There are several ways to acquire crypto currency. You can mine them, earn or farm them, buy them off of an exchange, buy them on a custodial service, or buy them “over the counter”. As a beginner, I recommend keeping things simple and buying on an exchange or maybe a custodial service– though I think explaining the other methods helps in understanding both the technology of crypto currencies and its market. Also, note that I will shift between talking about crypto currencies in general and Bitcoin in particular. This is because the methods I describe are all applicable to Bitcoin but may not apply to all other crypto currencies.
Buying crypto currency from a custodial service/app
A custodial service is a website or app that allows users to purchase Bitcoin or other crypto currencies through a simple, easy to use interface- usually at a slightly higher price than one would pay on an exchange. Apps like Robinhood and Pay Pal offer these types of services. The downside to using these types of services are that you don’t have control over your private key — and don’t even have access to a public key. Currently, you cannot even use these apps to send Bitcoin to other people though I’m sure this will change in the near future or perhaps by the time you read this. Still, I do not see much of a use for this since its impractical as an investment and a payment system. However, I can understand someone who uses these platforms for other purposes holding some of their crypto currencies in these accounts as just an easy, frictionless way to add to their holdings.
There is one other benefit to custodial services — and that is over the counter (OTC) custodial funds that trade on conventional electronic trading platforms like Fidelity or E*Trade. Grayscale Bitcoin Trust (GBTC) is currently the leading fund with others coming soon. Each share of GBTC gives holders 0.00094825 BTC. So if Bitcoin is trading at $50,000 in theory one share of GBTC should cost $47.41. Sometimes the demand for GBTC trades at a premium, meaning it is cheaper to just buy the Bitcoin on an exchange — while other times it trades at a discount. Note that more often than not the price is at a premium. Like other custodial services you have no access to public or private keys, however the advantage with GBTC and other similar funds is that you can take advantage of investment tools like IRA’s, Roth IRA’s, and 401(k).
Buying Crypto off of a custodial / retail exchange
There are several different kinds of exchanges — “retail”, spot, and decentralized (dex). There are also exchanges that offer trading in derivatives- most of those exchanges are part of conventional spot exchanges. Since this is document is meant as a “Crypto 101” guide, I will not get into derivatives or dex’s — though the idea of decentralized crypto trading, that is the ability for users to trade on an open protocol without a centralized authority is really exciting, and I am sure will be much more common in the future.
Retail exchanges, while still custodial, are probably the easiest and most efficient way for those completely new to crypto to buy their first crypto and experiment with how to use many of its features. They are also designed to act as your “wallet” for crypto payments. Some examples of these types of exchanges include Coinbase.com and Gemini.com. What is advantageous about these services is that they are as easy to use as your typical online banking service, have some (though poor) customer service, and do not require you to store your private key anywhere. This also means that they control your private key. Think of them like a conventional crypto bank — you are trusting them to hold your assets, and trusting that when you want to move or sell your assets that you will be able to do so. Keep in mind with no central authority controlling the trade of Bitcoin and other crypto currencies, these sites as well as any other type of exchange, may experience lags during periods of high volume. People have also experienced problems with transferring large amounts of money from their custodial exchanges to their bank accounts when they sell their assets.
These challenges aside, think of these services as guard rails, or “training wheels” of crypto usage. They are the easiest way to start if you are not comfortable with the technology, and unlike with other custodial services like PayPal or Robinhood easy to move into other crypto wallets and exchanges.
Coinbase.com and Gemini.com also are starting to offer interest paid in crypto assets for their users — however custodial services like Blockfi.com and Celsius.network offer much better rates — around 6% APY for crypto currencies like Bitcoin and Ethereum, and over 10% APY for “stable coins” — or crypto currencies pegged to the US Dollar (which I will go into in more detail in “Crypto 102: Alt Coins”). What is truly amazing about this technology is that not only can you earn Bitcoin or Ethereum — but also far more US Dollars through “stable coins” than you could through conventional banking. Unlike conventional banking, however, these deposits are not necessarily insured — though it is possible that this will come. If it sounds too good to be true — like with conventional banking services — your crypto private keys are not sitting in a vault, but being traded in the crypto environment.
