10 Things You Need to Know to Use Crypto

10 things you need to know to use crypto

Changelly e-book for beginners Crypto essentials for traders & investors Free expert tips and trends

2019 About Changelly

Founded in 2015 Up to 5 000 transactions daily 150+ cryptocurrencies listed 350+ partners using API 1+ million visitors monthly 2500+ aﬃliates

How it works

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Choose the crypto you want to buy Confirm the transaction and sign in/ Send the exact amount to the with any other crypto * sign up with an email only to save the address provided and check the history of your transactions purchase on your wallet within minutes * for fiat-to-crypto the flow is different Intro

Investing in cryptocurrency exposes to a novel and promising, yet highly risky, technically challenging and requiring knowledge and focus on details asset class. There are several ways to purchase and store crypto assets.

Although cryptocurrencies were originally intended to be a tangible/ hard asset class based on technical specifications (predefined fixed emission with no further expansion or contraction), reality is a bit more complex as prices fluctuate wildly based on market conditions and user sentiment. Bitcoin is seen as the industry forerunner and has the highest brand value, while its analogs have more practical use (i.e. payment, funds transfer). Bitcoin existed even before the modern cryptomarkets - one of the early and notorious transactions occured on May 22, 2010 when Laszlo Hanyecz paid 10,000 Bitcoins for 2 pizzas.

3 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Later, Bitcoin became a method of payment for Silk Road, a dark web marketplace for drugs, which helped its popularity in certain social circles. Another key BTC milestone was the launch of Mt. Gox crypto exchange in Tokyo. All that iconic and damaging PR helped crypto industry go mainstream and the genie was out of the bottle. Сrypto industry as we know it today, took years to develop, with the last push coming in 2018 making crypto assets easily accessible all over the world. New crypto exchanges and services are popping up daily and serve all kinds of investors. There are one-stop services like Changelly which oﬀer instant coin or token swap, OTC (over-the- counter) market, and public exchanges.

Trading crypto assets has become easier in some aspects and harder in others - almost all reputable exchanges will require going through a comprehensive KYC procedure that includes providing proof of identity such as a valid passport and participating in a live chat interview. Also, trading crypto is subject to AML which restricts withdrawals and may call for additional veriﬁcations. Yet, all these rules and limitations could be easily bypassed by someone with malicious intent and enough knowledge and experience. The world of digital assets evolves constantly and oﬀers a wide range of products. Research and Due Diligence as well as good understanding of technology will help users keep crypto assets safe and secure. Changelly will help you easily get into it with this handy e-book.

Part 1. What are you buying?

Ownership and Control: A Special Notice

In 2018, most digital assets were out of Regulators’ reach, i.e. they could not be seized, frozen, or revoked. However, centralized or semi- centralized control of the assets is welcomed.

4 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Tokens based on Ethereum can be frozen or revoked, and this has happened to a handful of projects, such as Bancor and Kick Coin. Those projects froze funds taken by a hacker and regenerated the missing tokens. Other tokens may also be frozen or revoked, which some believe is a positive feature, while others see it as a chance for centralized control.

Depending on the objective for buying crypto assets, it is best to be aware of the potential of token freezes. For most mined coins, there is no chance of coin freezing. For projects like EOS, there is a procedure that may freeze accounts under special circumstances. Other tokens, like PAX, have a way to block funds, especially when required by law.

When you send in cash to acquire a crypto asset for the first time, what is it that you are getting? Even regulators are now uncertain what is the definition of sending and receiving Bitcoin or other assets. When you are making a purchase of crypto coins or tokens, usually you are setting off a series of transactions, which end up as a final balance of assets and a form of ownership ensured by technology, including applied cryptography.

5 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook In most general terms, when buying crypto assets, you are receiving as a unique record in a ledger, and that record is encrypted and stored in a distributed manner across many computers across the globes. When using an exchange, or an exchange service, the ﬁrst phase of your purchase will show the balance of coins or tokens displayed as a database entry. Initially, your tokens will be held by the exchange, usually in a common hot wallet, and will become oﬃcially yours only when you receive it after a withdrawal.

Exchange Wallet: Your personal balance of coins and tokens, which are stored by a third party. Also used for storing funds of an exchange, which is an easy, but relatively insecure way to store crypto assets

Once you withdraw the coins or tokens, depending on which asset you have purchased, the ownership consists of several features. First is the ownership of a private key, which gives access to the balance of assets.

The second element is the balance of assets itself. In Bitcoin, this balance is known as Unspent Transaction Output (UTXO), a special transaction that re-sends the unspent coins from every transaction. Other coins, such as Ethereum, use the account model, which traces the balance changes in every wallet.

UTXO vs. Account Model: The UTXO model is intuitively understood as paying with cash, and receiving the unspent amount as banknotes of diﬀerent denominations, or change. The account model for crypto transactions works like a bank account, where a single sum is altered.

Hence, when you are receiving a crypto asset, either the Account gets funded, or you have an UTXO record.

6 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook But how do you access this balance and transact? The balance itself is kept on the blockchain, but you can alter the distributed ledger by using the private-public key technology.

Private Key: A cryptographically protected phrase which unlocks the balance of a cryptocurrency. A private key is a tiny set of symbols that is paired with a public key to set oﬀ algorithms for text encryption and decryption

In the end, the ownership of crypto assets is a lengthy process that ends up when the ﬁnal transaction is made from the originating wallet - an exchange, an individual - into your wallet, to which you hold the private key.

The record of the balance of digital assets can always be viewed through a blockchain explorer, a tool created to preview transactions. Preserving the transaction hash, it is always searchable and accessible. Buying digital assets leaves a semi-anonymous trace on the blockchain, which is in no way related to your name and identity.

