Many investors are struggling to find a way to invest in the hottest investing trend of the decade: cryptocurrencies.
But the asset class is unlike any other that has ever existed. You cannot buy cryptos via a regular brokerage account, and your neighborhood bank will not accept bitcoin as a deposit (at least not yet). While I expect this to change rapidly, today’s crypto investors and speculators remain forced to use specialized crypto-exchanges to buy and sell.
While there is a new bitcoin futures market tradeable via some traditional futures brokers, the market remains very thinly traded, with high margin requirements. This, plus the relatively heavy vetting required for trading futures, makes them only suitable for very active and experienced investors. Not to mention the fact that futures are bitcoin only, eliminating access to the wide variety of other opportunities in currencies like ethereum and litecoin.
Detractors still refer to bitcoin and the others as imaginary coins despite the burgeoning rates of acceptance, not to mention their monster gains. One of the reasons for the cynicism is that cryptocurrencies trade on unregulated and often international exchanges. The fact that Tokyo-based Mt. Gox, the largest cryptocurrency exchange at the time, lost $450 million worth of customers’ bitcoin and descended into bankruptcy only served to fuel the negative sentiment.
Fortunately, there has not been a high-profile exchange failure since the 2014 Mt. Gox debacle. Make no mistake; this does not mean that it can’t happen again. I consider exchange risk to be the highest risk facing investors in the major cryptocurrencies.
Presently, the best way to mitigate exchange risk is to diversify your holdings across several of the most reputable exchanges. Personally, I use three exchanges, and each one has a different protocol for investing.
This article will present my three favorite crypto-exchanges, what they offer, and the procedure for buying your first cryptocurrency.
Coinbase is the largest crypto exchange, boasting over $20 billion in trading volume and over 10 million registered users. The exchange offers access to ethereum, litecoin, bitcoin, and bitcoin cash. It was rumored that Ripple would be available on the platform early in 2018, but the company has stated that it has no such plan. Coinbase also provides an active trader platform known as GDAX that has a plethora of features and analytics for short-term crypto investors.
It is relatively simple to set up an account and buy your first cryptocurrency on Coinbase. The exchange is one of the very few that allow the purchase of cryptocurrencies via U.S. dollars.
Your account is set up by clicking on the “sign up” button on the upper right-hand corner of the site. Next, you fill in the requested personal details and agree to the user agreement, and click the “create account” button.
You’ll then need to verify your email and choose your account type. Most of you will pick individual account unless you decide to own your crypto in another entity like an LLC.
Everything seems normal so far, but this is where crypto exchanges start to differ from traditional online stock brokers.
You will be asked to enter your phone number. This is not so the exchange can call you to suggest upgrades or sell it to a telephone solicitor, the reason is far more important. Your phone number is used as a two-step authentication security system to help keep your account safe. When you log into your account, Coinbase will text a code number to your phone that needs to be used to log into your account. Your username, password, and text code create a strong barrier against hackers accessing your account.
Next, you will be asked to confirm your identity via uploading a photo of a passport, driver’s license or photo ID.
Finally, connect your funding method, which can be a bank account or debit/credit card to your new account. Funding methods are verified by Coinbase via a small, refunded charge to your account.
Now you are ready to make your first order!
Gemini is an exchange launched by the Winklevoss Twins of Facebook fame. The account setup is very similar to Coinbase, but the exchange is not available in some states.
While you can only trade bitcoin and ethereum on Gemini, the exchange provides FDIC insurance for cash balances. This is rarity I consider a huge positive in the world of cryptocurrency sites. Unfortunately, there is no insurance once your cash is converted into digital assets.
Kraken is a true digital currency exchange offering 17 different cryptocurrencies for trading. There is a three-plus level approval process with each level more onerous than the last.
The first two levels are very similar to the steps of the above exchanges. Being approved for level 1 or level 2 allow full use of the exchange, but there is no funding via U.S. dollars. You need to transfer to cryptocurrency from your wallet or another exchange to make trades on Kraken.
Reaching the third level requires all the steps for the first two exchanges plus a selfie photo of yourself holding a handwritten sign with the date and “for trading cryptocurrency on Kraken only” on it. Doing this reminded me of most wanted criminal flyers at the local post office.
What I like about Kraken is that if offers the red-hot currency ripple. There are very few exchanges offering ripple that also accept USD, making Kraken one of my favorite exchanges.
Risks To Consider: Outsized risks exist in every cryptocurrency and exchange. Only use money that you can afford to lose when investing in cryptocurrency. Think of crypto investing more like speculation than true investing. Along with the high risk, huge gains can also be made. In the crypto world, risk truly does equal reward.
Action To Take: Get in the game! Open up an account with one or more of the above exchanges and buy your first cryptocurrency.
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