Continued from Blockchain Investment -- Part I
Now after research on which blockchain protocol and coins or tokens to be invested in, the next step is to acquire the coins or tokens. There are several ways of doing that and before that there are one or two things need to be done -- opening an account with a crypto exchange and/or getting a crypto wallet. Would put these 2 things as one, that is obtaining a Crypto Wallet as most of the crypto wallet allows one to purchase the coins or tokens using credit card payment.
Crypto Wallet
One need a crypto wallet to manage his/her crypto assets. It is similar to a bank but technically not exactly the same. In the real world, one can put money into more than 1 bank and in cryptocurrency domain, there is no limit as to how many crypto wallet one can own. The different between bank and crypto wallet is bank actually hold custody of the money and in return pay you the interest. In cryptocurrency domain, the virtual coins or tokens are not held custody by the crypto wallet provider. Instead it is stored in the blockchains hosted by the nodes all over the world (that what is called decentralized). There are basically 2 categories of crypto wallet, custodian and non-custodian.
1. Custodian Wallet
Custodian wallet normally refers to those found in crypto exchange provider. It is a MUST HAVE for anyone. Must have not because it is the best crypto wallet in term of features and security but one must use the crypto exchange to link between real world and virtual world. One needs the crypto exchange to buy the cryptocurrency (mostly as there are other forms of getting the coins or tokens), and sell the cryptocurrency then cash out as fiat currency to be used in the real world. However, one need to search for the appropriate crypto exchange provider as the numebr of coins or tokens it supports is limited. Take the case of Coinbase, it lists over 5000 of assets for education purpose but in actual only supports 100 assets. Those main native coins like BTC, ETH, LTC, BCH, ADA, SOL, etc are of no issue as almost every wallets support that (less those official wallet for the specific coins or specific blockchain protocol like ERC20). On ther other hand, coins like ZIL, KMD, XMR, RVN, etc are not found in most crypto exchange wallet. Another aspect is for the convenience, one might want to choose a crypto exchange wallet (provider) that allows deposit and withdrawal of SGD easily.
In the event that the coins or tokens intended to invest in is not found in any of the crypto exchange wallet, one might have to go through an indirect way to own it. Purchase the popular coins (BTC, ETH, LTC, etc), send it out from the crypto exchange wallet to a non-custodian wallet (that supports the coins/tokens that intends to be invested in) then perform swapping at the non-custodian wallet. Example, if one sees the potential of XMR, one could purchase ETH in the crypto exchange and then send this ETH to the non-custodian wallet. Most of the non-custodian wallet should have the exchange feature to swap the ETH to XMR. Note that in doing so, several network fees would have to be incurred. Sending out ETH from crypto exchange (some might grant free transaction) will take off a little faction of the ETH. In the non-custodian wallet, the exchange from ETH to XMR will also incur some network fee and further take a little faction off the ETH.
2. Non-Custodian Wallet
The main different between a custodian and non-custodian wallet is ownership and it is the user's full responsibility to secure the wallet. Non-custodian wallet cannot perform a Sell transaction as it is not an exchange. However, some is able to provide services like Buy transaction with payment from credit card (please note there will be additional charge incur on credit card). It also provides exchange services among the cryptocurrency (something Custodian wallet is able to do also). Like custodian wallet, it also has a limit of the number of cryptocurrency it can support. As a whole, non-custodian wallet should be relatively more secure than a custodian wallet. Among the non-custodian wallet, its further sub-divided into several types :-
2.1 Desktop App based wallet (Exodus, Atomic, Coinomi, MyCryptoWallet, etc)
2.2 Web based wallet (Metamask, MyEtherWallet, etc)
2.4 Mobile App wallet (refer to solely only available on mobile app type)
2.5 Hardware wallet (also known as cold storage, eg Ledger, Trezor, SafePal, etc)
Of all those above, the most secure is none other than hardware wallet. While first start up in cryptocurrency investing, non-custodian wallet might not be necessary but as the assets increase and applying the diversification factor, non-custodian wallet will increasingly becoming a neccessity. Moreover, there is no limit to how many non-custodian wallet one can own. Sometime situation forces one to have multiple non-custodian wallets. Take the example if one has coin X and coin Y but none of the wallets available is able to support both so the only way is to have multiple wallets.
When deals with cryptocurrency wallet (both custodian and non-custodian), there is a thing one needs to know, Public Key and Private Key. These 2 keys are just a long strong of alphanumeric. If we view crypto wallet as a bank, public key shall be the bank account number. Receiving and sending transaction will require the public key acting as an address. In fact with the public key, one can search all the transactions associated to it in the blockchain explorer. This is why blockchain technology is transparent.
