Trade Cryptocurrency

Bitcoin has not only been just a trendsetter, ushering in a wave of cryptocurrencies built on a decentralized peer-to-peer network, but also has become the de facto standard for cryptocurrencies, inspiring an ever-growing legion of followers and spinoffs.

KEY TAKEAWAYS

A cryptocurrency, broadly defined, is currency that takes the form of tokens or “coins” and exists on a distributed and decentralized ledger.

Beyond that, the field of cryptocurrencies has expanded dramatically since Bitcoin was launched over a decade ago, and the next great digital token may be released tomorrow.

Bitcoin continues to lead the pack of cryptocurrencies in terms of market capitalization, user base, and popularity.

Other virtual currencies such as Ethereum are being used to create decentralized financial systems for those without access to traditional financial products.

Some altcoins are being endorsed as they have newer features than Bitcoin, such as the ability to handle more transactions per second or use different consensus algorithms like proof-of-stake.

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What Are Cryptocurrencies?

Before we take a closer look at some of these alternatives to Bitcoin, let’s step back and briefly examine what we mean by terms like cryptocurrency and altcoin. A cryptocurrency, broadly defined, is virtual or digital money that takes the form of tokens or “coins.” While some cryptocurrencies have ventured into the physical world with credit cards or other projects, the large majority remain entirely intangible.

The “crypto” in cryptocurrencies refers to complicated cryptography that allows for the creation and processing of digital currencies and their transactions across decentralized systems. Alongside this important “crypto” feature of these currencies is a common commitment to decentralization; cryptocurrencies are typically developed as code by teams who build in mechanisms for issuance (often, although not always, through a process called “mining”) and other controls.

Cryptocurrencies are almost always designed to be free from government manipulation and control, although as they have grown more popular, this foundational aspect of the industry has come under fire. The currencies modeled after Bitcoin are collectively called altcoins, and in some cases “shitcoins,” and have often tried to present themselves as modified or improved versions of Bitcoin. While some of these currencies may have some impressive features that Bitcoin does not, matching the level of security that Bitcoin’s networks achieve largely has yet to be seen by an altcoin.

Below, we’ll examine some of the most important digital currencies other than Bitcoin. First, though, a caveat: It is impossible for a list like this to be entirely comprehensive. One reason for this is the fact that there are more than 4,000 cryptocurrencies in existence as of January 2021. While many of these cryptos have little to no following or trading volume, some enjoy immense popularity among dedicated communities of backers and investors.

Beyond that, the field of cryptocurrencies is always expanding, and the next great digital token may be released tomorrow. While Bitcoin is widely seen as a pioneer in the world of cryptocurrencies, analysts adopt many approaches for evaluating tokens other than BTC. It’s common, for instance, for analysts to attribute a great deal of importance to ranking coins relative to one another in terms of market capitalization. We’ve factored this into our consideration, but there are other reasons why a digital token may be included in the list as well.

1. Ethereum (ETH)

The first Bitcoin alternative on our list, Ethereum is a decentralized software platform that enables smart contracts and decentralized applications (dapps) to be built and run without any downtime, fraud, control, or interference from a third party. The goal behind Ethereum is to create a decentralized suite of financial products that anyone in the world can freely access, regardless of nationality, ethnicity, or faith. This aspect makes the implications for those in some countries more compelling, as those without state infrastructure and state identifications can get access to bank accounts, loans, insurance, or a variety of other financial products.

The applications on Ethereum are run on ether, its platform-specific cryptographic token. Ether is like a vehicle for moving around on the Ethereum platform and is sought mostly by developers looking to develop and run applications inside Ethereum, or now, by investors looking to make purchases of other digital currencies using ether. Ether, launched in 2015, is currently the second-largest digital currency by market capitalization after Bitcoin, although it lags behind the dominant cryptocurrency by a significant margin. As of January 2021, ether’s market cap is roughly 19% of Bitcoin’s size.

In 2014, Ethereum launched a presale for ether, which received an overwhelming response; this helped to usher in the age of the initial coin offering (ICO). According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the decentralized autonomous organization (DAO) in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). As of January 2021, Ethereum (ETH) has a market capitalization of $138.3 billion and a per-token value of $1,218.59.

In 2021, Ethereum plans to change its consensus algorithm from proof-of-work to proof-of-stake. This move will allow Ethereum’s network to run itself with far less energy and improved transaction speed. Proof-of-stake allows network participants to “stake” their ether to the network. This process helps to secure the network and process the transactions that occur. Those who do this are rewarded ether, similar to an interest account. This is an alternative to Bitcoin’s proof-of-work mechanism, where miners are rewarded more Bitcoin for processing transactions.

2. Litecoin (LTC)

Litecoin, launched in 2011, was among the first cryptocurrencies to follow in the footsteps of Bitcoin and has often been referred to as “silver to Bitcoin’s gold.” It was created by Charlie Lee, an MIT graduate and former Google engineer.

Litecoin is based on an open-source global payment network that is not controlled by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of consumer-grade CPUs. Although Litecoin is like Bitcoin in many ways, it has a faster block generation rate and hence offers a faster transaction confirmation time. Other than developers, there are a growing number of merchants that accept Litecoin. As of January 2021, Litecoin has a market capitalization of $10.1 billion and a per-token value of $153.88, making it the sixth-largest cryptocurrency in the world.

3. Cardano (ADA)

Cardano is an “Ouroboros proof-of-stake” cryptocurrency that was created with a research-based approach by engineers, mathematicians, and cryptography experts. The project was cofounded by Charles Hoskinson, one of the five initial founding members of Ethereum. After having some disagreements with the direction Ethereum was taking, he left and later helped to create Cardano.

The team behind Cardano created its blockchain through extensive experimentation and peer-reviewed research. The researchers behind the project have written over 90 papers on blockchain technology across a range of topics. This research is the backbone of Cardano.

Due to this rigorous process, Cardano seems to stand out among its proof-of-stake peers as well as other large cryptocurrencies. Cardano has also been dubbed the “Ethereum killer,” as its blockchain is said to be capable of more. That said, Cardano is still in its early stages. While it has beaten Ethereum to the proof-of-stake consensus model, it still has a long way to go in terms of decentralized financial applications.

Cardano aims to be the world’s financial operating system by establishing decentralized financial products similar to Ethereum as well as providing solutions for chain interoperability, voter fraud, and legal contract tracing, among other things. As of January 2021, Cardano has a market capitalization of $9.8 billion and one ADA trades for $0.31.

4. Polkadot (DOT)

Polkadot is a unique proof-of-stake cryptocurrency that is aimed at delivering interoperability among other blockchains. Its protocol is designed to connect permissioned and permission-less blockchains, as well as oracles, to allow systems to work together under one roof.

Polkadot’s core component is its relay chain that allows the interoperability of varying networks. It also allows for “parachains,” or parallel blockchains with their own native tokens for specific-use cases.

Where Polkadot differs from Ethereum is that rather than creating just decentralized applications on Polkadot, developers can create their own blockchain while also using the security that Polkadot’s chain already has. With Ethereum, developers can create new blockchains but need to create their own security measures, which can leave new and smaller projects open to attack, as the larger a blockchain, the more security it has. This concept in Polkadot is known as shared security.

Polkadot was created by Gavin Wood, another member of the core founders of the Ethereum project who had differing opinions on the project’s future. As of January 2021, Polkadot has a market capitalization of $11.2 billion and one DOT trades for $12.54.

5. Bitcoin Cash (BCH)

Bitcoin Cash (BCH) holds an important place in the history of altcoins because it is one of the earliest and most successful hard forks of the original Bitcoin. In the cryptocurrency world, a fork takes place as the result of debates and arguments between developers and miners. Due to the decentralized nature of digital currencies, wholesale changes to the code underlying the token or coin at hand must be made due to general consensus; the mechanism for this process varies according to the particular cryptocurrency.

When different factions can’t agree, sometimes the digital currency is split, with the original chain remaining true to its original code and the new chain beginning life as a new version of the prior coin, complete with changes to its code.

BCH began its life in August 2017 as a result of one of these splits. The debate that led to the creation of BCH had to do with the issue of scalability; the Bitcoin network has a limit on the size of blocks: one megabyte (MB). BCH increases the block size from one MB to eight MBs, with the idea being that larger blocks can hold more transactions within them, and the transaction speed would therefore be increased. It also makes other changes, including the removal of the Segregated Witness protocol that impacts block space. As of January 2021, BCH has a market capitalization of $8.9 billion and a value per token of $513.45.

6. Stellar (XLM)

Stellar is an open blockchain network designed to provide enterprise solutions by connecting financial institutions for the purpose of large transactions. Huge transactions between banks and investment firms—typically taking several days, involving a number of intermediaries, and costing a good deal of money—can now be done nearly instantaneously with no intermediaries and cost little to nothing for those making the transaction.

While Stellar has positioned itself as an enterprise blockchain for institutional transactions, it is still an open blockchain that can be used by anyone. The system allows for cross-border transactions among any currencies. Stellar’s native currency is Lumens (XLM). The network requires users to hold Lumens to be able to transact on the network.

Stellar was founded by Jed McCaleb, a founding member of Ripple Labs and developer of the Ripple protocol. He eventually left his role with Ripple and went on to cofound the Stellar Development Foundation. Stellar Lumens have a market capitalization of $6.1 billion and are valued at $0.27 as of January 2021.

7. Chainlink

Chainlink is a decentralized oracle network that bridges the gap between smart contracts, like the ones on Ethereum, and data outside of it. Blockchains themselves do not have the ability to connect to outside applications in a trusted manner. Chainlink’s decentralized oracles allow smart contracts to communicate with outside data so that the contracts can be executed based on data that Ethereum itself cannot connect to.

Chainlink’s blog details a number of use cases for its system. One of the many use cases that are explained would be to monitor water supplies for pollution or illegal syphoning going on in certain cities. Sensors could be set up to monitor corporate consumption, water tables, and the levels of local bodies of water. A Chainlink oracle could track this data and feed it directly into a smart contract. The smart contract could be set up to execute fines, release flood warnings to cities, or invoice companies using too much of a city’s water with the incoming data from the oracle.

Chainlink was developed by Sergey Nazarov along with Steve Ellis. As of January 2021, Chainlink’s market capitalization is $8.6 billion and one LINK is valued at $21.53.

8. Binance Coin (BNB)

Binance Coin is a utility cryptocurrency that operates as a payment method for the fees associated with trading on the Binance Exchange. Those who use the token as a means of payment for the exchange can trade at a discount. Binance Coin’s blockchain is also the platform that Binance’s decentralized exchange operates on. The Binance exchange was founded by Changpeng Zhao and is one of the most widely used exchanges in the world based on trading volumes.  

Binance Coin was initially an ERC-20 token that operated on the Ethereum blockchain. It eventually had its own mainnet launch. The network uses a proof-of-stake consensus model. As of January 2021, Binance has a $6.8 billion market capitalization with one BNB having a value of $44.26.

9. Tether (USDT)

Tether was one of the first and most popular of a group of so-called stablecoins, cryptocurrencies that aim to peg their market value to a currency or other external reference point to reduce volatility. Because most digital currencies, even major ones like Bitcoin, have experienced frequent periods of dramatic volatility, Tether and other stablecoins attempt to smooth out price fluctuations to attract users who may otherwise be cautious. Tether’s price is tied directly to the price of the U.S. dollar. The system allows users to more easily make transfers from other cryptocurrencies back to U.S. dollars in a more timely manner than actually converting to normal currency.

Launched in 2014, Tether describes itself as “a blockchain-enabled platform designed to facilitate the use of fiat currencies in a digital manner.” Effectively, this cryptocurrency allows individuals to utilize a blockchain network and related technologies to transact in traditional currencies while minimizing the volatility and complexity often associated with digital currencies. As of January 2021, Tether is the third-largest cryptocurrency by market capitalization, with a total market cap of $24.4 billion and a per-token value of $1.

10. Monero (XMR)

Monero is a secure, private, and untraceable currency. This open-source cryptocurrency was launched in April 2014 and soon garnered great interest among the cryptography community and enthusiasts. The development of this cryptocurrency is completely donation-based and community-driven. Monero has been launched with a strong focus on decentralization and scalability, and it enables complete privacy by using a special technique called “ring signatures.”

From the outside, the cryptocurrency investing universe seems limited to Bitcoin. As the most well-known cryptocurrency, Bitcoin is the leader in market capitalization and overall traction with investors.

But there are several other options for those interested in diversifying their portfolio and experimenting with coins that offer a different take on the concept of digital currencies. Ripple’s XRP is one of them. In March 2021, the cryptocurrency ranked fourth, behind Bitcoin, Ether, and Binance coin, in terms of total market capitalization.