However, buying the coins is not anonymous, and exposes your identity, bank accounts, and in some cases, personal documents. We will discuss the issue of privacy later in this book.

Part 2. Types of Crypto Assets

As Bitcoin started to gain mainstream fame, there was a tendency of calling any digital asset “a bitcoin”. Assets were conﬂated with one another, rarely making a distinction. This made many users blindly buy up everything in sight, believing the asset to have very similar qualities to Bitcoin, just by virtue of being based on cryptography, containing a blockchain, and a distributed ledger.

7 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook There are many ways to classify digital assets. There is a basic distinction between coins and tokens - coins exist with their own blockchain, while tokens exist on another blockchain, and do not rely on separate mining.

Coins include Bitcoin, Litecoin, DASH, Monero, ZCash, and many others. Coins have a simple role of serving as money - a liquid asset for exchanging it for goods and services. Coins have no additional functions or use beyond serving as “digital cash”.

Proof-of-stake coins are a special class of assets that do not require the process of mining to achieve cryptographic protection. Those types of coins rely on individuals holding a certain amount of coins, while providing viable hardware that performs cryptographic computations, but at a rate much lower compared to minable coins. In eﬀect, owning the coins gives the right to secure the network and receive rewards. Proof-of-stake can be complete or partial. Some coins rely on both mining and staking for increased security.

Anonymous coins are a special subset of coins that allow for obscured transactions which hide sender and recipient.

8 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Coins by Mining Algorithm

Coins could also be classiﬁed based on the mining algorithm used. There is a notable distinction in families of coins, and the choice of mining algorithm can aﬀect the usage, popularity and market price of a coin.

Bitcoin is a SHA-256 coin, mined by one of the most complex algorithm. Bitcoin is mined predominantly by ASIC, specialized machines that are optimized for performing the speciﬁc types of mathematical transformations in the SHA-256 hash function, and generate multiple numbers until the right block number is discovered.

Litecoin, Dogecoin, Viacoin, and others are Scrypt-based coins.

There is one large family of coins using the CryptoNight algorithm. Of these, Monero is most famous as well as Bytecoin. There are multiple other CryptoNight coins, which now defunct, but are at one point dominated the market.

The Ethash algorithm is used most notably by Ethereum and Ethereum Classic.

9 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook The Equihash is an alternative mining approach, which allows mining using graphics cards. Equihash is used by ZCash and ZenCash.

Other coins include mining algorithms such as Keccac, X11, Dagger- Hashimoto, and others. Knowing the hashing algorithm and the parameters of a network give an estimation of how safe a coin is, and potentially how valuable it could be, based on the computational work done. The larger the network and hashrate, the more established the coin is.

Tokens by Mining Algorithm

Tokens are a class of digital assets that aim to derive their value based on their usefulness. Tokens are not mined independently, but their transactions are secured by the mining of the underlying network asset. Tokens can be based on almost any network, and there are a handful of Bitcoin tokens. But the most popular version is Ethereum-based tokens.

The reason is for those tokens were used as a form of crowdsourced ﬁnancing, known as an Initial Coin Oﬀering, ICO or a token sale. Tokens are usually acquired by participating in a crowdsale, or can be received for free in bounty programs, faucets, and airdrops.

10 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook A select group of tokens belonging to more prominent projects is sold on exchanges and exchange services.

The way tokens are stored and used depends on the network on which they exist. For Instance, Ethereum tokens require using MyEtherWallet or any other reliable wallets with the ERC20 option (but also having a small amount of Ethereum to move and transact the assets). There are also NEO-based tokens, and tokens from the Waves network, as well as Stellar and a handful of other projects. Each token requires compatibility with the storing service and synchronisation of the main wallet with the network, to display and move the token properly.

The exchange mechanism for tokens is similar to that of any other altcoins. However, tokens have various kinds of cybersecurity risks and are often on the temporary maintenance, disabled or not listed on exchanges at all. Tokens based on Ethereum also have a feature of being traded on decentralized exchanges, by using smart contracts.

Non-Fungible Tokens

The usual approach to tokens is that they are fungible, i.e. serving a certain task interchangeably. This rule applies to tokens using the ERC-20 standard, named after a proposition to build on top of the Ethereum network.

However, there are other types of tokens, known as ERC-271. Those assets are unique - each token is valuable itself. The usage of those tokens is to represent so-called crypto collectibles. Collectibles are images that are unique, and the token signiﬁes ownership of the image. Examples include the CryptoKitties game, as well as other cards and characters.

11 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Non-fungible tokens are not traded on exchanges, but only through informal platforms. Those assets also have their own forms of speculation, as rare digital collectibles sometimes reach exorbitant prices. However, those types of tokens are not considered a solid investment and are not seen as a part of a crypto investment portfolio. They are extra speculative, only based on the perceived value of collectible images.

Part 3. Types of Wallets

A wallet is a piece of technology that is being constantly synchronized with the blockchain and reﬂect the ﬁnal balance of coins and tokens that you own. It also secures your holdings by using private-public key cryptography.

12 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Each digital asset has a speciﬁc type of wallet and a unique type of addresses based on encryption. There are multiple-asset wallets, but each communicates with a separate blockchain.

Types of Wallets

Full or core wallets: Those are the most secure wallets, usually holding a copy of the entire blockchain. Since this may require signiﬁcant memory and time resources, use of full wallets is rare. Core wallets should be downloaded from trusted websites, as there have been instances of faked download links with wallets that can be emptied.

Light wallets: Wallets that do not contain the entire blockchain history, and are suitable for older coins with large distributed ledgers.

