With the recent rise and subsequent volatility of cryptocurrencies, the general public has acquired an unprecedented interest in getting involved. Often this interest is accompanied by a dose of perceived late-comer anxiety: FOMO (Fear Of Missing Out). So, does this sound familiar?
“What can you tell me about Bitcoin and Crytocurrencies? I want to get me some of that!”
Chances are, you have been a target for this kind of question because you are either very open about your involvement, or, like in my case, you are simply known as one of those people on top of every new major advancement in technology.
So, let me present some guidance on approaching this conversation. These are your friends and family. You have an obligation to pocket your ideologies and give them some serious advise. This is, of course, my thoughts on the topic. There are lots of different ways to approach this.
Caveat: This article has a 1st world bias. I will touch on the unique challenges of the developing world briefly, but this article assumes that we are all members of the banked and living in the 1st world.
Determine what kind of audience you are addressing
Ask them why they are interested.
Most simply want to get some exposure (speculation-lite, if you will). Some may want to send money to family across borders. Some may want to use it just because it’s cool.
Assess what they already understand. Assess what YOU already understand.
Some of your friends are already quite conversant on the topic but may have some gaps in their knowledge. You, yourself, may have some gaps as well. Make sure you are honest about this, and that you have your own limits of understanding. For example, I am not sufficiently conversant on many of the new technologies out there. In the end, financial advise is a tricky thing to deliver without error. You want to couch anything you state in caveats: The market may tank. They have to stomach highs and lows like they have never seen before. Etc. And contrary to their FOMO, these are still very early days.
How technically astute is this person?
I recently advised a friend who is a technical mishmash of experience and comfort. He is all over social media, but he doesn’t have a credit or debit card. He withdraws and deposits money at his bank by physically going to the bank and transacting through a teller. With crypto, he will be leap-frogging the current traditional banking technologies available to him.
Take care in disclosing your own wealth.
If you are among the newly digital wealthy, think long and hard about disclosing this. There are an infinite number of stories about friend and family dynamics that have been up-ended by even modest changes in fortune. It’s generally best to be rather vague about your level of exposure.
Temper your ideologies
If you got into crypto currencies with an intent to achieve anacho-capital nirvana by “stickin’ it to The Man”, you may want to tone down your rhetoric. Bring it down to earth. It’s okay to discuss the disruptive nature of cryptocurrencies to the banking industry, but if you tend to drift into tinfoil hat land, you probably need to check yourself. Many people will be turned off by this. Much like how email —and now chat and social media— upended the world of written and phone communication, these currencies offer the hope to democratize value transfer and banking. But, we are a long ways off from seeing how this plays out. Keep the conversation grounded.
Explain what cryptocurrencies are and aren’t
Cryptocurrencies are not backed by any institutions
There is no FDIC for cryptocurrencies. There is no credit card company insuring assistance in fixing fraud or mistakes. Sure there are exchanges that will try to help you, but you are largely on your own. A misstep can be costly.
Cryptocurrencies are censorship resistant
There is no single hierarchical entity that controls most cryptocurrencies and they can’t be manipulated without detection and correction. They each have their communities of developers, miners, node owners, and users. Everyone nudges things along, but for any radical changes, consensus needs to be reached. This lack of centralized ownership makes them the most democratizing monetary systems, ever. Some have more efficient means to rally the community in order to make decisions (Dash and her Masternode Owners, for example), but most have a much more difficult time introducing changes. What this really means though is that no state power can squash these currencies. They are “censorship resistant”.
Cryptocurrencies are not the simplest instruments to get into and out of
There are a myriad of ways to buy into and then exit cryptocurrencies, whether leveraging other cryptocurrencies as on and off ramps, or entering and exiting the world of fiat. Exchanges make this easier, but support for all of the important cryptocurrencies is mixed. And you are beholden to those exchanges and their incomplete services, outages, possible thefts, insolvency, etc.