Let’s take a closer look at what distinguishes XRP from Bitcoin and other top digital tokens.

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KEY TAKEAWAYS

Ripple is the company that is behind XRP, the cryptocurrency.

Bitcoin transaction confirmations may take many minutes with high transaction costs, while XRP transactions are confirmed in seconds with little cost.

XRP is a technology that is mainly known for its digital payment network and protocol.

Many major banks use the XRP payment system.

What is Ripple?

Any discussion of XRP must include a brief introduction to Ripple. In news reports, XRP and Ripple are often used interchangeably. Both are actually different.

Ripple is the name of the company and network behind the XRP cryptocurrency. The company was founded as a peer-to-peer trust network that leveraged social media. Users within a network could bypass banks and make loans and open credit lines with each other. But the network failed to take off.

In 2012, three years after Bitcoin ushered in the cryptocurrency era, Ripple changed tracks and became OpenCoin1 –a network for money transfers where large businesses and financial services firms acted as counterparties to transactions. XRP, its cryptocurrency, was launched in the same year and the founders, who coded it into existence, gifted 80 billion XRP to as initial corpus. The purpose of XRP was to serve as an intermediate mechanism of exchange between two currencies or networks. OpenCoin became Ripple Labs in September 2013.

On its website2, Ripple describes itself as a global payments network and counts major banks and financial services amongst its customers. XRP is used in its products to facilitate quick conversion between different currencies.

Bitcoin vs. XRP

Bitcoin operates on a public blockchain ledger that supports a digital currency used to facilitate payments for goods and services. The bitcoin network is based on the blockchain concept, a public ledger of verified transactions and record keeping. Miners verify transactions on an ongoing basis and add them to the Bitcoin blockchain. In exchange for their time and the computing power necessary to validate the ledger in this way, miners are rewarded with BTC upon successfully validating transactions3.

XRP is the native cryptocurrency for products developed by Ripple Labs. Its products are used for payment settlement, asset exchange, and remittance systems that work more like SWIFT, a service for international money and security transfers used by a network of banks and financial intermediaries4. XRP is pre-mined and uses a less complicated method of mining as compared to Bitcoin.

What are the main differences between Bitcoin and XRP?

The main differences between Bitcoin and XRP are as follows:

Both have different methods to validate transactions

Instead of using the blockchain mining concept, the Ripple network uses a unique distributed consensus mechanism to validate transactions in which participating nodes verify the authenticity of a transaction by conducting a poll. This enables almost instant confirmations without a central authority. The end result is that XRP remains decentralized and is faster and more reliable than many of its competitors. It also means that the XRP consensus system consumes negligible amounts of energy as compared to Bitcoin, which is considered an energy hog.  

XRP is cheaper and faster than Bitcoin

Due to the complicated and intensive nature of mining used in the cryptocurrency, Bitcoin transaction confirmations may take many minutes and are associated with high transaction costs. XRP transactions are confirmed within seconds and generally occur at very low costs.

Similar to the bitcoin transaction processing fee, XRP transactions are charged. Each time a transaction is performed on the Ripple network, a small amount of XRP is charged to the user (individual or organization)5

XRP has more coins in the market

About 1 billion XRP were pre-mined at launch and have been released gradually into the market by its main investors. In contrast, Bitcoin’s supply is capped at 21 million, meaning there will only ever be 21 million Bitcoin in existence. BTC’s artificial scarcity has helped generate investor interest in its potential as a store of value.

XRP and Bitcoin Have Different Circulation Mechanisms

Bitcoins are released and added to the network as and when miners find them. They do not adhere to a release schedule and their supply depends mostly on network speeds and difficulty of the algorithm used to mine coins.

A smart contract controls the release of XRP. Ripple planned to release a maximum of 1 billion XRP tokens each month as governed by an in-built smart contract; the current circulation is over 50 billion.

Any unused portion of the XRP in a particular month will be shifted back to an escrow account. This mechanism ensures that there will be no possibility of misuse due to an oversupply of XRP cryptocoins, and it will take many years before all the cryptocoins will be available.

Overall, XRP is better for lower processing times and lower transaction charges than bitcoin.6 7

Bitcoin vs. Ripple Example

To understand both with real-world comparisons, below are some analogies.

Peter, living in America, visits Walmart and pays for his purchases in US dollars. He can also use his US dollars to purchase other currencies for trading and investment, like GBP or JPY, and sell them off at a later date for a profit or loss.

Bitcoin is an equivalent digital currency—an alternative to real-world US dollars, for example.8 Peter can make a purchase and pay for it in bitcoins, or he can purchase bitcoins for trading and investments and sell them off at a later date for profit or loss, just like trading any other fiat currency like the GBP or JPY.

If Peter in America wants to send $100 to Paul in Italy, he can do so by instructing his American bank to execute the transaction. After taking necessary charges, Peter’s American bank will issue instructions using the present-day SWIFT system that will credit Paul’s Italian bank account with the equivalent euros (or USD). This process may involve high charges at both ends and takes a certain number of days for processing.

Enter Ripple, the payment and settlement system that also has a currency, the XRP.9

Ripple’s payment system uses XRP tokens for the transfer of assets on the Ripple network.10 The same $100 can be converted instantly by Peter to equivalent XRP tokens, which can be instantly transferred to Paul’s account over the Ripple network.

Upon suitable verification and authentication of the transaction by the decentralized Ripple network, Paul will receive the XRP tokens. He will have the option to convert it back to USD's or any other currency of his choice, or even retain it as XRP tokens. The verification process is faster than those of bitcoin and traditional money transfer systems.6

The Bottom Line

While Ripple works in a bit more complicated way, the above example explains its basic workings. The Ripple system scores better than the bitcoin network for its lower processing times and lower transaction charges.6 7 On the other hand, BTC is generally more widespread and better known than XRP, giving it the advantage in other ways.11

The forex market is the largest and most liquid market in the world. It's a truly global currency market, open 24 hours a day, seven days a week, everywhere.

As if forex was not dynamic enough, cryptocurrencies like bitcoin have added a fascinating new dimension to currency trading. In recent years, many forex brokers have begun to accept bitcoins for currency trading, with some accepting a variety of other digital currencies as well.

Should you jump in and begin using your hard-mined bitcoins in the forex markets? Find out the risks and benefits first.

KEY TAKEAWAYS

The forex market is dedicated to trading in the world's currencies.

Many forex brokers now accept bitcoin and other cryptocurrencies.

Bitcoin trades benefit from the anonymity and decentralized valuation system the currency represents.

They add a new layer of risk to forex trading, exacerbated by the extreme volatility of crypto-currencies.

A Standard Forex Trade

Before you consider whether to trade forex using bitcoin, it's helpful to understand how a conventional forex trade works.

A forex trade is simply an exchange of one currency for another at its current rate. Unlike tourists who exchange their home currency for local spending money, forex traders are trying to make money off the continual fluctuations in the real value of one currency against another.

Trading a 'Pair'

Imagine you are an American trader betting that the British pound will lose value compared to the U.S. dollar. This is called trading on the British pound/U.S. dollar currency pair (GBP/USD).

You deposit $100 with a forex broker. Assuming the rate of $1 = £0.5, you will receive £50 for your $100. If the GBP/USD rate changes to 0.45, you close the position to 50/0.45 = $111.11. That is, you make an 11.11% profit over your initial $100 deposit.

Most forex trading is conducted in a decentralized fashion via over-the-counter markets. However, the fact that the forex market is decentralized and that bitcoin is considered to be a decentralized digital currency does not mean that the two are equivalent.

The Impact of Decentralization

The key distinction is that, though forex exchanges might be decentralized, the currencies themselves are backed by central banks in the countries that issue them. It's the job of those banks to stabilize the value of their currencies and keep them stable.

Bitcoin and most other cryptocurrencies do not have that support.

A Forex Trade Using Bitcoin

Now consider an example of a forex trade using bitcoin. First, you open a forex trading account with a broker who accepts bitcoins. These include AvaTrade,1 eToro, and LiteForex.2 You then transfer 2 bitcoins from your digital wallet to the forex broker’s digital wallet.

If you want to trade using bitcoin, use only a locally regulated forex brokerage. And avoid using leverage until you know what you're doing.

Assuming the current bitcoin to U.S. dollar rate is 1 bitcoin = $7,500, your deposit of 2 bitcoins is worth $15,000. Now, assume that you want to take a position in British pounds. If the exchange rate is £0.5 = $1, you will receive £7,500. After some time, the GBP/USD rate changes to 0.45, and you square off your position to get $1,666.65 in your trading account. You have made a tidy 11.11% profit and you are ready to cash out.

The Bitcoin Effect

However, suppose that the bitcoin to U.S. dollar rate has changed during this period of time to 1 bitcoin = $8,500. When you withdraw your money in bitcoins, you receive ($16,666.65/$8,500) = 1.961 bitcoins.

$5,332-$11,982

The range in value of a bitcoin over the year ending in July 2020.

Despite the fact that your bet on British pounds earned you an 11.11% profit (from $15,000 to $16,666.65), the fluctuation in the bitcoin to U.S. dollar rate means that you sustain a loss of 0.039 bitcoin or about -2.%. (Initial deposit of 2 bitcoins — 1.961 bitcoins = .039 bitcoin).

However, had the bitcoin to U.S. dollar exchange rate changed to 1 bitcoin = $7,000, you would realize a profit from both the forex trade and the bitcoin exchange. You would have received ($16,666.65/$7,000) = 2.381 bitcoins, a profit of 19.1%.

Increased Unpredictability

This hypothetical example illustrates the big reason to exercise caution when using digital currencies for forex trading. Even the most popular and widely used cryptocurrency, the bitcoin, is highly volatile compared to most traditional currencies.

In the year ending July 24, 2020, the value of a bitcoin ranged from $5,532 to $11,982.

This unpredictability means that the risks associated with trading forex using bitcoin are that much greater.

Beyond the exchange rate fluctuations impacting profit and loss, there are other benefits and risks to consider before trading forex with bitcoin.

Benefits of Trading Forex With Bitcoin

Decentralized Valuations: A major advantage of trading forex with the bitcoin is that the bitcoin is not tied to a central bank. Digital currencies are free from central geopolitical influence and from macroeconomic issues like country-specific inflation or interest rates.

High Leverage: Many forex brokers offer leverage for bitcoin trades. Experienced traders can use this to their benefit. However, such high margins should also be approached with great caution as they magnify the potential for losses.

Low Deposit Amount: A trader can start with as little as $25 with some bitcoin forex trading firms. A few forex trading firms have even offered promotions like a matching deposit amount. Traders should check that the broker is legitimate and appropriately regulated.

Low Cost of Trading: Most forex brokers that accept cryptocurrency are keeping brokerage costs very low to attract new clients.

Security: You don’t need to reveal your bank account or credit card details to make a bitcoin transaction. This is a big advantage in terms of cost and financial security.

No Global Boundaries: Bitcoin transactions have no global boundaries. A trader based in South Africa can trade forex through a broker based in the United Kingdom. Regulatory challenges may remain a concern, but if both traders and brokers are willing to transact, there are no geographical boundaries.

Risks of Trading Forex with Bitcoin

Different Exchange Rates: Bitcoin trades on multiple exchanges and exchange rates vary. Traders must ensure they understand which bitcoin exchange rates the forex broker will be using.

U.S. Dollar Rate Risk: While receiving bitcoin deposits from clients, almost all brokers instantly sell the bitcoins and hold the amount in U.S. dollars. Even if a trader does not take a forex trade position immediately after the deposit, they are still exposed to the bitcoin-to-U.S. dollar rate risk from deposit to withdrawal.

Danger of Volatility: Historically, bitcoin prices have exhibited high volatility. In the absence of regulations, volatility can be used by unregulated brokers to their advantage and a trader’s disadvantage. For example, assume the intraday bitcoin rate fluctuates from $5,000 to $5,300 U.S. dollars per bitcoin. For an incoming deposit of 2 bitcoins, the unregulated broker may apply the lowest rates to credit the trader $10,000 (2 bitcoins * $5,000 = $10,000). However, once the trader is ready to make a withdrawal, the broker may use the lowest exchange rate. Instead of the original 2 bitcoins deposited, the trader receives only 1.88679 bitcoins ($10,000/$5,300 = 1.88679 bitcoins). The unregulated broker may be exchanging bitcoins and dollars at, say, $5,150, and pocketing the difference at the expense of the client.

