Cryptocurrency

So You Want To Get Started in Cryptocurrency

You can still get in on the cryptocurrency craze. But first, make sure you want to.

Alexander George

BITCOIN

There aren’t piles of bitcoin in vaults somewhere. Cryptocurrencies like bitcoin exist entirely as data, ones and zeroes passing between computers on the internet, proving their existence as numbers on a phone or laptop screen. In that sense, trading dollars for cryptocurrencies is like most forms of investing. So buying and holding bitcoin is not as crazy as it sounds, except for one key difference:



While typical investing is regulated by some central authority who can bust cheaters and provide an economic safety net when the bottom falls out, crypto­currencies regulate themselves. They use complex, nearly tamper-proof software running on hundreds of thousands of volunteers’ computers around the world to ensure that everyone plays by the rules—no using software to counterfeit, no fudging the numbers on an exchange. The whole thing seems kind of weird compared to investing in corn futures or, you know, putting your money in the bank. But big institutions like Goldman Sachs, which is opening a trading desk for crypto­currencies this summer, and Square, which now lets you buy and sell them within its cash app, are paying attention to these currencies and the technology that powers them. There are ways you can get in on it, too.

Until 2011, one bitcoin, which is still the most popular cryptocurrency, was worth a dollar or less. As we write this, that same bitcoin is now worth around $9,000. But if you missed that first wave, or if you suspect that such appreciation is unsustainable, there are more than a thousand other cryptocurrencies to buy. There may be fewer instances of bitcoin-grade stratospheric appreciation, but there’s no question that there’s still earning potential. Just be patient through the ups and downs. Brett Gibson, a venture capitalist and software engineer, bought bitcoin about five years ago, when each one was selling for $20. He’s started checking the markets daily, but generally keeps still. “I’ve ridden these waves before,” he says. “I saw bitcoin go from $1,000 down to $200, and I just didn’t do anything, Not doing anything today is as easy as not doing anything back then.”

ACTUALLY, IT’S LESS RELIABLE THAN GAMBLING.

To understand cryptocurrencies, you need to understand the term blockchain. It refers to the collective record (called a ledger) that stores cryptocurrency transactions—think of it as a communal Excel spreadsheet. It’s the silent, brilliant technology that keeps everyone honest.

The collective record is stored on volunteers’ computers, not a corporate data center, and those computers run software that verifies transactions, checking to make sure that both parties agreed to the change, and that the buyer has enough currency to honor it. These volunteers are called miners, and the reward for volunteering their hardware is kickbacks in the form of more cryptocurrency.

If enough of those computers conclude that yes, this is a valid exchange, that verification joins the rest of the world’s recent transactions as a “block.” To prevent people from generating counterfeit currency, the math required to verify a transaction takes so much computing power that no one user or group could do it.

Big companies are interested in blockchain because it’s a secure, quick way to move information, like money, between people without having to keep all that data in a single place. The software handles that on its own.

But be warned: Buying bitcoin is not the same as exchanging dollars for euros before your trip to Paris. Buying cryptocurrency really means investing in a commodity—a commodity that can fluctuate wildly, dropping and rising by thousands of dollars in a single day. And since there’s no governing body to step in if the floor falls out, it’s helpful to liken buying bitcoin to gambling. Actually, it’s less reliable than gambling. One Silicon Valley investor put it to us this way: “In roulette, if you put $1 on every number, you’ll spend $38 and be guaranteed to get exactly $36 in return. You could buy $1 of every cryptocurrency and they might all end up worthless.” So, no, don’t put your retirement fund into bitcoin. But if you have cash that you won’t miss, investing in cryptocurrencies is a chance to be a beta tester for a radical new money technology. And you may even make some money while you’re at it.

The Currency

Bitcoin: The one that started it all is still a good first purchase, if only because it’s the simplest to buy with U.S. dollars—many currencies can only be purchased by exchanging from bitcoin or other currencies. The general consensus is that bitcoin is a primitive first example of cryptocurrency, complete with downsides such as high transaction fees and slow exchanges. Stripe, the company that processes payments for big names like Lyft, Target, and Warby Parker, recently stopped accepting bitcoin payments for those reasons. But until the final bitcoin is sold (its software allows for only 21 million to be created, 80 percent of which exist now), it will still be relevant.