Spending cryptocurrencies on day to day things is challenging
You can spend crypto currencies at various online stores (example, Microsoft, Overstock, Egghead, etc.) but they are currently limited to Bitcoin and few and far between. Services like Discoverdash.com can lead you to places that accept Dash. Bitcart.io can be a great conduit for converting Dash into Amazon’s own currency: fiat denominated gift cards. But try to buy groceries. Try to buy gas. Try to pay your rent. It’s just not there yet. So if they want to save some and then spend later, you have to explain that, for the time being, this will largely be an exercise in on-ramping and off-ramping at exchanges into and out of their fiat bank accounts. Now, there are great debit card services out there. But I think that may be a phase II conversation.
Cryptocurrencies are not guaranteed to always increase in value
I think the events of the past few weeks have been great for illustrating the volatility of these assets. Additionally, some assets are more likely to succeed and be more volatile. Currently, Bitcoin is #1 by measure of market cap. But that position will always be at risk. The probability of Bitcoin being supplanted at some future date by a more nimble and featureful coin, for example Dash, is very high. New assets that rise very rapidly may also fall very rapidly (untested). In the end, any investment into this space HAS to viewed as potentially utterly tanking.
Today, think of cryptocurrencies as simply another asset class
Most banked people today have a checking account, a savings account, and ready cash in their wallet. Many others have mutual funds, individual stocks and bonds, and maybe even some gold and silver. Wealth is often tied up in a house and in special instruments like a retirement fund. Cryptocurrencies are another asset class that can also be wrapped in similar categories.
Explain the technology
Why are cryptocurrencies suddenly “a thing”
I advise describing some of the core concepts, but make sure you keep it simple and tailored to your audience.
- Blockchain is the big innovation that made all this possible. This allows for a trustless, un-editable (immutable) record of transactions. Your transaction becomes final (settled) when it is included in a block that is accepted by the network. See also “censorship resistance” described above. There is a lot of nuance to this, but leave it at that.
- Miners are special nodes on the network that are paid to ensure the Blockchain is propagated and syncronized. They are the ones that include transactions in new blocks and make sure they are valid.
- You pay fees to transact. These pay the miners for what they do.
- New coins are created and issued every time a block of transactions is created by the miners. This is done very systematically and there will be a fixed set of coins eventually issued (the coin supply is finite).
- Every currency does this somewhat differently. Some very very differently, but the basic concept is the same for most.
- In contrast, government backed currencies are issued by central authority and can be printed at will. There is no capped supply. Most cryptocurrencies are more akin to gold than dollars in this regard. Cryptocurrencies are governed by algorithm instead of humans, though humans can ultimately change that algorithm, but since the code is open source, it requires a lot of people agreeing before fundamental changes are made.
Explain how value is created
Why do they have value? At a basic level, because at some point in time, someone exchanged one asset with value for some quantity of cryptocurrency and that establishes a value. After that, supply and demand takes over.
Explain the various use cases
Bitcoin is gold-like. Bitcoin Cash and Litecoin are silver-like. Dash is the most cash-like currency that has the goal of becoming the easiest to use (PayPal-like). Ethereum aims to be a global compute system where Ether is the mechanism to track cost of usage. Explain to folks why you are very bullish on Dash. Maybe talk about the layer-two Masternode network, or maybe save that for later.
Explain that there are a myriad of other use cases that are being developed, but these are the most established today. Some are aimed at anonymity, others at enabling the Internet of Things. Some want to change how information is exchanged and tracked (think register of deeds, identity, health records). But don’t dwell on this unless they really want to dive into those discussions.
For more basics about cryptocurrencies in general, there are great articles out there on the topic. This video series does a good job as well: https://www.dash.org/school/
So, now that we have established a baseline of understanding. It’s time to get folks started. Here’s what I have advised in the past…
Only commit money they are willing to lose
This is true when investing in any asset that is new to you. Especially an asset class that is so volatile and experimental. Depending on the person, I usually recommend scraping up 1000 USD (I am US centric here) that they would not cry over losing. If they can’t do this, then maybe they should wait. If they don’t want to wait, YOU being their exchange is probably the right answer for smaller values. They could buy 100 USD of Dash from you, set up a wallet, where you then send them the corresponding value in Dash. Dash is perfect for smaller increments. If they are interested in Bitcoin instead, gently describe the whole fee and speed situation.
Identify the currencies for this first foray
I recommend Dash first because it is easy, cheap, and fast. It’s the most cash-like of all the cryptocurrencies out there. It is the easiest to understand for the layman.
