Guide for investing in cryptocurrencies (Part 1)

Guide for investing in cryptocurrencies (Part 1)

Crypto environment is evolving extremely fast nowadays. Nearly everyone heard about cryptocurrencies, especially Bitcoin, but not everyone exactly understands what these coins are and why they're growing so popular. On the other hand, there are lots of those, who are investing in crypto and are taking profits from their investments. Today, we’re going to talk about cryptocurrencies essence, some advantages they have while investing in them and which cryptocurrency worths purchasing.

Nature of cryptocurrencies

For making the most beneficial decision and understanding the right steps of investing in cryptos, you'll have to know basic things about these coins and processes related to them. So here we are going to start from the very beginning.

A cryptocurrency is a digital or virtual currency which serves as a means of exchange and applies cryptography to provide extra protected transactions. In their system, cryptocurrencies apply decentralized technologies objected to the centralized banking system.

Top 5 cryptocurrencies

Recently there is a bunch of fresh rising crypto coins, that are having a very short life and are not living up hopes of investors and users. Also, some currencies have a history or had a well-planned strategy and this kind of currencies took their positions in the top.

There are many great tools for tracking rates of cryptocurrencies. The most famous one is CoinMarketCap and according to it we have this picture in the top:

  1. The first cryptocurrency is Bitcoin, which was created by Satoshi Nakamoto (no one actually knows who Satoshi is or if he is a particular man or a group of people) in 2008. Bitcoin is still the leading cryptocurrency presently and it seems it doesn’t want to give up the position.

  2. Another popular cryptocurrency is Ethereum (ETH). Made by Vitalik Buterin in 2015, Ethereum has developed an innovative platform and was the first to apply smart contracts during transactions.

  3. The third in the top is Ripple. It’s a native asset of Ripple Consensus Ledger. XRP is considered to be the most efficient choice for the financial sphere and liquidity providers because it enables the fastest transaction verification.

  4. Litecoin is a cryptocurrency built by Charlie Lee. It has the fourth position in the top of cryptocurrencies. LTC was formed on Bitcoin’s protocol but it differs as it applies another hashing algorithm.

  5. The fifth popular coin is Bitcoin Cash. It’s the first hard fork of Bitcoin, which took place in August 2017. Later BCH was forked again and divided into Bitcoin ABC and Bitcoin Satoshi Vision.

What are crypto wallets, why do we need them and what types of wallets exist

Now when you have learned a little about some famous crypto coins, let’s understand where you’re supposed to hold them. A program which connects with many blockchains and gives users a feature of transferring and holding digital currencies is known as Cryptocurrency wallet. It’s a required thing, in case you've decided to work with cryptocurrencies. Some crypto wallets have the capacity of keeping multiple coins and tokens at once, but most of them hold only a few numbers of currencies.

Generally, these wallets are divided into two types: hot and cold. Hot are the ones that have a connection to the Internet, they’re more simple for beginners to understand and set up and usually they accept more tokens. Disadvantages of this type are mostly connected with possible regulation and hackers. Cold wallets are those, which don't have the connection to the Internet and so they’re supposed to be safer from hacks. The disadvantage of this kind is that it doesn’t accept a wide range of cryptocurrencies.

Top 5 crypto wallets

  1. Coinbase is considered to be the most reliable cryptocurrency wallet. It’s thought as the easiest way to trade and hold cryptocurrencies. The platform was the front to let users connect with US bank account and simply make BTC-fiat/fiat-BTC exchanges. This feature made Coinbase the leader in the industry, and it keeps its position until now. The wallet currently supports BTC, ETH, LTC and BCH.

  2. Electrum is a desktop wallet, this indicates that your coins are going to be stored on your PC. Presently it’s available on Linux, Android, Mac OS X and Windows.

  3. Trezor is not allowing to trade like Coinbase, but it is the best platform for storing Bitcoin. It is a physical device which connects to your PC, phone or other gadgets. The wallet also provides a service to protect from lost devices and forgotten passwords.

  4. Blockchain.info is similar to the leading wallet Coinbase, the main difference is that you can not sell Bitcoins directly via it. It means that coin storage and marketplace are separate.

  5. Formerly Robinhood was a free stock trading platform, now it has expanded and includes support of other investments, including cryptocurrencies. This platform has both and wallet and exchange features. Robinhood is a mobile-first application and it didn’t even create a Web version.

Operating process of crypto exchanges

The fundamental point is that crypto exchanges permit swapping one cryptocurrency for another, cryptocurrency for fiat currency and speculation of various crypto coins. That’s where the market decides the price of every cryptocurrency based on its demand.

Simply put, crypto-exchanges operate just like stock exchanges, but instead of stocks, you trade coins and tokens.

Though there are over 250 crypto exchanges, very few of them provides fiat-crypto trading pairs or fiat currency deposits, to make it simpler most of the exchanges prefer using fiat-backed stablecoins like USDT or PAX.

There are two types of crypto-exchanges: centralized and decentralized. Centralized exchanges can accept fiat-crypto/crypto-fiat swappings. In this case, the exchanges require KYC process and sometimes Credit Card verification.

KYC (stands for know your customer/client) is a process of verification. It’s applied by the businesses that want to check the identity of their clients. This is done for estimating the suitability of the customer and the possibility of risks or illegal actions connected with the business.

The main purpose of KYC is to prevent cryptocurrency exchanges, banks or other economy-related institutions from being used by criminals for their money-laundering activities. Usually, KYC policies have these four elements:

  • Customer Acceptance Policy;
  • Client Identification Procedures;
  • Monitoring of transactions;
  • Risk management.

CC (Credit card) verification is done for linking your card to an account so you'll have an opportunity of making transactions using fiat money, so be ready to be asked to upload selfies with your credit card.

Decentralized exchanges (DEX) demand an Ethereum wallet as they don’t store money directly on the platform. Instead, this type of exchanges provide users with P2P cryptocurrency trading. The advantage of DEX that they provide higher security and don’t require any additional steps to start trading, but on the other hand there is a lack of speed and low volume.

In the second part, we will talk about the top 5 cryptocurrency exchanges, how to sign up an account on these platforms and about the good sides of investing in crypto.