The Crypto Trader’s Digital Enchiridion is a simple guide that serves as a basic primer and glossary to help you get started with understanding cryptocurrency and blockchain.
Table of Contents
- What is Blockchain?
- What is Cryptocurrency?
- Getting Started with Investing
- Storing Your Cryptocurrency
- Common Trading Terms
- Crypto Glossary
What is Blockchain?
The World Blockchain Foundation defines a blockchain (in a mouthful) as:
…a decentralized and distributed digital ledger that records transactions
across many computers in such a way that the registered transactions
cannot be altered retroactively.
The short version: The blockchain stores immutable, accurate, and transparent records of transactions.
Imagine buying a home and not needing a title company because every bit of information about the home—down to and lien and back tax—is accounted for and accurate
Imagine if you were in the secondary market for a Paul Newman Daytona (Ref. 6239), and did not have to go through reference books, vintage forums, or your local jeweler for authenticity because the entire history of the watch can be made known to you. In addition, the seller’s reputation is also recorded on the blockchain, so that every 5-star review and 1-star bomb across multiple reseller platforms (eBay, Vintage Rolex Market, Rolex Forums, etc) is fully transparent.
Imagine sending a wire to your cousin in another country without using Moneygram and paying a large fee. The transaction takes less than a minute and the funds are received almost immediately with no hiccup, delay, and middleman to charge high fees and delay receipt of receiving funds.
Blockchain technology will redefine how we do business with each other, with other businesses, and with the government. It empowers the regular guy and removes unnecessary, intermediary friction from the transaction equation.
What is Cryptocurrency?
Cryptocurrencies are simply digital cash. You use them as a medium of exchange to either trade for tangible goods, or digital assets and currencies. Cryptocurrencies also serve a utility function in many cases, dependent on the blockchain mechanics. For example, you can buy Cryptokitties using ETH, or buy into ICO’s with ETH, receiving another set of coins. In addition, ETH is used to pay transaction fees (Gas), and as a reward for miners who secure the network.
Please read the Ethereum Foundation’s FAQ on ETH for a comprehensive look at the specifics of Ether.
Getting Started With Investing
Wallets are your deposit accounts for cryptocurrencies. Each cryptocurrency has a corresponding wallet address. The address is the unique identifier for the deposit account. The aforementioned exchanges handle your wallets for you. This will be expanded on in the next section, “Storing Your Cryptocurrency.”
Many traders use technical analysis (such as MACD or Fibonacci retracement) to help make better decisions when buying and selling. While there is never a guaranteed method to this chaos, some find it helpful. For a useful guide to technical analysis, refer to Investopedia’s easy-to-read guide.
Because trading cryptocurrencies can result in a taxable event, accurate record keeping is important. We recommend Bitcoin Taxes or Coin Tracking. Both have distinct features. I personally use Cointracking because it offers easy trading imports from most major exchanges, a companion phone app with a myriad of useful charting and reporting functions, and also can create capital gains reports for you. The basic account is free. But if you wish to upgrade, please access my affiliate link above. You will get a discount on purchase.
Keeping tabs on the market
I always check CoinMarketCap to get the latest read on the total market cap, exchange volume and average pricing across exchanges. There is a lot of useful information on the website to help you make better trading decisions, and forecast into the future. More importantly, the history of each coin as well as the entire market is kept, in case you need a comprehensive reference.
Storing your Cryptocurrency
What is a cryptocurrency wallet?
A cryptocurrency wallet stores your cryptocurrencies.
A wallet has three main functions:
- Sending cryptocurrency
- Receiving cryptocurrency
- Storing cryptocurrency
In order to understand how to send, receive, and store cryptocurrencies we must be aware of two very important components of a wallet:
The first component of a wallet is the public address.
The public address is very similar to an e-mail address, house address, or bank account number. When you want to receive an e-mail you can share your e-mail address to the sender. When you want to receive a package or a letter you can share your house address with the shipper. When you want to receive money, you can share your checking routing number to the payer. Like in the examples above, a cryptocurrency public address is safe to share. You use the public address to receive funds from yourself and others. You can request others’ public addresses to send them cryptocurrencies. And you can purchase cryptocurrencies from an exchange and move it to a wallet on another exchange by sending or withdrawing the cryptocurrencies to the public address of the respective wallet on the other exchange.
Now that you know what a public address is let’s move on to the second component of a wallet-the private key.
