies let you transact with any counter party in a trust-less, secure, and private way, all the while the transactions being publicly verifiable and immutable. To gain a better understanding of the potential impact of decentralised cryptocurrencies, I highly recommend reading Antonopolous’s book The Internet of Money.
In this book, Andreas explains why bitcoin is a financial and technological evolution with potential far exceeding the label “digital currency”.
A lot of attention on blockchain technology has been focussed on the skyrocketing monetary value of Bitcoin. However, the real power of the blockchain I think, is not about decentralised payments, but it’s everything else that can be transacted.
Take Ethereum for example. Ethereum is a cryptocurrency like Bitcoin, but instead of just storing a transaction in a block, bits of code can be executed as part of a transaction. Where Bitcoin validates transactions, Ethereum validates logic. This is called a smart-contract and it opens up the blockchain to a whole range of new possibilities; contracts, escrow, insurance, digital property, identity, a digital copy of physical property and of course cryptokitties. All without the need for a centralised (and expensive) middleman such as banks, insurance brokers, real estate agents, accountants, lawyers, you name it. I’ll write more about the power of Ethereum in a later post, but for now let’s get back to cryptocurrency as an actual currency.
Buy some Bitcoin or Ether
In The Netherlands, the easiest way to buy some Bitcoin or Ether (the currency on the Ethereum network is called Ether) is to open up an account on BTC-Direct.eu. Verify your identity (it’s the law), wait a bit, and off you are. If you happen to use bunq (an awesome modern bank), make an account at BL3P.eu and hook-up your bunq account. This way you can deposit and withdraw funds within minutes instead of hours or days.
Keep in mind that the tax agency can (and in the future probably will) ask these exchanges to handover information so they can estimate your cryptocurrency capital, exactly like they do with banks already. Therefore, you should probably just pay your taxes over your crypto-funds (there are ways to mitigate this problem, I’ll probably make a post about this on a later date, or maybe not).
Once you obtained some cryptocurrency through an exchange, you need a place to store those new funds. Actually, your funds are stored in the blockchain. What you will store yourself are the keys to acces those funds. A good wallet to use is Exodus: it’s easy to use, has a nice UI and is relatively safe. I say relatively, because there are always trade-offs between security and usability.
Make sure you follow the installation instructions, send a small amount to Exodus and follow the backup instructions (you start with a small amount to make sure everything is set up correctly). In the process, you’ll receive a seed phrase which is a phrase that consists of 12 random words. You need to BACKUP BACKUP BACKUP your seed phrase. Don’t take a screenshot or a picture of it, don’t store it in plain text on your computer. These words are all anybody needs to re-create your wallet and steal your funds. Write them down in a booklet and store it somewhere safely. Or copy paste them (don’t type, keyloggers exist) in a text file that you encrypt with Veracrypt of Cryptomator.
The seed words, or mnemonic sentence, use the BIP39 protocol to create deterministic wallets. It creates your private key, the public key and addresses.
You need to use a proper password for Exodus. Please use a password manager like 1Password to create decent passwords, since we humans are inherently bad at creating entropy (randomness). If you sign up at 1Password for a familly account and share it with 5 friends, you’ll get a high value service for a very low price. I can’t stress enough how important it is to use a password manager, it really adds a lot of security to everything you do online.
This all sounds like a hassle, and it kinda is, but you are now solely responsible for owning and controling your own funds. No more bank or middle man to blame if something goes wrong. So please go through this trouble to make sure your funds are safe and sound.
Once you’ve set up Exodus, you can use the receive address under Bitcoin or Ethereum to receive all your coins from BTC-Direct or BL3P. After receiving your funds (might take a while depending on the network), you can watch in amazement how your crypto-funds will become worth more and more over time. We are just getting started.
Right now there is a lot of hype, a lot of FUD (Fear, Uncertainty and Doubt), there will be bubbles and consequently pops. Bitcoin has been declared dead by the press ten times already. But cryptocurrencies are here to stay, and they will change our economies entirely.
To conclude this post, I’d like to share some tips that will improve your online safety. Please do take them into account. Unprotected internet-use is the same as unprotected sex: outdated, messy, dangerous, and not worth it.
- Install an anti-malware app. I like Malwarebytes, set it to scan you pc/mac every week, or buy the full version for real-time protection.
- Don’t click on links in emails. Scam emails are everywhere, and depending on your operating system (I am looking at you Windows) it can wreak havoc, or at the very least send you to a fake website.
- Use a password manager! Create a good long random password, and commit it to memory. Now, use the password manager to create random and long passwords for everything. Even the password to your local gym account, because that’s where hackers start. They can infer a lot from the way you made that specific password and continue to your other accounts.
- Don’t paste or type your private key or seed just anywhere! These literally are the keys to your funds.
- Double check the website you are going to (for example an exchange) and check the ssl certificate (press the little lock symbol in the address bar). Bookmark it and only use the bookmark from now on.
- Backup Backup Backup. Your computer might crash, your house might burn down. Make sure you have an encrypted copy of your private key in a cloud somewhere or, for the more paranoid, use an encrypted usb stick at a friends’ house.
- Don’t randomly download software. Double check the website, check Github, check sources, check the shasum, check the signature. Or ask me, I’ll help you.
- Use an ad/tracker-blocker in your browser. I prefer Better by In.die.
- Use two-factor authentication where-ever possible. But please don’t use sms-authentication, it’s surprisingly easy to get hold of a sim-card with the same telephone number as you, and thus receive your verification texts.
In a future post I will explain hardware wallets (safer but expensive) and paper wallets (safer and a lot of work). I will also write a post about good opsec (Operational Security). It will cover how to prevent malware, how to keep your privacy, how to use proper password and more.
Unless you want to become a cryptocurrency trader, the simplest advice I can give is to transfer €30 or so every month into Ether for two years. Don’t think about the value going up and down, just enjoy being part of history being made, and remember: HODL!