Multi-asset wallets: wallets that hold several assets, and can communicate with several blockchains. Those include Exodus and Jaxx, and others.

Online wallets: A wallet accessible through the browser. Oﬀers full ownership of private keys. This type of wallet is highly insecure,

13 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook subject to phishing attacks or using a fake site to steal the unlocking ﬁle or passphrase.

Hardware wallets: Devices that store private keys and communicate with computers, while never providing users with the access to the private keys.

Paper wallets: A printout of the private-public key pair. This type of wallet is used for “cold storage” and could be unlocked later.

When buying any crypto asset, having a secure wallet with backed-up private keys in advance is a must. The ﬁnal step of owning crypto assets for long-term storage is to transfer the funds from the exchange into the wallet.

With instant exchange services like Changelly, a wallet address is necessary, so that your exchanged funds could be successfully delivered to the destination point. Those services do not hold funds in custody but attempt to reach the user immediately.

14 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook We will discuss various types of exchange and trading services later on in detail.

It is highly important to have a wallet ready. Withdrawing funds to a wallet is the safest way to store your funds.

Backing Up a Wallet: A wallet is one of the most unforgiving pieces of software you will use. Forgetting the private key or the derivation phrase for the private key means a total loss of the wallet. Forgetting a wallet password is also deliberately made a fatal loss: wallets do not renew passwords.

Therefore, the best practice is to back up the wallet info in several forms.

User can write down, copy, or print the 12-word seed phrase or the private key. Store them safely in several locations.

Write down and copy passwords, PIN codes and any other information.

Back up all ﬁles, wallet ﬁles,or any other information, on several memory devices.

Transaction process also requires attention. Since most crypto assets still use long alphanumeric strings for an address, it is easy to make a mistake typing the address.

Always double-check the address!

Address Checking Pro Tip: Check the ﬁrst four and last four letters of the address. A coincidence with another address is highly unlikely. Also, make it a habit to check a few letters and numbers in the middle.

15 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook The reason is that a copy-paste mistake can happen. Additionally, the clipboard-kidnapping software could paste another wallet address in place of the correct one.

To be even more certain that the coins you’ve just purchased will arrive, there is another golden rule: test the wallet with a small transaction. For some crypto assets, a small initial transaction works to activate the address operational and include it in the blockchain. Always test the wallet ﬁrst and avoid sending signiﬁcant deposits to a newly created address.

A newbie also may need to be aware of full node wallets, which are not necessary in most cases, since they contain the whole history of the blockchain. The entire Bitcoin blockchain is humongous, having grown from around 60 GB in 2017 up to 173 GB as of June 2018. Storing that kind of data is a serious load to consumer electronics, so light client wallets are a must, at least for Bitcoin, but for other relatively large networks with older coins. Ethereum nodes are notoriously arduous to download, and most users avoid holding the whole blockchain history.

16 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Always test the wallet and address with a small transaction. This way, you can be certain you are sending to the right wallet, and the network has spare capacity and fees are reasonable.

Bitcoin and altcoin wallets also adjust the fees for the transaction. Take note of the transaction fee at the moment - in the case of Bitcoin, Ethereum and other well-known cryptocurrencies, there are days of high transaction load, when fees may rise to extraordinary levels, so the sent amount won’t be enough to cover it

Also be aware of exchange fees for trading and withdrawal - they are usually relatively low but will be reﬂected in the ﬁnal amount.

Part 4. Ways to Purchase Crypto

There are several traditional payment options available to buy crypto.

Depending on the experience level of users, there are various tiers of exchange services and marketplaces.

The simplest, most user-friendly ones do not require any crypto trading experience. The asset has a single price, which the user accepts - there is no placing of orders. Behind the scenes, the service operator will facilitate the transaction and send the balance of coins to the user’s wallet.

Exchange services often offer crypto as an alternative to fiat payment method. The other option is to switch between a more popular coin and a less popular one. Those types of services usually levy a higher fee, up to 5% of the order, and may offer prices that differ from the market. The reason is for a trade-off between

17 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook simplicity and order fees. The service takes up some amount of market risk, in order to oﬀer a quote price to the end buyer.

One of the most accessible exchange services is Changelly with a 0.5% all-in exchange fee.

Exchange services will often require a know-your-customer (KYC) procedure that has different tiers of verification, based on the depth of information they receive about the customer. Each level of verification has its own user privilege status. A basic account may only allow the purchase of small amounts, while a full verification may allow for selling substantial sums each day.

Know your customer - KYC

Exchange services may impose limitations, and part of the process depending on the willingness of banks to service the client and complete the transfer of funds. A warning must be made that it is possible a client’s bank may refuse to send funds to pay for crypto transactions.

A wire transfer or a bank transfer is the simplest, but also the slowest approach.

18 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Services as Neteller and Skrill, subject to limitations and AML transfer ceilings depending on verification, also offer more flexible options.

However, the most demanded option is buying Bitcoin via PayPal, but since PayPal transactions can be disputed, buying Bitcoin outright through the service has been limited. However, the way to buy crypto coins is through intermediary tokens. At one point, the most popular approach was to buy Second Life Linden Dollars, through the VirVox exchange. PayPal payments are also accepted through LocalBitcoins, though this is the riskier options. In general, paying with PayPal must go through an intermediary form of credit, which is later exchanged for the coins.

Once again, crypto transactions are irreversible, without the goodwill of the counterparty, which has every right to refuse returning the coins or reversing the transaction. On the other hand, traditional payment options, which are widely used in e-commerce, have always oﬀered the refund option.

This is also one of the reasons why credit cards are restricted for purchasing Bitcoin or other digital assets.

