How To Trade Cryptocurrencies

[Latest Update 11/19/17]

It's a very unfamiliar world for most people but over the years has become less and less daunting, owing to the rise of exchanges and other various tools. We're going to cover it all right below so read on.

This is to be a "living" guide that I regularly review and update as new information and tools become available, are adopted, and embraced. For this initial release, It's my aim to make it straightforward, not overwhelming, but also with a few more advanced features tossed in. Many Patrons are already trading in cryptocurrency which is a huge bonus for everyone. Rising tides lift all boats.

Getting from your fiat currency into crypto

You have US Dollars, Canadian, Euros, Yen...whatever. How do you actually get started, take that first step? There are three primary ways to do this.

  • Buy them from an exchange (easiest and safest)
  • Buy them from an ATM (local, physical, safer than withdrawing cash)
  • Buy them face-to-face (trusted sources only)

Getting them from an exchange

This is what I recommend for the newbie or "nobie." There are two types of exchanges, those where you can buy and sell into and out of Bitcoin and a select collection of other coins directly with fiat (like USD, Euros, etc.), and those that deal in crypto currencies only, Bitcoin being the most common. We'll cover the second one in the next section.

There are two fiat to crypto exchanges I'm familiar with, have used, and have never had a problem with (since 2014), so those are the only one's I'm going to recommend initially. Experienced Patrons are welcome to tell of their experiences with these and others, good and bad.

  • Coinbase (Bitcoin, Etherium, and Litecoin, for USD and about 30 other fiat currencies—signing up with that link gets you $10 worth of Bitcoin free.)
  • Abra (Bitcoin and 50 other world currencies. Mobile app only)
  • Paxful (Sleek and slim. Buy Bitcoin with a number of fiat currencies)
  • [Update 10/30/17: GDAX, which is the trading platform of Coinbase. See here on how to do it all with zero fees using GDAX. End]
  • [Update 11/19/2017: I originally had Bitfinex listed here. Then, a couple of months ago, they ceased taking new accounts for US customers but I left it on the list because there are lots on non-US patrons. However, I keeop seeing Very Bad Things, so I have removed it entirely and explicitly recommend against it. Consult Google for more. End]

Coinbase is what I use most often (but now with GDAX per the above update). It's my preferred exchange between crypto and USD (in my case), both ways. If you use a debit card, you can have your coin instantly (ACH takes about a week). However, fees for debit card are high, which we'll discuss in another section.

[Update 10/30/17: Be aware that some folks from countries outside of the USA have has some troubles with Coinbase. So, if not in the US, then be mindful that there might be an exchange in your country of origin that might suit you better. Just Google "buy bitcoin in [country]."

Also, here's two resources you can use to identify various exchanges, with reviews and such: CrtyptoCompare and Coin Clarity. End]

...So, now you're wondering, how do I navigate them? Well, you create an account pretty much like any other website with a modicum of security. You link up bank accounts, credit cards, and debit cards pretty much like any other money-transfer website, like PayPal, Dwolla, Square, etc. From there, you transact business in terms of exchange and trade pretty much like any brokerage account, like Schwab, TD Ameritrade, Fidelity, and so forth.

If you need detailed navigation help, just search YouTube: how do I set up or how do I use (x) platform. Yes, perhaps I could create yet another wheel-reinventing video with screen action showing what tons of others have already created. The newsletter peddlers are notorious for this. Why? to gain and build your trust. If you have to rely on them for everything, the more likely you'll believe they are the Oracle and you'll pop for the Exclusive $2,000 Alert!!! Service!!!

We're going to do it differently. We're going to respect everyone's intelligence and offer information at a fair price, no hidden agenda. That said, if you find yourself in a pickle, don't hesitate to ask in comments. Hey, I myself have sometimes forgotten which thing to click in Coinbase to do what I want to get done and I flail around until I get it. "Oh, yea, now I remember..."

...Alright. By this point, you should have some crypto. I'd recommend just starting with Bitcoin. It's your gateway drug into all the others. I'd further recommend that you initially stick with other coins you can get on exchanges, and not have to purchase directly. Intuit that the exchanges list other coins because there's trading volume, which is a very important element to all of this. Trading volume equates to there being a vibrant trading market so the exchange can make some transaction money. Make sense?

