This guide is for an absolute stone-cold beginner to crypto. This guide will be too large for email. Be sure to view it on the substack website in order to not miss anything.
A Definition list for the abbreviations, words, and terms that I use.
Who is a beginner? Someone that has zero exposure to crypto or, has only had a mild passing exposure that has only included buying crypto and nothing more.
The goal of this guide is to explain to you what crypto is, how to look at crypto, why its important, how to actually take custody of your crypto, and how to begin using it.
I will be pointing people back to this guide, and at a later date (behind the paywall), I will be making an Amateur and advanced guide to using crypto. In conjunction, those 3 posts, should be able to show someone the pathway to actually becoming crypto-literate enough to not be left behind.
This post is almost exclusively for beginners. If you are already interacting directly with smart contracts, signing transactions, in discord chats and telegram groups with developers, have your seed phrases burned into your memory, and in are a complete degenerate, there is nothing in here for you to learn and this can instead serve as something you share with new people to avoid having to go through a long explanation with them.
This includespaid affiliate links.
Table of Contents
What is Crypto?
Security
Can Someone Write a False Transaction?
Why Crypto?
Acquiring Crypto
Centralized Exchanges
P2P
Taking Custody
1. What is Crypto?
This is not a full technical explanation.
I will start by explaining something that you are probably already familiar with.
A bank account. You probably have one. You have an account number that is unique to your account at the bank, and if someone wants to add or deduct from/to your account you can enact a transaction to do so which authorizes this debit or credit. Some types of transaction might include a signed check, or running a card at a restaurant and then signing the receipt, or entering in a PIN code after your debit card is run at the grocery store. These are all actions that are familiar to you.
Behind the scenes at the bank, are they actually moving money around? No, they have a computer server, or several servers that track how much has been deposited and withdrawn from each account number. Whenever you log in to your online bank for instance, your computer or smart phone makes a pull request from this server, and the server spits out all of the transactions that are associated with your account and comes up with a current balance. The bank stores all transactions that have ever occurred at that bank on what is called a ledger.
An example of a ledger
If you were an adult before digital banking became popular, you probably kept a ledger on a monthly basis that you balanced against your checking account to make sure that no fraud occurred. If not you, then certainly your parents or grandparents did something of the sort. The bank you use has a server room that is keeping track of this ledger. It is a weak point, since someone could hack into it and write a fraudulent transaction on the ledger, or could destroy/disable the ledgers ability to communicate and disable the banks ability to function, and probably other forms of attack as well. I have no doubt that the bank probably has many redundancies, defenses, and back ups to mitigate this risk.
Fairly simple right?
That is exactly how crypto works. Except instead of one server keeping track of the ledger, there are over 100,000 computational processors keeping track of the ledger. You have a wallet address, which is identical to an account number at the bank. And you can sign for those transactions with your private key (which I will explain more about on another post). These digital signatures are fairly easy to verify for a computer, but very difficult to break. So when you broadcast a transaction, thousands of computers will check the crypto-graphy to confirm it is a valid transaction, and then thousands of computers will then confirm with each other that they agree about all of the new transactions and the final state of the network in that instance. If a majority agree then a new block of transactions is added to the ledger.
Security
Some of you might be wondering how secure the base cryptography of bitcoin is. It’s a fair question. The banks security system is not known to many people and the secrecy is what everyone depends on for security. However, the code for bitcoin is publicly known and so the question is simply, is the current encryption method safe? I won’t bore you with the details of how it works, but will instead give you an example to look at.
In 2015 a puzzle was created with 160 wallet addresses. Each wallet address is more and more complex, until the final address which uses the full complexity of bitcoin cryptography and is almost as secure as the average bitcoin wallet. It is not as secure because you can use the solution to the previous wallet to help solve the next one. Currently there are 100.33 BTC waiting in these wallets as a reward for whoever solves them. You can view the current wallets that have been solved and that are still waiting to be solved on this website.
The basis of the competition is this, the private key used to sign transactions for an address is a 64 character string of numbers and letters. Each wallet in the challenge has a complexity to the private key that increases at a fixed exponential interval. So the first private key for the simplest wallet was 59 zero’s, followed by the number 1. The time that it takes for the final wallet in this puzzle to be solved and the computing power used to do it, can be considered to be a rough estimation of how long it would take significantly dedicated and wealthy individuals to crack the private key of a single users wallet. Its been 7 years so far, and they have only solved 70 of the 160 private keys, and with each one being exponentially more difficult than the next, they are probably only 15% of the way there or less.
Basically, don’t show your private key to anyone, don’t share it with any one, and your funds are behind a cryptographic wall that would likely take extremely dedicated individuals several decades to solve. Again, I will explain the private key in another post.