Debit cards are a better option, although some services are requiring 3D security debit cards, issuing a special security code for extra veriﬁcation.

On rare occasions, it is possible to buy crypto assets with cash on hand, but those cases involve in-person transactions.

OTC Exchange Services

An alternative way to exchange crypto assets is to use formal or informal OTC markets. Those range from using well-established

19 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook intermediaries like Bitcoin Suisse for large OTC purchases and sales. Changelly OTC is also a service for large-scale customers.

Localbitcoins is one of the most popular OTC services, directly connecting buyers and sellers by country and city. This option is considered risky, although there is a system of feedback for honesty. The service uses an escrow account to move the funds, and excludes the usage of credit cards, because a Bitcoin transaction is irreversible, while a credit card transaction can be disputed. On Localbitcoins, this type of scam has seen sellers of Bitcoin left both without their coins, and without their cash transaction.

Localbitcoins oﬀers wide quotes, depending on availability. Other OTC services include informal exchanges through social media, and also include an escrow service that releases the coins and payments. Those services are only available for a limited number of assets and are not recommended for large sums, as scams are highly possible.

Investment Apps, Broker Platforms and Investment Vehicles

There is a way to buy into the price ﬂuctuation and bet on crypto

20 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook not owning the asset in the manner explained above, by holding it into a wallet with a private key. One easy and popular way to invest in crypto assets is to go for mobile apps such as Circle, Abra or TabTrader

Those apps do not directly connect to the blockchain, which would not be feasible technologically. Instead, the tokens and coins in circulation are held outside the system and only reﬂected as synthetic digital assets. While the risk for this type of buying is higher, it is a faster and more convenient way to invest or trade.

Broker platforms are a fast and dynamic type of marketplace, which brings together speculators and people with experience from all markets.

Broker Platform

The third option to acquire crypto assets by proxy is to invest in funds, which carry a portfolio of assets. Alternatively, it is possible to buy exchange-traded notes (ETN) based on Bitcoin and Ethereum, through the Nasdaq Nordic exchange. Investing in the Grayscale Capital funds also gives exposure to a small portfolio of assets, but buyers do not own the private keys, hence the assets are held and disposed of by the fund manager.

21 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Here we will focus on direct approach to transacting crypto by studying the tech behind it, leaving the other options as additional information for comparison.

Part 5. Centralized and Decentralized Exchanges

Centralized exchanges oﬀer the option to buy and hold, or continue to trade crypto assets. Those types of exchanges are the best option for intermediate to advanced users and require an understanding of placing orders.

Centralized exchanges are operated by a business entity, and make their proﬁt by charging trading fees. Trading fees vary, depending on the type of asset and the size of the transaction. Some of the most prominent centralized exchanges include:

HitBTC Binance Bittrex Bitfinex OKEx Poloniex Bithumb Huobi Centralized exchanges can be divided into two categories — those accepting fiat and crypto-only exchanges. With exchanges that accept fiat, either in dollars or in other currencies such as Korean won or Japanese yen, the ability to deposit funds may also be limited, depending on the level of account verification. Exchanges are also subject to trading limits.

22 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Centralized exchanges operate in all parts of the world. In general, the world of crypto trading is global. However, for easy use, some marketplaces are more user-friendly, and more ﬁt to the English- speaking world. It is also a good idea to stick to the better-established and larger exchanges, which have a good track record. Smaller exchanges hold the risk of being hacked, as well as withdrawal problems and lack of good customer service.

Some exchange services, in fact, use centralized exchanges to execute customer orders. Other services store funds in a wallet until they run out of reserves.

Not all digital assets are listed on all exchanges. Some coins and tokens only trade on speciﬁc exchanges, especially early on. With time, their representation on the markets increases, with more markets and pairs added. Some older digital assets, which have boomed in previous years, are in fact more diﬃcult to be found on the best current exchanges. Inversely, newly created projects manage to make their way into the most dynamic marketplaces.

One of the reasons is for that older digital asset projects were often a

23 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook grass-roots eﬀort, with no concerted goals to increase penetration and trading. However, exchanges have evolved, and the increase in the number of digital assets have made them selective regarding new listings.

Therefore, from 2017 onward, exchanges almost always levy a listing fee and very rarely list an asset for free. Binance is an exchange known for its relatively high listing fees. Assets are also listed for free in the Community Coin of the Month voting program. However, smaller projects and lesser-known coins and tokens usually have a hard time ﬁnding their way into the most liquid exchanges.

Keeping this in mind, a potential buyer must be aware of the risks due to low-activity trading and the need to use previously unknown and untested exchanges.

A Cautionary Tale: In 2016 and 2017, a new digital asset started to be distributed through a faucet. The asset was known as Rai Blocks and was later renamed to Nano. The coin is most famous for starting with a price of around 10 cents, and within a few weeks ﬁnding itself with a price of around $36. However, during that time, Rai Blocks was traded on small- scale, obscure exchanges. One of those exchanges was Bitgrail, an Italian marketplace. Those who got Rai Blocks early through the faucet deposited it to Bitgrail since there were no good wallets around to hold the coins.

Unfortunately, the wallet of the exchange got hacked, incurring losses of 17 million coins, worth $170 million at the time of the theft.

Always keep in mind that exchanges may be hacked, and new assets with still untested wallets are even riskier.

24 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook The best approach is to use the Exchanges for trading and, then transferring most of the coins to a secure wallet.