Buying Bitcoin from an ATM

Yes, you can. I have not, but it's as easy as Googling "Bitcoin ATM near me" and click 'allow' to use your location. I'm writing this from Union Square in San Francisco, a 2-day R&R with the wife. There are two Bitcoin ATMs within a half mile each, one at 2 miles, one at 2.3 miles, and one at 4.7 miles. So, five within 5 miles. Granted, it's San Francisco.

To do this, you will likely need a smartphone wallet set up already to receive the Bitcoin and of course, an ATM card. We'll cover wallets below.

Buying Bitcoin face-to-face

The first thing to be aware of is that this is principally the same as meeting up with a stranger to exchange cash for anything....gold, silver, a washer, a dryer. You are trading something on the spot, for cash. In person.

But in this case, you're getting digital coin, multiples or fractions thereof.

You will absolutely need to have a wallet set up for this beforehand and you ought to have tested that it can send and receive Bitcoin, even one hundred millionth of a Bitcoin, a Satoshi. Moreover, you will absolutely have to have that wallet on your smartphone that you take with you.

Unless it's already someone you know and trust, you will absolutely do the transaction in a public place and you will absolutely bring someone else along.

You'll absolutely have agreed on the price beforehand, or agreed to check the market and recalculate and agree on price right before the exchange. Once agreed, you show the appropriate amount of cash, he or she shows they have the requisite amount of Bitcoin in a wallet, then he or she scans your QR code or enters your Bitcoin wallet address, initiates the transfer, and you wait until the 9,000 plus global nodes create a new block in the chain (10 minutes or so, can be less) and the transaction is confirmed.

You hand over the cash and that private, untraceable transaction is done.

This is probably too bothersome for most people. It might be something you could do as a social or proof of cool experiment (Craig's List has BTC sellers I hear), or if total anonymity and untraceable is for you or what you need. It is literally like meeting to exchange cash.

Buying and trading 'altcoin'

Some people just want to stick with the big boy Bitcoin and that's fine. It's already a good roller-coaster. But I, like probably most of you, didn't have the advantage of stocking up when it was trading for pennies. Otherwise, we'd be worth millions, now, and we'd all be on yachts somewhere avoiding the next hurricane.

Even if Bitcoin hits $100K—and there are smart people who believe it will—you are still not going to get beyond 20, 30, 50x investment easy. Very not like buying for a few cents and having it go to $5k.

Here's the deal. It's no longer unprecedented.

Moreover, there are very many people who think that in this "gold rush," that if you can do it once, you can do it a bunch of times, and I generally think that's very possible. I also think it's probable that in the end, when it's all stable, it won't be Bitcoin on top. I'm also happy to be wrong, so a good portion of each buy is in Bitcoin.

There is only one way, and that's to spread small stakes around in coins that aren't stupid, have good trading volume, and are listed on exchanges.

I'll recommend two exchanges; one, because it's what I use and the other, because I've heard nothing but good. Again, experienced Patrons are welcome to add social value with their own good and bad, for these I list, or others.

For a list of many more exchanges, see CryptoCompare and Coin Clarity. End]

These are coin-only exchanges. In other words, you trade Bitcoin (or Ether in some cases) for other coins you may want. I have not opened an account with Poloniex yet. I chose Bittrex because it has more coins on offer for me to research over time to see if I want to take a small stake.

Now what do you do?

So, perhaps you're now getting the hang of this. You'll first buy your Bitcoin per the first section, above. Then, you'll open an account at one of the coin-only exchanges, which will automatically create a Bitcoin wallet for you on the exchange. You'll then use that wallet address to send Bitcoin to from your fiat-to-coin account, like Coinbase.