Can Someone Write a False Transaction?
For someone to write a false transaction to the ledger, they would have to be in control of over 51% of the processing power of the entire bitcoin network. This is called a 51% attack. There is a cool website you can check to see how much it would cost to rent enough computational power to do that for one hour, as well as if there is even enough of that computational power available to rent. As you can see, The theoretical cost to do such on both bitcoin and Ethereum is over $2M/hour, and there is less than 1% of the needed computational power for rent to do that to bitcoin, and only 7% of the computational power for rent to do that to Ethereum.
As the networks grow, the amount of computational power needed to do this, also increases. So its comparative cost is always going to be going up, so there will likely never be a time when this would be a cost effective endeavor if someone were to try to build a network of computers large enough to take over these networks.
2. Why Crypto?
As I outlined in This post, the money we are using is rapidly being inflated and serves merely as a form of exploitation of the labor of those who exchange their time for money. Those that control the flow of money and can direct where newly printed money goes to, can control the prices of all goods, services, and investments that are priced in that money. Those same people that are in control of the flow of money have chosen to devalue labor and work, and to instead value assets, this devalues the future value of any money earned today. Meaning that an individual who exchanges their time for money, and does not then spend that money right away is having the value of their time continually degraded. This is unacceptable. There are many ways to protect ourselves from this, but they all come with one downside or another.
Enter crypto. At its most basic form, crypto is currency with a fixed emission schedule that is uncontrolled by any central authority. The scheduled inflation goes to very specific individuals in exchange for work being done to support the network. This is very different from how the central bank of a country directs the new money they print. For instance, in the US, when money is printed, it is used to buy financial instruments from banks and the wealthy that have bought those assets ahead of time and then simply sold them to the central bank at a profit for fresh money that was printed. They are doing nothing of any value for the greater society except shuffling numbers around. And worse, as the money is printed, this is at a direct detriment to society. The chart below is M3 from 1960-2020, and as defined by investopedia
“M3 was traditionally used by economists to estimate the entire money supply within an economy.”
One thing people don’t understand when looking at a large chart like this, is the context of the chart. The data above is 1960 to 2020. It is growing at a faster and faster rate. What people will often do, is presume that the chart must be near a top and they are too late, I am now going to filter that chart, for just the period from 1960 to the 1980s and tell me what you see.
Same Chart, but only 1960-1987
Chart looks the same right? This is exponential growth. No matter how much you zoom in, or where you zoom into, the chart is constantly going up at a faster and faster rate. Even if you adjust the chart so that it ends in the 90’s, the chart is still going up. It only moves in one direction even in the absolute best times. I guarantee you, that it will continue moving up and to the right at a faster and faster pace, which means that any labor performed and earned in this currency will be devalued significantly.
Now take a look at Bitcoin.
It grows in the exact opposite sense. The inflation for bitcoin is on a fixed schedule all the way until the year 2140. It is awarded randomly to entities that are providing security for the bitcoin network, this process is called mining. The bitcoin awards are cut in half roughly every 4 years, which results in a constantly decreasing rate of inflation. What does this mean for the average person? If you work for money, and have additional savings, it is of benefit to you to save a portion within crypto-currency. Simply comparing the charts above for the supply of bitcoin, vs. the supply of US dollars makes it a given that if demand for bitcoin is flat from here on out (it won’t be, as I covered in Section 4 of This Post, only 16% of Americans own crypto and only about 3% are savvy enough to take custody of it yet) that its value will continue to increase faster than inflation, from a basic mathematical standpoint. If demand for bitcoin continues to increase, then its price will have to increase significantly. Consider the following statement. If every person in the world worth more than $1 million USD wanted 1 Bitcoin, there would not be enough to go around, even by the year 2140. This statement has been true for the entire time bitcoin has existed.
The Basic Mathematical Conclusion
Look into the future. In 10 years do you see most financial transactions occurring digitally? If the answer to that question is yes, then which digital currencies do you think the smart money and the wealthiest people will be choosing? The one with the supply constantly increasing at a faster rate? Or the one who’s supply increase is flattening out? They will choose the one that’s flattening out. Of course, every person, even with no financial background whatsoever will naturally choose the most deflationary currency to save in, because they will feel the affects of inflation, while similarly watching fairly liquid assets appreciate. The more spendable Bitcoin becomes without having to convert back to US Dollars, the more attractive it becomes as a main currency for an individual to transact in.
The above charts are just an argument on behalf of bitcoin, however, many crypto-currencies have very similar emission schedules with fixed inflation, decreased inflation, and some even are strictly deflationary where tokens are burned (destroyed) when used.