Unlike the public address, which you may share with anyone, YOU SHOULD NEVER DIVULGE YOUR PRIVATE KEY. The private key is like the key to your cryptocurrency vault. Whoever has access to your private key has control of all your cryptocurrencies. Let’s go back to the above examples with the e-mail address, house address and bank account number. Do you give out the password to your e-mail to a stranger? No. Do you give the keys to your house to a stranger? Certainly not..Do you hand out your pin code and password to your bank account to a stranger? Anddddd… that’s yet another Never. Drill this into your mind.. NEVER EVER DIVULGE YOUR PRIVATE KEY. Phew, I had to get that point across, but seriously this is one of the most common mistakes that newcomers to cryptocurrency make.
A common scam you may encounter is when malicious parties send you an e-mail offering free coins- provided that you disclose your private key. Do you send them your private key in hopes of receiving free coins? Absolutely, unwaveringly NO. WE NEVER GIVE OUR PRIVATE KEYS TO ANYONE. We’re smarter than that. Here are some other security measures to ensure the confidentiality of your private key:
- Never take a photo of your private key on your mobile phone
- Never e-mail or upload your private key
- Don’t print out your private key on a public printer
- Don’t keep your private keys unencrypted on your computer
- Consider keeping your private keys on cold storage (offline storage like a paper wallet)
- Invest in a hardware wallet
Now that we know the basics about wallets, how do I go about obtaining one?
When it comes to wallets there are a plethora of options available, but with so many to choose from, how do you go about picking the one that’s right for you?
The first wallet you will probably come across as you venture into the world of crypto is the exchange wallet. The exchange wallet is the wallet you are given when you make your first crypto purchase on a fiat gateway such as Coinbase, Gemini, or Kraken (just to name a few). For example, if you purchase Bitcoin or Ethereum on Coinbase, you are given a new wallet for each respective currency. This means that you will have a public address for your Bitcoin wallet and you will have a separate public address for your Ethereum wallet.
So now, you may be wondering about a couple of things:
Do exchange wallets have private keys?
Yes, technically exchange wallets do have private keys but they are never exposed to you. Instead, the exchange manages it and gives you access to your wallet by having you log in with a username and password.
Can I send Ethereum to a Bitcoin wallet address? Vice Versa?
A mistake people make all the time is sending funds to the wrong type of wallet. If you have a Bitcoin wallet you should only send Bitcoin to it. You shouldn’t try to send Litecoin, Ripple, Ethereum, or NEO to the Bitcoin address. Same thing goes vice versa.
However, there are certain exceptions to this rule. You may send ERC-20 tokens to an Ethereum address. And you may send NEP-5 tokens, to a NEO address. Always double check that the wallet you are sending tokens to support the them prior to sending.
Creating a wallet
We suggest referring directly to these websites for proper instructions on wallet setup:
Ethereum – MyEtherWallet (Disclaimer: MyEtherWallet is a very popular wallet that is constantly getting phished. When accessing their online website, always make sure that 1) you are on a secured website; 2) the URL reads: https://www.myetherwallet.com; and that the URL bar is titled “MYETHERWALLET LLC” (in Green). If you want to check on your balances without having to access your wallet (off-wallet), please use etherscan.io and ethplorer.io. Again, refer to instructions on their respective sites.
Bitcoin – Bitcoin.org – a good resource to read the many choices you have to store Bitcoin.
Now that we downloaded a wallet for its respective currency, let’s talk about private keys. When you create a wallet, you are usually given an option to set a password to enable login using a JSON or keystore file. You should create a backup of this file on a separate hard drive or usb stick, and also memorize and write this password down and store it somewhere safe. The keystore file and your password is one of the methods of accessing your wallet.
The second method of accessing your wallet is via private key. As you create a wallet, you are also given a long string of randomly generated numbers and characters. If by some mishap, your computer and your backup keystore file gets erased or corrupted, you can still access your funds by entering your private key into the wallet. We strongly recommend you write down your private key and secure it.
Nearly all of us at AllCoinBits have multiple hardware wallets for extra security.
Hardware wallets provide an extra layer of security because they never expose your private key on a potentially unsecured computer when transacting. The key is stored in the device itself and must be connected to a computer in order to sign off on transactions. It is one of the safest methods to send/receive cryptos. Please note that hardware wallets cannot protect you from technical issues stemming from a compromised computer. Here are some hardware wallets to consider:
Ledger – they offer 2 main products, the Nano S and the Blue. Most of us use the Nano S, and thus far, have not encountered any issues with its use. The features and functions are also robust. If you decide to buy one, always purchase it through the actual product page and not by a third party. Many people have been scammed with compromised ledgers. The Ledger supports a wide assortment of cryptocurrencies such as: Bitcoin, Ethereum, Litecoin, Dogecoin, ZCash, Dash, Ripple, Bitcoin Cash, Komodo, Ethereum Classic, ViaCoin, Vertcoin, PIVX, Neo, Ark, Ubiq, and Stratis.
