What’s a Cryptocurrency?

How to get started with Blockchain, Bitcoin, Ethereum, and hype.

“I’m buying some Bitcoin right now,” exclaimed the giddy lady sitting a couple tables away from me at a Washington DC falafel shop last Saturday night.

“Hold up,” I called out — “step away from the vending machine, I got this!” I’ve heard of these machines but never came across such a thing in person, I had to get a closer look. After settling a mild sense of disgust I explained to the lady that this Bitcoin vending machine was charging an outrageous premium and that she would be much better off using a reputable exchange. At the time, one bitcoin was trading at around $2,400 USD and this particular machine was charging well over $2,600 USD — that’s more than 8% of the transaction lost on a terrible exchange rate, and I didn’t even check to see if there were additional transaction fees. Lately, there has been so much hype about bitcoin, and as the first modern cryptocurrency, with good reason. But before investing in cryptocurrencies, you should know where they come from — so we begin with an introduction to blockchain.

What is blockchain?

You’re not learning anything about cryptocurrencies before you get an elevator pitch on blockchain technology, so here is a definition by IBM: “A blockchain is a tamper-proof, shared digital ledger that records transactions in a public or private peer-to-peer network.”

Simply put, blockchain is a novel, secure, and transparent means to conduct transactions on the internet. Actualizing the concepts of “decentralization,” “smart contracts,” and “distributed ledgers,” this technology also brings to us a new way of thinking about relationships between people, businesses, and governments. Because transactions on the blockchain are “distributed,” there is a permanent record of the transaction on a large number of nodes across the internet — hence, decentralization prevents that any single party can control and manipulate the actual version of the “truth.”

As each transaction on the blockchain is distributed to all nodes in the network, one can imagine a virtual ledger that records, in connected blocks, transactions (i.e. asset exchanges, contracts, etc.) that take place between the peers in the network. In order for a new transaction “block” to be verified, it must be verifiable against preceding blocks — hence, we reintroduce the title of this film: “blockchain.”

What are cryptocurrencies?

Unlike traditional fiat currencies, cryptocurrencies reside entirely online. As valuable assets, these online currencies require a method of securing ownership, which is where cryptography comes in. In order to transact money on the blockchain, the parties involved in the transaction need to present a set of cryptographic hash keys to validate and transfer ownership of the money.

Bitcoin is built using blockchain technology. As the first cryptocurrency on the blockchain, it is a pioneer, and it continues to break barriers. Just recently, in April 2017, Japan officially recognized bitcoin as a legal method of payment — a massive validation for the cryptocurrency concept.

There are almost a thousand cryptocurrencies on the market, but you’ve probably heard of major players such as Bitcoin, Ethereum, Ripple, Litecoin, Dash, and Monero.

How to buy cryptocurrency.

If you’re looking for a good payout you might find it by investing in cryptocurrencies such as Bitcoin, Ether, and Litecoin…but you might also lose a lot of money. So, be prepared to invest what you’re willing to lose. In fact, you’d be hard-pressed to find specific advice because the value of cryptocurrencies, aside from being subject to extreme market-driven volatility, depend fundamentally on each cryptocurrency’s underlying technology. For example, the Bitcoin community has been up in a fuss as of late (when has it never, really?) because of fundamental disagreements with regard to software development that have serious implications on the platform’s security, software performance, and competitiveness as a cryptocurrency. Out of all blockchain platforms, I am very bullish on the Ethereum platform; and, if the cards in play pan out, the platform will expand along with the value of the Ether currency.

Buying your first cryptocurrency is a great way to dive into the world of blockchain — so here’s a quick start guide to get you moving in the right direction by buying the Ether cryptocurrency:

First you need a way to convert real money (i.e. USD, EUR, etc.) to a cryptocurrency. For this there are several platforms you can use such as Coinbase, Kraken, Gemini, Poloniex, and GDAX (Coinbase’s pro platform). At the time of this writing, I can tell you that Coinbase is the simplest way to get started, and there’s also an intuitive iPhone app to keep track of everything on the go. Let’s assume you’re going to use Coinbase.

As soon as you’re all set up on Coinbase you can start buying one of three currencies: Bitcoin (BTC), Ether (ETH), or Litecoin (LTC). Check out the price trends over the past week, month, and year to figure out which price point you would be willing to pay for your first cryptocurrency. It’s simple to buy cryptocurrency: after selecting the amount you want to buy, the exchange will add its transaction fee (~1.5% to ~4% of the total transaction) and reveal a grand total.

Now what? I can’t feel the cryptocurrency in my hands…where is it?!

Once you hit “buy” it won’t be long before you receive the Ether, and you need to take fundamental steps to ensure the security of these assets. Enter: The Wallet. When you buy cryptocurrency from an exchange (like Coinbase) your currency is at risk because it’s always online. The best practice is to keep your money on exchange platforms only as long as you are actually exchanging (buying or selling). If you’re still working with a very small amount of chump change, don’t worry about moving the money — but, if you have any substantial value in your portfolio, move it out to a storage location that is not connected to the internet, known as “cold storage.”

ETH, like other currencies, can be stored into “wallets” using a variety of methods. The two entry-level methods are to use an online service like MyEtherWallet or a hardware device like the Ledger Nano S and the Trezor White. To use cryptocurrencies we really need to change the way we think about our internet connected lives. Just like we have physical wallets that go into handbags and back pockets, these concepts exist…only digitally. And soon, your neighborhood bank will offer cryptocurrency services as well.

The big difference? You don’t touch and feel this new money. It’s in cyberspace, it’s protected (sort of) so don’t freak out, but it’s floating around on the internet. Your only claim to that money, and proof that you own the money, is that you possess the public and private addresses for that money. This is why we use a service like MyEtherWallet to generate a digital wallet to store money.

When you generate a wallet with MyEtherWallet you are granted two critical pieces of information that you must never forget in order to maintain access to your wallet: 1) Public Address (this is the front door to your wallet, money can go in with or without your permission); and, 2) Private Key (this is your key to get into the front door, you need this key to access your wallet and to send money from your wallet).

Know this: the wallet you just generated lives on the internet at large, not on MyEtherWallet’s technology. All MyEtherWallet did is create a public address and private key pair for you. Now it’s up to you to save that information in a safe place — ideally in a locked safe, in the real world! In this regard, the ETH trading community overwhelmingly advocates using a hardware device as a wallet, the most popular hardware wallets are offered by Ledger and Trezor. So, instead of preserving a piece of paper, you can maintain a hardware device that displays wallet information on a small screen and is able to connect to your computer to enable transactions.

Bonus round: Tracking down Ether transactions on the blockchain.

When you start moving ether around, because it’s done on a blockchain, you can use online tools to demonstrate a complete transaction history for your public address. One such tool is Etherscan, where you can enter any known Ethereum address and get key details for each transaction such as the exchange rate, public address of the other party involved with the transaction, and technical details such as the amount and price of gas used (cost of computation). Now you can imagine the powerful visualizations this data could fuel to reveal relationships between individuals, businesses, and governments.