Read the Whitepaper
Businesses have annual reports, politicians have tax returns (most of the time), and cryptocurrencies have the whitepaper. Every cryptocurrency or token released will have a whitepaper; it’s almost ceremonial. Popularised by Satoshi Nakamoto’s original whitepaper, the concept caught on because it’s an easy way to get a little technical and showcase the true benefits of the platform. Bitcoin’s whitepaper was a simple. elegant, 9 page masterpiece. What enamoured people about it was, in a few pages that almost anybody could understand, Satoshi created and outlined a technology that would change the world.
Not every cryptocurrency you find will have a whitepaper like Satoshi’s. Some stay true to form, like the similarly elegant 8 page RaiBlocks whitepaper. Some are simplified for consumers, while some are just plain copied from other cryptos. A whitepaper can tell you a lot about the project roadmap and how innovative the actual technology of the product is. If the whitepaper beats around the bush and doesn’t contain many details about the tech itself, it’s safe to say that they’re avoiding something, so it’s best to be wary.
Here’s some whitepapers to get you started:
Understand the Market Cap
The market capitalisation of a coin like usdc is the price of the cryptocurrency multiplied by its circulating supply. The circulating supply is the amount of times in people’s hands at the time. The total supply is the total possible supply it could ever be. Bitcoin for example, has a total or max supply of 21,000,000 BTC, though the circulating supply right now is around 17,000,000 BTC. The max supply will only be reached some time in the 22nd century. These variables are different for different coins.
- Ripple has a circulating supply of 38 billion tokens, with a total supply slightly under 100 billion (due to Ripple’s token burn). However, much of Ripple’s tokens lie with founders and associated institutions, so the actual available supply in the market needs to be considered.
- Kin, a project by messaging app Kik, has a circulating supply of a whopping 756 billion, with a total supply of 1 trillion coins. This means that each Kin’s price is in the order of $0.0007 USD.
When considering cryptocurrencies, it’s not the price of the coin that matters, but the market cap. A coin like Ripple might seem orders of magnitude cheaper than Bitcoin, but since there are so many more Ripple tokens in the market than Bitcoin (38 billion vs 17 million), their market caps are in the same order of magnitude (hundreds of billions).
The market cap of a coin is similar to the public float of a company when measuring the value of its stock, since it’s based on circulating supply and not total supply.
Figure Out How to Store Your Cryptocurrency Before Buying
If you’re not day trading, it’s best to take your hard earned cryptocurrencies out of an exchange like Coinbase or Binance and keep it with yourself in a wallet. In an exchange, you don’t truly own your cryptocurrency – the exchange does. If the entire operation shuts down, you could lose all your coins. Most people set up desktop or hardware wallets and store their coins safely and securely. In 2014, when Mt. Gox shut down, thousands of people lost millions of dollars worth of Bitcoin and there was nothing anyone could do about it. The Bitcoins on Mt. Gox were lost.
The thing is, each cryptocurrency is unique, and will have a different process for transferring funds. A Bitcoin wallet and Ethereum wallet address will have different fundamentals and will require you to use it differently. But how can i buy ethereum with paypal?
Cryptocurrencies and ways to store them:
- Bitcoin: Electrum, Mycelium, or Bitcoin Core.
- Ethereum: MyEtherWallet
- You can use the Ledger Nano S hardware wallet or Jaxx.io client for most popular cryptocurrencies.
Always Look at Transaction Fees
Most cryptocurrencies have a transaction fee, as well as an exchange fee if you’re trading on exchanges. The transaction fee is usually paid to the miners or bookkeepers of the network while the exchange fee is a cut (usually 0.1% to 0.2%) that the exchange takes on every trade you make. Some cryptocurrencies don’t have any transaction fees. Popular cryptocurrencies without transaction fees are RaiBlocks, NEO (for now), IOTA, and Byteball.
The important thing about transaction fees is they are dynamic and keep changing a lot. Bitcoin is suffering from ultra high transaction fees right now because so many people are using it, leading to network congestion. This means that one day your minimum recommended fee could be 700 sats/Byte or 150 sats/Byte. That’s the difference between a $30 and $2 fee, and it can fluctuate wildly.
Check the latest transaction fees at
- Bitcoin: bitcoinfees.earn.com or Johoe’s Bitcoin Mempool Statistics
- Ethereum: ethgasstation.info
If you put in low fees, your transaction might not be processed in the blockchain for several hours or even days. You also shouldn’t over pay for no reason. So before sending any transaction you should check the latest recommended transaction fees. This isn’t just true for Bitcoin or Ethereum, but for every cryptocurrency that requires fees.
Get Familiar With Crypto Terminology
- Shilling: The act of covertly advertising something for your own benefit. For example, going to a public forum like the /r/cryptocurrency subreddit and adding saying “X Coin is the next moon! People not buying this at $0.1 are obviously idiots.” That’s a shill.
- Mooning/Going to the moon: When a coin jumps up in price, it’s “mooning” aka going to the moon. This refers to the drastic increases in price charts.
- Bag holders: People whose coins aren’t doing so well. They bought their “bags” of coins but are now looking to sell, except they can’t, because no one wants to buy their bags.
