Bitcoin and cryptocurrency may be new to you; they are to most people. Even seasoned investors and Wall Street big hitters are only now getting into digital currency. We’ve already started to see new Bitcoin-based investment products rolling out. The big players are coming and some hedge funds are already in.
Values have skyrocketed and people are desperate to invest. But they have concerns about security.
Even so, they’re ready to risk the kid’s college fund because their friend at the bar said Ripple is going make them rich.
I have been talking to people I work with about digital currency for quite a while. They didn’t want to know about it until it became a legitimate news headline.
Investment advice is something I don’t give because I want to keep my friends. But I currently have everyone and their mother asking me about Bitcoin and how they can buy it. What is it? Is it safe? Who can they trust online?
You should never rush into buying digital currency. Do some research on the safest way to buy it and talk to your financial adviser before you make a purchase. I know Bitcoin most likely went up by $1,000 yesterday, but don’t panic. It may well come back down again next week. The market fluctuates a lot.
I have answered the same questions so many times that I decided to compose a top 10 list of frequently asked questions.
Friends, if you’re watching, please read this.
1. How do I buy Bitcoin or any of the other cryptocurrencies?
To buy cryptocurrency, you need to sign up for an account at an exchange. There are many, and everyone tells you theirs is the best because of lower fees or reliability. I prefer to go for security when it comes to money. I’ll pay a little more or wait an extra day if I know my money is safer.
I go for what people would say are the obvious, safe choices. I have made many transactions using two particular exchanges and never lost a cent. I’m not saying it’s easy, and it can be frustrating. It works if you take it slowly and do basic security measures every time you trade.
So, who do I currently use and recommend that you try first?
Recognized as the safest exchange. This does come with issues like temporarily frozen accounts. New security checks are starting to prevent this but add time to verification. Easy to use.
*Full disclosure. If you use this Coinbase link and buy or sell $100 of digital currency or more, we will both earn $10 of free Bitcoin.
It takes time to get used to their user interface. They have lower fees than Coinbase. Apparently, they have never been hacked.
2. Why do I need to sign up for more than one exchange?
Coinbase trades Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Bitcoin Cash (BCH). Kraken also trades additional currencies that Coinbase doesn’t, like ZCash (ZEC) and Monero (XMR). Moving money in and out of the exchanges can be slow at different times of the day. Kraken often presents an error page because it is busy.
Coinbase can be slow or be doing maintenance at the time you need to buy or sell. Kraken also requires you to wire money in, so you have to pay your bank a wiring fee in addition to a fee paid to Kraken. Coinbase uses ACH from your bank account. The cost to trade depends on how much cryptocurrency you buy.
Coinbase will let you buy currency at the price it is when you do the trade. The actual transaction can take a week to go through if you are using your bank account. Kraken makes you wait until the wire is complete before you can buy. In recent times, this can take a while, and you could have made a few hundred dollars if the money had moved quicker.
And sometimes, you make some money by hitting a dip!
Coinbase and Kraken both have phone Apps. The Kraken App is currently only for iOS devices but Coinbase has Android as well. There are also some third-party Apps available. I do not recommend you ever trade using your phone. There are far too many security issues. Using a phone is convenient though. It may be an option with small amounts for day-to-day purchases.
Both exchanges have their quirks, and as you will see in the next answer, two exchanges are safer than one. Start with Coinbase, as it has a friendlier interface. Then, open a Kraken account once you feel comfortable.
*UPDATE. Cryptocurrency trading has exploded recently and the exchanges are experiencing huge traffic. Kraken is especially slow and trades take many attempts. I still use Coinbase and Kraken and will monitor their services.
**I have now added Binance. It is easier than Kraken to get approved and they are adding more cryptocurrencies. Give them a try: Binance.com
Also, try Bittrex and Poloniex. Only use Bittrex if you want to trade an altcoin not on Kraken or Binance. Poloniex has a bad rep for customer service so we suggest using them only if you have issues with the other exchanges.
