Blockchain technology has been heating up in the past several months, thanks in large part to the surge in Bitcoin’s price since early May. The cryptocurrency skyrocketed from less than $1,000 in March to an all-time high of $4,440 on August 14.
Given this meteoric rise, it’s no surprise that investors are clamoring to figure out how to break into the Bitcoin marketplace. But there are many other cryptocurrencies (such as Ethereum) and blockchain companies on the stock exchange where investors can funnel their money.
The first thing investors or future investors need to do in such a volatile market is research, research and then some more research before investing a dime. A good place to start is a site called coinmarketcap where you will find a list with all the crypto currencies available on the market. The site gives you information about all the ICO’s and alt coins, their total market cap, circulating supply, current price, the percentage growth charts for the last 24hours and much more.
Identify your cryptocurrency of interest and a relevant exchange.
Cryptocurrencies are traded on their own exchanges. Not every exchange will offer every cryptocurrency. It is a good practice to stick to the larger exchanges with higher volume to maximize the chance that your trades will go through. Large exchanges like GDAX, Kraken, Bitfinex, and Gemini will offer good volume to trade Bitcoin and ethereum with USD through bank transfer or credit cards. The main difference between these exchanges are fees and user interfaces.
However, investing in a cryptocurrency is different than investing in a regular stock. When you invest in a company, you’re buying shares of that company and essentially own an extremely small percentage of it. When you invest in Bitcoin or Ethereum, you receive digital tokens that serve different purposes. With Bitcoin, you get decentralized currency that also happens to be partially anonymous. With Ethereum, you get a piece of the power that runs decentralized apps and smart contracts.
Trading cryptocurrencies occurs on dedicated exchanges. Larger exchanges like GDAX, Kraken, Bitfinex, and Gemini typically offer solid volume to trade cryptocurrencies through bank transfers or credit cards. Coinbase and bittrex is also options that is growing in popularity thanks to its ease of use and built-in wallets. But the trade off here is comparatively higher fees. Poloniex is another exchange that offers more than 80 cryptocurrencies for trading, but the catch is you can only use Bitcoins or other cryptocurrencies to fund these trades.
Verify your account.
After you’ve selected your exchange of choice, you’ll typically go through a somewhat onerous process to verify your account. You’ll be asked for identification documents such as your driver’s license or passport, and usually you’ll be verified within 1–3 business days. Since transactions on these exchanges cannot be cancelled or refunded due to the nature of blockchain, exchanges are very concerned about fraud. You might wonder why personal information needs to be provided to buy currency that is decentralized. The answer is that while the cryptocurrency exchange is anonymous, the trade of fiat (USD) to crypto is not! It is important to exchanges to verify your financial information and identity so that scammers can’t buy a ton of tokens with fake credit cards or take part in other shifty shenanigans.
Choose a wallet, or “cold storage” solution.
Rightfully so, one of the greatest concerns about cryptocurrency is security. While the exchanges are far more secure than 3–5 years ago, it is foolish to believe they are impervious. As long as your tokens sit in the exchange, you don’t fully control them yourself.
Every time you buy X amount of cryptocurrency on an exchange, that amount is linked to a public key, or digital code indicating that amount. This is the bread and butter of the transparency of the blockchain — everyone can see all public keys and the amounts of cryptocurrency to which they are linked. On the exchange side, they also own a private key that indicates ownership of that public key. If a hacker obtains that private key, your investment is gone, so you need to protect it.
This might be a weird concept, but the tokens themselves are not actually in your wallet. When you “transfer” your cryptocurrency in a wallet, you are actually storing that private key, a unique digital code that’s known only by you. This private key acts as a ledger and allows you to transfer coins that you own on the public key. As long as the exchange holds your cryptocurrency, you do not have full ownership of it. As such, you should store your cryptocurrency in a wallet to mitigate security risk, particularly if you are a long-term holder.