Centralized exchanges work by choosing to sell or buy coins and tokens at a price that you have some ﬂexibility in determining. For most exchanges, the quoted prices may be denominated in another crypto coin. This means that the intuitive dollar price may have to be recalculated in that crypto prices. For example Bitcoin prices are usually denominated as a fraction of BTC, as in 0.01 BTC. Otherwise, for low-priced coins, the price is denominated in Satoshi, which is 1/100,000,000 part of Bitcoin.

Coins could also be traded against Ethereum, Litecoin, and other coins, depending on the adoption and penetration of the asset. We will discuss the matter of liquidity and trading pairs later on in detail.

Decentralized Exchanges (IDEX, EtherDelta)

Decentralized exchanges are a type of marketplace which utilized the technology of projects like Ethereum, Stellar, etc. to facilitate trading without central authority. Those exchanges require more conﬁdence in using crypto assets, and the liquidity is usually lower. Decentralized exchanges allow the user to keep total ownership of their funds, and the coins or tokens are only sent for trading through a wallet, which the user controls completely.

Volumes of trading on decentralized exchanges are signiﬁcantly lower compared to centralized marketplaces.

25 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook A Word about faucets

Faucets have existed since the dawn of Bitcoin - a service paying out a small transaction of coins. At the beginning, early faucets gave as much as 5 Bitcoins per registration. Now, the payout is a few Satoshis.

But an early tester of crypto coins could try faucets as a way to test the usage of wallets and the sending of funds. Bitcoin, Litecoin, Dogecoin, Bitcoin Cash are all available through the Moon faucets. The Coinpot microwallet is used to store the coins, and also carries Dash coins. The microwallet, after collecting a minimal balance, can send it into a regular wallet.

Faucets may also appear for smaller coins or new projects. The Nano coin was distributed through a faucet, under the name of Rai Blocks, and early adopters managed to get valuable assets for free. Searching out such faucets is a matter of scouring crypto-related social media and forums such as Bitcointalk. Faucets rely on web advertising and usually require solving a captcha. They are just a way to test crypto coins and in the long run may be a waste of time. Still, faucets can be a fun learning experience.

26 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Part 6. Anonymity, Account Veriﬁcation and KYC

Initially, Bitcoin trading was largely anonymous. Later, improved security was added by the exchanges.

In 2018, most exchanges, whether carrying fiat or crypto only, require a verification of the identity, in order to access higher limits for trading. The reasons are manifold but mostly follow official requirements, mirroring the activity of financial institutions.

KYC requirements or Know Your Customer, make cryptocurrency trading connected to one’s name and identity. Identity veriﬁcation starts with a phone number, and for higher trading limits, may require the presentation of a valid passport.

Passport Warning: When performing KYC, not all passports are treated equally. Depending on nationality, only an ID card or a driver license could be requested. For other nationalities, an international passport is required.

Unfortunately, some users have been banned from using exchanges such as Bittrex. Passports from certain countries have been banned. The countries include Cuba, Iran, North Korea, Syria.

US-based buyers have to check each asset they need to buy, as some are banned for US citizens, and some projects prefer to limit the sale to non-US citizens only. The reason for this is that some digital assets may be considered securities and the issuer to fall under legal ban for selling unregistered securities. It is still uncertain what kind of coins and tokens would fall under the deﬁnitions of securities, but it is better to be on the safe side.

27 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook It is possible to buy small amounts of crypto assets with just a phone or email veriﬁcation. However, there are even fewer chances now to buy crypto assets with absolute anonymity and limitations apply.

Additionally, the Changelly service, while semi-anonymous, can require more thorough KYC for selected transactions, especially if the amounts of funds and the trades are suspicious. It is always best to complete KYC and lift the limits of the account before engaging in more active trading. This means that more coins can be withdrawn into wallets, as there are sometimes limits to moving Bitcoin or other assets, depending on the exchange service. It is best to always be aware of withdrawal limits, in order to avoid having funds locked on an exchange.

The Importance of 2FA

In 2018, most exchanges are reasonably secure, although hacks are happening occasionally. One essential security element, that is on the user side is 2FA or two-factor-veriﬁcation.

Exchanges like Binance always stress the importance of that step. Using a mobile phone, a user receives a unique code which adds to

28 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook the strength of login authentication. Without this step, an account could be hijacked and the coins could be traded without the owner’s knowledge.

Part 7. Liquidity and Selecting Crypto Assets

When choosing to buy a crypto asset, there are multiple issues to consider, but perhaps the biggest one is how liquid the asset is, and how readily it can be traded.

The liquidity of crypto markets is a complex issue. Direct purchases with fiat by first-time buyers are rare, even at peak market prices. Most of the trading volumes happen, as we discussed previously, in crypto-to-crypto exchanges. For that reason, newcomer buyers may have to resort to one of the two options for exchanging and trading: on-ramp currencies or fixed price coins, or dollar-pegged tokens.

29 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook On-Ramp Currencies: Those are usually large, established coins with a good track record, safe and well-developed networks and several ways to buy for cash. Bitcoin has always worked as an on-ramp currency. Other popular coins include Litecoin, Dogecoin for niche pairs. Ethereum is immensely popular in pairings with tokens and is widely traded as a quote currency, but also used as an entry point into crypto assets.

The on-ramp currencies can also be more easily sold for ﬁat in the same manner, ensuring the investment can be liquidated on time.

The risk of those assets is that their price also ﬂuctuates, both in dollar terms and against Bitcoin. In general, using Bitcoin as an entry into altcoins is risky, and can lead to dollar gains, but losses of Bitcoin positions. This has made many Bitcoin maximalists warn that owning any altcoin is more or less meaningless since its price depends on that of Bitcoin.

The less risky option is to use dollar-pegged, euro-pegged or other stabilized currencies (stablecoins), and make trades with only one asset ﬂuctuating.

