Summary: In this post we explore the key ways by which you can buy, hold and transfer cryptocurrency to meet your specific needs, including an explanation of the fees charged by each provider and how to move cryptocurrency around using wallet addresses.
Centralized: run by a company with a management team and staff
Cold wallet: an offline device on which you store your cryptocurrency
Cryptocurrency exchange: a platform on which you can buy, sell and trade cryptocurrency
Decentralized: run without a central management team, typically through digital contracts
Hot Wallet: an online wallet hosted by a provider in which you hold your cryptocurrency. Some also allow you to buy cryptocurrency with fiat, or traditional currency and swap your cryptocurrencies
KYC: Know Your Customer, or KYC, involves providing personal information to confirm your identity before using a service
Off-Ramp: where you can exchange your cryptocurrency for fiat, or traditional currency and transfer it to your bank account
On-Ramp: where you buy cryptocurrency with fiat, or traditional currency
Seed phrases/keys: the security code for a cryptocurrency wallet that, if lost, will mean you lose access to your funds forever
Web3 wallet: a cryptocurrency hot wallet attached to your web browser, typically used for DeFi
So, you have decided that you would like to buy some cryptocurrency, but you have no idea where to start – you are not alone. While cryptocurrency adoption is becoming ever more mainstream, knowing how and where to buy your first cryptocurrency is not as clear as opening a bank account in traditional finance.
It is by no means impossible, however. Indeed, in just a few simple steps you can have a cryptocurrency wallet up and running, allowing you to buy your favorite crypto. From there you will be able to move it around the cryptocurrency ecosystem to take advantage of all the exciting new innovations happening, not least in decentralized finance (DeFi).
What do you want to do with your crypto?
The first thing to consider is what you want to buy crypto for. Is it just to hold it in the hope it will increase in value over time or do you want to start trading with it? Or perhaps you have decided you want to deposit it with a DeFi wealth management platform to earn a high annual percentage yield (APY). Your answers to these questions will determine where you go to buy your first crypto, so make sure you think about this before starting your research.
Wallets for buying, holding and selling
If you are planning simply to buy crypto to hold onto it (or HODL, in crypto slang) then you will likely need a secure wallet. The most secure wallet is called a cold wallet, and this is a physical device that you plug into your computer and then follow the instructions to set up. You can then buy cryptocurrency through an on-ramp service like a cryptocurrency exchange, and download it onto your device.
Hot wallets are online wallets managed by a service provider and are a good place to start for beginners. Some of the biggest centralized cryptocurrency companies host hot wallets, such as Binance, Coinbase and Blockchain.com. These companies are both on-ramp and off-ramp services - meaning you can buy cryptocurrency with fiat, or traditional currency, and also transfer it back to your traditional bank account all in one place. Many also have exchanges that you can also trade your cryptocurrency on.
Fintechs and currency exchange providers
For an alternative approach to cryptocurrency purchases, there are a handful of apps and platforms where you can on-ramp by simply exchanging your fiat currency for cryptocurrency, like a traditional foreign exchange company. These include Wirex, which is a crypto-focussed currency exchange service, as well as some traditional finance providers that are moving into crypto: most notably PayPal and Revolut. Some of these will also give you a Visa or Mastercard with which you can spend your crypto directly with retailers.
Web3 wallets for interacting with DeFi
If you have decided that you would like to purchase cryptocurrency so you can participate in DeFi, you will need to have a particular type of hot wallet called a Web3 wallet. Web3 wallets are an extension of your internet browser that allow you to connect with different platforms and protocols to deposit and exchange your cryptocurrency.
Unlike hot wallets, Web 3 wallets do not require you to give your personal details, known as “Know Your Customer (KYC)”, to open an account. Because of this, however, not all of them, allow you to buy cryptocurrency directly within them. Typically, you will need to transfer funds from a centralized exchange first, and then move your funds to your decentralized Web 3 wallet (more on this later).
Keeping your crypto safe
No matter where you decide to buy and store your cryptocurrency, the most important thing is to keep it safe and secure. Unlike with a bank account, where the bank has full control and responsibility for keeping your money safe, in cryptocurrency this is entirely down to you (with the growing exception of more mainstream financial service providers now offering crypto services like PayPal and Revolut). Typically, when you open a crypto wallet you will set a password and be given a very important set of words, known as your seed phrases, or seed keys.
Seed phrases or seed keys (same thing, different names) are essential to the security of your account. This is what you will use to retrieve your crypto if you lose the password, switch devices, or - worst case - the wallet provider or platform you are with is hacked. If you lose these keys you lose access to your crypto, with no way back. As such, it is essential that you keep your seed keys safe and offline: do not store them on your cloud notes, for example. Instead, write them down and put them somewhere very, very safe. You should also add two factor authentication to your account, which you can find out more about here.
Fees on buying crypto
Now we come to the thorny issue of fees. As in most areas of life, convenience comes at a price, and as such, the most expensive way to buy cryptocurrency is typically through a hot wallet with a larger provider (though not always). These fees, however, are often not clear. Blockchain.com, for example, quotes a wide spread for buying, swapping, and transferring crypto within its wallet without this always being obvious to the customer.
Currency exchange providers can also be expensive. Paypal, for example, charges a combination of a spread (or margin) between the market price and the quote it recieves from its trading service provider (Paxos), plus the exchange rate between US dollars and the crypto asset you are buying and adds a transaction fee on top of this. They will quote a total fee before you complete a transaction, but there is not way to calculate this before going through the process. This is broadly the same for Revolut as well as crypto-first currency exchange providers like Wirex.
Usually, the most cost effective way to buy cryptocurrency is through a centralized cryptocurrency exchange like Binance or Coinbase, although not always. It may be that you have to pay a higher fee to first purchase your crypto through a hot wallet, but then you can move funds through an exchange to avoid high fees later on. This will depend on how and where you choose to buy your cryptocurrency in the first place, and what is available in your particular region. Do some research here before you buy.
Moving your cryptocurrency around
Most cryptocurrency wallets have an “address”: a long string of letters and numbers that you can use to transfer funds in and out of that wallet, as well as receive funds (this is not the case for PayPal or some other currency exchange platforms). If, for example, you have bought cryptocurrency to deposit funds with a DeFi wealth management platform, you will need to buy your cryptocurrency on one of the on-ramps described above, and then send them to your Web3 wallet using that wallet’s specific address.
Just like seed keys, addresses are very important in crypto: if you happen to send your funds to the wrong address, they will most often be lost forever. So be sure to check and double-check an address before sending your funds. Many providers make this easier with a QR code you can scan, but still be careful! And this holds for your entire crypto-journey – while buying cryptocurrency has become much easier, risks remain. Always do your own research and make sure you are using the most suitable and safest services that meet your needs.
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DISCLAIMER: The content of this article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up, and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.