3. Acquiring Crypto
So, you’ve decided that you want to own some crypto, how do you go about buying it? There are two ways to do it when starting from 0, you can either buy it from a Centralized Exchange, or you can buy it directly from another individual on a P2P exchange in an anonymous transaction. A Centralized exchange is simpler, especially for someone new that does not yet understand how to sign transactions, or how to properly secure a private wallet and direct funds to its public address. However, I would instill a sense of urgency within you to learn how to manage your funds yourself.
Currently the US government, and other insolvent and abusive governments have not yet figured out that they need to close the exit gates from USD. When that happens, things will look very similar to Nigeria and China. Basically, the government bans crypto, but they can only enforce that ban through the centralized exchanges. So you can no longer pass the KYC and AML on Coinbase, Binance, etc. and those exchanges have banned all accounts using an address within the geography through which trading is banned. Then the demand moves to anonymous P2P transactions and the price of bitcoin for the local currency on these platforms goes far above the market price. When Nigeria banned Bitcoin, Nigeria became the 2nd largest P2P market for crypto in the world, behind the US. If I had to guess, the IRS and federal government will start tightening restrictions on centralized exchanges in 2023, with outright bans coming in 2024 or early 2025 after the elections. Meaning that you as an individual probably still have about 2 years where the convenience of a centralized exchange will still be available to you. Phrased another way… you have 2 years to learn. If you do learn, the governments ban on crypto will be absolutely meaningless to you. If you don’t learn, it will have a massive impact on your life.
Centralized Exchanges
We’ll start with centralized exchanges. At the very least, if you buy crypto, it absolutely has to be on an exchange that allows you to withdraw your crypto and take custody of it. If the exchange does not allow you to do that, you are not buying crypto, and gain none of the benefits from the ownership. Meaning you absolutely cannot buy crypto on Robinhood, Paypal, or another broker that does not allow withdrawals. These entities must be avoided. If you have made the mistake of buying crypto there, my immediate advice to you is to sell, eat the tax exposure, and take the cash to an exchange that will allow you to withdraw.
The main centralized exchanges that people use are (some affiliate links ahead):
Binance - Exchange for most countries except the US
Binance.us - Exchange for most but not all states within the US
Crypto.com - Exchange app available worldwide and for most US states, also offers a crypto cash back debit card, which I have had for almost 2 years and recommend if its something you want.
KuCoin - International exchange available for most US states
P2P Exchanges
Bitcoin and other crypto was always meant to be exchanged peer to peer in as anonymous a method as possible. Some of the following P2P exchanges offer full anonymity, while others allow for pseudonymity, or restrict daily trading limits below a fixed $$$ amount unless you are ID verified. In this case, phone, email, ID, and address verification are used to add trust for the sellers and buyers in the transactions. These exchanges do not do the typical KYC or AML that centralized exchanges do. Meaning they are not asking for your Social Security Number or Tax ID Number. So no reports are being generated for the IRS from activity on these platforms. They are a more ideal means of transaction than a centralized exchange, because there is a lower possibility in the future that the IRS will be told how much crypto you have acquired through this platform. On a centralized exchange that collects tax payer identification there is a much higher possibility that one day the IRS will be told that you bought x bitcoin on y date.
In a P2P exchange, you will find listings made by sellers and they will all have different restrictions. They will tell you what forms of payment they accept, the dollar limits of the exchange they are willing to accept, and the BTC (or ETH) price they are willing to accept. You simply find the offer you want and then click on it.
An example of listings from a P2P exchange
Once you have chosen an offer, you will be taken to another screen where you can choose how much you will pay, and will see the escrow fees and platform fees that are charged.
Once you go through the “buy screen,” your purchase is reserved and the P2P platform that you are using will receive the BTC (or ETH) in Escrow. For those unaware, Escrow is when a disinterested but trusted 3rd party takes custody of the goods in exchange, and takes custody of the money in exchange. Once the 3rd party has received both the money and the goods (crypto), they then allow the buyer and seller to withdraw. So once both items are in escrow, you as the buyer, can then give your wallet address to the platform for withdrawal.
The final thing to understand is that on some of these platforms activity limits are set for the accounts you start until you verify certain documents. This is a lifetime limit. So usually you can buy and withdraw $1,000 per email if you just refuse to add any information to these platforms. An image of your photo ID will usually get you to a $10,000 lifetime limit on the account. If you verify your address to match the address on your ID, you can usually get an unlimited account. So this isn’t totally anonymous, and most of this is done so that those performing the transaction feel a certain level of faith with the platform.