Trezor – Trezor also has 2 offerings. The Trezor wallet, and the Trezor T which is available for pre-order. The Trezor wallet is also a great way of keeping your private keys secure while signing transactions. The Trezor supports MyEtherWallet, Bitcoin, Bitcoin Cash, Litecoin, Dash, ZCash, Ethereum, Ethereum Classic, Dogecoin, and NameCoin.
The team members at AllCoinBits prefer the Ledger Nano S as the developers at Ledger are quick to release software updates and their broad coin support, including NEO. This doesn’t mean that the Trezor is any less useful. If you are looking to store just the coins that the Trezor supports, it is a great option.
Common Trading Terms
- Arbitrage – purchase and sale of the same token on two different exchanges to profit from the price difference. For example, a buyer may purchase BTC on GDAX for $16,000 per BTC, and sell on Bithumb for $18,000 to make a $2,000 gain.
- ATH – All time high. The highest recorded price of a coin.
- ATL – All time low. The lowest recorded price of a coin.
- Bearish – feeling that the market will perform in a downward trend
- Bear market – a market that is performing in a downward trend
- Bear trap – a false signal that the rising trend of a token will reverse and trend downward. Instead, it trends upwards
- Bullish – feeling that the market will perform in an upward trend
- Bull market – a market that is performing in an upward trend
- Bull trap – a false signal that a downward trend of a token will reverse and trend upward. Instead, it trends downwards
- Buy/Sell wall – when the graphical depth of the order book has a large accumulation of orders, such that it appears to be a wall. Usually, a wall indicates a pressure to sell or buy depending on where the volume of orders lie on the order book.
- Day trade – the act of buying and selling within the same day
- Dip – the declining performance of a token
- Limit order/buy/sell – an order placed to buy or sell a token for a specified price
- Market order/buy/sell – an order placed to buy or sell a token at the current price
- Market Cap – market capitalization (mcap). The total market value of a token’s circulating supply. The mcap is calculated by taking the current token price and multiplying it by the total circulating supply.
- TA – Technical Analysis. A tool used to evaluate token performance and forecast future performance base on historical data.
- Altcoin – alternative coin. A term used to describe coins other than Bitcoin.
- Bags/Bagholder – bags are positions of a coin that have depreciated from its original value of purchase. A bagholder is a term used to describe someone holding depreciated coins.
- Blockchain – a digital ledger that records transactions
- Coin/Token – a unit of measure for use as a medium of exchange or for utility in the blockchain ecosystem.
- Cold storage – keeping reserves of your cryptocurrency in an offline format
- DApp – Decentralized Application. An application running on a blockchain platform such as Ethereum. An example of a DApp would be CryptoKitties.
- Decentralized exchange – an exchange market that is not reliant on a third party to hold the user’s funds. Transactions are facilitated peer to peer. An example of a decentralized exchange is EtherDelta.
- Exchange – an exchange market that relies on a third party to facilitate trading and holds the user’s funds. An example of a centralized exchange is GDAX.
- Fiat – refers to traditional paper money; government-issued legal tender.
- Fork – a protocol change on the blockchain that results in a newer, updated version. An example would be the Bitcoin Cash fork.
- FOMO – fear of missing out. Anxiety and fear of missing out on an event. Usually leads to poor trading choices. For example, buying coins at all all-time high because you are afraid you will miss out on the gains.
- FUD – fear, uncertainty, doubt. Refers to news or information, disseminated with the intention to cause a negative pressure on prices.
- Gas – 2 distinct meanings. 1) the cost of sending ETH, determined by setting a cost limit and a price 2) dividends provided to NEO token holders. These are produced over time dependent on the number of NEO one holds and has a fixed cap of 100 million tokens that will ever be created.
- Gwei/wei – a term used to describe a specific fraction of ETH. Gwei represents 0.000000001 ETH and Wei 0.000000000000000001 ETH. These units are used primarily in calculating Gas costs when sending ETH.
- Hardware wallet – a physical device that securely stores your private key and can usually host a number of different cryptocurrencies.
- HODL – hold on for dear life. A slang term to describe holding onto a coin through a market correction or crash.