While there are definite differences in the design of the wallets out there, the general principle is the same: they house your private key such that only you can access the tokens you own. No one will be able to touch your currency unless you’ve engraved this key onto your cold, dead hands. Be aware that this is a double-edged sword — if you lose your private key and your wallet recovery phrase, your cryptocurrency is gone forever!
Now that you have your wallet, token transfers should be pretty easy. If you’re moving cryptocurrency out of the exchange, simply paste your wallet’s public key into the exchange website and send. If you’re doing the reverse, paste the exchange’s public key into your wallet’s transaction contract and confirm. On mobile wallet apps, it is possible to scan a QR code as well. Each transaction from your wallet will cost a fraction of a BTC/ETH/etc. (my last transaction cost was .00042 eth, or approximately 0.084 cents at this time of writing). Without getting too technical, this transaction cost disincentives high volumes of malicious contracts and provides an incentive for miners to confirm your transaction in a block on the blockchain. It also beats those sky-high wire fees at your bank! To read more about this process, check out this article by Collin Thompson.
How to Invest in Blockchain Technology
Blockchain technology powers Bitcoin and other cryptocurrencies, but there are many ways to invest in blockchain tech without pouring your money into these digital currencies. The first is to look into blockchain startups (we’ll detail more in the next section).
The second option is crowdfunding platforms, as blockchain startups in their infancy will often look into crowdfunding to get off the ground. A platform called BnkToTheFuture allows investors to place their money into several Bitcoin and blockchain startups.
Another possibility is to invest in the initial coin offerings, or ICOs, of new blockchain projects. Blockchain companies issue cryptocurrencies or other tokens through ICOs in order to raise capital. There is a bit more risk in this route, as this new form of crowdfunding is still rather unregulated, but the returns reported thus far have been stellar.
Personal Cryptocurrencies I Invested In
There are several paths one can take when deciding in which cryptocurrencies to invest, a handful of these have risen to the top but there will most likely be more winners in the future, so do your research before investing.
- Bitcoin: There’s a reason you’ve heard the name Bitcoin all over the financial news space. The price of the cryptocurrency has increased nearly 8x in the last year as of the time of this writing. Moreover, the original design of Bitcoin ensured that there would never be more than 21 million in existence (and math indicates we’ll never actually reach that number). This means Bitcoin is not subject to inflation.
- Ethereum: Arguably the second-most well-known cryptocurrency, the price of Ethereum has exploded more than 3000% in the last year. Even with that growth, the price remains at less than 1/10th of Bitcoin, so it could be a better value play for investors who don’t have the resources to
- Litecoin: Litecoin has risen more than 2000% in the last year. The peer-to-peer digital currency acts in a complementary way to Bitcoin, and its comparatively low price makes it a solid entry point for new crypto investors.
- Monero: Think of Monero as a second level of privacy and anonymity beyond what something like Bitcoin offers. The price exploded in 2016, and the market cap swelled from $5 million to $185 million thanks in large part to the cryptocurrency’s adoption by the major darknet market AlphaBay. Law enforcement shut down AlphaBay in July 2017.
- Bitcoin Cash: In August 2017, the Bitcoin blockchain spun off a more nimble iteration called Bitcoin Cash. It’s essentially identical to Bitcoin, but with the important distinction that it has more block size capacity. The price of the cryptocurrency has already doubled from $300 to more than $600 as of this writing. And if you owned Bitcoin before the split, then you received an equal amount of Bitcoin Cash. There are approximately 16.5 million units of each in existence, which makes Bitcoin Cash the third-most valuable cryptocurrency in the world with a market cap of more than $10 billion.
- Ripple: Ripple is a protocol that permits near instantaneous transaction settlements and reduces transaction fees to mere cents. Some VCs and even several major banks (such as Bank of America, UBS, and BBVA) have implemented Ripple into their systems. The key difference from Bitcoin, though, is that it is centralized and pre-mined.
- ZCash: ZCash operates in a manner similar to Monero. The price of the cryptocurrency surged in June 2017 to nearly $400, but has since leveled off to the sub-$300 range.