Security Risks Inherent to Bitcoin: Deposited bitcoins are prone to theft by hacking, even from a broker’s digital wallet. To reduce this risk, look for a broker who has insurance protection against theft.

Risk of Leverage: Using leverage is risky for new traders who may not understand the exposure. This risk is not unique to cryptocurrency forex trading and comes into play in traditional forex transactions as well.

Asset Class Mixing: Cryptocurrency is a different asset class altogether and has its own valuation mechanism. Trading forex with bitcoins essentially introduces a new intermediate currency which can impact profit and loss in unexpected ways. Any money that is not locked down in a trader’s base currency is a risk.

The Bottom Line

Although cryptocurrencies like bitcoin are gaining popularity, there are still many associated risks. In forex trading, dealing in a decentralized currency that offers global transactions with no fees is an advantage. But the tradeoff is essentially adding a third currency to what was a trading pair.

Most people have a credit card they can use to pay for things. But some also have bitcoin at their disposal. Which one should people use, and when, to maximize their assets?

WS/Telegram + 852 57054691 is a trusted buyer to sell Bitcoin, Ethereum, Binance Coin, Huobi, Dogecoin and other cryptocurrencies. All deals will be done in trusted wallets.

KEY TAKEAWAYS

Bitcoin transactions seek to operate more like cash: exchanged person-to-person without a financial intermediary.

Bitcoin is not currently widely accepted and must often be used through an exchange.

Credit card companies are widely accepted but charge fees.

They also offer fraud protection that Bitcoin does not.

Bitcoin Transactions

Satoshi Nakamoto, the inventor of bitcoin, titled his original white paper on the subject "A Peer-to-Peer Electronic Cash System." This description touches on the core differences between bitcoin and credit card transactions.

Bitcoin payments are analogous to wire transfers or cash transactions, where payment is "pushed" directly from one party to another, without going through another financial institution. Payment processing is executed through a private network of computers, and each transaction is recorded in a blockchain, which is public. Bitcoin is based on peer-to-peer technology and relies on the blockchain and the cryptography securing it, without any third-party oversight.

When making a bitcoin transaction, it is not necessary to provide personal identification, such as your name and address.

Credit Card Transactions

By contrast, credit card transactions entail the buyer effectively authorizing the seller to "pull" a payment from their account, passing through financial intermediaries in the process. For example, a typical Visa transaction involves four parties: the merchant, the acquirer (the financial institution that enables payments to the merchant), the issuer (the cardholder's bank), and the individual cardholder.

Key Differences

Bitcoin transactions are made using an anonymous alphanumeric address, that changes with every transaction, and a private key. Payments can also be made on mobile devices by using quick response (QR) codes.

While credits cards are stored physically in a wallet, bitcoin transactions are sent to and from electronic wallets, which can be stored on your computer, smartphone, or in the cloud.

Bitcoin transactions are irreversible and can only be refunded by the receiving party—a key difference from credit card transactions that can be canceled. This means there are no charge-backs for merchants when taking payment via bitcoin. A charge-back is the demand by a credit-card provider for a retailer to cover the loss on a fraudulent or disputed transaction.

Bitcoin merchants also save on credit card fees that can range anywhere from 0.5% to 5%, plus a 20 to 30 cent flat fee for each transaction made. Bitcoin payments can be sent and received at a very low cost or none at all, as bitcoin fees are based on the amount of data sent.

For merchants, the advantages of receiving bitcoin are obvious. Payments made using the virtual currency save substantially on processing fees and eliminate the risk of charge-backs. For shoppers, the advantages of paying with bitcoin include greater simplicity in placing the transaction, user anonymity, no interruptions from intermediaries, and very low transaction fees. (For example, your account being frozen as a result of a fraud alert).

Due to the unique nature of virtual currencies, there are some inherent advantages to transacting through bitcoin over fiat currencies. Although over a decade old, the digital currency landscape is constantly changing, with most tokens being untested as a medium of exchange, and users should be careful to weigh their benefits and risks. That said, bitcoin is designed to offer users a unique set of advantages over other payment methods. We'll take a closer look at those below, but before we do, it will be useful to explore what bitcoin is. By better understanding how bitcoin was designed, it will be easier to see what the advantages of using bitcoin for payments are.

What Is Bitcoin?

Bitcoin is a decentralized, peer-to-peer cryptocurrency system designed to allow online users to process transactions through digital units of exchange called bitcoins (BTC). Started in 2009 by a mysterious entity named Satoshi Nakamoto, the Bitcoin network has come to dominate and even define the cryptocurrency space, spawning a legion of altcoin followers and representing for many users an alternative to government flat currencies like the U.S. dollar or the euro or pure commodity currencies like gold or silver coins.1

Why the need for bitcoin in the first place, if there are already so many traditional means of making payments? A key element of bitcoin is its decentralized status, meaning that it is not controlled or regulated by any central authority. This immediately distinguishes it from fiat currencies. Bitcoin payments are processed through a private network of computers linked through a shared ledger. Each transaction is simultaneously recorded in a "blockchain" on each computer that updates and informs all accounts. The blockchain serves as a distributed ledger and obviates the need for any central authority to maintain such records.

Bitcoins are not issued by a central bank or government system like fiat currencies. Rather, bitcoins are either "mined" by a computer through a process of solving increasingly complex mathematical algorithms in order to verify transaction blocks to be added to the blockchain, or they are purchased with standard national money currencies and placed into a "bitcoin wallet" that is accessed most commonly through a smartphone or computer.

El Salvador made Bitcoin legal tender on June 9, 2021.2 It is the first country to do so. The cryptocurrency can be used for any transaction where the business can accept it. The U.S. dollar continues to be El Salvador’s primary currency.

Benefits of Bitcoin

Now that we have seen a brief overview of what bitcoin is, we can better understand how this leading cryptocurrency provides potential benefits to its users.

1. User Autonomy

The primary draw of bitcoin for many users, and indeed one of the central tenets of cryptocurrencies more generally, is autonomy. Digital currencies allow users more autonomy over their own money than fiat currencies do, at least in theory. Users are able to control how they spend their money without dealing with an intermediary authority like a bank or government.

2. Discretion

Bitcoin purchases are discreet. Unless a user voluntarily publishes his Bitcoin transactions, his purchases are never associated with his personal identity, much like cash-only purchases, and cannot easily be traced back to him. In fact, the anonymous bitcoin address that is generated for user purchases changes with each transaction. This is not to say that bitcoin transactions are truly anonymous or entirely untraceable, but they are much less readily linked to personal identity than some traditional forms of payment.

3. Peer-to-Peer Focus

The bitcoin payment system is purely peer-to-peer, meaning that users are able to send and receive payments to or from anyone on the network around the world without requiring approval from any external source or authority.

4. Elimination of Banking Fees

While it is considered standard among cryptocurrency exchanges to charge so-called "maker" and "taker" fees, as well as occasional deposit and withdrawal fees, bitcoin users are not subject to the litany of traditional banking fees associated with fiat currencies. This means no account maintenance or minimum balance fees, no overdraft charges and no returned deposit fees, among many others.

5. Very Low Transaction Fees for International Payments

Standard wire transfers and foreign purchases typically involve fees and exchange costs. Since bitcoin transactions have no intermediary institutions or government involvement, the costs of transacting are kept very low. This can be a major advantage for travelers. Additionally, any transfer in bitcoins happens very quickly, eliminating the inconvenience of typical authorization requirements and wait periods.

6. Mobile Payments

Like with many online payment systems, bitcoin users can pay for their coins anywhere they have Internet access. This means that purchasers never have to travel to a bank or a store to buy a product. However, unlike online payments made with U.S. bank accounts or credit cards, personal information is not necessary to complete any transaction.

7. Accessibility

WS/Telegram + 852 57054691 Sincerely buying cryptocurrency at high price through trusted wallet 100% securely and instantly

If you’re looking to buy or sell cryptocurrencies, you’ll need to use a cryptocurrency exchange. These online services often work similarly to a stockbroker, giving you the tools to buy and sell digital currencies like bitcoin, ethereum, and dogecoin. The best crypto exchanges make it easy to buy and sell the currencies you want with low fees and strong security features.

When choosing the best crypto exchange for your needs, it’s important to look at supported currencies, pricing, withdrawal options, and security which is where we focused when picking this list of the best crypto exchanges. Keep reading to learn more about which crypto exchange could be best for your goals.

Best Crypto Exchanges of 2021

Best Overall: Coinbase and Coinbase Pro

Best for Beginners: Cash App

Best for Altcoins: Binance

Best Decentralized Exchange: Bisq

BEST OVERALLCoinbase and Coinbase Pro

Number of Currencies: 64

Transaction Fees: $0.99 to $2.99 (Coinbase), Up to 0.50% (Coinbase Pro)

Wallet Included: Yes

OPEN ACCOUNT

Why We Chose It

We picked Coinbase because it makes buying and selling cryptocurrencies very easy with strong security and transparent pricing.

Additionally, Coinbase offers Coinbase Pro with a lower fee structure and significantly more features in terms of charts and indicators.

Pros & Cons

Pros

Solid variety of altcoin choices

Extremely simple user interface

Very high liquidity

Cons

High fees when not using Coinbase Pro

User does not control wallet keys

Overview

While the cryptocurrency industry has been fraught with fraudulent coins and shady exchanges, Coinbase has largely avoided any controversy. Coinbase offers an extremely easy-to-use exchange, greatly lowering the barrier to entry for cryptocurrency investment, which is typically seen as confusing and convoluted.

Coinbase also offers insured custodial wallets for investors and traders to store their investments. They carry insurance against data breaches and hacking and your cash is stored in FDIC insured bank accounts. These custodial accounts are very convenient for newer users just getting their feet wet, but the private keys to the coins within them are owned by Coinbase, and not the investor.

Additionally, Coinbase also offers the free Coinbase Pro version that has a different, but cheaper, fee structure and significantly more options in terms of charts and indicators. Coinbase Pro is a perfect next step for those who have learned the ropes using Coinbase, and it helps round out the overall offering by adding features that the more advanced user would want.

Read the full Coinbase review.

BEST FOR BEGINNERSCash App

Number of Currencies: 1

Transaction Fees: Varies

Wallet Included: Yes

OPEN ACCOUNT

Why We Chose It

We like Cash App because it is very easy to use and gives you flexible options to withdraw to other crypto wallets.

Pros & Cons

Pros

Peer-to-peer money transfer like Venmo or Zelle

Ability to withdraw Bitcoin

Extremely simple user interface

Cons

Only supports Bitcoin and no other cryptocurrencies

3% charge when sending money via credit card

Daily and weekly withdrawal limits apply

Overview

Cash App is a peer-to-peer money transfer system much like Venmo. This type of service allows users to split food, pay rent to a roommate, or even shop online at a retailer that supports Cash App. Cash App can essentially act as a bank account and users can have their own Cash App debit cards. This service is very convenient by itself, but Cash App has even more features.

Cash App also allows its users to invest in stocks, ETFs, and Bitcoin in a similar fashion that Robinhood does. The mobile-first interface that this exchange uses is very easy to figure out and use, making it ideal for a first-time investor.

While its main feature is money transfers, similar to apps like Venmo, it also has a basic crypto investment feature similar to Robinhood. The Cash app allows the user to withdraw cryptocurrency investments to your own wallet. This is the main reason that we chose Square’s Cash app over Robinhood as the best option for beginners looking to buy Bitcoin.

The ability to withdraw cryptocurrency from an exchange is extremely important in the cryptocurrency community. With Robinhood, you can invest and trade cryptocurrency, but you cannot withdraw and spend it how you wish. However, with Cash App, one drawback is that you still don't control the private keys, similar to Coinbase. Many in the crypto-community refer to this concept as “not your keys, not your coin.” This means that if you do not hold the private keys to the wallet the coins are stored in, they are effectively not owned by you.

BEST FOR ALTCOINSBinance

Number of currencies: Hundreds

Transaction Fees: 0.012% to 0.1%

Wallet Included: Yes

OPEN ACCOUNT

Why We Chose It

We chose Binance because it offers a very long list of currencies beyond the most popular digital coins.

Pros & Cons

Pros

Lower fees than other commonly used exchanges

Large variety of cryptocurrencies and trading pairs

More advanced charting

Cons

Geared for more advanced users

Binance US has fewer trading pairs than international version

Not all states supported

Overview

The Binance exchange is an exchange founded in 2017 with a strong focus on altcoin trading. Binance offers over 100 different trading pairs between different cryptocurrencies. It offers plenty of fiat-crypto pairs as well.

