Chapter 6: How is a transaction carried out and what is a portfolio?

It is relatively simple to carry out a transaction in cryptocurrency, the transactions are of several types:

  • You can buy and sell your cryptocurrencies through exchanges (Binance, Bittrex, KuCoin) or brokers (Coinbase)
  • You can buy and sell some cryptocurrencies at a Bitcoin ATM. In France, there are not yet any.
  • You can use your cryptocurrencies (mainly Bitcoin) to buy goods and services from some online retailers and in some stores.
  • You have an e-commerce and you can sell your own goods or services for Bitcoins.
  • You can mine a cryptocurrency in order to earn coins.

If we consider a Bitcoin transaction, here is how it works in a very simplified way:

  • A (the buyer) wants to buy a Bitcoin from B (the seller)
  • Told B how many pieces he wants
  • B tells A how much it will cost him, including any costs
  • A gives B the public key to his portfolio. It is a 256-bit code (a binary code composed of a sequence of 1 and 0) with an additional 160-bit code at the end that corresponds to the portfolio address (if you are not a geek, you probably didn’t understand anything, but that’s okay)
  • B must use its private key (an alphanumeric code generated at random, mathematically linked to the address of its Bitcoin portfolio and linked to its Bitcoins in particular) to indicate to the network that it wishes to sell Bitcoins
  • All information is uploaded to the network
  • The transaction is verified by minors working on the network
  • Both the buyer and the seller receive a notification that the transaction has been verified
  • The transaction becomes part of a block and is added to the public ledger

Of course, these steps are more or less transparent depending on how you use it. In Japan, for example, you only need to bring your phone closer to a terminal specifically designed to pay the merchant in Bitcoin, for example.

Here is what a bitcoin address looks like: 1Js1s4s4b7UPNg2ZY7dUrvThFe32vNsRhzFh

Not likely to memorize it, most transactions are done via a QR code or by copying and pasting it on a computer

If you want to buy Bitcoin or other cryptocurrencies, the best way is to use an exchange or use a Bitcoin vending machine. Although there are many online exchanges, most people choose Coinbase, a service known for its good reputation and the levels of assurance it offers. Coinbase focuses on only a few cryptomonal currencies and accepts fiduciary money as a means of payment. Coinbase uses a two-step verification process and you will also need to provide proof of your identity when you register. Before you can purchase parts, you must register on the site. This procedure is simple since it is sufficient to follow the few steps indicated on the website. In general, your account is validated in a few tens of minutes.

There are many cryptocurrency exchanges. Some will allow you to pay in cash, while others only allow cryptocurrency-to-cryptocurrency-to-cryptocurrency-transactions. Once you have decided which cryptocurrency to buy, you will need to research the exchanges that offer this currency. It is also vitally important that you check the credibility of the exchanges before proceeding with any transaction. At the end of this book you will find some useful addresses to get you started with confidence.

Digital portfolio

Of course, you cannot (yet) store your cryptocurrencies in your bank account. It is necessary to store them somewhere, and there are several more or less secure solutions to do this, called a digital wallet.

The digital portfolio does not directly contain the cryptocurrency: what it contains are public keys (in order to receive transactions) and private keys (in order to be able to send them). These keys allow you to interrogate the blockchain to find out what belongs to you. For the analogy, it’s like being in a vault with millions of closed safes, and as soon as you take a key out of your pocket, the different safes open directly. Well, it’s a little more complicated than that in real life, but you understood the principle.

With cryptocurrency, YOU are the bank! You are the only master to manage your parts. It is therefore a very great responsibility and you must be fully aware of it in order to limit the risks. This is currently a major disadvantage in the use and storage of cryptometers: there is no very easy to use and foolproof solution. But I am convinced that in the coming years services will emerge so that it will be as easy to use as a credit card.

As mentioned above, your portfolio contains a private key as well as a public key. The private key is required to send or sell your cryptocurrency, as it is a direct link to it. Without this key, you will never be able to use your cryptocurrency: it will be permanently lost. Your public key is required if you want to add a transaction to your portfolio. Your private key to your cryptocurrency is a bit like the share bearer bond system. Whoever has the vouchers owns these shares.

Note that cryptocurrency portfolios are mostly currency-specific: if you have several currencies, it will make you several portfolios. Some portfolios may support more than one currency, but you will need to consider making sure you do.

You can keep your cryptocurrency in the exchange where you bought it. However, this is not recommended, as you would lose control of it. The data in your cryptocurrency would be online and could therefore be hacked.

It is quite common for exchanges to be hacked or compromised. It has happened in the past and there is no reason why it should not happen in the future. You must therefore exercise total control over your cryptocurrencytic portfolio: there are different methods for this.

These different portfolios are called “hot storage” because your data is stored online and can therefore be hacked. The other preferable method is called “cold storage”. Cold storage portfolios are a way to keep your offline data safe from hackers. I also included a third type, called semi-cool storage.