Ethereum: Also volatile (last year, it went from $319 to $0.10 in a few seconds), this is the second-most popular currency after bitcoin. However, the software behind ethereum makes it more flexible than bitcoin, so it can be used beyond simple payment (gambling!). A vote of confidence for its programming: Multinational bank Barclays uses the core technology for its own trading systems.

IOTA: IOTA uses different math from other cryptocurrencies, the biggest advantage of which is faster transactions than with bitcoin or ethereum. That’s why big companies like Microsoft and Cisco are testing out IOTA to quickly buy and sell data.

Ripple (XRP): Unlike most currencies, Ripple is both a company and a currency, which is less sinister than it sounds. More than 100 financial institutions use it to quickly send money between countries, but civilians can use it as well. There are 38 billion ripple coins in use, with about one billion more released into circulation each month.

The Tools

You need a service that exchanges your dollars for crypto­currencies. Think of these companies as stock brokers, but in app form, handling all the logistics based on your instructions. Once you’ve bought your currencies, you’ll use that app to watch the market activity, and buy, sell, or trade with a few taps. Most of them are free, but charge you per trade. That’s good. It means motivation to buy and hold, rather than trade around constantly. In addition, most of these apps also let you produce a scannable QR code or identification key to buy stuff in person or online—it works like a rudimentary version of Apple Pay or a credit card saved to your Amazon account.

There are dozens of companies that provide this exchange and trading service, and many investors use more than one. Here are several endorsed by the entrepreneurs, venture capitalists, and other experienced investors we asked.

Gemini: Founded by the Winklevoss twins, who became billionaires after taking the payout from their lawsuit with Facebook and investing it into bitcoin. For now, Gemini works only with the bitcoin and ethereum currencies, but it has a clean interface, is easy to sign up for, and is based in the U.S., which means actual customer support.

Coinbase: The most popular exchange service, with around 12 million users. Type in your bank’s routing and account numbers, and Coinbase will withdraw dollars to purchase bitcoin, ethereum, litecoin, or bitcoin cash, an offshoot alternative to bitcoin. The mobile versions are as clean as any banking app, down to features like Face ID verification on the iPhone X. You can also set it to notify you if a currency goes above or below a certain value and you want to cash out.

Binance: If you want to work with a broad base of currencies, including more obscure options such as IOTA, this is the best option. To sign up, you’ll go through some unusual security measures—like taking a photo of yourself holding up your driver’s license and a piece of paper with the date and the word Binance.

Bitfinex: A trading site for professionals, presenting users with an array of X-Y graphs and trading options. Membership to Bitfinex used to be invitation-only. Its new barrier to entry: Accounts created after January 1, 2018, must have a minimum balance of $10,000 before they are allowed to trade.

The Timing

“So many people enter this market because of emotions, the fear of missing out. And what do they do? Exit the market based on emotions, not on informed data. And I get it. But cryptocurrencies aren’t a pump-and-dump thing where you get rich in one week. You have to consider investments over the course of a year, and take time to do dollar-cost averaging. It isn’t sexy, but that’s the only way to survive, the only way to make guaranteed gains.” —Cryptocurrency investor Peter Saddington. Last year, he bought a Lambor­ghini Huracan with 45 bitcoins. In 2011, when he first invested, one bitcoin was worth about $3.

A Term to Know: Cryptocurrency Wallet

Bitcoin millionaires don’t rely on a couple of passwords to access their funds. Many high rollers use a digital wallet, a $100 piece of hardware that you plug into a computer when you want to spend or make exchanges. These devices generate a tic-tac-toe grid of nine randomized numbers that you type into the computer to verify your identity. The most popular model is from a company called Trezor and it’s deliberately low-tech—no Wi-Fi, no Bluetooth, no way to get at your bitcoin unless it’s really you. Investors we asked about them who didn’t use one all said the same: “I don’t, but I should.”