Dollar-Pegged Coins: Dollar-pegged coins are a relatively new addition to the world of cryptocurrencies. Noticing the signiﬁcant price ﬂuctuation, those stabilized coins use various mechanisms, so that their value in trading conforms closely to the US dollar.

The most intuitive mechanism is to use funds stored in a bank, ensuring that each token can be exchanged back into cash. The most famous case of a dollar-backed token is TetherUS or USDT. The asset unoﬃcially claims to have bank account balances matching the amount of USDT tokens, although there has been no oﬃcial audit of the funds and their origin.

30 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Tethers can be found on exchanges and to a limited degree, to be bought through the Tether website. However, selling Tethers is extremely diﬃcult, despite the promise they are backed by ﬁat. Through the central website, exchanges have a long waiting period and funds are not immediately available.

Tethers are considered essential to the trading of crypto assets, and ensure about 20% of the liquidity on the markets. Tethers are present on almost all major exchanges, which is an ideal situation to move into a multitude of digital assets. Tokens or coins which have pairings with the Tether are traded more actively and more intuitively.

Other fixed-price coins include TrueUSD or TUSD, as well as the recently launched Gemini Dollar, Paxos, and a potential asset by the Circle app, USDC. There are other minor dollar-pegged coins and tokens, as well as assets linked to the euro and Chinese yuan. The best advice is to choose the older, more popular coins. The usage of the dollar-pegged coin is a tradeoff between market risk and the risk of the assets themselves. Some believe Tether is not secure enough. The newer generations of assets, the Gemini Dollar and Paxos, offer full compliance with New York financial regulations, and offer more transparency and security.

31 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook The chief utility of ﬁxed-price tokens is that they can be moved quickly between exchanges. Unlike cash, which could take days and be met with resistance and losses, especially for international remittances. Tokens move through the blockchain, always leave a record and some dollar- pegged assets are present on multiple exchanges. This means a trader can easily move funds between accounts and arbitrage price diﬀerences.

Fixed-price tokens can also be used during times of volatility, to store funds and value in case there are expectations asset prices would weaken.

Buying the tokens is possible through several mechanisms, including the various project websites. Some of the sellers of tokens may require an account and some form of user veriﬁcation. Selling the tokens depends on exchanges, markets, and pairings.

The third option is to use exchange-issued coins or tokens, to achieve liquidity.

Exchange-issued tokens are a special class of digital assets, which exist especially to facilitate trading on crypto-only exchanges. Those include Binance Coin, Kucoin Shares, as well as lesser coins for niche exchanges. The coins or tokens are used as a quote currency and support numerous pairs. The best quality of exchange-issued tokens is that they oﬀer reduced or zero trading fees, as well as bonuses based on the earnings of the exchange - as trading fees from other pairs are distributed.

The market value of those coins ﬂuctuated based on free-market principles, but they generally keep their value, for being a source of liquidity on the exchange.

32 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook For some, the exchange-listed tokens can be an investment, as they reflect the success of the exchange. However, for crypto exchanges only, it is extremely difficult to exchange the tokens into fiat. Usually, those tokens are limited to a single market, and cannot be moved between exchanges.

There is one more option to ensure liquidity and adequate funds, and that is to use actual fiat. This approach is limited to a handful of exchanges. Bittrex has started unrolling fiat pairs and fiat deposits, although new accounts require special effort to get permissions to deposit. Kraken is also a fiat-based exchange, especially accessible for European customers.

The ability to deposit ﬁat funds depends on relationships between banks and their willingness to allow a transaction related to crypto exchanges. Banks will sometimes post a warning, but at other times, deny service without explanation.

To avoid banking troubles, test exchanges with the minimum amount of funds allowed, then transfer larger sums. Make use of the most favorable banking laws and regulations, and the best approach is to

33 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook pick an exchange or an exchange service closest to your country, to make use of business hours of customer support. Understanding local banking policies and habits of work is also useful, so US-based customers may be better-served by US-based exchanges, while European Union marketplaces have a diﬀerent type of regulation and banking approach, using the SEPA Euro Area banking regulation for faster, cheaper transactions.

There is a class of low priced coins and tokens, which may be attractive for a small, speculative investment. During the peak times of the crypto boom, there were many cases of such assets rising from sub-penny prices to a few cents, enough to provide 1,000-fold gains or more. However, even a small investment in such assets is rather complex and involves using several trading pairs.

Exchanges that carry small, niche assets with low liquidity include:

Cryptopia TradeSatoshi HitBTC LBank CoinBene

There are also other alternative marketplaces, but it is best to search out exchanges by the asset selected.

The coins and tokens with extremely low prices sometimes have very low daily trading, as low as 3 BTC in 24 hours. This means that the price can be swayed by Bitcoin holders with relative ease. Being able to do a trade in such conditions is extremely diﬃcult, and the 1000- fold gains may be just on paper, or impossible to realize.

34 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Part 8. Security Tokenomics

On Thursday, December 20th, in a mostly symbolic act, one Democratic and one Republican United States Congressman sponsored the “Token Taxonomy Act” to change what deﬁnes a security and to add a deﬁnition for “digital token.” Since 1946, “The Howey Test” has been used to determine whether a business venture is to be regulated by the Securities and Exchange Commission (SEC) and how it is to be taxed by the Internal Revenue Service (IRS).

