An Introduction to Investing in Cryptocurrencies: Part 1

An accessible method for personal investment

Posted on May 1, 2017, 10:13 p.m.

Since Bitcoin was invented in 2008, cryptocurrencies have made waves in the finance industry. As I'm sure you know, Bitcoin is a digital currency that allows owners to make payments to anyone, anywhere in the world. It is a decentralised technology, meaning that there is no central authority managing transactions or issuing new coins. Instead, this work is performed collectively by the community and security is enforced by the Bitcoin algorithm.

If you would like to find out more about how Bitcoin works, a good place to start is the original white paper written by Satoshi Nakamoto. There is also this great post by vpnMentor than covers a lot of the terminology around Bitcoin (thank you Valerie Newville for the suggestion), however the purpose of this post is to provide an introduction to investing in Bitcoin and in other cryptocurrencies in general. As with any investment, you could get back less than you put in, but the nice thing about investing in cryptocurrencies is that there is no minimum spend, so you can start off as small as you like.

Open Source is the Way Forward

Since the code written to implement the Bitcoin algorithm is open source, anyone is able to download it, modify it and release their own cryptocurrency. This has given rise to hundreds of different cryptocurrencies, each with their own distinctive features. This activity has also spawned a number of cryptocurrency exchanges, allowing investors to trade with people from around the globe, usually with the aim of turning a profit. I have been very successful doing this myself over the last few months and I will guide you through the process I use.

Buying Your Own Cryptocurrency

The first step to trading Bitcoin, or any cryptocurrency, is to buy some using normal fiat money. There are many websites you can use to do this, however the only two I have used are CryptoMate and Coinbase. I would recommend Coinbase as it is straight forward to sign up through their website and they provide you with both a Bitcoin and an Ethereum wallet. A wallet is an application that manages your transactions for a particular cryptocurrency. I will cover the ways in which you can download and handle a wallet yourself in a future article; however, if you accidentally delete or corrupt your wallet, you lose your money, so letting Coinbase manage it for you instead of having it on a personal device is probably much safer for someone just starting out in the world of digital currency. More importantly, you can use Coinbase to change your Bitcoin and Etherum back into fiat money. The following steps describe the process I went through to set up my Coinbase account.

  1. Sign up to Coinbase using my invite form. Of course, you are not obliged to use it and you can reach the normal sign up form directly through the Coinbase homepage, however if you do use it both you and I will receive £7 ($10) worth of Bitcoin should you ever buy or sell a total of $100 of Bitcoin or more through Coinbase (not necessarily in one go)

  2. Follow the instructions on the form to create your account

  3. Once you are logged in, register your credit or debit card by going to "Settings" in the main menu and clicking the "Payment Methods" tab. Click the "Add Payment Method" button, select "Credit/Debit Card (3D-Secure)" and follow the instructions

  4. Once your card has been registered successfully go to "Buy/Sell" in the main menu, select the currency you want to buy (either Bitcoin or Ethereum at the time of writing), select the payment method you have just registered, enter the amount you want to buy (I recommend buying a small amount initially) and click the button to buy instantly. You will then be presented with a summary of your transaction. Click "Confirm Buy" to complete the transaction.

  5. Go to "Accounts" in the main menu and you should be able to see your updated balance in the corresponding wallet

Joining an Exchange

Simply holding either Bitcoin or Ethereum may be enough. Both currencies have generally been growing extremely quickly recently and so simply selling them at a later date may be enough to make a decent profit. However, they are both very volatile and often drop by a significant proportion within minutes, so you may want to test your trading prowess and join an exchange to buy and sell cryptocurrencies other than Bitcoin and Ethereum. Again, there are many to choose from, such as Bittrex, C-CEX and Poloniex. I use Poloniex and so I will explain the process for getting started with that exchange.

  1. Go to the Poloniex homepage, click "Create your Account" and follow the instructions

  2. Make sure you're signed in to your new account, hover over "Balances" in the main menu and click "Deposits & Withdrawals" (on a mobile "Deposits & Withdrawals" can be reached directly from the main menu)

    The "Deposits & Withdrawals" page shows the amount of each currency that you currently hold on Poloniex and an estimated total value for your holdings. When you sign up for a Poloniex account, a wallet for each of the currencies you can trade is created for you automatically, including a Bitcoin and an Ethereum wallet. In order to trade on Poloniex, you need to hold currency in at least one of these wallets. To transfer the currency you bought on Coinbase into the corresponding Poloniex wallet you need to get the wallet's address. The wallet's address will be a long sequence of numbers and letters used by the corresponding currency's algorithm to send transactions to the correct place.

  3. Scroll down the "Deposits & Withdrawals" page until you find the row corresponding to the currency you bought earlier. On the right hand side of that row, click the "Deposit" link. This will expand the row and display some information about the wallet for that currency. Pay special attention to any warnings displayed here, for example the Bitcoin wallet will say "IMPORTANT: Send only BTC to this deposit address". Make sure you do this, otherwise you will likely lose any money you send.

  4. Once you have read and understood the information, click the "Deposit Address" link which will show you the wallet's address. Copy this value to the clipboard, making sure you don't miss off any letters or numbers

  5. Go back to the Coinbase website and click "Send/Request" in the main menu. Make sure the "Send" tab is selected (it should be by default), choose the Coinbase wallet you want to move currency from (again making sure it is for the same currency as the address you copied) and paste the wallet address into the "Recipient" field

  6. Enter the amount you want to transfer (I recommend sending a small amount initially to make sure you're doing it correctly) and click "Send funds". If the form has been filled out correctly you will be presented with a summary page. Click the "Confirm" button to complete the transaction

Now, unlike most bank transfers, this procedure will not be near instantaneous. The community has to accept your transaction through the mining process before the funds will appear in your Poloniex wallet. In the past it has taken about an hour or so for my deposits to appear in Poloniex and it can be quite nerve-racking waiting for that to happen if you're moving large amounts of money. If you click on "Accounts" in the main Coinbase menu and select the wallet you have just transferred currency from, you should see that your transaction is marked as pending. After half an hour or so you can head back over to Poloniex, hover over "Balances" and then click "History" (or on a mobile go to "Deposits & Withdrawals" and then click on the "History" tab). Your transaction will eventually appear as pending on this page, which means you're nearly there. Don't worry if this takes longer to happen than expected, there are a number of factors that can affect the speed at which transactions are confirmed. Once it changes to "Complete", go to "Deposits & Withdrawals" again, find the row corresponding to the currency you just transferred and you will see that the "Total Balance" is no longer 0. You are now ready to start trading! In part 2 I will cover the trading process in Poloniex as well as some good resources you can use to research the markets.

Please comment below if you have any questions or thoughts on the above.

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