Coinbase users should think about using GDAX instead. You can login with your Coinbase details. The trades are cheaper on GDAX and the interface is more suited to trading.
3. Is my money safe in the exchanges?
If you leave money in the exchanges (never leave more than a small amount in to trade with. And only if you can afford to lose it), it is better to spread it between the two mentioned here. You never know. Hackers are trying to get into these sites 24/7.
There is also something called asset lock. This can happen for various reasons, and it has nothing to do with hackers. Asset lock occurs because of government regulations. The exchanges must verify you so you can take out larger amounts. Because of the backlog, verification can take weeks. That could leave you waiting while only being able to draw out a small amount each day. If you have two exchanges, at least you can withdraw smaller amounts from both until you get verified. For most smaller investors asset lock will not be a problem.
There are extra security measures you can take to safeguard your money. Taking your cryptocurrency offline is one. You become your own bank. Do this by using a paper or hardware wallet or a clean computer that is for your digital currency only. This is what’s called cold storage.
The short answer is that I don’t trust anyone or any establishment when it comes to money. There’s not only hacking issues but a lot of unintended human error as well. Use techniques taught on this site and you’ll have less chance of losing everything. Even if one exchange does go down.
If I had cryptocurrency to store I would use cold storage.
4. What do I need to open an account?
It’s like opening a regular bank account, but it can be slow to get approved. I read estimates of up to 100,000 people joining Coinbase per day as Bitcoin got up in the $10,000-plus region. Coinbase displayed a warning to anyone opening a new account that stated: “ID verification is currently failing to complete due to high traffic.”
Forget customer service on these websites; they can’t keep up. I have tried contacting them, and they got back to me weeks later. I had solved the problem by the time they contacted me.
These are not bad or sketchy companies. They are trying to keep pace with an exploding market. Things like speed and customer service will get better. Even though everyone has heard of Bitcoin, these are still early days.
For Coinbase and Kraken, you need government photo ID. You must provide scans of the back and the front of your driver’s license. I had trouble getting mine approved. The best way is to put the ID on a black background and scan it. Once I did that, it went through first time.
Kraken has different tiers that limit the daily and monthly deposits and withdrawals. Go through the process and get tier 3 qualification. The fees are lower for higher tiers.
Kraken makes you hold up a piece of signed paper with the date. You have to write “Only for trading digital currency on Kraken” on it for tier 3 approval. You take a photo of this while also holding your ID next to your face. It’s like a ransom note in a movie.
These exchanges are doing as much as they can to keep things safe and legal. I see a lot of complaining online about the long, slow processes to get verified. When it comes to money, exchanges have to do whatever they can to make sure the process is safe. Despite the inconvenience.
5. I read that cryptocurrencies are scams.
There is some validity to that statement. The majority of cryptocurrencies are most likely scams. I do not believe they all are. As I often mention, I do not give investment advice, and I would never tell you what coins to invest in. My personal take is that I stay with the established cryptocurrencies. The major players with track records and quality teams behind them. I also do as much research as I can. I don’t care what any so-called expert is saying. With so many different coins, it can be confusing.
Don’t take anything at face value or gamble on a coin because it’s cheap. Do your own research before you part with a single penny.
6. Why do all these different currencies exist?
If you go a bit deeper, you will see that different coins solve different problems. How well they solve problems might be an indicator of how legitimate the coins are and how well they do over time. There won’t be one outright winner, like technologies in the past. This is not like VHS and Betamax in the 70’s. Yet, that isn’t to say that some will not fall by the wayside; they will.
To give you an example, here are the basic functions of two of the bigger coins out there.
Litecoin – A faster and lighter coin than Bitcoin. Transactions are four times faster, and they are cheaper. This makes it popular for smaller payments.
Ethereum – A platform that can run apps and software. Used for self-executing contracts known as smart contracts. This means a transaction can happen without middlemen, like accountants and lawyers.