As written, the “Act” stipulates that Initial Coin Offerings (ICO’s) are subject to regulation as securities until each qualifies as a functioning network. In their roundtable information gathering session, the lawmakers were urged to further define cryptocurrencies as commodities due to their on-platform utility functions, and further, to switch cryptocurrency regulation to the U.S. Commodity Futures Trading Commission (CFTC). The IRS would also be directed, by the just submitted legislation, to exempt, as “de minimus,” the results of any trades between cryptocurrencies as well as any capital gains earned as a result of cryptocurrency trading.

Bitcoin (BTC) and the Ethereum platform’s ether (ETH) are not securities according to the U.S. Securities and Exchange Commission Chairman (SEC). William Hinman, SEC head of the Division of Corporation Finance classiﬁes BTC and ETH as “decentralized,” or not centralized enough to be called a security. There is no decision- making individual, body, or organization that decides what happens with the funds raised, collected or otherwise gathered through issuance of BTC or ETH tokens. A small group controls neither bitcoin nor ether, by their designed decentralized natures and the ongoing “proof-of-work” block veriﬁcation competition between “crypto- miners.”

35 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Neither BTC nor ETH represents ownership of assets other than the “hash” that tags the coin’s anonymous owner—a string of 64 letters, numbers and characters. Bitcoin, ether and other cryptocurrencies have value because their owners believe in their values, just as each paper dollar bill has value because holder trusts its value. Those that hold their ownership support the prices paid for those coins that are made available by sellers or by the steady increase in supply from “mining.” But the reverse of the buyer’s bid has been in place for a year and fewer crypto-believers believe less and buy less.

ICO

Initial coin offerings (ICO’s), are securities according to Jay Clayton of the SEC. “Every ICO I’ve seen is a security” Mr. Clayton said in February. That quote was enough for most ICO’s to prohibit deposits, purchases or participation by US citizens. The geographic residence of both the owner and the issuer determine the body, agency or commission that regulates how a security may be offered, registered and traded. Any ICO, developers feared, if defined as a security, would be subject to securities regulation by the United States agencies or by any of the 50 state securities regulators.

Block.one’s EOS (EOS), which began its distribution in the summer of 2017, raised $4 billion (without a live product) by the summer of 2018, without accepting money from United States citizens, and only accepting ETH in exchange for the new EOS tokens.

STO

The problem with the SEC classifying tokens as securities is that a token’s utility as a means of exchange of value within a digital cryptographic economic environment—a tokenomy—is denigrated or devalued. Every exchange of a utility token (UTO) would have then to

36 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook be reported, tracked, accounted for, and settled as if it were a stock, bond or any other regulated security. Traditional securities can take days to settle; whereas token transactions are settled in seconds. Securitization would not only eliminate the near-instant time eﬃciency of a blockchain exchange of value, but anonymous transactions would be impossible.

STO’s are an attempt to access the market for cryptocurrencies without running afoul of current federal securities or tax law. The Security Token Oﬀering (STO) proposes to place tokens on the market that can be traded on exchanges and tracked by owners, buyers, sellers, investors, accountants, taxpayers and tax-collectors. STO issuers, owners and traders would be responsible, if the SEC requires, for compliance with securities regulations and federal tax reporting. Every cryptocurrency exchange of value could be subject to capital gains or ordinary income tax. Just the burden of reporting such activity could be very expensive.

Hybrid

Some new oﬀerings include a dual-token model. One token, a security, is traded on a cryptocurrency exchange and is publicly quoted, as are stocks, bonds and mutual funds. Another token, a utility, purchased with the security token upon entry, allows for the exchange of value on the platform or in the tokenomy.

In the two-token model, the utility coin (UTO) is not classified as a security and can, therefore, be freely exchanged for a real-world value that has been “tokenized,” that is specifically described by a unique identifier that acts as a deed, title, receipt or ticket. Utility tokens can digitally represent, with a “smart contract,” a real-world asset, service, access, or usage agreement. A tokenized asset can be exchanged digitally, instantly and anonymously on the platform.

37 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook ShareRing, a platform for trading real-world assets, is a recent oﬀering that resembles the two-token model. ShareToken (SHR) will be used as the STO on exchanges, while the second token, SharePay (SHRP), will be used as the utility token for sharing services. Bincentive also has a dual token system: BCNT which trades, and MST (Margin Stable Token) which is ﬁxed in value to the price of BCNT.

Congress must adopt new legislation, and adapt to a new and more eﬃcient means of value transfer between individuals, companies and countries. Cryptocurrency issuers, users and developers would like the SEC to limit its purview to tokens that have been issued as STO’s and allow tokens that are not traded on exchanges—UTO’s—to be transferred between users of certain “tokenomies.” If the SEC were to limit its regulation to publicly traded coins as securities, the door would be open for expansion of new insular token economies where value is exchanged but is enumerated only in terms of the digitally local UTO. Assets, services and usage traded in such an alternate economic environment cannot be tracked or taxed in a ﬁat currency economy. The taxman may yet lose money. The cryptocurrency community would very much like the SEC and the IRS to look at UTO’s as if they were foreign currency traded in a foreign country and no business of the United States.

Part 9. Trading Risks and Mechanics

Despite the seemingly unlimited upside potential, one has to keep in mind the risks involved in cryptocurrency trading.

38 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Besides the usual market risk (asset price going down) a crypto trader is exposed to non-market risks that don't usually exist in mainstream markets:

1) Regulation risk - at this point in time, the crypto industry is still largely unregulated, so the trader is not protected by a governing body which means that crypto exchange policies are not enforceable.

2) Asset risk - trading in any asset could be suddenly halted and funds frozen indeﬁnitely if the coin/token is deemed to be fraudulent by the Exchange.

3) Exchange risk - the Exchange can get hacked, shut down, or even bankrupted by its owners, putting customer funds at full risk.

