How to Buy Crypto: A Guide

Posted by Frank Gogol

In the early 21st century, several technologies are seeing increased application in everyday life. One of these is cryptocurrency or crypto for short. You’ve undoubtedly also heard about people making big bucks with crypto. The good news is you can also get into the game! 

Let’s examine what crypto is and how to buy crypto.

What is Crypto?

The word cryptocurrency is itself an abbreviation of cryptographic currency. 

Cryptography is the study and practice of secret communication. It uses mathematical techniques to obscure information to unauthorized viewers while keeping it readable to the desired viewer.

A currency is any system that allows people to store and exchange economic value. The most-used physical currencies in modern times are based on specialized paper and metal tokens. 

To be effective, a currency needs to have several properties:

  1. Durable: someone needs to be able to store currency for a long time without it degrading. That is why food is not a good currency.
  2. Difficult to counterfeit: if anyone can just create or get any amount of currency whenever they want, then it has no real value. That is why sand cannot be used as currency.
  3. Divisible and easy to transfer: paying someone with currency needs to be as easy as possible. That is why money is divided into small units, and why it is made of small and lightweight objects.
  4. Widely accepted: this may be the most important property of currency. People holding the currency must believe that others will accept it.

The cryptography software that produces digital assets with the characteristics of a currency is called a blockchain protocol.

An important characteristic of crypto is that information about the current distribution of the currency is shared by many different participants on the network, called nodes. The nodes are responsible for ensuring nobody can spend their currency twice. They are rewarded for performing this and other functions with the native currency of the blockchain.

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Cryptocurrency is divided into two main categories: coins and tokens.

Crypto coins are the native currency of their blockchain protocol. Examples of this are Bitcoin (BTC), which is native to the bitcoin protocol, and ether (ETH), which is native to the Ethereum network. Coins are the fundamental unit of value of a crypto blockchain.

By contrast, tokens are not fundamental to the blockchain they exist on. They are more like apps installed on the blockchain. You can think of the difference between coins and tokens as the difference between an app on a smartphone, and the operating system that the app is installed on. For example, a game is installed on Android. In turn. Android is installed on the phone’s hardware.

Both of those pieces of software are on the phone (the blockchain) but without the operating system (coin), the phone is just a plastic and glass paperweight.

The main way to interact with crypto you own is through a piece of software called a crypto wallet. The wallet keeps track of the coins and tokens associated with your account. Your wallet also communicates with the nodes to inform them of any transfers of crypto you wish to make.

It is also possible to have a crypto exchange or broker own and control crypto on your behalf without a wallet. This is generally considered less secure than having a wallet.

How to Buy Crypto

There are two main places to buy cryptocurrency: centralized exchanges and decentralized exchanges. 

On an exchange, you can trade one type of cryptocurrency for another. You can also trade crypto for fiat currency on some exchanges. The main thing that determines how to buy crypto is whether the cryptocurrency you want to buy is a coin or a token. It is generally easiest to buy a coin from a centralized exchange.

If you buy crypto from a centralized exchange like Coinbase, Kraken, or Binance, the first step is to open an account with the exchange.

To combat criminal activities like money laundering, many countries have KYC (know your customer) regulations. These regulations require financial institutions to record the identity and personal or business details of all the customers they do business with. This process allows government officials to trace the identity of account holders if a crime is committed.

Since they provide crypto in exchange for fiat currency (normal cash), centralized exchanges based in the United States and many other countries require you to provide some form of official identification before you are allowed to use the platform.

Once you have met the KYC requirements you can use your credit or debit card to fund the account with crypto at the offered exchange rate. 

If you have a crypto wallet, you can transfer the crypto from the centralized exchange to it. If you intend to hold crypto for a long time, it is generally considered safest to keep it in your wallet. You can also leave it on the exchange.

If you wish to purchase the crypto from a decentralized exchange like Uniswap or 0x, you will need to have a wallet that is compatible with your chosen crypto and has some coins or tokens to trade. You connect the wallet with the exchange and do the trade. The crypto you buy is deposited directly in your wallet. You do not open an account or submit KYC documentation.

It is also possible to buy cryptocurrency through a broker like stocks or bonds. At the small scale (also called retail) level, two well-known brokers that also provide crypto services are Robinhood and SoFi.

Alternative Ways to Buy Crypto

Besides the options mentioned above, there are also other ways to become involved with cryptocurrency, a little less directly. You can think of these as how to buy crypto without buying crypto.

Wait for Crypto Exchange-Traded Funds (ETFs)

In traditional stock market trading, exchange-traded funds are derivatives linked to the price of a group of underlying assets. By purchasing a crypto ETF you share the profits generated by the underlying crypto assets with other traders who have purchased shares in that ETF. You also reduce the risk of loss if any individual asset loses a lot of value

It is still early days in crypto. For now, there are no crypto ETFs available. Over time, growing acceptance will mean more and different cryptocurrencies will have listed ETFs.

Invest in Companies Connected to Cryptocurrency

Another way to join in the crypto boom is to use the so-called ‘pickaxe strategy’. This term was coined during the California gold rush. It refers to business people who, rather than participating in gold mining and prospecting themselves, provided services to miners and prospectors. Investing in companies that are connected to cryptocurrencies, such as centralized exchanges or security auditors is a way to invest in crypto without buying it.

Conclusion

Cryptocurrency is a way to use software to produce digital assets that have the properties of a currency. There are several different ways to buy crypto. You can also get involved indirectly in crypto by buying related assets.