With the information and fair warnings out of the way, let’s say that you’ve considered things deeply and would like a little exposure to crypto.
Well the biggest deterrent for most people is the barrier to entry. Where do you even start? You can’t buy crypto directly through most stock brokerages. You can't store crypto at your bank.
There's a few potential approaches you can use to buy crypto. The right one for you will depend on your level of technical ability and how much effort you want to put in. Of course there are trade offs to each.
By far the most common way for people to buy and sell crypto is through an exchange. Some of the most popular regulated exchanges include Binance, Gemini, Crypto.com, and Coinbase. Exchanges are online marketplaces where you can use your fiat money to buy and sell crypto. They are third party companies that act as market makers and facilitate trades. For their services, exchanges will take a fee on any trade. A lot of the complexity of buying crypto is hidden away by exchanges and the user experience is usually fairly painless. You don’t need your own crypto wallet. Exchanges generally require customers to go through KYC (know your customer) verification processes, which goes against the anonymous premise of crypto according to some people. The big tradeoff for this user friendliness is that the exchange technically owns and controls the crypto you hold there. Say whaaaa? Yeah, the crypto is not in your own wallet. You are still relying on a trusted third party. A lot of people know this compromise and are ok with it. You might be too. We’ll come back to this point in a bit since there’s more to dig into.
Peer-to-Peer (P2P) Crypto Trading
It is possible to buy and sell crypto directly with other people on decentralized marketplaces. According to some crypto purists, this is the way that crypto was meant to be transacted. There will not usually be any platform trading fees aside from the costs which power the verification of blockchain transactions themselves (since you are actually trading crypto yourself). Because there is no company backing P2P marketplaces or regulations being enforced on them, there will be no protection for you if things go wrong. For trading crypto peer-to-peer, you’ll need to actually hold the crypto yourself in your own wallet which can be more complicated than using an exchange. One popular P2P marketplace for crypto is Bisq. You never even need the marketplace as long as you can find a willing buyer or seller for your crypto - just make the trade directly with them.
In some places, you might see ATMs that allow you to buy crypto with a debit or credit card. These are still a fairly new concept and are not commonly used. The fees on these ATMs can be quite large. The rates usually are not very competitive with other methods of buying and selling crypto. Some people who can’t or don’t want to go through KYC processes might choose to use a crypto ATM since they offer some amount of anonymity.
Crypto Exchange-Traded Funds (ETFs)
Ok so this one doesn’t really count since if you buy crypto ETFs, you will only ever be buying shares in an index that tracks the price of common cryptocurrencies. If you’re looking for some exposure to crypto prices through a normal stock brokerage or if you want to have any crypto gains sit in a tax advantaged investment account, this will be your best bet.
First, you’ll want to figure out if you’re going to hold crypto directly yourself or let someone else hold it for you. The entire promise of cryptocurrencies is to reduce dependence on trusted third parties so if you believe that then you’re probably saying “I’ll hold it myself”. But there is a lot of complexity and additional effort that comes with that.
What does this have to do with custodians? Not much, unless you happen to be a particularly tech-forward custodian. These are just the words used to describe who holds the private key to the crypto.
If you hang around the crypto world for long enough, you’ll hear the mantra “not your keys, not your coins”. What does that mean?
When cryptocurrency gets sent anywhere, it goes to an “address” on the blockchain. If you receive crypto, the address is your public key. The public key can be safely shared with anyone.
The keys from the mantra above are referring to your private keys. The private key is critically important. If you have the private key, you have the crypto. It’s the password that unlocks the actual crypto assets behind the public key. The person or company that has the private key has complete power over what happens to the crypto. In the case of using a crypto exchange to buy, most of the time you are trusting the exchange to buy and hold on your behalf with their private key. With peer-to-peer trading, you’ll be in control of the private key and therefore own the crypto directly by yourself.
The flip side of owning the private keys and having full control is the responsibility of making sure that the crypto has the right security measures protecting it. There is no one to blame if you make a mistake and expose your own private key.
In some ways, a custodial wallet can be less secure than a non-custodial wallet because exchanges have been hacked or taken down in the past. Many people prefer custodial wallets though because you don’t need to make sure your private keys are safe by yourself and are usually more convenient.
The right choice is different for everyone!
A non-custodial wallet is a crypto wallet in which you are the only one with control of your private keys.
A custodial wallet is a crypto wallet where another party controls your private keys.
If you choose to buy crypto through a regulated exchange, most of the complicated parts of holding the crypto are hidden away since you’re probably not actually holding it yourself (it is in a custodial wallet). What is important if you go this route is to choose an exchange that has taken proper steps to make sure that your crypto remains safe and accessible to you. When you are doing your own research on exchanges, you might see that they describe a majority of crypto being held in “highly secure cold storage hardware wallets”. That sounds cool but we should really know what it means.
Crypto can be “stored” using two main types of wallets: hot wallets and cold storage. Stored is in quotation marks because the actual crypto itself lives on the public blockchain that everyone can see. The thing you are “storing” in a wallet is the private key that provides you control over the crypto. Hot wallets store your private keys through devices with internet access. Cold storage stores private keys on devices with no internet connection. The “wallets” here are just different ways of keeping the private key safe. Some are software while others are physical devices.
Hot wallets are considered less secure but more convenient because they are connected to the internet. You’re able to access your crypto right away through any online service but that also means that you’re more at risk to software attacks.
There are three main types of hot wallets:
- Web Wallets
- Desktop Wallets
- Mobile Wallets
Web (aka. online/cloud) wallets are software that is accessible on any device connected to the internet. They run on cloud servers. Web wallets allow you to access your crypto easily and trade quickly. Web wallets have more potential points of security weakness because of the convenience they provide.
With a desktop wallet, you download, install, and use the software directly on your computer’s operating system, rather than accessing it through a website or mobile app. Your computer does have its own risks like viruses and spyware to keep in mind.
Mobile wallets are apps on your phone. They make it easier to trade and manage your crypto like you would use any other payments app. The risk here is in losing your phone and someone being able to access it.
Cold storage wallets keep your private keys offline and disconnected from your computer. This is the most secure approach but it comes at the expense of being less convenient because you need extra steps to access your crypto when you trade.
Some types of cold storage include:
- Hardware Wallets
- Paper Wallets
Hardware wallets are physical devices that can be used to securely store crypto private keys offline. Private keys never leave the device. Cold storage hardware wallets minimize risks like data breaches from crypto exchanges and malware in web, mobile, or desktop wallets. Crypto purists usually prefer to keep their keys stored with hardware wallets. The higher security means more complicated steps to take when you want to trade.
Paper wallets are literally pieces of paper with the crypto public and private keys written on them. Then you put the paper in a secure place, like a safe. Old school, but this is actually one of the safest ways to store crypto offline. The risk is that paper can get lost or physically damaged.
The choice of where you buy and store crypto is a personal one. Think about the level of convenience vs security that will let you sleep well at night. Remember that crypto transactions are irreversible so make sure you know who you’re sending funds to!