7. It all seems so underground and shady. Not like a legitimate currency a government control.
Legitimate like the currency in Venezuela that the government decided to withdraw? The Venezuelan government took the 100-bolivar note out of circulation. They only gave citizens 72 hours’ notice. This caused much disorder and looting.
The Zimbabwean dollar became worthless because of inflation. Shops in Zimbabwe began to accept only foreign currencies so they could use it to import goods. Civil servants were still paid in Zimbabwean dollars even though they were worthless. That meant they had to take a wheelbarrow of cash to buy anything. The result was that in 2016, around 90% of all transactions in Zimbabwe used US dollars.
Some citizens in both these countries are adopting ZCash to buy and sell. You can use ZCash for private transactions so the government cannot trace what you are doing. That’s something you cannot do with Bitcoin.
I have seen this government failure myself. Travelling through Eastern Europe I saw the same thing in Yugoslavia in the 80’s. I remember filling up the gas tank and giving the attendant stacks of dinar. It was the last stop before we left the country, and we all gave him handfuls of cash. And that was after we had bought every item at the gas station.
The US government prints more money and devalues it all the time, and we let this happen. The government is stealing from us. No one knows how many notes are in existence. This can’t happen with Bitcoin because there can only ever be 21,000,000 coins minted. That is why the de-centralized nature of cryptocurrency is so appealing.
The US does not currently have riots in the streets or many of the problems these other countries have. We do like to let banks and unscrupulous traders rip us off and walk free every now and then, though.
Japan is forging ahead With Cryptocurrency
Half the global trade volume in Bitcoin takes place in Japan. Bitcoin is a legal form of payment there. Some of Japan’s well-known stores and restaurants accept it. Remember, this is following the collapse of a big exchange, Mt. Gox. Since then, there have been many new regulations introduced. The Japanese are doing their best to make sure it won’t happen again.
8. Can I put cryptocurrency in my US bank account?
No. If you want to cash out, you have to sell your cryptocurrency on one of the exchanges first. Then, you can transfer the dollar value to your bank account. There are transaction fees for this.
9. Do I have to pay tax on my cryptocurrency?
Yes. In 2016, only around 800 people paid tax on their cryptocurrency trades in the US. I’m pretty sure more people than that should have paid tax. That won’t go on forever, as the IRS will get their money one way or another.
Remember, Bitcoin is not 100% anonymous; the IRS can trace it.
As I understand it, if you buy and leave cryptocurrency in your exchange account, you don’t have to pay tax on it.
1. When you exchange it into Fiat (state issued legal tender) currency.
2. You exchange it for another cryptocurrency and show a profit.
3. Or you buy things with it.
You must pay tax.
In the eyes of the IRS, cryptocurrency is not currency; it’s property. A capital asset. Like shares, you will have capital gains and losses once you dispose of it. If someone pays you in digital currency for goods or services, you must pay income tax on the gross amount. The IRS determines the value of the currency using the dollar amount value on the day of the transaction.
The IRS has issued guidelines on reporting your digital currency taxes here.
We have an article about cryptocurrency and taxes. Check it out here.
*Full disclaimer: I am not a tax adviser. I know nothing about tax or tax law. This answer is for entertainment purposes only. See your registered tax expert for the laws on digital currency.
10. Will I get hacked buying digital currency?
You might, but that is the nature of the internet.
If you follow the practices we recommend, you will narrow your chances of getting hacked. It can still happen, so you should never take any shortcuts.
The viruses are out there, of course.
CryptoShuffler is one Trojan virus that hit the news. When you send or receive cryptocurrency, you have a long address to cut and paste or scan. CryptoShuffler replaces this address, and the cryptocurrency goes to the hacker instead.
Always check the addresses on any transaction before you hit send or receive. If the address is different, cancel the transaction. Come offline and scan your computer for viruses and malware.
The Cryptocurrency Market Moves Fast
I hope we’ve answered some of the questions you have about cryptocurrency. The market changes fast and so should you.
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