My advice if its your first time using a P2P exchange, start with Paxful and LocalBitcoins. Don’t do any of the ID verification. Make transactions with trusted sellers until you hit the limit ($1,000 each). If you still want to keep buying crypto in this manner, you can then decide to either provide Identifying information, or to move to the fully anonymous P2P’s using a VPN. There is no need to start at the deep end first. You have time and can be patient, get your feet wet, and practice. Hell, start on a centralized exchange if you are uncertain on a P2P. When I say you have about 2 years left to learn the P2P side, please remember that I do mean 2 full years.
I have included links to 3 P2P exchanges that do not require any ID and have no buy and sell limits. But all 3 of them require the use of a VPN because they block IP ranges from restricted countries from connecting to their site. The US is most definitely a restricted country. (Affiliate Links Ahead)
Paxful - largest P2P exchange, can buy Bitcoin, Ethereum, and Tether. Lifetime Trading limits lifted after ID and address verification.
LocalBitcoins - Bitcoin only exchange. Lifetime trading limits lifted after ID and address verification.
Hodl Hodl - Bitcoin only exchange. No KYC or ID requirements, does not allow anyone to connect from American IP addresses, this means that you need to use a VPN whenever you sign in to this site. There are NO LIMITS TO USE if you use a VPN to connect as an American. Most other countries have access except for a few other restrictive entities (Iran, China, Nigeria, and some of the other autocratic regimes).
LocalCoinSwap - Bitcoin, Ethereum, Polkadot, Nexo, and Stablecoin exchange. No KYC or ID requirements. All you need is an email address. Again, use a VPN if you are living in a restrictive financial regime like the United States.
Remitano - Bitcoin, Ethereum, Ripple (XRP) and Binance Coin (BNB) exchange. No KYC or ID requirements. All you need is an email address. Again, use a VPN as many countries are not allowed to access this site due to their existing laws (ex: United States).
4. Taking Custody
The last step and the most important is to take custody of your coins. There is a phrase in crypto that is repeated often; “Not your keys, Not your coins.” If you leave assets on an account at a centralized exchange, or worse, you buy them on a broker like Robinhood that does not allow you to withdraw, then you are absolutely at the mercy of that entity, and all of the weak points that entity has which can be targeted by a criminal actor, or the government (as an example).
Centralized exchanges can be hacked, and if your assets are taken, too bad. Most have multiple security contingencies in place and insurance contingencies in place, however this is still a risk. The larger risk will be the regulatory crackdown for those living in the US, or in other western nations that decide to go further in this direction, like Canada. For those Americans that had assets on binance there was a period when US customers were no longer allowed to use Binance and had only a few weeks to withdraw their assets before they were locked out of their accounts. I suspect that there will come a point in time when the government also begins requesting information from these exchanges about which of their citizens had assets on the exchanges. The longer you have been away from these centralized exchanges when that occurs, the better. However, I understand that right now convenience is a major factor and it’s very likely that you reading this now will turn to a centralized exchange. Fine. But please withdraw assets immediately from the exchange.
You will need to set up a wallet in order to take custody of your assets, the below is copied from an older post on my instagram account that explains this process.
Every blockchain has a different wallet file type and format. The wallets can be created easily for free, the screenshots here just showcase the steps for creating a bitcoin wallet using the electrum app.
On ETH, the standard wallet interface is metamask, which has an app and browser extension. On other chains, there will be many choices for interfaces to use, both on mobile, and PC.
Note that when you create a "standard wallet" you are prompted with "seed phrases" or "recovery phrases." Do not lose these. Write them down, and save them in a second place, maybe even multiple copies, or if you can, commit them to memory. Using just these phrases you can recover a wallet anywhere. Forgot your password, Phone or Computer broke, home flooded? Doesnt matter. Without these phrases, you can never get your wallet back.
Examples of Seed phrases on an empty wallet
You can also recover the wallet to multiple devices using these phrases, in case you want access to your wallet from multiple locations.
Once you've recovered a wallet with the seed phrase, you set a password for that device which is what you will use to access it from that device.
Once in the wallet, you can grab your public address. On BTC, they start with 1, 3, or bc1. On ETH they start with 0x. Each chain is different, its up to you to figure that out for other chains.
Example wallet address on an empty wallet
You can send assets to any wallet by using the public address as a receiving address. Your first few times transacting, send a test amount first, you might mess up, its okay to lose 0.05% because of an error. Not okay to lose 100% because you mistyped. There are no undos or refunds when you send a transaction. Make sure the address is correct first. Eventually you won't need a test amount, but its good practice.
When you set up a wallet, the file is downloaded. You can save it wherever you want. Some people prefer to keep it on a USB. Others prefer to delete it every time they use it. Up to you.
This is one of the best write-ups I've seen explaining DeFi. I've been sharing it with my clients.
What payment methods are recommended for p2p transactions?
To clarify : use a VPN if in Usa, but sign in that you are in USA?