I Bought My First Crypto, Now What?
|— Crypto operates within a unique system that’s unlike traditional finance, so if you’ve just purchased your first crypto, your new job is getting to know how it works|
— Your private key is what gives you the right to access the crypto in a particular location on the blockchain, so if you don’t own the keys, that crypto’s not yours
— There’s a good chance you’ll start out keeping your crypto in an exchange wallet – but this type of wallet is custodial, meaning the private keys are tied to the exchange – not to you. This brings us to crypto’s most important mantra: not your keys, not your coins
— Ledger’s hardware wallet is a cold storage device that securely stores the private keys for your crypto assets, mitigating the risks of being your own bank
It’s done! You’ve bought your first cryptocurrency. But what comes next?
Crypto assets are digital money that exists on the blockchain, and that concept takes some getting used to. Let’s take a deep dive into the finer points of owning crypto, so you can get comfortable with your new coins and tokens.
What does it mean to own crypto?
When you buy crypto, what you really own is an address on the blockchain, and the private keys (cryptographic code) that control that address. The blockchain itself keeps track of how many coins or tokens are in that address at a given moment.
Your coins are not in any sort of account: they exist on the blockchain, and are managed solely by you. This means that it is your responsibility to ensure they remain truly and safely yours. This first step is about learning some cryptocurrency foundations and aspects, so that you understand why they need “special attention” in terms of security. As well as how to leverage them to achieve financial freedom.
Crypto Means Being Your Own Bank
In our “About crypto” playlist, we listed the different characteristics of cryptocurrencies, including their ability to prevent double spending and the security offered by decentralization. Once a transaction has been made on the blockchain, there is no turning back. This means you are the only one in charge to secure your crypto assets, as well as the only responsible for the decisions you will make.
Being aware of this, the first thing to understand is that buying crypto assets doesn’t mean physically owning the coins. Because digital money is not tangible and does not exist physically. What you really own instead is called a “private key”. And this is precisely what you need to protect.
Understanding what the private key is all about and how cryptocurrencies work will help you grasp the rules of thumb that will help you secure your crypto assets.
Public Keys VS. Private Keys
When it comes to crypto, there is no tangibility such as with fiat currencies or commodities. It’s fully digital. To allow for a secure network, cryptocurrencies work based on a double system of private key and public key.
The public key is a public receiving address that any user in the network can send crypto to. It would be similar to your bank account number, such as IBAN or SWIFT or your email address.
Linked to your public key, there is your private key. This one is comparable to an actual key as it unlocks the right for its owner to access and spend the associated cryptocurrencies. Your private key is yours and only yours, and should therefore remain private. This means that anyone that has access to the private key will possess the funds. Your private key would be similar to your bank account password. Sharing your private key would be like sharing your online banking password or credit card pin.
So, where are your coins?
Remember, any crypto asset you own will only ever exist digitally at an address on the blockchain. So whether or not you have access to that address defines whether those assets are yours. Not your keys, Not your crypto – it is that simple. Let’s take a look at how that works in practice.
Not Your (Private) Keys, Not Your Crypto
OK so owning crypto means possessing the private key, Easy peasy, right? Well actually, not really.
Are you using a crypto exchange right now? Maybe that’s how you bought your first coins. If you hold funds on your favorite crypto exchange , it might seem like you actually own the assets on your account. After all, you do need to log in to gain access to them, right?
But in fact, the exchange owns those coins for as long as they stay in the exchange wallet. The exchange itself controls the private keys, leaving you with just a password for the interface itself (but nothing for the blockchain), and good faith that your coins will still be there next time you log in.
Bottom line? The exchange is in control. And you’re relying on them to give you access to your funds when you demand it. Would you trust an entity with your house or safe keys?
Besides, what happens if the exchange has security issues? Or if you don’t want to abide by certain withdrawal or deposit policies? Moreover, in some countries, depending on the exchange, you can be restricted from making transfers, or constantly asked questions as to the purpose of the transfers. This is NOT the point of a distributed ledger.
Such phenomenon isn’t limited to exchanges: it goes for any service provider that doesn’t allow you to own the private keys to the associated funds. This means putting back a middleman in a system that aims to be decentralized.
So how will you manage your private keys?
Hopefully this article has clarified the crucial importance of private keys when it comes to controlling your crypto – and the consequences of not owning them. The wise thing to do after buying your crypto assets is to make sure you truly own your private keys, and know how to secure them too. That’s what Ledger is here for. So let’s go a bit deeper with our explanation of private keys, before we delve into the nuts and bolts of managing them like a boss.
Knowledge is power.
So keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block episode all about the fabled riches of crypto!