As of July 2021, Binance dominates the global exchange space, making up a significant portion of crypto trading volume daily. The exchange only allows for U.S. Dollar deposits by global users via SWIFT, but it does allow you to directly purchase a select number of cryptocurrencies with a credit or debit card. Deposits using 12 other fiat currencies are allowed, including the Euro.

Binance is suited to people who would like to trade or invest in lesser-known altcoins. Binance offers more than 50 different cryptocurrencies to trade and is a good option for anyone who wants more advanced charting than most other exchanges. The features, charting abilities, and data that come with your account are truly impressive, especially when you consider their reasonable fees.

BEST DECENTRALIZED EXCHANGEBisq

Number of Currencies: 63

Transaction Fees: 0.05% to 0.70%

Wallet Included: Yes

OPEN ACCOUNT

Why We Chose It

We picked Bisq because it is a decentralized, open-source exchange with no KYC requirements.

Pros

Decentralized, non-KYC platform

More than 25 different payment options

Mobile app for both Android and iOS

Cons

Transaction speed can be slow

Trading volumes can be low

Not designed for active trading

Overview

The premise of Bitcoin itself is that it grants open and free access to a unit of account. Banking products, like a checking or savings account, are only accessible if you have a legally provable government-issued identification. With Bitcoin, this isn’t necessary. It can be accessed regardless of nationality or location, and without any identification.

While many argue that this accessibility opens up possibilities for criminal activity (the same could be said about using cash), it also immediately grants units of account to individuals in countries with less-developed banking systems. There are millions of people in the world who do not have access to bank accounts or means to trade because their countries may not have the proper financial infrastructure, or the individuals may not have government-issued identification. Bitcoin, used in tandem with a decentralized exchange like Bisq, can be a good solution in these cases.

Bisq is a downloadable software and peer-to-peer decentralized Bitcoin and crypto exchange. This means that Bisq has no central point of failure and cannot be taken down, much like Bitcoin itself. Bisq is non-custodial, which means that no one other than the user touches or controls the user’s funds. This differs from centralized exchanges, like Coinbase, as Coinbase controls the user’s funds in a custodial account to which the user does not have the private keys. In that scenario, Coinbase holds the right to seize your funds if it deems your account activity suspicious, whether or not the activity is actually illegal in your location.

Bisq is instantly accessible to anyone with a computer or smartphone as there is no registration process or KYC (Know Your Customer) rule. This makes it ideal for those looking for privacy, dissidents living within an oppressive regime, or anyone who does not have any government-issued identification.

Bisq offers trading of several different fiat currencies including USD, as well as Bitcoin and a number of other cryptocurrencies. Its decentralized and peer-to-peer characteristics can mean low trading volumes and slower transactions, but for some, this is well worth it.

Final Verdict

If you’re looking to get started with cryptocurrency trading or investing, it’s important to choose the best exchange for your goals. Whether you want the most currencies, the lowest fees, or the easiest experience, there is a good option for you. Whether that’s our all-around winner Coinbase or a competitor like Binance, all you need is a funded account and you can buy your first cryptocurrency.

Compare the Best Crypto Exchanges

Frequently Asked Questions

Understanding the Types of Crypto Exchanges

To choose the best exchange for your needs, it is important to fully understand the types of exchanges.

Centralized Exchange

The first and most common type of exchange is the centralized exchange. Popular exchanges that fall into this category are Coinbase, Binance, Kraken, and Gemini. These exchanges are private companies that offer platforms to trade cryptocurrency. These exchanges require registration and identification, also known as the Know Your Customer, or Know Your Client, rule.

The exchanges listed above all have active trading, high volumes, and liquidity. That said, centralized exchanges are not in line with the philosophy of Bitcoin. They run on their own private servers which creates a vector of attack. If the servers of the company were to be compromised, the whole system could be shut down for some time. Worse, sensitive data about its users could be released.

The larger, more popular centralized exchanges are by far the easiest on-ramp for new users and they even provide some level of insurance should their systems fail. While this is true, when cryptocurrency is purchased on these exchanges it is stored within their custodial wallets and not in your own wallet that you own the keys to. The insurance that is provided is only applicable if the exchange is at fault. Should your computer and your Coinbase account, for example, become compromised, your funds would be lost and you would not likely have the ability to claim insurance. This is why it is important to withdraw any large sums and practice safe storage.

Decentralized Exchange

Decentralized exchanges work in the same manner that Bitcoin does. A decentralized exchange has no central point of control. Instead, think of it as a server, except that each computer within the server is spread out across the world and each computer that makes up one part of that server is controlled by an individual. If one of these computers turns off, it has no effect on the network as a whole because there are plenty of other computers that will continue running the network.

This is drastically different from one company controlling a server in a single location. Attacking something that is spread out and decentralized in this manner is significantly more difficult, making any such attacks unrealistic and likely unsuccessful.

Due to this decentralization, these types of exchanges cannot be subject to the rules of any regulatory body, as there is no specific person or group running the system. The individuals who participate come and go, so there is no one individual or group that a government or regulatory body can realistically pursue. This means that those trading on the platform do not have to declare their identification and are free to use the platform in any manner they choose, whether legal or not.

Methodology

What does it cost to trade bitcoin? Apart from the price of bitcoin itself, each cryptocurrency exchange adds a fee for trading, when customers purchase and sell coins. These fees include Maker (which add to the order book liquidity through limit orders) and Taker (which subtract liquidity from an order book through market orders) fees. In some cases, cryptocurrency traders can incur maker as well as trader fees, if the limit order is already present in the order book.

Cryptocurrency exchanges mainly calculate fees in two ways: as a flat fee per trade or as a percentage of the 30-day trading volume for an account. In both cases, they’ve adopted a tiered structure that depends on the amount being traded.

KEY TAKEAWAYS

Buying and selling cryptocurrencies has become increasingly popular since bitcoin first debuted back in 2009.

Dozens of online exchanges now exist to help buy and sell digital currencies as well as to trade cryptocurrencies against one another.

The typical costs involved include trading commissions paid to exchanges, the width of the bid-ask spread, and a fee to transfer funds to/from your bank account.

Four Things To Consider While Trading On Cryptocurrency Exchanges

There are four important things that traders must consider while purchasing cryptocurrencies.

First, cryptocurrency exchanges are unregulated in most jurisdictions. Most regulators in countries around the world have taken a hands-off approach to cryptocurrency regulation in some of its biggest trading markets. For example, cryptocurrency exchanges are governed by a patchwork of regulations in the United States—among the largest markets for cryptocurrency trading. Some types of cryptocurrency trading are banned in China, which accounted for as much as 90% of overall trading up until the beginning of 2017.1 Nonetheless, several prominent Chinese exchanges are still operational and have simply shifted base to Seychelles or Malta since the government crackdown.

Second, fee schedules at cryptocurrency exchanges are designed to encourage frequent trading in large transaction amounts worth thousands of dollars. Fees often decrease with an increase in amount and frequency of trades. As such, small and infrequent orders are not cost-efficient at cryptocurrency exchanges. For example, some exchanges charge no fee for trades worth $10,000,000 and over.

Third, exchanges encourage trading with coins. Fiat currencies generally incur deposit and withdrawal fees at exchanges, depending on the payment mode. But purchasing cryptos with other coins, for the most part, is free. In some cases, a small fee may be charged to set up a wallet for the required cryptocurrency.

Fourth, most well-known cryptocurrency exchanges do not offer access to all coins. But, in many cases, traders can transfer funds from one wallet to another and fund their trading accounts using either fiat currencies or cryptocurrencies. For example, traders wishing to buy Cardano (ADA), a top-15 cryptocurrency by market cap, are not currently able to do so directly on the popular Coinbase exchange.2 However, traders can use fiat currency to purchase bitcoin at Coinbase. Binance, another exchange, already offers users the facility to import coins from other wallets. Once they have bitcoin in their Binance account, they can use it to buy ADA listed on the exchange. The transfer between multiple wallets at different exchanges incurs small charges at each end.  

Here is a brief comparison of trading fees for bitcoin at the current list of most popular exchanges by trade volume. This comparison does not take into account margin and leverage fees.

HCoin

Seychelles-based HCoin is one of the newest entrants into the cryptocurrency exchange field as of January 2020. Launched in August 2018, HCoin offers customers the opportunity to trade in a list of cryptocurrencies and fiat currencies including bitcoin, ether, XRP, litecoin, bitcoin cash, EOS, USDT, and HKDT, among many others.

HCoin's fees are dependent on the base currency and volume and are listed in a chart on the exchange's website.3 The company does not appear to list any fees for funding an account through transfer of digital assets from another wallet, nor is it clear whether the transaction fees change depending upon the size of each trade.

Coinsbit

Estonian platform Coinsbit has a focus on security and on innovative offerings such as InvestBox, a low-cost, low-risk way for investors to make exploratory transactions involving new altcoins.4 When it comes to fees, Coinsbit charges a flat 0.2% fee for trading. The exchange also has variable fees for deposit and withdrawal, depending upon the cryptocurrency, and with different minimums for each token as well. As of January 11, 2020, the fee to deposit USD was 0.8% and the fee to withdraw USD was 0.4%. Some of the cryptocurrencies are free to deposit (i.e. ETH, ARK, ATB, and others), and others are free to withdraw.5

Additionally, new accounts are initially prohibited from making withdrawals. Later, basic accounts have a withdrawal limit of USD$500 or equivalent per 24-hour period, while enhanced accounts can withdraw up to USD$100,000 or equivalent in a 24-hour span.

BitForex

The third most popular cryptocurrency exchange by trade volume is BitForex, an exchange headquartered in Singapore and registered in Seychelles. BitForex offers a host of trading options, including margin trading, derivatives, and more. As such, this exchange has a more complex fee schedule than some of its peers on this list.

For spot trades, BitForex charges 0.1% for both maker and taker feeds. For perpetual trades, there is a maker fee of 0.04% and a taker fee of 0.06%. Discounted rates are available for specialized market maker accounts on the platform. Deposits to BitForex are free, while withdrawals vary depending upon the currency involved. There are also minimum and 24-hour maximum withdrawal levels associated with each cryptocurrency.6

LBank

Besides being a popular cryptocurrency exchange, LBank also supports innovation in the altcoin space through its "LBK Voting Listing" event, which pits 8 new cryptocurrency projects against one another for a chance to be listed on LBank for free.

LBank charges a taker fee of 0.2% and a maker fee of -0.05%, meaning that makers earn a portion of the generated trade fee on the transaction. Different cryptocurrencies are associated with various withdrawal rates set at fixed quantities of those cryptocurrencies themselves. For instance, a user withdrawing bitcoin from LBank will be charged a flat fee of 0.0005 BTC. There are also withdrawal minimums for each cryptocurrency that are also set as fixed quantities of the token in question. Interestingly, LBank does not indicate a maximum withdrawal over a 24-hour period.7

P2PB2B

What Is a Bitcoin Exchange?

A bitcoin exchange is a digital marketplace where traders can buy and sell bitcoins using different fiat currencies or altcoins. A bitcoin currency exchange is an online platform that acts as an intermediary between buyers and sellers of the cryptocurrency.

The currency ticker used for bitcoin is either BTC or XBT.

KEY TAKEAWAYS

A bitcoin exchange acts as the intermediary between a seller and a buyer or, to use cryptocurrency language, between a "maker" and a "taker."

A bitcoin exchange works like a brokerage, and you can deposit money via bank transfer, wire, and other common means of deposit. However, you will often pay a price for this service.

If a trader wants to trade between cryptocurrencies, they will pay a currency conversion fee, similar to institutional banks when you trade money from different countries.

Purchases and sales are based on the same ordering system as existing brokerages, where a buyer (taker) places a limit order which is then sold when a corresponding cryptocurrency is available from the seller (maker).

Understanding Bitcoin Exchanges

Bitcoin exchange platforms match buyers with sellers. Like a traditional stock exchange, traders can opt to buy and sell bitcoin by inputting either a market order or a limit order. When a market order is selected, the trader is authorizing the exchange to trade the coins for the best available price in the online marketplace. With a limit order set, the trader directs the exchange to trade coins for a price below the current ask or above the current bid, depending on whether they are buying or selling.

To transact in bitcoin on an exchange, a user has to register with the exchange and go through a series of verification processes to authenticate their identity. Once the authentication is successful, an account is opened for the user who then has to transfer funds into this account before they can buy coins.

Different exchanges have different payment methods that can be used for depositing funds including bank wires, direct bank transfers, credit or debit cards, bank drafts, money orders and even gift cards. A trader who would like to withdraw money from the account could do so using the options provided by their exchange, which could include a bank transfer, PayPal transfer, check mailing, cash delivery, bank wire, or credit card transfer.