Buying Crypto off of a conventional / spot exchange
Conventional, or “spot” exchanges like Coinbase Pro (pro.coinbase.com), Binance (binance.com or if you are in the United States Binance.us), Bittrex.com, Kraken.com are designed to allow you to trade crypto currencies at specific prices. If you anticipate a crypto’s prices going up for down for example, you can set how many coins or fractions of a coin you wish to trade at what price or prices you want to trade at. Think of these types of exchanges as a cross between an E*Trade account and Bloomberg Terminal.
If you wish to simply buy and hold crypto assets long term, this might not be the service to use, however if you want to engage in more active trading or buy mid to lower cap altcoins this will be your best and sometimes only option. Many of these exchanges may also offer different trading strategies, or offer features like options, futures, and margin trading.
While this is a “101” guide, there is no reason to go into this type of trading in too much detail, however it is important to know that these services exist, since they are usually the cheapest way to purchase crypto currencies. Many users start off on retail exchanges until they are more comfortable with using crypto, then transition into using spot exchanges- even if it is only purchase Bitcoin at the current market price.
Mining & Other Ways to Acquire Crypto Currencies
There are a few other ways one can get crypto currencies other than buying them directly. The easiest method has already been mentioned –earing interest on existing currencies like Bitcoin through a custodial exchange- but that requires already having some of the currency. Also, be on the lookout for payroll services that will allow workers to be paid in Bitcoin — though these services are still in early stages.
Crypto can also be purchased “over the counter” (OTC) — either through an OTC exchange or just a private transaction. Private transactions can be done either in person or on websites like localbitcoins.com. People do this for several reasons but it is often to either trade large quantities of crypto at a flat fee rather than risk triggering a significant price change (called “slippage”), to trade crypto anonymously, or to purchase crypto with sources other than a bank account or credit card (like a gift card).
Among the most interesting and unique ways to earn crypto is through “mining” — though keep in mind that not all currencies can be mined. The problem is, setting up a mine is not easy, mines are expensive, and they consume a significant amount of electricity. On top of that Bitcoin mines are loud, and produce a lot of heat. What further complicates Bitcoin mining however, is that there is an ongoing “arms race” to make mines faster and more powerful. Initially, people could mine Bitcoin by simply running an application on a typical laptop or desktop computer. Then one needed computers with powerful graphics cards. Then application-specific integrated circuit (ASIC) computers, or computers who sole function is mining Bitcoin and nothing else. Now mining is dominated by powerful ASICs that don’t even plug into household power outlets. This is because of how new Bitcoin enters the economy.
Bitcoin runs on a “proof of work” consensus mechanism. Because there is no central authority like a “federal reserve bank” to determine how much new money is created and where it goes — since the amount of new currency is fixed, the new Bitcoin that is generated is more likely to go to more powerful miners. What is interesting, is that individual miners can team up all over the world and pool their computing power to form massing mining “cooperatives” where they can be assured to get small shares of the pool’s rewards depending on how much computing power they contribute.
The important thing to understand is, mining Bitcoin is not an efficient way to acquire the currency. One can most likely get more Bitcoin by just buying it on a marketplace with the same amount they would otherwise spend on hardware and electricity — unless you have access to cheap (or free) renewable electricity.
There is a lot of criticism about Bitcoin mining’s electrical consumption– which in my opinion tends to be very short sighted. I will write more about that another day — but for now I will say this….while Bitcoin’s authority is backed up by a sophisticated computer network that consumes a not insignificant amount of electricity — is it worse than the carbon footprint of the US Dollar whose authority is backed up by the United States Military (to say nothing of ethical considerations of a currency backed by a military, or the carbon footprint of the global banking system)?