[Update 10/30/17: Exercise much caution on this step because for many of you, this will be the first time you'll experience sending and receiving coin without a middle man. You'll do it from one address to another address and in some number of minutes (about 15 on average for Bitcoin) it will show up at the receiving address. Make certain the addresses are correct and a simple way to do this is to verify the first and last four characters of each address. Also, critically important, is that you must send the correct coin, from the correct wallet, to the correct wallet. Bitcoin to Bitcoin, Ether to Ether, etc. End]

Then what do you do?

Again, as with the previous section, this operates just like any sort of brokerage account. The only difference is that you're completely within the realm of cryptocurrency here and in most cases, Bitcoin will be your base currency from which everything else is measured (don't worry, you can make your portfolio display in various fiat currency equivalents if you don't yet have any sense of what the "value" of 0.01523981 Bitcoin is).

So, what you're going to do is decide which "altcoins" you want to buy, and once you've sent your fiat-exchange Bitcoin to your wallet (e.g., from Coinbase to Bittrex), you can then buy them in exactly the same way as you would buy stocks or funds in a brokerage account. That is, you can use market or limit orders. Market orders will be filled instantly, and limit orders may take some time, or, could never be filled if the market is moving the other way relentlessly.

Some of these exchanges offer margin trading, where you can borrow Bitcoin in order to buy a higher stake than you're actually putting up coin for, or to go short. But these are advanced trades and I'd recommend you steer clear unless you're experienced in margin trading, preferably with experience in options and futures. It's leveraged trading, meaning not only can you win bigger, you can also lose bigger and in that case, you'll likely end up with a "margin call," where you'll have to put up more coin just to hold your negative position.

Which coins you buy is going to be up to you. Scan through the posts and comments here to get some ideas. I will be regularly posting about the positions I hold (see my public portfolio I created just for this) and will also post when I make trades. Plus, I'll be posting about new possibilities before actually making trades, so that the community can 'hash' out the possibilities.

How to send and receive coin

All coinage is sent from a public address and received at a public address. It's essentially just like a home or commercial physical address, like your checking-account routing and account number, and even somewhat like a credit card number. In the case of Bitcoin, addresses can be 26-35 alphanumeric characters, 34 being typical.

But what it's mostly like is stuffing some cash in an envelope, writing an address and return-address on it, and dropping it in the mailbox. Setting aside the possibility of it being stolen or misdirected en route—which can not happen with cryptocurrency—you must have the correct address. If you send coin to a valid but incorrect address, then whoever that address pertains to gets the coin and it's no different than had you written the wrong house number on a street address on that cash-stuffed envelope. That house gets the cash and there's nothing you can do about it if they decide not to send it back to the return address.

All of the exchanges and all of the wallets are designed to allow you to enter an address to send coin to, and will provide you with an address to give to others to receive coin. Or, you can use that provided address to send coin to yourself at a different place. For example, Bittrex will give you an address so that you can go into Coinbase, click send, input that address given by Bittrex, enter an amount of Bitcoin to send, and then click and confirm. A few minutes later, the Bitcoin will be in your Bittrex wallet—provided you entered the address correctly.

Here's a tip I heard of and use every time when I send, or when I paste in an address to pass along in order to receive coin from someone else. Just look at and verify the first 4 characters and the last 4 characters. Verify twice. If they match, you're good to go, since it's astronomically unlikely to the point of impossibility that those would match but the rest would not, and that it would be a valid address.

When using a smartphone with a wallet app installed, you can usually just scan a QR code and voila, the address will be entered, which is a common way to do an in-person peer-to-peer transfer. But still, verify the first and last 4 characters before sending and confirming.

Various coins take different amounts of time to be confirmed. In Bitcoin, a new block gets written to the chain every 10 minutes. Depending on various things, I've seen my transactions confirmed anywhere from just a few minutes to 15 minutes, so don't freak out your first time if you end up on the north end of that range.

How to store your coin

This is the area where the most continued development needs to take place, in my view.

The most common places to keep coin, from least to most secure, are:

  • In an exchange
  • In a software wallet
  • In a hardware wallet
  • On paper

Obviously you're going to have to have coin in an exchange to get anywhere, but once you've made your trades, it's prudent to move the coin to something more secure. The most brutal assessment of this is that when it's in an exchange, you don't own it, the exchange does. If the exchange goes out of business or just absconds, your coin is lost or stolen. This is not unprecedented. See the Mt. Gox incident and most recently, Ecoin Plus.