Decentralized Exchanges

Decentralized bitcoin exchanges are those that are operated without a central authority. These exchanges allow peer-to-peer trading of digital currencies without the need for an exchange authority to facilitate the transactions.

There are a number of benefits to decentralized exchanges. First, many cryptocurrency users feel that decentralized exchanges better match the decentralized structures of most digital currencies themselves; many decentralized exchanges also require less personal information from their members than other types of exchanges. Second, if users transfer assets directly to other users, that eliminates the need for the transferring of assets to the exchange, thereby reducing the risk of theft from hacks and other fraud. Third, decentralized exchanges may be less susceptible to price manipulation and other fraudulent trading activity.

On the other hand, decentralized exchanges (like all cryptocurrency exchanges) must maintain a fundamental level of user interest in the form of trading volume and liquidity. Not all decentralized exchanges have been able to achieve these important baseline qualities. Further, users of a decentralized exchange may have less recourse if they are the victims of fraud than those who make use of exchanges with centralized authorities.

Special Considerations

Fees

Making deposits and withdrawals comes at a price, depending on the payment method chosen to transfer funds. The higher the risk of a chargeback from a payment medium, the higher the fee. Making a bank draft or wiring money to the exchange has a lesser risk of a chargeback compared to funding your account with PayPal or a credit/debit card where the funds being transferred can be reversed and returned to the user upon request to the bank.

In addition to transaction fees and funds transfer fees, traders may also be subject to currency conversion fees, depending on the currencies that are accepted by the bitcoin exchange. If a user transfers Canadian dollars to an exchange that only deals in U.S. dollars, the bank or the exchange will convert the CAD to USD for a fee. Transacting with an exchange that accepts your local currency is the best way to avoid the FX fee.

All bitcoin exchanges have transaction fees that are applied to each completed buy and sell order carried out within the exchange. The fee rate is dependent on the volume of bitcoin transactions that is conducted.

Foreign exchange spreads are important measures when transacting in bitcoin and vary depending on how liquid the bitcoin exchange is.

Bitcoin Wallets

Note that a bitcoin exchange is different from a bitcoin wallet. While the former offers a platform through which bitcoin buyers and sellers can transact with each other, the latter is simply a digital storage service for bitcoin holders to store their coins securely. To be more technical, bitcoin wallets store private keys which are used to authorize transactions and access the bitcoin address of a user. Most bitcoin exchanges provide bitcoin wallets for their users, but may charge a fee for this service.

Makers and Takers

Online bitcoin marketplaces usually designate bitcoin participants as either makers or takers. When a buyer or seller places a limit order, the exchange adds it to its order book until the price is matched by another trader on the opposite end of the transaction. When the price is matched, the buyer or seller who set the limit price is referred to as a maker. A taker is a trader who places a market order that immediately gets filled.

Example of a Bitcoin Exchange

For example, on a bitcoin exchange, three coin sellers are asking for BTC/USD 2265.75, BTC/USD 2269.55, and BTC/USD 2270.00. A trader who initiates a market order to buy bitcoins will have their order filled at the best ask price of $2265.75. If only five bitcoins are available for the best ask and 10 coins are available for $2269.55, and the trader wants to buy 10 at market price, the trader's order will be filled with 5 coins @ $2265.75 and the remaining 5 @ $2269.55.

Best Bitcoin Wallets

Bitcoin has gained widespread acceptance and continues to grow in popularity. Unlike stocks at a stock brokerage, you can withdraw your cryptocurrencies from a crypto exchange and store them in an outside wallet. The best Bitcoin wallets make it easy (and maybe a little fun) to securely store and manage your crypto portfolio.

If you’re looking to buy and store Bitcoin or other cryptocurrencies, you may be on the hunt for the best Bitcoin wallet. We looked at a long list of Bitcoin wallets with a focus on cost, user experience, supported cryptocurrencies, and other features. Keep reading for a look at some of the best Bitcoin wallets available today.

The Best Bitcoin Wallets of 2021

Best for Beginners: Exodus

Best For Advanced Bitcoin Users: Electrum

Best for Mobile Users: Mycelium

Best Hardware Wallet: Ledger Nano X

Best For Security: Trezor Model T

Best Bang For Your Buck: Ledger Nano S

BEST FOR BEGINNERSExodus

Purchase Cost: Free

Cloud Storage: Yes/No

Cold Storage: Yes/No

OPEN ACCOUNT

Why We Chose It

We picked Exodus as best for beginners because it is free and comes with good customer support and optional support for cold storage.

Pros

Huge variety of cryptocurrencies

Built-in exchange

Good customer support

Cons

Closed source software

Overview

Exodus is a desktop and mobile wallet with a very simple user interface and an exchange built-in. One of Exodus’s most popular features is the ability to swap between a growing number of cryptocurrencies. Exodus currently allows for swaps between over 100 different cryptocurrencies.

With its simplicity, this wallet is great for beginners just getting into the crypto space. It also has great support, which is an essential feature for beginners getting into what many would consider a confusing market.

While it is great for beginners, more advanced users may find it lacking in some features. First, Exodus is a closed source wallet. This goes against the ethos of the idea of Bitcoin and blockchain and can create some security concerns as its code is not open for everyone to see. Instead, users rely on the Exodus team to ensure there are no holes in the security of its wallet.

Exodus has an option to set custom fees to keep costs down in addition to the option of automatically setting a fee that ensures the transaction completes quickly.

BEST FOR ADVANCED BITCOIN USERSElectrum

Purchase Cost: Free

Cloud Storage: Yes

Cold Storage: Yes

OPEN ACCOUNT

Why We Chose It

We chose Electrum because is it secure, open-source, and offers advanced features and options.

Pros & Cons

Pros

Customizable transaction fees

Greater level of security than most hot wallets

Ability to customize seed phrase

Cons

Bare-bones user interface

Only works for Bitcoin

No customer support

Overview

Electrum is one of the original Bitcoin wallets. It has been around since 2011, two years after Bitcoin’s creation, and has changed little since. While this wallet is bare-bones in terms of its user interface and its commitment to only Bitcoin, it excels at this primary function. Electrum is also more suited for advanced users due to its complex options.

Electrum is open source, allows its users to set custom transaction fees, and has the option to choose between legacy Bitcoin and Segwit. It also offers users the ability to determine the level of security they wish to use. For example, you can create a standard wallet, one with 2-factor authentication, or a multi-signature wallet. You can also elongate your seed phrase with custom words.

Electrum is perfect for the more advanced Bitcoin holder who wants great security features and customizability all in a simple layout.

BEST FOR MOBILE USERSMycelium

Purchase Cost: Free

Cloud Storage: Yes

Cold Storage: Yes

OPEN ACCOUNT

Why We Chose It

We chose Mycelium for mobile users because it gives you more control over transaction fees and integrates with a hardware wallet.

Pros & Cons

Pros

Customizable transaction fees

Ability to use hardware wallets

Open-source software

Cons

Mobile only

Confusing for a first-time user

Overview

Mycelium is an open-source and mobile-only Bitcoin wallet. Mycelium currently only supports Bitcoin, ETH, ERC-20 tokens, and FIO token. In some ways, Mycelium is quite similar to the Electrum wallet with some of the differences being that it is mobile only, has a more refreshed user interface than Electrum, and also has a built-in exchange.

Mycelium, like Electrum, is one of the earlier wallets in the space. Also like Electrum, you can set custom transaction fees so you can choose how long you’re willing to wait for a transaction to be completed.

Mycelium also has a few more interesting features such as hardware wallet support, which allows users to hold their Bitcoin in an offline storage device while still using Mycelium’s user interface to see their holdings.

BEST HARDWARE WALLETLedger Nano X

Purchase Cost: $119

Cloud Storage: No

Cold Storage: Yes

OPEN ACCOUNT

Why We Chose It

We picked the Ledger Nano X because it offers secure cold storage and connects to devices with Bluetooth or USB through the Ledger desktop or mobile app.

Pros & Cons

Pros

Ledger Live has an intuitive and convenient user interface

Stores up to 100 different apps

Open-source software with added benefit of customer and community support

Convenience of Bluetooth connectivity

Cons

Bluetooth integration a potential vector of cyber attack (USB is still an option)

Bluetooth feature not perfected

Limited wallet storage

In July 2020, Ledger experienced serious hacks that revealed detailed customer information including names, phone numbers, email addresses, and even home addresses in some cases. Though this does not affect people’s private keys, it has led many to question the integrity of Ledger’s internal security measures.

Overview

The Ledger Nano X is the second generation hardware wallet from Ledger, a French company launched in 2014. Ledger’s first cryptocurrency product, the Ledger Nano S, was one of the first hardware wallets on the market and dominated the space for a number of years.

The Nano X resembles a USB drive and connects to your device via USB or Bluetooth. This means that you can connect the wallet to your iOS or Android device and do not need a computer. It supports well over 1,500 cryptocurrencies. This list continues to grow each year as the Bitcoin community asks for support for their favorite cryptos.

While the device itself is a cold storage hardware wallet, the Ledger team has created the Ledger Live software that provides a user interface for all your holdings. This gives users the ability to add new wallets for different cryptocurrencies to their devices and manage their portfolios. Ledger hardware wallets have been, and currently are, the most popular in the industry. The Ledger also comes with a USB Type-C cable so that it can be connected to either a desktop computer or a smartphone if preferred over Bluetooth.

BEST FOR SECURITYTrezor Model T

Purchase Cost: $180

Cloud Storage: No

Cold Storage: Yes

OPEN ACCOUNT

Why We Chose It

We chose Trezor as best for security because it comes with the strongest security features and track record of any reviewed hardware wallet.

Pros & Cons

Pros

Web-based user interface with exchanges built-in

Massive list of supported cryptocurrencies

Open-source software with added benefit of customer and community support

Cons

Higher price point than others

Small touchscreen for typing

Confusing for a first-time user

Overview

Trezor, like Ledger, is a name synonymous with crypto cold wallet storage. Its Model T is the second generation of hardware wallets they have created. The Trezor Model T is very much like the Ledger, but it gives the user the ability to access third-party exchanges, like Changelly and CoinSwitch, directly in its website interface. While this is quite convenient, it hardly justifies its more expensive price tag of $181.

The Model T utilizes a touch screen, which can be easier to use for beginners than the buttons their previous model used. The Trezor also has a MicroSD card slot, allowing you to use MicroSD cards to encrypt the PIN and further protect your device from attacks.

Like the Ledger Nano X, the Trezor Model T also comes with a USB Type-C cable so that you can connect to either your smartphone or desktop computer. Currently, the Trezor Model T supports more than 1,600 different cryptocurrencies. Some consider the Model T to be a bit more secure than the Ledger Nano X due to the X’s Bluetooth connectivity (although Ledger’s Bluetooth is optional).

BEST BANG FOR YOUR BUCKLedger Nano S

Purchase Cost: $59

Cloud Storage: No

Cold Storage: Yes

OPEN ACCOUNT

Why We Chose It

We picked the Ledger Nano S because it offers an affordable entry point into cold storage hardware wallets.

Pros & Cons

Pros

Access to Ledger Live

Secure storage for a low price

Open-source software with added benefit of customer and community support

Cons

Max storage of 6 apps

No wireless Bluetooth feature

Overview

The Ledger Nano S is the first generation hardware wallet introduced by Ledger. One of the first hardware wallets ever made, it followed shortly after the first generation of the Trezor. Like its successor, the Nano S is compatible with 1500+ cryptocurrencies. The Nano S does not come with a USB type-C cable, so users with more modern smartphones may have trouble connecting to their devices.

The Nano S is essentially the same as its successor, the Nano X, minus a couple of features. Both support the same list of cryptos and have access to the Ledger Live software. Unlike the Nano X, Nano S lacks Bluetooth connectivity, and it only stores up to 6 apps versus the 100 that can be simultaneously stored with Nano X.

The Nano S only has enough storage to make wallets for a limited number of cryptocurrencies at a time. If you were to delete an app in order to add another type of cryptocurrency, their online guide says it will not affect your assets.

The deleted wallet, and crypto within it, can still be seen in Ledger Live, but the wallet will not be seen on the Ledger device itself. This means that if you would like to send or receive to the wallet you have deleted, you may have to delete another wallet to make more room.

That said, at just $59, the Ledger Nano S is a fantastic wallet for those looking to store their cryptocurrency safely for a fair price. It is also quite easy to use with Ledger Live, making it an ideal product for a beginner looking for safe and simple storage for a handful of cryptocurrencies.

