It’s been a while since cryptocurrency first leapt into the global spotlight thanks to its wild price rises, but many people are still unaware of exactly how it works.
Before even contemplating a cryptocurrency purchase, it is important to note that tokens like Bitcoin, Ethereum, and other digital currencies are not an investment, and you should know exactly what you are purchasing before deciding to buy them.
The value of these cryptocurrencies are based largely on speculation and can be extremely volatile depending on regulatory news or the movements of major holders.
Subsequently, you should be prepared to lose the money you “invest” into Bitcoin or other cryptocurrencies.
The text below outlines the basic cryptocurrency purchasing process for South Africa users, placing importance on security and user responsibility.
Using an exchange
Buying cryptocurrency is made far easier for South Africans by the presence of multiple local exchanges which allow users to simply trade rand for Bitcoin or other tokens at the current market price.
The most popular of these local exchanges is Luno. Luno is a large exchange which operates across multiple countries and offers a wealth of resources aimed at educating its users about cryptocurrencies.
Once you have signed up for an exchange – we will use Luno as an example for this article – and purchased Bitcoin or Ethereum via an EFT to the exchange’s bank account, you will be provided with an updated balance in your exchange wallet.
It is important to note that while you are now able to access the cryptocurrency you have purchased, it is still stored by Luno and you do not have the same degree of control over your cryptocurrency as you would have while holding it in your own wallet.
The blockchain technology which cryptocurrencies such as Bitcoin and Ethereum are built on allows users to have ultimate, uncensorable control over their funds secured by cryptographic keys that remove the need for banks and third-party institutions.
If you aim to quickly cash out or want to trade between cryptocurrencies or back to rand on an exchange like Luno, it may be easier to leave your funds in your exchange account – just be sure to enable two-factor authentication and use a unique, strong password.
However, if you aim to hold your cryptocurrency for a while, you should generate your own wallet to store your digital tokens.
Security and stability
There are several storage options available for cryptocurrency owners, the most secure of which is to download the blockchain yourself and create a Bitcoin wallet on your machine.
However, you can also use online wallets such as Blockchain.com to generate Bitcoin or Ethereum wallets to securely store your cryptocurrency.
Online wallet providers host physical Bitcoin wallets on behalf of customers, allowing users to access their private wallet from anywhere in the world.
It is important to avoid online wallet websites which require access to your Bitcoin wallet private key, as this grants them the ability to access your funds.
Instead, login options such as a keystore file paired with an encrypted password allow users to safely manage funds without the wallet provider being able to access their funds.
If you do choose to store your purchased cryptocurrency in this way, be sure to back up your private key somewhere secure and do not forget this or your keystore file and password combination.
There is no third party to reset your password if you store your own cryptocurrency, and if you lose your private key and other credentials, you will lose your funds.