Again, this is analogous to cash. You're welcome to entrust your cash to someone for safe keeping, but so long as they're holding it, they're controlling it and can do as they like with it—including taking a vacation, assuaging a drug habit, or paying off Guido in lieu of broken legs.

In the end, you are compromising the security inherent in an untrusted system (trust is not required for it to work and is essential to its working right) and reverting to what's the problem with fiat currency and its banking system in the first place. The whole edifice relies on trust, full faith, and credit—which makes it easy for them to steal your value over time without you even noticing.

So, it's better to trust just enough to get done what you need to get done, then move along and back into the sphere that does not operate on trust, but on math, cryptography, and unanimity (yep, 2+2=4...we all agree).

Software wallets

There's a long way to go with this. There's a ton of them out there. A software wallet is an app on your computer and/or device. However, only a few of them are multi-currency, meaning that they can hold more than just Bitcoin, or any other single coin.

When you have your coin in a software wallet, it can be as secure as you having your cash in a safe at home. It's as secure as you have the means and motivation to make it so. So, if you have no password or other security to unlock your computer or phone, or use 'password' or '12345' then you could be compromised, but that's on you. It's like leaving your cash and credit-card wallet on the bartop for a trip to the loo.

I use Jaxx. You hold the private key, nobody else. This is as secure as a software wallet comes, and you can set up 2-factor authentication. You need to have a backup that's stored somewhere else and your 12-word recovery phrase in another place, and also printed on paper, somewhere secure, like a home safe.

[Update 10/30/17: I also now use MyEtherWallet to store my Etherium as well as all the ERC20 token based on the Etherium blockchain. It's quite an elegant and simple solution. A single wallet address to send all your Etherium and supported ERC20 tokens (check first) and the wallet sorts out what you have of each. I use the Keystore file to encrypt my private key, and a complex password to unlock it. You can save the Keystore file as a simple text file. Also, it's very easy to print a paper wallet, so you can take the whole thing offline if you like.

See CryptoCompare and Coin Clarity for a list of many wallet options. End]

There are many, many other wallets, and none of them are, as of yet, going to hold in one place all the coin you might want to take small grub stakes in. So, you're left with setting up software wallets for each coin you hold, separately, which is a huge pain in the butt. But, all you'll need to do is Google 'wallet for (x)' and you'll see your options. Be sure and check independent reviews to make sure it's not a scam. I haven't heard of one, yet, but for sure there are going to be "free wallets" out there where as soon as you set them up and send your coin, your coin is gone to the scammers.

Another problem is continued developer support, so you have to check your wallet regularly. When I first purchased Bitcoin in 2014 and just let it sit for a couple of years, I opened my Hive wallet one day, and found it wouldn't open. A trip to the website informed me that it was no longer being supported. MacOS updates in the interim had rendered it non-functional. However, they provided a recovery procedure and I was able to get my coinage back to Coinbase. Whew!

Currently, I use Jaxx because it can store Bitcoin, Etherium, Litecoin and a few others. Their aim is to have more and more coins, so that's what I'm going with for now. As for my altcoins it can't store, I'm leaving them in Bittrex, for now. My stakes in alts are small (and all of them are listed in my public portfolio), so it's a risk I'm taking, for now.

Hardware and paper wallets

I have not used either, yet.

A hardware wallet is a device you plug into your computer, like an SD card or thumb drive, that is the wallet itself. Nothing is on your computer except an app to communicate with the device. You only plug it in to send or receive coin, and then it goes back in the wall or floor safe. There are a whole bunch of hardware wallets available on Amazon (search 'Bitcoin wallet'). [Update 9/21/17: see Mark Johnson's comment, below. He's correct. It's possible for a hardware wallet to be compromised, just like a software wallet, so best not to buy from just anyone, but only from the actual manufacturer. End]

A paper wallet is as secure as you can get, because it's impervious to any digital compromise. It literally involves printing your wallet out so it can be recovered later, at any time. Here's a good primer on how to do it different ways. Of course, you will absolutely keep your paper wallet wrapped in a moisture-proof medium, in a fire safe.