Read the full Ledger Nano S review.

Final Verdict

With many Bitcoin wallets to choose from, including a piece of paper with your public and private keys printed on it, you have a lot of options when finding the best Bitcoin wallet. Whether you want an easy-to-use online wallet or a super-secure hardware wallet, there’s a good option for your crypto storage needs.

Frequently Asked QuestionsWhat Is a Bitcoin Wallet?

A Bitcoin wallet is a place that stores your digital Bitcoin and validates your transactions when you’re using your Bitcoin. A wallet keeps secret information, called a private key or a seed, which is used to validate transactions and “sign” them so that your Bitcoin can be used to make purchases or exchanged for another asset. This prevents someone else from using your Bitcoin or the transaction being altered by a third-party.

Often when people refer to a Bitcoin wallet they are actually referring to a crypto exchange that offers a wallet as part of their account features. In this sense, the wallet is just the place where all of your cryptocurrencies are kept, or where you can keep fiat money for future use.

How Does a Bitcoin Wallet Work?

A blockchain is a shared public ledger where all Bitcoin transactions are conducted, from Bitcoin wallets. When a transaction occurs, there is a transfer of value between more than one Bitcoin wallet. Typically, a single party is exchanging some value of Bitcoin for another asset or service with another Bitcoin wallet. When this occurs, every individual Bitcoin wallet will use its secret data to sign and validate transactions, providing mathematical proof that the buyer or seller is the owner of their Bitcoin wallet. Your wallet can safely keep as much Bitcoin as you’d like without any limit.

How Much Does a Bitcoin Wallet Cost?

Using a Bitcoin wallet doesn’t cost you anything if you’re just storing Bitcoin in the wallet. However, if you’re completing a transaction, then the owner of the exchange or device that is housing your wallet will charge you various fees depending on what you’re trying to do. Purchasing a wallet could cost you anywhere from $0 to $200 or more. If you’re using a wallet as part of an exchange then you’ll likely pay either a flat fee of a few dollars or a percentage of the total transaction value.

How Do You Cash Out Your Bitcoin Wallet?

You can’t convert Bitcoin to cash directly whenever you feel like it, but you can sell your Bitcoin anonymously on the blockchain in exchange for the fiat currency you desire. A crypto exchange can handle the transaction on your behalf and find a buyer so that you can quickly convert the value of your Bitcoin into the cash you need. Every wallet has different rules and time periods for transferring your fiat currency over to your bank account, but most can be done in 1 to 3 days after the Bitcoin sale is complete.

Methodology

Cryptocurrency custody solutions are independent storage and security systems used to hold large quantities of tokens. Custody solutions are one of the latest innovations to come out of the cryptocurrency ecosystem and have been expected to herald the entry of institutional capital into the industry. Here is a brief primer on why crypto needs custody solutions, and the types of custody solutions being offered in the market.

Why Does Crypto Need Custody Solutions?

The main utility of cryptocurrency custody solutions lies in the safeguarding of cryptocurrency assets. Private keys, which are used to conduct transactions or access crypto holdings, are a complex combination of alphanumerics. They are extremely difficult to remember and can be stolen or hacked. Online wallets are a potential solution but they have also proven susceptible to hacks. The same is true of cryptocurrency exchanges.

Other solutions include storing private keys offline, on paper or a hard disk (or other electronic equipment) that is not connected to the Internet. But losing physical custody (or either the paper or electronic equipment) is a real possibility, and in those cases recovery of the cryptocurrency holdings can be impossible. For individual holders of bitcoin, the possibility of losing private keys is a risk; for institutional investors, though, it represents an even more significant risk. The latter go to extreme lengths to guard against this danger. Some major investors have even been known to distribute portions of a paper wallet across numerous storage units in different locations.

The other important reason for the existence of cryptocurrency custody solutions is regulation. According to SEC regulation promulgated as part of the Dodd Frank Act, institutional investors that have customer assets worth more $150,000 are required to store the holdings with a “qualified custodian." The SEC’s definition of such entities includes banks and savings associations and registered broker-dealers. Futures commission merchants and foreign financial institutions are also included in this definition. Within the cryptocurrency ecosystem, very few mainstream banks offer custodian services. Kingdom Trust, a Kentucky-based custodian, was the largest such service for cryptocurrencies until it was purchased by BitGo, a San Francisco-based startup.

What Are Cryptocurrency Custody Solutions?

Put simply, cryptocurrency custody solutions are third party providers of storage and security services for cryptocurrencies. Their services are mainly aimed at institutional investors, such as hedge funds, who hold large amounts of bitcoin or other cryptocurrencies. The solutions generally incorporate a combination of hot storage, or crypto custody with connection to the Internet, and cold storage, or crypto custody that is disconnected from the Internet.

Both types of storage have benefits and drawbacks. For example, hot storage is connected to the Internet and, as a result, offers easier liquidity. But hot storage options may be prone to hacks due to online exposure. Cold storage solutions offer greater security. However, it may be difficult to generate liquidity from crypto holdings on short notice because of their offline nature. Vault storage is a combination of both types of cryptocurrency custody solutions in which the majority of funds are stored offline and can be accessed only using a private key.

Big Players in Cryptocurrency Custody

One of the emergent major players in the cryptocurrency custody space is Coinbase, the popular digital currency exchange. Coinbase entered the institutional-grade custody solutions area relatively recently, buying up acquisitions like California's Keystone Capital, a registered broker. In August of 2019, Coinbase acquired the institutional business of storage provider Xapo as well. Swiss bank Vontobel also launched a Digital Asset Vault aimed at institutional investors in the crypto space as well.

The Future Of Cryptocurrency Custody

Cryptocurrency custody solutions have grown in popularity as analysts and institutional investors have increasingly viewed them as a bridge between the traditional institutional investment market and the shifting cryptocurrency space. At least two developments are expected to affect the future of cryptocurrency custody.

The first one is the entry of big players. Established names, such as Goldman Sachs (GS), are conspicuously absent from the list of names offering cryptocurrency solutions. Their entry could shake up the nascent market. Some of that is already happening with Coinbase and Fidelity Investments taking the lead in offering or designing cryptocurrency custody services.

A paper wallet is an offline mechanism for storing bitcoins. Unlike fiat currency, there is no physical representation of a bitcoin (or most other types of cryptocurrency). Rather, wallets that are used to store digital tokens are usually software programs that help to facilitate updates to the blockchain ledger when transactions are made. Paper wallets are different from so-called hot wallets because they operate separately from the Internet. However, they still do not store physical bitcoins; the paper quality of these wallets refers primarily to the method of access for the cryptocurrency owner.

Paper wallets were primarily popular in the early years of bitcoin. In recent years, cryptocurrency users have tended to explore other methods of securing their holdings.

KEY TAKEAWAYS

A paper wallet is a printed piece of paper that contains keys and QR codes that are used to facilitate cryptocurrency transactions.

Because they are removed from the Internet, at one point paper wallets were considered to be more secure than other forms of cryptocurrency storage.

Many investors believe that risks associated with losing, misreading, or damaging the paper wallet may outweigh the potential security benefits.

Understanding a Paper Wallet

Like a hot wallet, a paper wallet also makes use of public and private keys. Cryptocurrency users wishing to store their holdings in a paper wallet typically go through the process of printing the private key onto a piece of paper. For those who are interested in setting up a paper wallet, the first step is to visit a wallet generator site which will create keys and corresponding QR codes at random.

It's generally advised that users unplug their Internet access while the keys are being generated, and that users wipe their Internet history after the keys have been created. Ideally, they'll be generated on a brand-new computer to completely avoid any malware interference. Of course, this won't be feasible for most users, but everyone should—at the very least—run a malware check on their computer before generating the keys. Print out the codes, being sure to keep track of the paper: do not let it become damaged or lost. The codes can be scanned to access additional information about the wallets, but a user must have a "live wallet" (one connected to the Internet) in order to facilitate transactions. The live wallet can be used to "sweep" the paper wallet, effectively transferring coins from the paper wallet to the live wallet.

Pros and Cons of Paper Wallets

Physical wallets were long considered one of the safest ways to store bitcoins. If properly constructed, and provided that certain precautions are taken, it will be nearly impossible for a hostile user to access your bitcoin holdings. A paper wallet is considered an extremely secure way to keep bitcoins safe from cyber-attacks, malware, etc.

But it's important to remember that it’s not the bitcoins that are being printed out like regular currency. It's the information stored in a bitcoin wallet or digital wallet that gets printed out. The data appearing on the wallet includes the public key (wallet address), which allows people to transfer money into that wallet, and the private key, which gives access to fund spending. Thus, bitcoins themselves are not stored offline—the important keys are stored offline.

This form of cold storage confers enormous security advantages. The user is more or less invulnerable from cyberattacks and malware because it is simply not possible to access a user's private key via those avenues. Of course, the safety of these physical documents cannot be entirely guaranteed either—if a would-be hacker discovers the location of your paper wallet and physically steals it, they can access your bitcoin holdings. Some users hide or disguise the paper wallet. The paper wallet should also be protected from physical damage; if the keys fade and can no longer be scanned, the user will never again be able to access the bitcoins sent to that address. Even using the incorrect type of printer (non-laser printers can allow the ink to run, for example) may damage the paper wallet.

While paper wallets offer security advantages, they also come with risks—some of them severe. Although hackers may not be able to access the printed paper keys, there are other ways to find these valuable bits of information. Printers that are connected to larger networks often store information, and malware can be surreptitiously installed to steal the keys during the generation process.

For many users, the bigger risk with a paper wallet comes down to user error. If a printer uses inexpensive ink, it may run, bleed or fade with time, rendering the wallet inaccessible. If the paper is lost, stolen, ripped or otherwise damaged, the same concerns apply. If a user misreads a key or if the wallet software no longer recognizes the private key format of the printed wallet, these also bring about problems.

A hot wallet is a tool that allows a cryptocurrency owner to receive and send tokens. Unlike traditional currencies, there are no dedicated banks or physical wallets that can be used to keep cryptocurrency holdings secure. Cryptocurrency wallets are tools that are commonly used to store and protect these holdings, and they come in many different forms and varieties.

One of the most popular kinds of cryptocurrency wallets is called a hot wallet. The difference between a hot wallet and a cold wallet is that hot wallets are connected to the internet, while cold wallets are not.

KEY TAKEAWAYS

A hot wallet is a tool that allows cryptocurrency users to store, send, and receive tokens.

Hot wallets are linked with public and private keys that help facilitate transactions and also act as a security measure.

Because hot wallets are connected to the internet, they tend to be somewhat more vulnerable to hacks and theft than cold storage methods.

Understanding Hot Wallets

There are different reasons why an investor might want their cryptocurrency holdings to be either connected to or disconnected from the Internet. Because of this, it's not uncommon for cryptocurrency holders to have multiple cryptocurrency wallets, including both hot cold wallets.

The biggest advantage of holding cryptocurrency in a hot wallet is that it can be used to help facilitate basic transactions. Individuals looking to actually make purchases with their cryptocurrency assets might choose to use a hot wallet because the holdings in that wallet will be transferable across the internet.

On the other hand, hot wallets are more likely than cold storage techniques to face security issues or potentially be hacked. Compared to a cold storage method that is entirely removed from the Internet ecosystem, a hot wallet presents more risk to the holder because it can access (and theoretically be accessed by) other parts of the Internet. However, a hot wallet is not an unsafe way to store your cryptocurrency.

How a Hot Wallet Works

After an investor decides to buy or mine digital currency, they must then determine where and how to store their tokens. Although they are called wallets, the name is somewhat misleading because hot wallets don't actually store cryptocurrency in the way that traditional wallets store currency. The role of hot wallets is to help facilitate any changes to the record of transactions stored on the decentralized blockchain ledger for whatever cryptocurrency is being used.

For the cryptocurrency investor, the cryptographic public keys and private keys are the most important elements of a cryptocurrency wallet. Public keys are similar to account usernames; they identify the wallet so that the user can receive tokens without revealing their identity. Private keys are similar to pin numbers; they allow the user to access the wallet and check balances, initiate transactions, and more. Without either of these keys, the wallet is effectively useless.

Security and Hot Wallets

The safety and security of a hot wallet are largely dependent upon the user's behavior. Any items stored in a hot wallet are vulnerable to attack because the public and private keys are stored on the Internet.

Experienced cryptocurrency investors will only keep a small portion of their holdings in their hot wallets because it's less likely that a hacker will break into a hot wallet for a small number of tokens. For example, they may only keep the amount they plan to spend in the near future in their hot wallet. Their remaining assets will stay in cold storage until they are needed for specific transactions.

