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 was in the same boat for a long time.
Instead of getting too technical, here’s the easiest way to think about cryptocurrencies:
A cryptocurrency is basically 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.
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 must “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.
How do You Buy Cryptocurrencies?
First must go to an exchange or service that will allow you to purchase cryptocurrencies. Some of the bigger exchanges are:
- Coinbase
- Poloniex
- CEX
- Bittrex
- Bitfinex
- Binance
- LocalBitcoins
Many of them will allow you to use a credit card or link a bank account. As much as possible, do not store your cryptocurrency at the exchanges because they can be hacked.
It’s easy to get Bitcoin, Ether and Litecoin. But if you want the smaller altcoins, you will have to do an exchange.
How to Buy Altcoins.
First buy Bitcoin or Ethereum because those are the coins that are most easily transacted against the smaller altcoins. When in doubt, buy Bitcoin.
Then find out where the altcoin that you want is traded. Go to Coinmarketcap and click on the coin you want to buy.
Next, click on the Markets tab for that coin. For example, here’s where you can get NEM. The Source column will show you the exchanges where this coin is being traded.
Next, login to the account where you bought your Bitcoin or Ether. If you bought it from Coinbase, then you can go to: Accounts > Send and paste the deposit address into that field.
How do You Store Cryptocurrencies?
With currency like US Dollars, you can store them at the bank or in your wallet. It’s 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 look at how cryptocurrency storage works.
You store your cryptocurrencies on the blockchain in a “wallet.” This is simply an address on the blockchain.
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 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 so far. It makes it so easy for the non-technical person to buy Litecoin.
Soon after the Coinbase launch, 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.
Watch exchanges like Coinbase, Bitfinex, Poloniex or CEX.
It could give it the boost you have been looking for.
Wallet Improvements.
Since you are reading this post, you probably want to start actively day 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 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.
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