4) Crypto "storage" risk - not adhering to the basic common sense internet security rules (lost or stolen wallet private key/password, using unsecured wiﬁ etc.).

5) Crypto "transit" risks - accidentally sending coins to the wrong wallet address is irreversible and results in total loss.

39 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook 6) Overnight risk - cryptocurrencies are traded 24 hours 7 days a week, so it's physically impossible to monitor the situation at all times.

The world of crypto assets is new and developing, and there are constant surprises and losses, for various reasons. Technical, human factor, unexpected bugs, as well as deliberate scams, are constant threats for both new and veteran investors and traders. Not all assets are created equal, and it is extremely easy to fall for cases of faked tokens, scam token sales, or schemes promising quick returns.

It must be noted that crypto assets come with an implied volatility warning, which in some cases could mean an immediate loss of 99% of an asset value. Sometimes, a project could crash due to just one piece of news, even if everything was going well up until that moment.

There are several types of scams, as well as potentially risky technical issues, which may come as expected or unexpected losses to any crypto buyer.

40 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook To start trading crypto, register with the exchange of choice, verify your identity and fund your trading account. After the funds have been transferred, go to the trading terminal, select a trading pair in the “Instruments” section and set up an order.

(HitBTC)

Click "Buy" to perform a trade.

You can always check the fees and the history of your trades on the particular market in the related section. Normally, your cancelled and rejected orders are shown for the last 24-hour period.

41 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Part 10. Popular Scam Schemes

For brand new, as well as for old digital assets, downloading and using the right wallet is extremely important. Use oﬃcial wallets only and for just created assets, it is best to wait and see if user reports appear. It is possible that in the hassle and chaos of new coin creation a wallet can be created with the code allowing the theft of funds.

There have been such reports and wallets for assets like Bitcoin Cash, Bitcoin Gold. Be very careful when downloading a wallet from the GitHub page of a coin. GitHub pages have various levels of access, and in the case of Bitcoin Gold, an unknown person managed to oﬀer his own wallet version, which was accepted by the community. A few days later, the balances of coins were missing, taken by the hacker.

BEWARE OF SCAM

The other dangerous scam is fake online wallets, accessible through the browser. Those wallets steal funds in a similar manner.

Some wallets produce “tainted addresses”, which means that the phrase from which the private key is derived is known. When the derivation phrase is known, anyone can re-generate the private key, and take ownership of the coins.

42 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Pyramid, or Ponzi schemes

This type of scam has existed alongside cryptocurrencies for years, starting almost immediately after the launch of Bitcoin. One of the most notorious examples is OneCoin, an international scheme that relied on new recruits to pay out higher tiers of the pyramid. OneCoin collapsed in early 2017 when Bitcoin prices started to crash.

But the most notorious example was BitConnect, advertised as a crypto lending scheme. BitConnect appeared in 2016, as a small-scale crypto lending venture. But as Bitcoin prices rolled higher, the eﬀorts of BitConnect to popularize itself increased. The PR campaign included large-scale events in rented halls, featuring iconic sales pitches. At the same time in social media, especially in YouTube, with high-proﬁle promoters.

However, buying into BitConnect was extremely problematic. The BCC coin was only trading on a single marketplace only, especially created to facilitate investments into the BitConnect scheme. This meant that no other markets accepted the coin, or there was very little trading. Also, the price of BCC rose constantly, but the payouts were received in dollars only.

When the BitConnect scheme collapsed in January 2018, the coin was lightly traded on a handful of exchanges only. A few months later, the coin was delisted, leaving users with a defunct digital asset that no exchange wanted to deal with. BitConnect, along with the similar DavorCoin scheme, was the biggest cautionary tale in the cryptocurrency market, showing that not all coins and tokens are reliable.

43 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook Faked exchanges

This is a relatively mere scam, in which a cloned exchange site steals login credentials. It is a type of phishing scam, aﬀecting the most visited exchanges. It is always best to bookmark exchange login pages and check the address bar before committing the password.

Faked ICO buying addresses

During peak ICO interest, all it took to purchase tokens was to sending Ethereum to the designated address. However, since projects were in a hurry, some saw their websites hijacked. A hacked injected their own Ethereum wallet, in eﬀect taking in the funds meant for the ICO. Since then, the interest in token sales has waned. However, it is best to double-test the address through other links and social media, in case of investing into an ICO.

Phishing attempts

These types of common scams usually aim at two things. One is to make naive user send a transaction, usually in Ethereum. The gullible customer is enticed with a promise of a token bonus.

44 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook The other is trying to steal a user’s private keys. Usually, an email or a social media personal message, through Telegram, Slack, or other channels as well, will request the user log into his online wallet - usually MyEtherWallet. However, the link is a cloned copy of the wallet, with a slight change in the spelling. To avoid this scam, it is best to have MyEtherWallet bookmarked, and never search the wallet through Google.

Also be aware that MyEtherWallet does not need to verify anything and ask for the private keys. No project will ask for anyone’s private keys under any pretext, so all emails asking for the login ﬁle, passphrase or anything else, should be automatically considered a scam.

Fake Tokens

There is a minor class of scams that uses wording confusion to make a buyer exchange his funds into tokens that only resemble an oﬃcial asset. The crypto world has platforms such as Waves and NEXT, which oﬀer a form of trading between tokens, coins, and of course, Bitcoin. In this platform, Bitcoin is represented by a token - the real Bitcoins are parked into a safe wallet. However, users have tried to generate fake tokens of the same name or ticker. Recently, tokens with the name of EOS have been presented as the real asset.

45 https://changelly.com/?utm_source=ebook&utm_medium=social&ref_id=blogebook

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