- Shitcoins: Back in the day, any cryptocurrency that wasn’t Bitcoin, was an altcoin. Through Bitcoin’s 9 year success and rally, these altcoins which never did anything and had no reason to exist, became known as “shitcoins”. It’s an insult people use for coins that are scams or don’t meet their criteria.
- HODL: A really old but popular Bitcoin meme, a misspelling of HOLD. It refers to holding onto your cryptocurrencies and not getting scared by the ebb and flow of price crashes in the market.
Be Wary of ‘Pump and Dumps’ and Market Manipulation
Cryptocurrency is an unregulated market, so a lot of weird things can happen which would be illegal in your run of the mill stock exchange. One of this is the pump and dump, where a group of people coordinate and mass buy a cryptocurrency at a specific time, jacking up the price. Unaware investors see this sharp spike, think the coin is hot, and buy as well, raising the price even more. This is the pump. The original coordinated group then sells at this increased value, leading to a crash – the dump.
You do not want to get caught in a pump and dump. This practice is so rife on small market cap coins that you can assume any sharp spike that happens for no reason (no new information released) is a PnD. For this reason, you should always invest in a coin based on its fundamentals and long term viability, and not the minutiae of day-trading prices.
Always Use 2FA
Most cryptocurrency exchanges and wallets support 2FA, Two Factor Authentication. This adds an additional layer of security, so you don’t just require your password or private key, but also a piece of information that only you have. This code be a temporary code available on your phone or email, depending on the service. Always use 2FA whenever the option is available. Yes, it takes some extra time, but it’s worth it in the long run as it stops brute force attacks and hackers from stealing your hard earned cryptos.
You can use Google’s 2FA, Google Authenticator on popular exchanges such as Kucoin and Binance.
Understand Your Country’s Tax Laws
Different countries have different tax situations when dealing with cryptocurrency.
- The United States, under a new law, treats all cryptocurrency trades as a taxable event, and cryptocurrency itself is treated as property. This means you pay capital gains when cashing out to USD, and taxes on every trade you make between two cryptocurrencies.
- South Korea’s central bank classified cryptocurrency as a commodity in October 2017.
- Japan, on the other hand, recognised multiple Bitcoin exchanges and officially recognised Bitcoin as a payment method. Cryptocurrency (Bitcoin specifically) in Japan can be used to buy a car, or a coffee, and many local establishments accept Bitcoin as a means of payment alongside the Yen.
- India, unlike Japan, does not recognise cryptocurrency as legal currency. India’s Income Tax Department has not released any official guidelines on whether to tax profits from cryptos as a capital gain, or whether to treat it as business income. This distinction would have provided a clear directive as to whether Bitcoin is treated as property, a commodity, or a currency. So far, the only official directive in India is that cryptocurrency is unregulated, taxable, and not legal tender.
It’s important to consult a financial or legal advisor in your country to sort out taxes. The limited information above might soon be wrong and outdated. Since cryptocurrency is a new and fast-developing field, and many governments are scrambling to get their act together, there are regulatory risks that you have to consider. Nobody will be able to help you except your own financial advisor.
Follow Your Cryptocurrencies on Social Media
If you’re buying a cryptocurrency, it’s important to be a part of the community. Keeping yourself updated will give you a feel for the growth of the project you have invested in. It’s actually an important part of researching a coin.
- Take a look at the development team, and their LinkedIn and Twitter updates.
- Join the Telegram groups, Slack groups, and Subreddits.
- Interact with the community, ask questions and understand what other people think about it. No one can answer your questions better than the devs.
This will help you gauge not just the legitimacy of the project but also the dedication of the devs and the community surrounding them. I have personally found that the projects with the most active communities do very well.
Do Your Own Research
There are many great guides about what cryptocurrencies to buy. I’ve written a few here:
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The 5 Most Promising Cryptocurrencies to Buy in 2018
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6 Undervalued Cryptocurrencies That Have the Potential to 100X
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5 Safest Cryptocurrency Bets for 2018
Slack and Telegram groups that would tell you which coin to buy, or celebrity influencers such as John McAfee, will constantly be talking about ICOs or one of the over 1500 cryptocurrencies.
Don’t fall for it! There is no replacement to doing your own research and your own due diligence. In this market, when someone gives you advice on a coin to buy, you should assume they have a financial interest from popularising that coin. Everything mentioned in this list, such as reading the whitepaper or following their social media pages and understanding the team, goes towards researching.
Conclusion
The 10 things you should know about cryptocurrencies before you start investing in a coin, are:
- Read the whitepaper
- Understand the market cap
- Figure out how to store your cryptocurrency
- Be aware of the latest transaction fees
- Get familiar with crypto terminology
- Be wary of pump and dumps
- Always use two factor authentication
- Understand your country’s tax laws
- Follow your cryptocurrency on social media
- Do your own research
Cryptocurrencies are volatile and risky, but understanding the market around them will help you identify successful projects. In a world that’s moving towards decentralised apps, smart contracts and blockchain solutions, knowing how cryptocurrencies work can be a huge advantage. Hopefully these tips and tricks on cryptocurrencies will help you in that journey.