[Update 11/8/2017: See my post What Is A Cryptocurrency "Wallet" Really? End]

Accounting for transaction costs

It had to happen. You can watch Bitcoin Cheerleading videos from just a few years ago and free!!! is touted over and over, especially as it relates to micro-transactions for poor people with barely a smart phone to their name...or, even, using SMS from an old flip phone.

The thing is, mining used to be "easy" enough that miners could offer their hashing confirmation services for free or almost free. It was always envisioned that once Bitcoin was fully mined that miners would just be the dudes who run the protocol and there would be transaction fees to compensate them for services. Now we have a hybrid, where mining has become so cost intensive that they need a bit of coin transactionally, too. One would assume, perhaps, that when they're no longer mining, costs crash, and that will be reflected in transaction costs.

Nobody really knows. Uncharted waters.

I'm not up to speed on how that's working out...I'm just guessing that transaction costs are a big reason behind the rise of some of the alts, such that people just pay it once or twice, then they can get close-to-free once in a particular alt that's popular and widely adopted chez eux.

So, that's one reason to take account of transaction costs. Another is because of what at least some of us are trying to do here, which amounts to tossing enough smart poopoo on the wall that something may stick.

So, for example, if you're going to be speculating on the eventual future of some alts with say, somewhere between a $20-100 stake, and they currently trade in pennies, a few bucks transaction cost can mean you get 20, 50, 100 or so fewer coins. If it should go to hundreds or even thousands, you'll have left a hell of a lot of fiat on the table.

Unfortunately, I don't yet have all tricks of trades in this area, just one tidbit learned from one of the Patrons.

How about if you could get from fiat into Bitcoin and back for FREE!!!???

This involves using Coinbase in conjunction with their trading platform GDAX.

Here's the video.

And here's the basics. What he found, essentially, is that 1) coinbase will let you deposit and hold fiat like US Dollars for free, via ACH, which takes a few days but is free, and 2) then, you can open an account on GDAX and the funds you have lodged in Coinbase, that you got in there for free, can be used to trade there, on GDAX.

Following me so far?

OK, now, all you have to do is make sure you're making markets and not taking markets. I'll explain.

In all pure market trades, there's a maker and a taker. Someone creates the market trade opportunity (the maker) and someone presents in value what the maker wants (the taker). "I'll take it!"

You have a choice of which you want to be. How you do that is simple. A limit order, not a market order. A Market order says you'll take whatever the market is right now. It's usually not risky because if there's trading volume, it will be filled instantly. A limit order that's different from other limit orders waiting to be filled puts you in the category of maker, since you are proposing a trade that is not currently being traded, so you are making a market once someone takes that trade.

It's very elegant. Encourage the makers to make, with the incentive that their trade is free.

[Update 10/8/17: See this post for additional insight into cutting transaction costs to bare zero. I went through the whole process myself and it cost a total of about 40 cents to trade about $200 into 6 trades. End]

Conclusion

I've endeavored to make this something the old hands don't scoff at, the newbies and nobies aren't overwhelmed by, and it has the fewest errors possible.

But, it's surely incomplete, doesn't contemplate only the best, and is already in need of improvement, even before publishing. But that's the nature of honest and forthright dealing. We're always wrong, and the struggle is not to be right, but less wrong.

If I can emphasize one thing, it is to have fun with this. If you're stressing yourself out, and you're not a pro-trader where that sometimes goes with the territory, then please ensure that the stakes you take are potentially laughable losses. Like, when you go to Vegas and the smart vacationer says "here's my stake, I'm fine with losing it all for fun, but I'm going to try to be smart and gamble in a way that most prolongs my chances of hitting a rare JACKPOT."

I welcome all commentary, and especially those comments that can correct any errors I've made and enhance this guide with sane and rational additions or even substitutions.

See The Cryptocurrency Resource Library — A Complete Up-To-Date Index of All The Most Important Stuff.

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