Your Guide to Getting Started in Crypto

Best practices and the tools you need to safely get involved

October 19, 2021Michael Nadeau
Your Guide to Getting Started in Crypto

Hello readers,

Since many of you are new to the space, I thought it would be helpful to put together a short guide on how to safely get started in crypto.

This is a two-part article. In part two we’ll do a deep dive on personal security best practices as well as how to keep track of your crypto for tax purposes.

As a quick reminder, if you’re getting value from these reports and would like to receive them directly in your inbox as they are published, please subscribe below. As always, thank you for your continued support.

Let’s go.

Getting Started

The absolute first step (and easiest way) to understanding the value and utility of crypto and distributed ledger technologies is to buy a very small amount, set up a wallet, and make a transfer.

There are lots of folks out there that have very strong opinions about crypto yet have never engaged with it.

On the same hand, I have yet to encounter someone who has used it and has a negative opinion on it.

That should tell you a lot.

And it’s one of the most fascinating things to me when it comes to crypto. The psychology of this. The human behavior element. The people that have these negative feelings about it for no logical reason. I find it to be an incredibly interesting lens through which we can learn about how humans think. And how the media and voices around us can influence our ability to think rationally and logically.

As a quick aside, the book Thinking, Fast and Slow by Daniel Kahneman provides a wonderful framework to understand this more clearly.

Back to the program.

How to buy $10 worth of Crypto

Coinbase is probably and most user-friendly exchange for a beginner to get set up.

I recommend folks start there. *Coinbase Pro* to be precise as the transaction fees are much cheaper on the Pro version. You don’t have to set up a separate account on Coinbase Pro. Just set up your account on Coinbase.com and your login will work on Coinbase Pro. Once you are comfortable with Coinbase, you may want to check out other reputable exchanges that work with regulators if you choose. Kraken and Gemini are two other good resources for US-based exchanges. If you are abroad, Binance is probably your best option, but I do not recommend them for US users since we cannot access the entire suite of assets on the exchange (unless you are using a VPN).

Simply go to Coinbase.com, create an account, and link your bank or credit card. You’ll need to provide a photo ID to verify your identity. This is how KYC/AML works and it’s how the government can keep track of who has bought/sold crypto on Coinbase to monitor taxes and anti-money laundering. ALWAYS enable 2FA on any crypto accounts you set up. And always use an authenticator app instead of an SMS text message. I recommend Authy or Duo.

Buy $10 worth of crypto. I recommend buying bitcoin first. Your bitcoin will show up in your account balance immediately. However, you will not be able to send it off of the exchange until Coinbase clears the transaction with your bank, which will take a few days. Stop and think about that. With crypto, transactions settle and clear almost immediately. Congrats, you just learned one of many features that make blockchains superior payment rails compared to our traditional system. You wouldn’t have learned that if you just listened to the media or your cranky uncle.

Setting up a Wallet

You just bought $10 worth of bitcoin. But it is sitting within your account on the exchange. You don’t have self custody of it yet yourself. You have a claim on it. One of the most important lessons in crypto is “not your keys, not your crypto.” If your crypto is on an exchange, you do not have the key to it. The exchange does. In the early days of Bitcoin, the Mt. Gox exchange was hacked and many users, unfortunately, learned this lesson first hand. Mt. Gox was a private company with poor security. They were hacked and many of their customers with assets on the platform lost their crypto. This has nothing to do with the security of blockchain and everything to do with the lack of security of a private company.

Had users simply sent their bitcoin into personal custody, their assets would have been safe. Remember, there is no FDIC protection for cryptoassets. You are the bank here. Dealing with crypto takes extreme ownership and responsibility.

So, how do you set up a wallet? For this $10 exercise, I recommend the Coinbase Wallet. You can set this up on your phone or on your computer. I recommend downloading the app on your phone. Simply find the Coinbase Wallet on the App Store.

During set-up, you’ll need to write down your 12 or 24-word seed phrase. This is the private key to your wallet. Do not share it with anyone. I recommend keeping your seed phrase offline. If you lost your phone or the app was somehow deleted, you would be able to recover your funds by simply downloading the app again and entering your existing seed phrase.

Keep in mind that your assets are always held on the blockchain. We access these assets with our private key. We can think of this as mailbox slots at the post office. Your bitcoin is in the slot, and you access it with your private key. If you don’t have a private key (because you kept your BTC on the exchange), you don’t have a private slot.

