Saturday, September 10, 2022

How to Buy, Sell and Store Cryptocurrency

For those of you who want to know more about cryptocurrency ... courtesy of AAII.  


How to Buy, Sell and Store Cryptocurrency

A guide to the decision-making process when choosing a provider for trading cryptocurrency.

by Steven Ehrlich | August 2022

Here’s a common scenario: An investor reads about bitcoin bottoming out in this market cycle and decides to make their first purchase. However, frustration sets in because a number of questions arise and they don’t know where to start. Some of the more common ones include:

  • Where can I buy cryptocurrency?
  • How much does it cost?
  • How can I keep my cryptocurrency secure?
  • Can I eventually cash out?

Definitions of Terms

Cryptocurrency: A virtual currency that is uncontrolled by a third party or an authority such as a government. Bitcoin is the most popular and most valued cryptocurrency; other common examples include ether, litecoin and solana.

Crypto Wallet: A software wallet is a digital interface used to interact with a network where cryptocurrency is stored. A hardware wallet is a dedicated device that has been built specifically to protect cryptocurrency assets.

Fiat Currency: Legal tender established by government regulation, such as U.S. dollars.

Multi-Factor Authentication: A secure method of proving your identity using a credential (factor) beyond a simple password. Two-factor authentication (2FA) usually involves sending a passcode to your smartphone. Authenticator apps are a more secure way to receive a passcode than text messaging.

Fortunately, it has never been easier to buy and sell cryptocurrency. In the early days of bitcoin, purchasers had to wire money around the world to unregulated exchanges without any guarantees of receiving their bitcoin or a refund. Today, we have a wide variety of trading platforms that have gone to great lengths to make their products easy to use.

For instance, in the U.S. alone there is an extensive range of secure and regulated exchanges that offer simple onboarding procedures for new clients. Some of the biggest and most widely used include Coinbase, Kraken and Gemini. They have easy-to-use websites where you can set up an account and make purchases within minutes as well as simple mobile applications for trading on the go. Forbes ranked the best 60 exchanges in the world, in a project led by our director of data and analytics Javier Paz. Table 1 shows the top 10 providers; the full article is available at https://tinyurl.com/forbes-crypto-exchange.

TABLE 1. Forbes Crypto Exchange Global Rankings

Additionally, as the space has grown, many non-cryptocurrency native platforms and financial applications such as Block, Robinhood, Revolut and PayPal have enabled cryptocurrency trading. The added benefit with these platforms is that you do not need to do any additional onboarding if you are already a client of theirs.

Key Questions to Consider

Given the multitude of venues that are available to buy cryptocurrency, it is important that you pick the option that best suits your needs. To find the optimal exchange or platform, you first need to ask yourself a few questions about your goals:

  • Why do you want to buy cryptocurrency?
  • How long do you plan to hold your cryptocurrency?
  • What types of cryptocurrency assets do you want to buy?
  • How much cryptocurrency do you want to buy?
  • Do you ever plan to borrow against your cryptocurrency?
  • Are you interested in earning passive income on your holdings such as interest or staking fees?
  • How much responsibility do you want to take for the security of your cryptocurrency?

Once you answer these questions, here is a list of additional questions you can use to conduct due diligence on various platforms and figure out the best fit for your needs:

  • Does the entity service customers in your state or country?
  • Has the entity experienced security or liquidity issues in the past?
  • Has the entity ever faced allegations of fraud such as wash trading or illegitimate volumes?
  • Does it offer insurance? If so, what is covered?
  • Can you convert to and from fiat currency, such as the U.S. dollar, and link the platform or exchange to your bank account?
  • What funding methods are supported?
  • What assets does it support? Typically, exchanges have a much wider selection of assets to buy and sell, while more traditional financial technology (fintech) platforms offer a few core cryptocurrencies such as bitcoin, ether and litecoin.
  • Does it support automatic recurring purchases? Some traders prefer to make regular purchases of a fixed amount in order to gradually accumulate their holdings and smooth out the purchase price of an asset if it is volatile (aka dollar-cost averaging).
  • Does the entity offer ways to earn passive income through deposit interest or staking fees?
  • What is the fee structure? Fees tend to be higher for smaller purchases and decrease with volume.
  • Does the entity let you withdraw cryptocurrency to another wallet? This can be helpful if you want to take additional control over your security.
  • Do they have integrations with cryptocurrency accounting reporting software or provide you with 1099 Forms that allow you to easily understand the tax obligations of your trading activities?