I recommend Bitcoin second. Why? Because it was first to market, has brand recognition, and is probably the reason the person is sitting in front of you today. I also think it is important to diversify into Bitcoin so that they feel they are plugged into this revolution at the brand level.
Get commitment to not cash out until some fixed date in the future
For anyone new to cryptocurrencies, watching the price can be scary at times. I advocate having your student set some concrete date in the future —at least 3 to 6 months out should be sufficient— where they pledge not to cash out. This will force them to weather some emotional storms and get used to the wild swings that can happen in that timeframe. But also, be aware, these markets can also have nice long stagnant periods. For example, 2015 was a rather boring period for Dash volatility.
The first Dash transaction and the mobile Dash Wallet
- Set up a dash wallet on their mobile phone
I recommend the Dash Wallet (by HashEngineering). It demonstrates InstantSend, and is super simple.
- Send them a small amount of Dash with and without InstantSend
This is a great opportunity to show the contrast between a normal Dash transaction and its much faster instant payment capabilities. I sent my friend $4 and then $1 worth of Dash using each method. He then sent me back 1 dollar’s worth.
Show him how the receiving address changes with each transaction and stress the importance of verifying that the address you are sending to is what you expect. Discuss block confirmations and why, though the wallet may show a balance, he can’t necessarily spend it immediately.
- Set a PIN and back up their wallet seed.
Most wallets allow you to set a pin to protect against casual access to your funds. With The Dash Wallet dive into the left menu > Safety > Change spending PIN. Write down this PIN on a piece of paper.
Just about every wallet has a seed that you can back up (writing it on paper). Some force you to do this immediately, others leave it up to you to do later.
The Dash Wallet gives you a mechanism to back up its wallet data file and the seed itself. I advocate just backing up the seed itself since the workflow is very similar to other wallets. Again, dive into the left menu > Safety > View recovery phrase. Write down the words on the same piece of paper.
- Build confidence in that seed
Uninstall the app and reinstall it. Then… recover: Left menu > Safety > Restore from recovery phrase. Input the phrase, and wait for everything to sync up and note that the balance will be as you expect (syncing can take some time). Remember to reset the PIN since that was obliterated with the uninstall.
Buying Bitcoin on an exchange
My recommendation for this is Coinbase (in the USA). Outside of the USA there are other exchanges you can demonstrate, but definitely use one that you know.
Coinbase is pretty straight-forward. Walk them through it anyway.
- Link their bank account
Coinbase can’t link to every bank. If their bank is not one of the larger banks, chances are they can’t do this. If that is the case, they can either open a bank account at one of the large banks just for this purpose or link a credit or debit card. My friend that I discussed before used a local small bank and he didn’t have a card. So, he went and set up an account at a large bank just to be able to do this.
- Purchase Bitcoin
- Walk through the interface and show them the various account types
- Discuss fees and dry-run a transaction from Coinbase to a mobile Bitcoin wallet
I showed my friend a couple mobile wallets (we installed CoPay). And then I showed him how to send Bitcoin to one of those wallets. We stopped short of an actual transaction because the fees, at the time, were ridiculous.
- Set up 2-factor auth and explain that you don’t have access to the seed
Coinbase, like most exchanges, fully control your money. You have an account and a username and password. Your private key is managed by the exchange, but if it is somehow stolen… that’s it. The exchange is most likely not liable.
Again, write down their username, password, and method of 2-factor auth on a sheet of paper. Just like that seed phrase. It’s good practice and their heirs will thank them.
- Show him the Coinbase Vault and leave his Bitcoin on the exchange
This is where I commit crypto-sacrilege. My friend was playing with $1000 worth of Bitcoin. I recommended that he leave his Bitcoin at the exchange. I again explained the risks associated and recommended he place his money in the Coinbase Vault (safer storage). As mentioned previously, the fees associated to a simple transfer make moving his small amount of Bitcoin off-exchange currently impractical.
If they are moving around larger sums, transfer it to an off-exchange wallet. If they are a very wealthy friend and they are playing with a rather large sum of money, discuss a hardware wallet with them. Trezor, Ledger, and Keepkey all make fine hardware wallets.