Private key is somewhat like the security pin to access your bank account but technically it is not exactly that. Private key and Public key come in pair for each of the coin or token in the wallet. Non-custodian wallet users can access the private key of that particular coin or token but not custodian wallet users. This is to how custodian wallet protect its users. With the private key, anyone could access the assets from another wallet and perform transactions on it. This is the reason why private key must be at all time kept it a secret. For non-custodian wallet, the last line of defense to protect the assets is the Recovery Phrases. These recovery phrases are usually a 12 or 24 randomly generated words when one creates the non-custodian wallet. The mechanism of this recovery phrases is they are the seed to generate the public and private key for each of the coins or tokens in the wallet. Hence, if one forget about the password to login to the wallet, the recovery phrases can be used to restore the wallet and reset the login password. Thus, it is strongly advise Recovery Phrases to be hand written on a piece of paper and safe keep it.
Now, why hardware wallet is the more secure than the rest ? Be it Desktop based App, Web based App or Mobile App type of wallet, the private key in certain way is connected to the internet. With malware, the private key can be stolen when the user access the wallet. Hardware wallet different in the sense that it is not connected to the internet all the time thereby reducing the risk of the private key being stolen.
The ultimate will be using hardware wallet especially after one build up quite a substantial holding of crypto assets mainly for security reason. Then again, there isn't a limit of how many hardware wallet one can own too.
Acquiring Cryptocurrency
Once settled on the crypto wallet, the next step shall be how to acquire the coins or the tokens. There are several ways and that shall be covered in this installment and the next.
1. Direct Method
The most simple and easy method is to buy the coins or tokens from the crypto exchange after funding the crypto wallet. This is exactly the same as how one invest in shares from the stock market. There are pros and cons in doing so.
Pros
-- Simple process, just a few mouse clicks or touches on the smartphone and the job is done
-- Should the coins or tokens after purchase rises few folds, can just easily cash out and enjoy the big fat profit
Cons
-- Unlike shares, cryptocurrency doesn't give you dividend and for long term investment, the bet is on the price surge in the long run. Hence, the fund will be locked until it is being cash out. Its also risk being ended up in capital loss with no dividend to offet or minize the loss.
-- Unlike shares in which they have a direct connection to the economy whereby investors can always make the "perfect" timing to purchase during crisis and most of the time will be rewarded when economy recovered. There isn't direct link of cryptocurerncy valuation to the economy and there isn't any earning reports like share to provide forward guideline or valuation so to actually time to make the "perfect" purchase is quite difficult
-- In share, one might adopt Dollar Cost Averaging method but in cryptocurrecny, this is a very dangerous method unless one has unlimited fund.
-- A strict cut-loss level must be set
In short, adopting the same method as in how one acquire shares in stock market might not be fully workable in cryptocurrency investing. Some mindset needs to be adjusted or changed when come to cryptocurrency investing. For those who are very fundamental and value in stock investment, cryptocurrency investment might not be the cup of tea for you.
2. Rewards
Yes, you did not read it incorrectly that one can acquire cryptocurrency through rewards. Its just kind of promotion gimmick by the crypto exchange providers to get more customers. One real example is Coinhako (refer here). In Coinhako, after opening an account with them, one just need to be really hardworking in everyday login via mobilephone (mobilephone login earn 2x reward than web based login) to get reward point. Consecutive daily login will further earn bonus reward every 7 days. Performing trades also can earn reward points. One just need to accumulate 2000 reward points and can redeem for 1 unit of ADA. Each daily login via mobilephone earn 20 reward points and every 7 consecutive day of login, the bonus is 350 point. On average, 1 month should be enough to earn 2000 point for 1 ADA redemption. There are also other crypto coins or tokens like MATIC, VET, DOGE and so on that can be redeemed. This is how I have acquired several units of ADA for the past few months foc by just spending a minute a day to login.
Pros
-- A very low cost way of start investing in cryptocurrenncy
-- A very low risk way of investing in cryptocurrency
-- Bare minimum efforts needed
Cons
-- A very slow process in accumulating the cryptocurrency to a substantial quantity
-- It might not be the coins or tokens that intended to be invested in
-- Uncertain when the reward system might end or change
In case someone interested can use my referral link to open an account and start earning coins or tokens via the reward system. Also please note that after accumulating the required reward points, one must perform a transaction (just deposit S$10 and make a purchase, S$10 can purchase at least 3 ADA at present price to add on to the claimed reward) and you are qualified to make the redemption.
Next installment shall cover on Staking and Mining as a method to acquire the coins or tokens.