There are no right or wrong answers, but it is important to understand the differences between platforms that are out there today. Table 2 provides an example of how to compare and contrast many platforms.

TABLE 2 Forbes Classification of Crypto Retail Investing

Sign-Up and Onboarding

Once you’ve selected your preferred provider, the next step is to get set up for trading. The specific procedure that you follow will depend on whether you are creating an account from scratch with a new entity or choosing to utilize a cryptocurrency trading functionality that is offered from an existing service provider.

If you do not have accounts with an existing provider or prefer to use an exchange, you will need to get onboarded. Fortunately, the process is much simpler today than it was even a couple of years ago. In fact, most of you will find it similar to setting up an online bank account.

The specific procedures will depend on which service provider you choose. However, a lot of the basic steps will be the same. They include:

  • Setting up a username and password and AML/KYC (anti-money laundering/know your customer) vetting and verification (this step is required to comply with the Bank Secrecy Act and is necessary to engage in fiat-to-cryptocurrency transactions).
  • Each exchange and platform will have its own verification tiers and levels. It will have unique daily/weekly/monthly limits on various actions such as deposits, trades and withdrawals. Be sure to select a provider that suits your needs.

Funding

Once you have set up an account and reached the desired level of verification, the next step will be depositing fiat currencies so that you can begin trading.

Every regulated platform or exchange that you patronize will have a corporate account with a U.S. bank and/or payment processor. In fact, most have multiple banking and payment partners around the world so that they can support a global clientele and diverse set of fiat currencies. To fund your account, you will need to deposit fiat currency with the platform’s banking partner. Once the payment clears, you will see your account credited on the platform’s website.

There are a few ways to do this, and the specific funding options available to you will again depend on the chosen platform. Common methods of funding accounts include:

  • Debit cards,
  • Bank account integrations and
  • Wire transfers.

There are differences between these methods, and each fits a certain user profile. For instance, they vary based on:

  • Speed (the time it takes for the funds to be deposited in your account at the exchange),
  • Cost—automatic clearing house (ACH) payments are often free, while other services such as wire transfers can incur fees and
  • Deposit minimums and maximums.

Trading

Now that you’ve funded your account, the next step is to purchase your first cryptocurrency. Regardless of whether you are on the platform’s website or mobile application, the first step will be navigating to a page where you can see the cryptocurrency assets listed for trading.

In addition to each asset, you will see the specific pairs offered for trading. For instance, a particular platform may offer bitcoin trading pairs against fiat currencies such as the U.S. dollar, the euro and the pound. It is important to note that exchanges can offer different trading pairs for each individual digital asset or fiat currency. They make decisions on what pairs to offer based on a multitude of factors, including customer demand and order book liquidity.

Most first-time buyers will not need to worry about this, as virtually every major U.S. platform offers trading pairs for the U.S. dollar and other fiat currencies against major digital assets such as bitcoin, ether and solana. However, as you look to diversify your portfolio you may start to engage in cryptocurrency trades, at which point this information could become more relevant.

The other piece of information you will need to know is the fee structure. Exchanges charge fees to compensate them for the work they do to bring buyers/sellers together and facilitate a secure marketplace. The fees will either come as a flat or variable rate.

For instance, Coinbase charges a $2.99 flat fee for smaller purchases. However, Coinbase and other exchanges offer variable maker and taker fees for larger purchases. These fees can fluctuate, so it is important to know what it will cost you to trade on a given platform. The aforementioned Forbes rankings of the top exchanges include fees as important criteria.

Security and Storage

Once you’ve bought cryptocurrency, you need to keep it safe. Virtually all the platforms recommended for first-time buyers will provide software wallets (similar to mobile banking applications) that are reasonably secure. They have been built by experienced software developers and security professionals. The security of these applications can be further enhanced by taking a few basic steps:

  • Choosing a complex and unique password or phrase, and
  • Utilizing two-factor authentication (2FA) as a second check when logging into your account.

When logging in using 2FA, you will receive a one-time passcode that must be entered after your password.

Additionally, when setting up 2FA, it is highly recommended to use an authenticator app or piece of hardware like Google Authenticator, Okta or Authy as opposed to an SMS (standard text) message. Please check with each platform to see which 2FA applications are supported.

While some people feel comfortable using exchange wallets to hold their cryptocurrency, once you accumulate enough funds it may be safer to take some of them off of the exchange and move them into a more secure wallet. (We will walk through the withdrawal process in the next section.)