Buying Dash on an exchange
For this example, I am going to recommend Uphold.com. They are dead simple to use. Kraken.com is a great option if the person you are assisting is rather technical, but Kraken is particularly hard to use (and requires an expensive wire transfer). Uphold is simple and has reasonable fees (a bit expensive, but not terribly so). Note: By the time you read this, other exchanges may be supporting Dash more directly. This space moves very quickly. Evaluate the current situation.
- Link their bank account
Very similar to Coinbase, Uphold can only link larger bank accounts.
- Buy Dash
- Transfer it to that mobile wallet —Dash, unlike Bitcoin, is cheap to transact.
- Consider uninstalling that mobile wallet
They have all they need in order to recover the wallet. And they have committed to not move around their Dash until some date in the future. Reduce the risk of having their phone hacked and uninstall the app.
Buying Dash using another crypto asset
This used to be the primary way people purchased Dash (and other currencies) in the past. Not too long ago, the process was that you purchased Bitcoin using an exchange and then purchased Dash with Bitcoin. Transacting in Bitcoin is so expensive anymore that I don’t recommend this unless moving significant sums of money. There are a number of services for this. This can be done with exchanges that support multiple currencies, but also through fairly anonymous services like Changelly and Shapeshift. This is beyond the scope of this article though.
Hit by a bus
We are all going to bite it some day. Maybe unexpectedly. Or be rendered incapacitated.
- Make sure your new student of crypto makes a copy of these passwords and seed phrases and stores them in multiple secure locations. A fire safe for one copy is ideal. Read more about security here: “Dash Security/Safety Tip Basics”.
- Have them write up instructions to their heirs to keep with each copy. I have instructions that include the contact information for several “phone a friends” that are trustworthy and my wife can turn to for help. But the instructions should be clear enough that anyone can muddle through and figure out how to claim the funds. Don’t shirk this duty.
UPDATE: Read a recent expansion of this topic: “What Happens to Your Cryptocurrency If You Get Hit By a Bus?”
The taxman cometh
When trading in cryptocurrencies, taxes have to be tracked. In the United States you treat crypto just like you do stocks. If you acquire Dash, for example, by working for it, it’s treated as income. If you cash some out to fiat (or a good denominated in fiat), you also have to track the difference in value for long or short capital gains. What matters to the US government is fiat value of that currency. This is the unfortunate, frustrating, and tedious reality of the crypto-elite.
For example, if I buy Dash at $1000 and then sell it 6 months later at $1500 per dash. I have to log that as $500 per Dash of short term capital gains. If done after a year… it’s long term capital gains. If that same Dash was a payment for my labors, then I have to log that as $1000 / Dash of income as well for the year I acquired it (and then also pay the capital gains when sold).
If I sold at a loss, the same applies but the rules are a bit more complicated. You should seek a tax professional if you need more advice, of course.
Other discussion points
- Show your friend or family member how to track the value of their portfolio. There are several decent mobile apps that help you do this: Gravychain, Blockfolio, CoinCap, and others. Plug in the quantity of each and watch the value fluctuate. Fun!
- Discuss the idea of multiple wallets. I have my mobile wallet carry only a few hundred US dollars worth of Dash. The bulk of my dash is stored away in a more secure fashion. It’s very similar in concept to long term savings and a short term account for ready cash.
- Currencies other than Bitcoin and Dash. Honestly, I try to steer new people away from anything else in the beginning. Bitcoin Cash and Ether are other options that are more accessible to new people, but for a first experience, I would steer clear.
- Sending Bitcoin or Dash to family members in other countries. This is beyond the scope of this document, but ultimately the principles remain the same, but for the recipient. They have to be able to safely manage their Dash and use it when they receive it. Maybe that will become its own how-to article.
- Have follow on conversations.
- Periodic automated purchasing at an exchanges
- Deeper technical discussions. For example, what is the Dash Masternode network? Why is 6 confirmations somehow magical? What is PrivateSend? Etc.
- Share news stories.
- Introduce them to the Dash community if it makes sense: Dashchat.org
- Buy something from the many merchants of Discoverdash.com
- Introduce them to Wall of Coins and similar services if they want to try a more democratized method of buying and selling.
If you have taken these steps with someone, congratulations. You are a worthy ambassador for the crypto-community and have recruited another participant in this financial revolution.