First steps of crypto trading: The importance of wallets and exchanges
The best way to learn crypto trading is to jump in and do it, but that doesn’t mean that you shouldn’t have a plan. If you’re a complete beginner, you may not even know how to jump in. That’s okay. In this series, we’re going to start with the absolute basics and work our way up. Once you start, you’ll see that it’s not as difficult as you thought.
First steps In crypto trading
Let’s begin at the beginning. You can’t trade cryptocurrency if you don’t have any, and for some, that’s the most intimidating part. But it doesn’t have to be!
Rule number 1 in crypto trading is, never invest more than you can afford to lose. It’s okay to start small when you start. In fact, it’s smart to start small until you get the hang of everything. Do NOT borrow money or invest your life savings into cryptocurrency. Crypto is still a new thing, and as such it is still volatile. It will go up and down which means you can lose money while you learn to invest in cryptocurrency.
Decide on an amount that you feel safe starting with. Then you need to choose an exchange and a wallet. Let’s look at exchanges now, because there are several to choose from.
Choose an exchange
There are two types of cryptocurrency exchanges. Centralized exchanges and decentralized exchanges. Centralized exchanges are the most common of the two. Some of the most popular centralized exchanges include Coinbase, Kraken, Binance, and Gemini.
Centralized exchanges are where you make exchanges between fiat and cryptocurrency. What this means is you can use your money to buy crypto, or you can convert crypto into regular money. Your transactions are safe and your assets are protected. Most exchanges take place on centralized exchanges. They are easy to use, and have high liquidity.
Fiat currency: Government-issued currency such as the U.S. dollar or the euro.
Liquidity: Liquidity is how easy it is to convert an asset into another asset, without disrupting prices. The higher the liquidity, the better.
Centralized exchanges are not perfect. When you use a centralized exchange, you don’t hold your private keys. This means you don’t have full control of your crypto. The flip side of that is, you don’t have to worry about losing your private key. This is good because if you lose your key, you lose access to your assets forever. You should also be aware that hacks have occurred on centralized exchanges. It’s not easy, but it does happen on occasion.
Decentralized exchanges are sometimes referred to as DEX. These exchanges are where you can trade alt coins that you may not be able to trade on a centralized exchange. Commonly used decentralized exchanges include YOLO, Uniswap, Aave, and MDEX.
A DEX works like a server. It has computers connected all over the world instead of in one single central location. If one computer is compromised, the others still have run the network. Hacking a system like this is very difficult if not impossible. This translates into high security. You also have access to far more coins on a decentralized exchange. There are thousands of alt coins available. Most of them aren’t found on a centralized exchange.
Centralized exchanges need your identification to set up an account. Decentralized exchanges do not, because there is no regulatory body running them. On a decentralized exchange, you control your private keys. Of course that means you are also the only one at fault if you lose them. You can’t call 1–800-LostMyKey and get a new one.
The downside to decentralized exchanges is that they are often slow. Front running can be an issue because every transaction is visible before it’s even mined. Someone can pay more to have their transaction mined first. Other downsides include expensive cancelation and trade failures.
Decentralized exchanges are more popular than centralized exchanges. Both exchanges have a place in the world of crypto trading. Which type of exchange you use is up to you, but you don’t have to limit yourself to one. You may want to try different exchanges and see what you like best.
Now that you’ve chosen an exchange, let’s talk about keys and wallets.
The keys to your crypto
A crypto wallet is an app or device that allows you to store your crypto assets. It’s much like a physical wallet that stores your money. A wallet keeps assets safe and gives you easy access if you need to use them. The difference of course, is that crypto assets are digital. You aren’t storing actual cryptocurrency in your wallet. You are storing the public and private keys connected to the public digital address where your digital assets are kept. You cannot access your assets without your private key.
Think of a private key as a secret code that you, and only you, have access to. If you lose your secret code, you can’t get to your digital access. The digital “door” remains locked unless it’s opened with the secret code, your private key. This is very important to remember, because you are 100 percent responsible for your private key. If you lose it, your crypto assets are gone forever. A public key is also necessary to make transactions. It’s another code that is used to make transactions between two parties.
Cryptocurrency cannot be sent or received without both a public and private key. Only the user knows their private key. It’s what authorizes a transaction to be made. The public key verifies ownership of the private key. Then the public key creates a public address. This information is stored on the blockchain as a permanent record of each transaction.
You should have a better understanding of how keys and wallets work. Now let’s go into more detail about wallets.
Crypto wallets
There are two main types of crypto wallets: Hot wallets and cold wallets. A hot wallet is connected to the Internet. This makes them really easy to use, but also makes them more vulnerable to being hacked or being exposed to other security issues. A cold wallet is not connected to the Internet, allowing them to be free from security issues. The tradeoff is that they are not as easy to use.
Most experts recommend having both wallets. Use a hot wallet for small amounts of cryptocurrency so you have it available to make purchases and other transactions. Keep the rest of your assets in a cold wallet to keep it safe.
Hardware wallets are like small USBs that are used to store your keys. Hardware wallets are more secure because they are not always connected to the Internet. But, they can be connected when needed. Some feel these types of wallets are not beginner-friendly.
Software wallets are apps on your computer or smartphone. They are very convenient, but not as secure because they are always accessible. If you use this type of wallet, always back everything up on a regular basis to keep your assets safe.
Crypto storage on exchanges
Now you may be wondering why you need to worry about wallets when you can just keep your crypto on an exchange. There are two reasons.
One reason is, when your crypto is left on an exchange, you don’t get a private key. And as they say, no key, no crypto. If the exchange goes down, your crypto goes with it.
The second reason is, exchanges can, and do, get hacked from time to time. If all your assets are stored there, they can be stolen if the exchange gets hacked. This may not be a huge issue if you’ve only bought $20 in crypto. But if you have a significant amount, it could be a financial catastrophe.
The best thing you can do is store your crypto in a wallet (or several, ideally) and only have the amount you want to trade on the exchange.
You should now be fairly comfortable with crypto exchanges and wallets. The next article in this series will discuss types of cryptocurrencies, and actually buying your own. Because you can’t trade if you have nothing to trade with.
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