As the cryptocurrency market has matured there has been an explosion in what we call hardware wallets. These are dedicated devices that have been built specifically to protect crypto assets. Some of the more common manufacturers available today include Casa, Trezor, Ledger, ColdCard and KeepKey. Their offerings often include custom hardware, biometrics and dedicated software to help you manage your passwords and prevent intrusions. At the same time, they can also come with mobile applications and websites that let you easily manage your crypto. Some even have integrations built into exchanges so you can actually buy and sell without having to move crypto directly onto the exchange.

We would recommend that you look into these manufacturers and devices and see if one suits your needs. They come at a range of prices and with different levels of features and support. However, not every device supports each cryptocurrency, so it is very much an individual decision.

Withdrawals

Once you’ve made some trades the time may come to take some of your money or cryptocurrency off of the exchange. Perhaps you made a profitable trade and want to use the proceeds to pay for a vacation. You may want to diversify where you keep your holdings as a security measure, or you might see a trading pair or asset on another exchange not supported by your current provider.

In any of these cases, the process for moving money off of an exchange is relatively straightforward. Let’s begin with how to withdraw fiat currency back into a bank account.

To withdraw money, you first need to make sure that you have dollars or another supported fiat currency in your exchange account. You may already have some that were deposited but not converted into cryptocurrency. In other cases, you may need to trade bitcoin, ether, litecoin, etc., for fiat. Either way, once you are ready, the withdrawal process for most providers is as simple as navigating to the withdrawal window, selecting the amount of money you wish to withdraw and then choosing a destination bank account. For most people, it will be the same one that you used to fund the account initially.

If you are looking to withdraw cryptocurrency, that really means that you are planning to send your crypto-currency to another wallet that supports the asset. In that case, you do not need to convert anything into fiat. All that you would need to do is select the withdrawal option—again, choose the crypto asset to withdraw and then enter a destination address (either manually or by scanning a QR code, depending on the provider).

Tip: Before you send a substantial amount of money from one cryptocurrency wallet to another be sure you are entering the correct address. Exchanges will not accept responsibility for money sent to the wrong address. A good way to make sure you are sending money to the right place is to send a small transaction first and verify that it arrives at the intended destination.

Please note that most exchanges also charge withdrawal fees when you want to take assets off of a platform, regardless of whether you are taking cryptocurrency or fiat. Please be sure to consult the relevant fee pages before initiating any transactions so that you are not surprised.

Conclusion

There is no right or wrong provider to use when buying cryptocurrency. It always depends on the unique needs of a buyer. However, this framework can help guide you through the decision-making process. If you have questions, you can reach me at sehrlich@forbes.com.

Discussion

ROBERT A from NC posted about 1 month ago:

I have no plans to buy a cryptocurrency (although I wish I had done it back when a Bitcoin was going for $4), but one question I've always had is: How do you know you really have a Bitcoin? If I were to buy one, I'd want to store it in my own wallet, but how would I know that what I bought was really in there? When I buy a stock, I can always contact the company's registrar if I have any suspicions. Or when dividends start coming in, that pretty much confirms that I own the stock. But what confirmation can I get that proves I have more than a few made-up bits and bytes in my Bitcoin wallet? (I know this is probably a really dumb question to cryptocurrency aficionados, but to my tiny intellect, it remains a mystery.)


CHARLES C from WA posted 18 days ago:

Robert, I have only recently started investing in crypto businesses. Each one is on a publicly accessible block chain which shows a record of everyone who has had possession of that particular crypto item. I am not investing in crypto currencies like Bitcoin, which to me is akin to investing in gold. There is no business concept behind it and its value is simply based on its scarcity and what people currently think it is worth. There are crypto businesses who are building real businesses that provide services that generate real income. Ethereum is probably the best known example of a crypto business. What you want to look at is their business model (i.e. what is the product or service they are offering and does it make sense to you), their "token" economics, i.e. do they have an unlimited supply of tokens or is their a finite amount, and how do they use their tokens. I would certainly like to see AAII feature more articles on "crypto", i.e. block-chain technology businesses because I believe it will have the same transformative effect on businesses that the internet has had. That is, many of the largest companies in the world today only exist because of the internet. I think block-chain technology will do the same thing and helping investors to better understand the concept of block-chain technology and the real-world applications of it which are creating new businesses seems to me to be a worthwhile column for the monthly AAII Journal.