Some investors choose to keep their cryptocurrency tokens in accounts linked to popular exchanges like Bitstamp or Poloniex. These companies will store your funds in their infrastructure and can be considered hot wallet providers. If an investor keeps their tokens in a Bitstamp or Poloniex account, and an attacker gains access to one of these company's servers, they could suffer a loss if the hacker is able to infiltrate their customer accounts.

Because many of the top digital currency exchanges allow users to transfer between various fiat currencies and cryptocurrencies, it's common for users to hold small amounts of various currencies in their accounts. If they maintain a substantial balance of any currency, there is more risk of drawing the attention of hackers or, in the event of a theft, losing a substantial portion of their holdings.

Types of Hot Wallets

There are a variety of hot wallets available for investors and many of them are free to download. Some wallets are specifically designed to be used in partnership with particular mobile web applications or even with certain cryptocurrencies.

It can be useful for an investor to conduct research into the development of a hot wallet before downloading and using that service. Developers have varying degrees of expertise, various commitments to security and privacy, and different priorities in mind when creating their wallets.

Developers will also adopt different strategies when it comes to updating their products. Ideally, a hot wallet provider should be continually updating its product in response to the ways that hacking efforts are changing and evolving.

Software Hot Wallets

Software hot wallets are downloadable applications that aren't linked to any particular exchanges. You maintain control of your private keys, so the cryptocurrency assets in the hot wallet remain under your control.

However, your cryptocurrency is still vulnerable to hacking because a hacker that gains access to your computer could theoretically drain your wallet via the software application.

Cold storage is an offline wallet used for storing bitcoins. With cold storage, the digital wallet is stored on a platform that is not connected to the internet, thereby protecting the wallet from unauthorized access, cyber hacks and other vulnerabilities to which a system that is connected to the internet is susceptible.

KEY TAKEAWAYS

Most cryptocurrency wallets are digital, but hackers can sometimes gain access to these storage tools in spite of security measures designed to prevent theft.

Cold storage is a way of holding cryptocurrency tokens offline.

By using cold storage, cryptocurrency investors aim to prevent hackers from being able to access their holdings via traditional means.

Understanding Cold Storage

When a checking, savings or credit card account with a traditional bank has been compromised, the bank is able to refund the lost or stolen money back to the account holder. However, if your cryptocurrency account or wallet has been compromised and your bitcoins have been stolen, the owner would be unable to recover his coins. The reason for this is that most digital currencies are decentralized and do not have the backing of a central bank or government. Hence, there is a need for a safe and secure medium of storage for bitcoins and altcoins.

A bitcoin wallet is associated with the public and private keys of a bitcoin owner. The private key given to any bitcoin user is a unique string of alphanumeric characters required to access the user’s bitcoin holdings for spending purposes. The public key is akin to an account name and helps to identify a destination for coins that are being sent to the wallet. Two people making a transaction with bitcoin, where one is a seller and the other a buyer, will have to share their public keys with each other in order to complete the transaction. The buyer of the commodity or service sends the required number of bitcoins to the seller’s divulged address as payment, and the blockchain verifies the validity of the transaction and confirms that the buyer or sender really has those funds to send. Once the payment has been delivered to the address, the seller or receiver can only access the funds through his or her private key. It is, therefore, imperative for private keys to be kept secure because if stolen, the user’s bitcoins or altcoins could be unlocked and accessed from the address without authorization.

Protection From Theft

Private keys stored on a wallet connected to the internet are vulnerable to network-based theft. These wallets are known as hot wallets. With a hot wallet, all the functions required to complete a transaction are made from a single online device. The wallet generates and stores private keys; digitally signs transactions using private keys; and broadcasts the signed transaction to the network. The problem is that once the signed transactions have been broadcasted online, an attacker crawling the networks may become privy to the private key which was used to sign the transaction.

Cold storage resolves this issue by signing the transaction with the private keys in an offline environment. Any transaction initiated online is temporarily transferred to an offline wallet kept on a device such as a USB, CD, hard drive, paper, or offline computer, where it is then digitally signed before it is transmitted to the online network. Because the private key does not come into contact with a server connected online during the signing process, even if an online hacker comes across the transaction, s/he would not be able to access the private key used for it. In exchange for this added security, the process of transferring to and from a cold storage device is somewhat more burdensome than the process for a hot wallet.

The most basic form of cold storage is a paper wallet. A paper wallet is simply a document that has the public and private keys written on it. The document is printed from the bitcoin paper wallet tool online with an offline printer. The paper wallet or document usually has a QR code embedded on it so that it can easily be scanned and signed to make a transaction. The drawback to this medium is that if the paper is lost, rendered illegible or destroyed, the user will never be able to access his address where his funds are.

Another form of cold storage is a hardware wallet which uses an offline device or smartcard to generate private keys offline. The Ledger USB Wallet is an example of a hardware wallet that uses a smartcard to secure private keys. The device looks and functions like a USB, and a computer and Chrome-based app are required to store the private keys offline. Like a paper wallet, it is essential to store this USB device and smartcard in a safe place, as any damage or loss could terminate access to the user’s bitcoins. Two other popular hardware wallets include TREZOR and KeepKey.

Finally, users looking for cold storage options can also opt for offline software wallets, which are quite similar to hardware wallets but are a more complex process for less technical users. An offline software wallet splits a wallet into two accessible platforms – an offline wallet which contains the private keys and an online wallet which has the public keys stored. The online wallet generates new unsigned transactions and sends the address of the user to the receiver or sender on the other end of the transaction. The unsigned transaction is moved to the offline wallet and signed with the private key. The signed transaction is then moved back to the online wallet which broadcasts it to the network. Because the offline wallet never gets connected to the internet, its stored private keys remain secure. Electrum and Armory are often quoted as the best offline software wallets in the cryptoeconomy.

“A fool and his money are soon parted” ~ Thomas Tusser

Since the launch of Bitcoin in 2009, the world of cryptocurrencies has grown larger and more popular, particularly in recent years. There has been an increase in the usage and acceptance of virtual currencies alongside a growing number of tokens and investors. However, with the increase in prominence has also come higher incidence of thefts, fraud and hacking. Since the regulatory framework of virtual currencies remains murky, there is often no recourse for owners in case of fraud or theft.

The onus to keep bitcoins secure thus typically falls on the investor. Users must decide how to store bitcoins and other cryptocurrency tokens in the safest, most secure way possible while still having access to those tokens as needed. Where should you store bitcoin? Technically nowhere, as it’s not actually bitcoins that are stored in the same way as a physical store of value like gold. Indeed, Bitcoin as a network is not actually individual physical coins at all, but rather it is closer to a piece of computer software. Below, we'll take a closer look at what users should know about storing bitcoin and how to keep their holdings safe with a system known as cold storage.

Basics of Bitcoin Wallets

Before we can understand cold storage, we must first explore the concept of a bitcoin wallet. For the cryptocurrency user, wallets function in a somewhat similar way to physical wallets which hold cash. They can be thought of as a storage device for cryptocurrency tokens. However, in most cases wallets are not physical items, and neither are the bitcoin they hold. Rather, they are digital storage tools which have both a public key and a private key. These keys are strings of cryptographic characters which are necessary in order to complete transfers of bitcoin to or from the wallet in question. The public key, analogous to a username, identifies the wallet so that other parties know where to transfer coins during a transaction. The private key, similar to a password, is the wallet's owner's special access code and acts as a security device to help ensure others cannot access the bitcoin stored within.

There are various ways to secure a bitcoin wallet, the popular ones being encryption, backup, multisig and cold storage; none is infallible though. The first way is to encrypt your wallet by using a strong password. The second way is to make a backup of the wallet. Even a computer malfunction can result in a loss of bitcoins, let alone hacking. Multisig is another method is to protect bitcoins. It involves creating a multi-signature transaction system under which more people (usually at least 2 or 3) need to approve the funds being released.

Volume 75% 1:29What Is Cold Storage For Bitcoin?

What is Cold Storage?

While wallets provide some measure of security, if the private key is intercepted or stolen, there is often very little that the wallet owner can do to regain access to coins within. One potential solution to this security issue is cold storage.

Cold storage is often seen as even more secure than a traditional wallet. It involves storing bitcoins offline—that is, entirely separate from any Internet access. Keeping bitcoins offline substantially reduces the threat from hackers. There is no need to worry about a hacker gaining digital access to a wallet when the wallet itself is not online.

The method of cold storage is less convenient than encrypting or taking a backup because it can be harder for users to access their coins. Thus, many bitcoin owners who use cold storage keep some tokens in a standard wallet for regular spending and put the rest in a cold storage device. This reduces the effort of digging out coins from the cold storage every now and then for everyday use. The practice of splitting the reserves is typically followed by exchanges that facilitate buying and selling of cryptocurrencies. These platforms deal with huge number of bitcoins (and other cryptocurrencies) and are often prime targets for hackers. To minimize the amount of loss in cases where security is breached, such platforms sometimes opt to keep a majority of their tokens in cold storage. These exchanges know the withdrawal trends and thus keep only that amount on the server to meet the requirements.

Methods of Cold Storage

The commonly used methods of cold storage are:

Paper Wallet

A paper wallet is a way to safeguard against hackers or computer malfunction and involves printing the public and private keys on paper. In addition, a paper wallet may have a QR code which can be scanned and added to a software wallet to make quick transactions. Since the paper contains all relevant information needed for spending the coins, its safety is crucially important. It’s usually a good idea to encrypt as well as duplicate the paper wallet for more safety

Hardware Wallets

Storage devices like a USB drive are also used to keep the secret keys. Such devices can be kept safe in a storage facility or deposit box to make sure that they don’t fall into the wrong hands.

Hardware wallets are becoming a preferred choice to secure a wallet in an offline mode. These are small devices which are water and virus proof and even support multi signature transactions. They are convenient for sending and receiving virtual currency, have a micro storage device backup and QR code scan camera. Pi-Wallet is an example of a hardware wallet.

Sound Wallets

Although not especially common or popular, sound wallets are another way to secure virtual currency tokens. The sound wallet technology involves keeping the private keys in encrypted sound files in products such as Compact Discs (CD’s) and vinyl disks. The code hidden in these audio files can be deciphered using a spectroscope app or high-resolution spectroscope.

Deep Cold Storage

After reaching a peak in price late 2017 and subsequently fading from popularity, cryptocurrencies like Bitcoin have experienced a more another significant surge through 2019 and 2020, surpassing their previous all-time highs. As this has taken place, so too have the number of publicized hacking events increased as well. Given that many investors are new to the system and may not know how to keep their investments secure, hackers are coming up with ingenious ways of stealing funds. Some of the most prominent thefts have been those that have taken place in plain sight: some hacks even blatantly reroute tokens bound for one wallet for another. The victims watch as their tokens are stolen away from them, with nothing they can do about it.

KEY TAKEAWAYS

Users can lose bitcoin and other cryptocurrency tokens as a result of theft, computer failure, loss of access keys, and more.

Cold storage (or offline wallets) is one of the safest methods for holding bitcoin, as these wallets are not accessible via the Internet, but hot wallets are still convenient for some users.

Those interested in the safest storage should consider using a hardware wallet for all of their long-term Bitcoin and cryptocurrency storage.

Just the way we keep cash or cards in a physical wallet, bitcoins are also stored in a wallet—a digital wallet. The digital wallet can be hardware-based or web-based. The wallet can also reside on a mobile device, on a computer desktop, or kept safe by printing the private keys and addresses used for access on paper. But how safe are any of these digital wallets? The answer to this depends on how the user manages the wallet. Every wallet contains a set of private keys without which the bitcoin owner cannot access the currency. The biggest danger in bitcoin security is the individual user perhaps losing the private key or having the private key stolen. Without the private key, the user will never see her bitcoins again. Besides losing the private key, a user can also lose her bitcoin by computer malfunctions (crashing a hard drive), by hacking, or by physically losing a computer where the digital wallet resides.

Below, we'll take a look at some of the best ways to store bitcoin safely.

Hot Wallet

Online wallets are also known as “hot” wallets. Hot wallets are wallets that run on internet-connected devices like computers, phones, or tablets. This can create vulnerability because these wallets generate the private keys to your coins on these internet-connected devices. While a hot wallet can be very convenient in the way you are able to access and make transactions with your assets quickly, they also lack security.

This may sound far-fetched, but people who are not using enough security when using these hot wallets can have their funds stolen. This is not an infrequent occurrence and it can happen in a number of ways. As an example, boasting on a public forum like Reddit about how much Bitcoin you hold while you are using little to no security and storing it in a hot wallet would not be wise.