- ICO – initial coin offering. A way for blockchain companies to secure funding through crowdsale participation, usually in exchange for their tokens. ICO’s usually consist of a pre-sale (sale to specific participants), and the main sale (for the general public). ICO participation is usually restricted by country and participants must pass a know-your-customer (KYC) questionnaire and anti-money laundering (AML) process in order to qualify.
- Mainnet/Testnet – mainnet refers to the blockchain being used for real-world transacting, such as Ethereum. A testnet is a version of the blockchain that is used to test the mechanics of features, usually before an actual release of the mainnet.
- MEW – MyEtherWallet. An Ethereum wallet that is widely used.
- Mining – an action to add and verify transactions on the blockchain. This usually generates rewards. In the case of Bitcoin mining, the miner receives BTC.
- Moon – an event where a coin has experienced a sharp growth in price.
- Node – an entity that is connected to the blockchain that fulfills a particular function in that ecosystem. In the case of Dash, they enable InstantSend and PrivateSend.
- Proof-of-Work – an incentivized protocol to ensure that abuse does not occur on the blockchain. In the case of Bitcoin, transactions are verified and recorded on the public ledger and BTC is given as a reward for that work. This process requires an internet connection and proper hardware to facilitate the work.
- Proof-of-Stake – PoS. An alternative protocol to prevent abuse on the blockchain. Unlike Proof-of-Work – PoW. The transactions are validated and recorded based on the token holders stake (quantity). This method is generally less resource intensive than in the PoS system.
- Smart Contract – a protocol that enables the negotiation of terms on a blockchain without a third party. On the Ethereum platform, many ICOs use smart contracts to handle the automated receiving of ETH and distribution of tokens.
- Shilling – endorsing a coin. Usually used to refer to someone actively promoting a coin for the purpose of improving their positions when others buy in.
- Wallet – a method of storage for cryptocurrencies
- Whale – describes a person who has a large enough holding in a particular token to be considered wealthy
- Whitelist – a record of individuals who have been accepted to participate in an event, usually a token sale (ICO)
Is blockchain/cryptocurrency real?
As real as you and I. The technology is already making strides in retail and supplies logistics industries. For example, Nucleus Vision seeks to improve the business to customer relationship through data-driven, personalized service. They already have partnerships with ICON, a working, patented product, and is live in 10 retail stores. Waltonchain has their own patented RFID technology, and plethora of partnerships ranging from exchanges (Coinnest), to government (Fujian Provincial Government), where they have been contracted to work on tech infrastructure updates.
What creates the value in cryptocurrency?
The value is derived from the benefit or potential benefit of application for its specific industry. In the above example, Waltonchain provides tangible value through real world integrations and demand for their token due to its token mechanics (node system).
Can you cash out?
Absolutely. You can sell your coins on an exchange for traditional currency. In the US, Coinbase and GDAX can help you change ETH, BTC, LTC and BCH for USD.
Is trading safe?
The short answer is no. There is inherent risk in any investment made, whether it is in the traditional stock market, real estate, or even bonds. Scams, hacks, and human-error drive up the risk. But if you can overcome the these barriers of entry by educating yourself, and taking appropriate security measures, the risk becomes a lot more tolerable.
Are the gains that some people report real? Is it sustainable?
Everyone likes reading success stories. It is easy to get caught up in the hype. The truth is that the losses are just as real. Many people lose their life savings and literally their homes. The most important tenet to trading responsibly is to only trade with money you can afford to lose. If you lost this money, can you still make rent and live for the next few months? To understand if the growth is sustainable, we need to analyze the implications of the technology and whether or not it could reasonably weather a financial crash. If you presuppose blockchain is here to stay, then you could reasonably expect that in the long term, the value will improve.
Is it too late to get into trading?
No. Do not time the market. Rather, find the right time to be in the market. If you concentrate on the dips and highs, you forget to look at the bigger picture of the economy at scale. Again, if you believe blockchain’s longevity is secure, trading now may make sense because of the belief that the space is undervalued at the moment.
How do I get started trading?
Hopefully this primer helps you form a better grasp of the tech, its application and its value. I recommend this short but easy to read post by Trading Heroes for more information on trading.
I do not know what to buy. What should I buy?
Unfortunately, we do not have a crystal ball. The best decision you can make is to make your own decision. While AllCoinBits provides opinionated information, we suggest everyone do their own research. Education is power – the more you understand, the less risk you expose yourself to when trading. At the end of the day, you understand your position better than anyone else. Do not let anyone pressure you into a trade or trick you into thinking that they have 100% infallible strategies. They do not exist.