Thomas M from VA posted 17 days ago:

I made the mistake of trusting this author's firm, Voyager, with my money. It is now in Chapter 11 and I have no idea if I'll ever recoup my cash (which was invested in the USDC stable coin).


JEAN H from IL posted 17 days ago:

Thomas, sorry to hear about your experience. However, the Stephen Ehrlich of Voyager is a different person. The author of this article is a journalist at Forbes; he spells his first name Steven. Please click on the author's name at the top to see his full bio. -Jean Henrich, AAII


BARRY J from TX posted 17 days ago:

I usually like AAII articles. I learn something I can use every time. This one perplexed me. Maybe it’s the subject matter. Maybe it evokes a prejudice I hold. It reads as if the intent were to defend cryptocurrencies rather than to present an evenhanded overview. As Kyle Perrin, my first debate coach taught me long ago, it uses “facts” like as drunk uses a lamppost -- for support, not for illumination. As I read on, my ability to suspend disbelief vanished. When I finished this 20 minute read, I sought out more information. In less than 60 minutes at brokerage sites, I found more than 20 articles during the last 90 days (mid-May-mid Aug 2022) on (1) the continuing implosion of cryptocurrency business models due to their inherent economic and financial vulnerabilities, (2) the interrelated and interconnected fragilities its nascent ecosystem, and (3) the unscrupulousness, self-serving and villainous behaviors of its key players who are either under suspicion, under indictment, in bankruptcy, insolvent, in distress or “in the wind.” As I weight the evidence NOW before me, I have formed an opinion on the suitability of cryptocurrencies as an investment. I say no to crypto. (That sound like a bumper sticker I could sell online.) I remembered a childhood lesson that may provide others some guidance on how to handle the tempting opportunity crypto presents. Remember the serpent in in the Garden of Eden? He may be back! The serpent’s purpose was to separate foolish Man from a righteous God. Today’s reincarnated serpent’s goal is to separate worldly wealth from gullible “greater fools.” "The serpent was more cunning than any beast of the field" and a deceptive trickster who promoted as good what is forbidden. The serpent had the ability to use reason against Man. God warned Man not to eat the fruit of the Tree of Knowledge of Good and Evil. Adam and Eve – the original “greater fools” listened to the serpent and were banished from the Garden where all their needs had been fulfilled. God punishes the serpent to crawl on its belly and eat dust. Time in a Federal prison wasn’t an option then. This retelling of what may have been one of the first lessons every Judeo-Christian learns may seem overly dramatic when overlaid on a single cryptocurrency op ed, but it provides a razor to separate the beguiling conjectures and conclusions presented as facts in this article from the many provable facts published elsewhere that indicate that the cryptocurrency ecosystem is a “Garden of Eden” populated by cunning “serpents” who seek to separate back-sliding investors from economic truths. An apple anyone?


WILLIAM P from HI posted 16 days ago:

I purchased a crypto currency through crypto.com.They allowed me to deposit money into my account and to purchase crypto with no 2FA. Now that I own a share of crypto and have some cash in the account, I can't get into the account because it won't sync with Authy 2FA. I've asked for help and I think I'm getting a non-human AI bot who is not helpful at all. Do you think a complaint with the SEC would help?


Robert M from TX posted 16 days ago:

This article would've been very helpful several years ago when I got started in crypto. Thanks to my ignorance, I've lost several thousands of dollars due to keeping my holdings stored on an exchange only for it to close down or discontinue access to American investors. I've also been scammed out of several hundred dollars in BTC mining schemes. It'd be nice to see an article feature some of these topics along with what the tax implications are. I've not kept any records of my purchases on and off over the years, and I'm sure it's going to be a nightmare when I finally cash out and am on the hook for capital gains/losses, etc. It'd be nice to see something written about that as well.


Matt E from WY posted 3 days ago:

About four years ago, I purchased $1000 BTC through Coinbase, a reputable firm I chose through extensive research. I chose an amount I could afford to lose because I categorized the crypto market as a speculative investment. Fortunately, within days I had made over $200, so I immediately recouped my initial investment. I sold my remaining BTC before the bubble fully bubbled, held that cash until it burst, and began infrequent trading with a 'buy and hold' equities type mentality. That has kept me at capital gains tax levels and allowed me to ride out the wild swings in the markets while taking profits at key points for future re-investment, quite like investing in more established markets. The value of this account makes up for one of my other spec bets: Iraqi Dinars. Can't win 'em all.


You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.

Download the FREE Report Here:

Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)