These wallets are meant to be used for small amounts of cryptocurrency. You could liken a hot wallet to a checking account. Conventional financial wisdom would say to hold only spending money in a checking account while the bulk of your money is in savings accounts or other investment accounts. The same could be said for hot wallets. Hot wallets encompass mobile, desktop, web, and most exchange custody wallets.

It is important to note here that holding cryptocurrency in an exchange wallet is not the same as holding it in your personal wallet. Exchange wallets are custodial accounts provided by the exchange. The user of this wallet type is not the holder of the private key to the cryptocurrency that is held in this wallet.

If an event were to occur where the exchange is hacked or your account becomes compromised, your funds would be lost. Cryptocurrency exchanges do not provide SIPC or FDIC insurance, making safe storage of cryptocurrencies especially important. The phrase “not your keys not your coin” is a heavily repeated concept within cryptocurrency forums. As mentioned previously, it is not wise to keep large amounts of cryptocurrency in any hot wallet, especially an exchange account. Instead, it is suggested that you withdraw the majority of funds to your own personal "cold" wallet (explained below). Exchange accounts include Coinbase, Gemini, Binance, and many others.

While these wallets are connected to the internet, creating a potential vector of attack, they are still very useful for the ability to quickly make transactions or trade cryptocurrency.

Cold Wallet

The next type of wallet, and the safest option for storage, is cold wallets. The simplest description of a cold wallet is a wallet that is not connected to the internet and therefore stands a far lesser risk of being compromised. These wallets can also be referred to as offline wallets or hardware wallets.

These wallets store a user’s address and private key on something that is not connected to the internet and typically come with software that works in parallel so that the user can view their portfolio without putting their private key at risk.

Perhaps the most secure way to store cryptocurrency offline is via a paper wallet. A paper wallet is a cold wallet that you can generate off of certain websites. It then produces both public and private keys that you print out on a piece of paper. The ability to access cryptocurrency in these addresses is only possible if you have that piece of paper. Many people laminate these paper wallets and store them in safety deposit boxes at their bank or even in a safe in their home. Paper wallets have no corresponding user interface other than a piece of paper and the blockchain itself.

A hardware wallet is typically a USB drive device that stores a user’s private keys securely. This has serious advantages over hot wallets as it is unaffected by viruses that could be on one’s computer because private keys never come in contact with your network-connected computer or potentially vulnerable software. These devices are also typically open-source, allowing the community to determine its safety rather than a company declaring that it is safe to use.

Cold wallets are the most secure way to store your Bitcoin or other cryptocurrencies. For the most part, however, they require a bit more knowledge to set up. It’s essential for anyone interested in owning cryptocurrency to learn about safe storage and the concepts of both hot and cold wallets.

Physical Coins

Services are cropping up which allow Bitcoin investors to buy physical Bitcoins. The coin you purchase will have a tamper-proof sticker covering a predetermined amount of Bitcoin. In order to purchase the physical coin, you may need to pay a slight premium over the value of the Bitcoin that you're buying, owing to the cost of the manufacture and shipment of the coin itself.

Other Security Precautions

Backup

Backup your entire bitcoin wallet early and often. In case of a computer failure, a history of regular backups may be the only way to recover the currency in the digital wallet. Make sure to backup all the wallet.dat files and then store the backup at multiple secure locations (like on a USB, on the hard drive, and on CDs). Not only this, set a strong password on the backup.

Software Updates

Keep your software up to date. A wallet running on non-updated bitcoin software can be a soft target for hackers. The latest version of wallet software will have a better security system in place thereby increasing the safety of your bitcoins. If your software is updated with the latest security fixes and protocol, you may evade a big crisis because of the enhanced security of the wallet. Consistently update your mobile device or computer operating systems and software to make your bitcoins safer.

Multi-Signature

What Is Cryptocurrency Mining?

Cryptocurrency mining is the process through which transactions are verified and added to a blockchain public ledger. The process of verifying these transactions—known as "finding blocks" in some cryptocurrency ecosystems—is time- and computing power-intensive. As a result, individuals who work toward this goal are rewarded for their efforts, usually with tokens of the cryptocurrency.1

Understanding Cryptocurrency Mining Pools

While the rewards of mining appear lucrative, the process is complex. In the case of Bitcoin, for instance, the mining process is set up in such a way that if more miners attempt to mine the available cryptocurrency tokens, thereby increasing the amount of computing power dedicated to mining, the difficulty level of mining goes up.2

Add to this the prospect of having to spend hundreds or even thousands of dollars on an expensive and specialized mining rig, as well as the cost associated with electricity, and individual miners often do not find cryptocurrency mining to be a profitable venture.

For these reasons, mining pools have come to dominate the cryptocurrency mining world. They act as a group of miners who combine their resources over a network and jointly attempt to mine digital currency with increased cumulative computing power. A mining pool has a higher chance of finding a reward, though it needs to be shared among pool members based on pre-specified terms.

Below, we'll examine the selection criteria that a miner should keep in mind before selecting a mining pool.

1. Infrastructure Compatibility

With hundreds of mining devices already available on the market and with new-age advanced devices hitting stores every day, it is important to check whether the mining device you use is compatible with the pool requirements. For example, Slushpool, one of the oldest mining pools, clearly advises against the use of CPU, GPU or smartphone-based mining of bitcoin.3

Similarly, a pool may not support the use of any and all mining software packages, and a miner may need specific software that is compatible with the pool. Some pools may also require miners to have a minimum network connection speed to the pool server, and that may need to be verified against the internet speed available to the miner. Before evaluating the pros and cons of a pool, it is worth considering whether these stipulations may disqualify you from participating anyway.

2. Task Assignment Mechanism

Mining pools use different methodologies to assign work to miners. Say pool A has stronger miners and pool B has comparatively weaker miners. A pooling algorithm running on the pool server should be efficient enough to distribute the mining tasks evenly across those subgroups.

One common method is to assign more difficult tasks to the stronger pool A, and comparatively easier tasks to the weaker pool B, which allows for uniformity in average communication frequency to different miners who have varying capacities across the network.

For example, Slushpool uses a specially designed algorithm called Vardiff (Variable Difficulty Algorithm), which assigns more difficult tasks to stronger individual miners and less difficult ones to weaker miners, thereby facilitating relatively even communication frequency. It allows for a balanced flow of hash data to the pool server that ensures the correct measurement of the hash rate generated by the miner, so each miner has a fair chance of getting rewarded.4

Before joining a mining pool, a miner should pay attention to uniformity in hash tasks that get assigned by the pool server irrespective of the mining power of a participant’s device. Imagine joining a pool that gives priority to high-speed devices. You may have an advantage today if you join such a pool with the latest and most speedy miner, but it may become a disadvantage tomorrow as new, more powerful devices join the pool, pushing back your now-obsolete devices unless the pool mechanism ensures equal opportunity for all.

3. Pool Transparency by Operator

There are obligations of the mining pool operator that must be performed fairly in order to ensure transparency and trustworthiness among the mining members. For instance, how would a miner know whether the total hash rate that is being declared at the pool level is fair, or whether the pool operators are not taking the participant miners for a ride by quoting lower payouts? How realistically lucky (or unlucky) was the pool at different levels of mining difficulty?

Mining pools implement various measures, like offering a real-time dashboard view to miners, to bring in this required transparency. Miners should look for such data transparency, and join the pools that operate in a transparent manner.

4. Payout Threshold and Frequency

If you have low-end hardware devices, you should avoid pools that have higher thresholds for making payments. Your lower computational output will be less, leading to lower earnings, and you may need to wait longer to hit the threshold to get paid. The same applies to the payment frequency of the mining pool.

5. Pool Stability and Robustness

Another important factor to consider before joining a pool is the assessment for its security. Does the pool offer a secure connection or an open connection? Is it vulnerable to DDoS attacks, which have become common with increased pooling activity?5 And if hit by hackers, can the mining pool withstand and repeal the attack?

6. Pool Fee Structure

Along with pools that charge a nominal fee to participants for using the mining pool services, there are pools that charge no fee at all. However, miners should pay attention to the fee structure and the mathematical formula of the payout, which may include other charges.

Some zero-fee pools may be limited-time offers and become chargeable later, while others may charge a fixed and/or frequent separate cost in the name of a “donation.” Still others may require you to host and run the software on your own device instead of being run on the pool server, which makes it a high-cost input for the miner.

Does Size Matter?

Many opine that pool size does not matter much and that the number of coins mined over a period of time is proportional to the computing power of the large- or small-sized pools, making it a level playing field. But there is a catch: time does matter!

Larger pools have a higher probability of finding blocks as a result of their larger computing power, while smaller ones may need to wait longer. Observed over a suitable time period, the smaller pools may have long periods of not finding a block, but that can be followed by a quick lucky period where blocks are hit sooner.

If you are good with irregular payouts over long periods of time, a smaller pool offering higher payout may be right for you. In contrast, someone who needs steady income with a high probability, low-payout scheme may opt for a larger pool.

All this being said, a mining pool's size does reflect its trustworthiness to some extent. Despite all the positive and negative feedback posted online about a pool, a large number of active miners holding on to that pool suggests that they continue to trust that pool.

Supporting Decentralization

While it may be tempting to pick a popular mining pool by its large size, the underlying blockchain concept recommends that the network is better maintained in a truly decentralized manner if a large number of smaller pools are used for mining rather than a smaller number of large pools.

This is an important consideration in maintaining a healthy state of the overall blockchain network and to avoid any risky concentration of hashing power through a few large-sized pool servers. Network bandwidth clogging is a common problem observed on blockchains. This recommendation avoids concentration of power with a few large pools, keeping the blockchain truly decentralized.

A mining pool is a joint group of cryptocurrency miners who combine their computational resources over a network to strengthen the probability of finding a block or otherwise successfully mining for cryptocurrency.

KEY TAKEAWAYS

Cryptocurrency mining pools are groups of miners who share their computational resources.

Mining pools utilize these combined resources to strengthen the probability of finding a block or otherwise successfully mining for cryptocurrency.

If the mining pool is successful and receives a reward, that reward is divided among participants in the pool.

How a Mining Pool Works

Individually, participants in a mining pool contribute their processing power toward the effort of finding a block. If the pool is successful in these efforts, they receive a reward, typically in the form of the associated cryptocurrency.

Rewards are usually divided between the individuals who contributed, according to the proportion of each individual's processing power or work relative to the whole group. In some cases, individual miners must show proof of work in order to receive their rewards.

Rewards are usually split among the miners based on the agreed terms and on their respective contributions to the mining activity.

Anyone who wants to make a profit through cryptocurrency mining has the choice to either go solo with their own dedicated devices or to join a mining pool where multiple miners and their devices combine to enhance their hashing output. For example, attaching six mining devices that each offers 335 megahashes per second (MH/s) can generate a cumulative 2 gigahashes of mining power, thereby leading to faster processing of the hash function.

Mining Pool Methods

Not all cryptocurrency mining pools function in the same way. There are, however, a number of common protocols that govern many of the most popular mining pools.

Proportional mining pools are among the most common. In this type of pool, miners contributing to the pool's processing power receive shares up until the point at which the pool succeeds in finding a block. After that, miners receive rewards proportional to the number of shares they hold.

Pay-per-share pools operate somewhat similarly in that each miner receives shares for their contribution. However, these pools provide instant payouts regardless of when the block is found. A miner contributing to this type of pool can exchange shares for a proportional payout at any time.

Peer-to-peer mining pools, meanwhile, aim to prevent the pool structure from becoming centralized. As such, they integrate a separate blockchain related to the pool itself and designed to prevent the operators of the pool from cheating as well as the pool itself from failing due to a single central issue.

Benefits of a Mining Pool

While success in individual mining grants complete ownership of the reward, the odds of achieving success is very low because of high power and resource requirements. Mining is often not a profitable venture for individuals. Many cryptocurrencies have become increasingly difficult to mine in recent years as the popularity of these digital currencies has grown and the costs associated with expensive hardware necessary to be a competitive miner as well as electricity oftentimes outweigh the potential rewards.

Mining pools require less of each individual participant in terms of hardware and electricity costs and increase the chances of profitability. Whereas an individual miner might stand little chance of successfully finding a block and receiving a mining reward, teaming up with others dramatically improves the success rate.

Disadvantages of a Mining Pool

By taking part in a mining pool, individuals give up some of their autonomy in the mining process. They are typically bound by terms set by the pool itself, which may dictate how the mining process is approached. They are also required to divide up any potential rewards, meaning that the share of profit is lower for an individual participating in a pool.