Storage options

  • Hot wallet storage. It includes: online databases, exchanges, PCs, laptops, tablets and smartphones
  • Semi-cool storage (“hardware wallet”). It includes: digital hardware wallets, dedicated laptops, external hard drives
  • Cold wallet storage… It includes: paper portfolios and brain wallet portfolios

Hot storage portfolios.

To start, let’s take a look at the hot storage options. All devices on which portfolio software can be downloaded and which remain permanently or regularly connected to the Internet are referred to as hot storage options.

As I have already mentioned, the problem is that your data and your cryptocurrency remain exposed to hacking or theft. When initially purchasing a cryptocurrency, it is often unavoidable to use a hot storage portfolio to complete the transaction. However, it would be wise to transfer it to a cold storage portfolio as soon as possible. If you have to leave your currency in an exchange for any length of time, try to use an exchange that provides cold storage facilities. Exchanges are constantly exposed to piracy: they are a prime target for criminals who want to get their hands on the money they hold.

Your connection information to this exchange must be secure, in absolute terms, have an e-mail and a specific password by exchange. Serious exchanges offer additional protection: the 2FA code, the “Two factor authentication” code. It is a code that is sent by SMS, email or via a specific application to increase security. Stealing your credentials is possible, stealing your phone is more complicated at the same time. I can only advise you to activate this option as soon as you register somewhere.

In addition to the risks of hacking into your hot storage portfolios, if your data is stored on a PC, laptop or phone, you should be aware that it may also be exposed to other risks, such as data corruption, viruses, power surges, theft, loss and damage.

Semi-cooling type portfolios.

This type of storage is a better compromise and will provide you with better protection against hackers. It involves the use of a device on which you can store data related to your cryptomarket transactions that only connects to the Internet when you make a transaction. They include:

  • Specialized digital hardware wallets or hardware wallets (such as the Nano Ledger or the Trezor, to name only the most famous) are small devices that connect to your PC or laptop via a USB connection. They can simply be purchased in computer stores, on Amazon or from other online retailers.
  • A dedicated laptop computer where you can exclusively store different currency portfolios and which, like digital hardware portfolios, only connects to the Internet when you want to make a transaction.
  • A dedicated external hard disk can also be used for this purpose.

However, some problems persist with all semi-cold storage portfolios. A computer or hard disk could still be hacked when you connect to the Internet. They could also be exposed to data corruption, damage, theft, loss and power surges.

Hardware wallets are the most efficient: they are small (the size of a USB key) and much more secure than a laptop. The “Ledger Nano S” has become the most widely used portfolio. It is produced by a French company. They are designed not to expose the private key during the transaction: the transaction is confirmed only via the ledger, which provides increased security.

Moreover, even if you physically lost the ledger or it is destroyed in an accident, you would not lose your currencies! A “pass phrase” system, a list of several dozen words, allows you to regenerate your addresses to access new coins on a new hardware wallet. To do this, you must keep this list of words carefully somewhere: in a bank safe, at a notary’s office or more simply in another place where you live and where you have confidence (a letter from a family member, for example).

The cost of a Hardware wallet is about a hundred euros. Low investment considering the security it provides.

Cold storage portfolios.

These old-fashioned portfolios are up to you, since you will have to memorize, note or print your information. Like all other portfolios, cold storage portfolios are used to store your private and public keys. Due to the level of security required, these must be long and complex. Let’s take a closer look at the different options.

  • Paper Wallets or “Paper Wallets”. They are what you can expect: they are pieces of paper with your public and private keys. Extremely simple, all you have to do is write or print your information. However, be aware that if this information is lost, damaged or stolen, you will have lost your cryptocurrency forever!

Many cryptocurrencies include software that you can use to create your own paper portfolios. They contain all the information in a format that can be scanned via a QR code. Entering your keys on the computer is not a good idea, because the slightest error in numbers could be a very costly error.

It is recommended not to print this wallet on a piece of plain paper. Buy a specialized paper that is both tear-proof and waterproof. You will need a color laser printer to print your wallet. Then, you will just have to keep it in a particularly safe place! Paper portfolios are truly similar to bearer bonds, which means that the people who hold them can use them to access the cryptocurrency in question. The biggest advantage of paper portfolios is that they are never online. They are therefore never exposed to pirates and cannot therefore be corrupted. However, they can still be damaged, lost or stolen.

It is a very secure method, but security depends on you, so think carefully if you choose this method.

  • Brain Wallets or “Brain Wallets”. Similar to paper wallets, their name “brain wallet” is rather explicit. A brain wallet is a method of learning an access code, usually in the form of a list of random words to memorize (several tens). This list of words then allows you to access the keys of your cryptocurrency portfolio. The idea is to remember this list without writing it down, so that it is almost impossible for anyone to access the information. The major disadvantage of this technique is of course the possibility of an omission: personally, in view of my memory, the brain wallet would certainly not be my first choice!

Ultimately, it is up to you to choose your portfolio type. You need to think carefully about how many currencies you want to keep, how long they will be kept and any security issues that could make you particularly vulnerable. The security of your currencies depends greatly on your choice of portfolio.