Sending Your First Transaction

Now that you have a Coinbase wallet on your phone, you have a destination to send your bitcoin to from your Coinbase exchange account. On your Coinbase wallet, simply go to “receive.” An address will appear - this can be presented in two ways: 1) QR code, 2) string of letters and numbers. I usually use the string of #’s and letters myself but that is up to the user. This is your public address an can be shared with other people or businesses to receive payments. It is associated with your private key (12 or 24 seed phrase) which should never be shared with anyone.

Copy the address. It should look something like this: bc1q2y6cuw5h8x5ksmklxph62grq2dq0tjvayzzrq3

Now go back to your Coinbase exchange account. Go to “send” within your account. Choose the asset you are sending. Paste the address. Double-check it. Choose the amount. Hit send.

You’ll be able to go to your Coinbase exchange wallet from here to “view transaction.” This will take you to Blockchain.com where you can watch your transaction confirmation on the blockchain. A base layer Bitcoin transaction takes about 10 minutes (as opposed to a layer 2 Lightning transaction which is immediate) for the first confirmation to come through. If you’re interested, you can read more about bitcoin transactions here. You should see the bitcoin on your Coinbase wallet (on your phone) almost immediately. And the transaction will verify itself after a few confirmations (blocks).

Congratulations! You just made your first peer-to-peer blockchain transaction. What you just did is the equivalent of handing someone a dollar in person. A bearer instrument. Except you did it electronically without seeing the recipient. You did it without trusting a central intermediary. You did it with full transparency to all other nodes on the network. And you were able to see your transaction become confirmed in real time.

You just experienced the power of a revolutionary innovation as an early adopter. If you’re like me, you’ll stop and think through what just happened. Compare it to a traditional bank transfer. And you might decide that this is going to be the future.

A few additional benefits to transacting on a blockchain:
  • Instant and final settlement. Transactions today take multiple days to settle. For example, credit card transactions are not final. The banks create IOUs with each other as transactions happen in real-time. These transactions are batched and settled later on at the base layer. ACH transactions and wires take even longer. The same is true for the settlement of trades (stocks, bonds, etc) on a brokerage platform. Blockchains increase transaction velocity, reduce fraud and increase security.

  • Public blockchains are permissionless. Anyone gets access. This means that the 2 billion folks worldwide without a bank account can access the Bitcoin network and a global monetary system. A cell phone and internet connection are all that is required. Bitcoin is intuitive in places around the world that have inflating currencies or a poor system of property rights and laws. Something we take for granted in the United States.

  • Blockchains introduce triple entry accounting. For example, each transaction on the Bitcoin blockchain (as well as others) is blasted out to a global network of decentralized nodes. Each node updates its ledger in real-time. So, for each transaction, we are recording a debit and credit (double-entry accounting). But we add a final step - every node (computer) on the network also updates their ledger. Every node agrees with each other. This functions as an automatic audit.

  • Blockchains are immutable and more secure than traditional payment systems. Why? Because traditional systems are centralized. A bad actor has 1 target. With blockchains, there are thousands of computers running the software and updating the shared ledger. Therefore there is no central point of attack.

Keep in Mind: You are an Early Adopter

The reason it feels scary to use Bitcoin or other blockchains today is the fact that we are so early. If you remember the early days of the internet, we can think of it as being about 1997 in terms of blockchain adoption. This means the user experience is still quite clunky. Remember when you would get kicked off of AOL when someone called the house? We are like that early today. Businesses today are working feverishly to make it easier for the general public to engage with Bitcoin and other blockchains. In the meantime, we need to be patient and aware of how nascent this technology still is today.

That’s it for today. Next, we’ll do a deep dive on personal security (including types of wallets that I did not cover here). We’ll also discuss taxes and best practices to ensure that you are staying compliant and above board.

___

Thanks for reading and for your continued support. Have a question, comment, or thought? Leave it here:

And if you’re getting value from these reports, please consider sharing them with your friends, family, and social networks so that more people can learn about crypto and blockchains.

Take a report.

And stay curious my friends.

Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general investment information only, is not individualized, and as such does not constitute investment advice.

© 2024 The DeFi Report. All Rights Reserved.