Be sure to check out the related story How To Invest In ICOs: 10 Financial Tips.
Speculators are throwing their 0-1% interest savings (or their astronomical bitcoin and ether gains) at initial coin offerings and token sales.
As mentioned in my story yesterday on financial tips for speculating in ICOs, these new crowdsales of crypto assets have pulled in more than $1 billion this year.
The pace of them nearly doubled from April to May, and the amounts keep getting bigger. The latest record was broken last week by smart contract platform Tezos, which raised $232 million.
But the everyday buyer has no idea how this new technology works or how to get their hands on tokens. If you’re thinking of purchasing some yourself, make sure to read these financial tips so you don’t end up becoming a victim of crypto’s dramatic 50% price swings. If you still want to try it out, here’s a technical guide.
How To Buy During An ICO
1. Get bitcoin or ether.
This is easily done at leading cryptocurrency exchange and wallet Coinbase. Hook up your bank account or credit card, make a purchase, and then wait a few days for your bank to process it. Just make sure to do it at least a week in advance of the token sale you want to participate in, as it takes days for these transactions to go through since they use the traditional banking system. Also note that on Coinbase, the fee for using credit cards is higher — 3.99%, as opposed to 1.49% for bank transactions.
If you plan to keep some bitcoin or ether here, move the bitcoin into the vault, and make sure not to use two-factor authentication via SMS but instead on Google Authenticator or a Yubikey. (More on why this could be a disaster for you below.)
2. Move your bitcoin or ether to a wallet you control.
This step is important because you cannot participate in an ICO from your Coinbase account. The reason for this is that when you use a centralized service such as a company like Coinbase, you do not own the private keys to your bitcoin or ether address. The way the ICOs typically work, you send them your ether or bitcoin, and the smart contract immediately sends the tokens back to your address. But since you don’t have private keys in a Coinbase account, if you send ether or bitcoin to an ICO address from your Coinbase account, you’ll simply be enriching Coinbase instead of getting your desired tokens.
If you’re using ether, which is commonly accepted in ICOs, you can use a site like My Ether Wallet to create a new Ethereum key there and transfer your ethers on Coinbase to that wallet. Another option is Parity, which enables you to do things like invest in an ICO at an exact time — a feature that you might want to use if you believe the ICO will sell out within seconds. If you’re using Bitcoin, Blockchain.info has a good user-controlled wallet. (Many token sales accept other coins as well, but bitcoin and ether are the two most popular.) Once you’ve transferred your coins to a user-controlled wallet, you’ll have an ether or bitcoin address whose private key you control — and that means that you’ll be able to receive tokens there as well.
3. Participate in the ICO by sending your crypto to their address.
The token sale will post an address where money is being collected during a certain window of time. Be very careful that the address to which you are sending coins is actually the address of the token sale. Scams trying to get people to send their ether and bitcoin elsewhere abound. In fact, yesterday, during its ICO, Coindash.io’s website got hacked, and the crooks appear to have made off with $7.9 million worth of ether simply by changing the address on the website to their own.
It’s also possible to use a smart contract to make your bid. During the crowdsale for prediction market Gnosis, which I wrote about in the July cover story, because there was concern the crowdsale would be over quickly, people who were, say, living in a part of the world where they’d likely be asleep during the ICO made their bids via smart-contract-powered bidding rings. Because of the time crunch that occurs during many ICOs, many investors try to get in before others during a limited window by paying exorbitant fees to make sure their transaction goes through quickly. For the Gnosis ICO, these bidding rings collected people’s money beforehand and made the bid for them at the appropriate time, thereby saving individual investors money because the exorbitant fee was now split all bidding ring participants, rather than just one person shouldering it. This also meant that the investors didn’t need to trust a person or institution to return their fair share of tokens to them.
4. Once you have your tokens, figure out how to store them.
If you have a significant amount of money invested, it’s best to use a cold wallet (one not connected to the internet), and particularly a hardware wallet, which is a device specifically designed to hold bitcoin, ether, and other crypto tokens securely. The two most popular hardware wallets are Trezor and Ledger. Whichever you get, plug it into a USB port, transfer your coins to the address that comes with your hardware wallet, and afterward, unplug it from your computer. You’ve just stored your coins so they are secure even from viruses on your computer.
If you lose your hardware wallet, you can re-create it using what’s called a paper backup — a series of words that you can use to obtain your private keys again.
5. If you want to store a coin not supported by your hardware wallet …
This isn’t very common now that almost all tokens follow what’s called the ERC-20 standard (a standardized token on the Ethereum network), but in case you have an obscure coin that isn’t supported, one option is to store those coins in an encrypted text file on a USB drive. Afterward, unplug it from your computer and keep it stored in a safe place such as a safety deposit box until you need to use the coins.
Again, create a piece of paper with the information necessary to re-create the private keys. Each coin should have a guide on how to do this since the method differs slightly coin to coin.
Another option would be to store those coins on an exchange. However, if you do so, be sure to secure those coins with what’s called two-factor authentication, not with your phone number, but with either Google Authenticator or a Yubikey. (More on that below.)
How To Buy Tokens After Their ICO
1. Get bitcoin or ether.
Same as step 1 outlined above.
2. Transfer it to an exchange that has the coins you want to buy.
When you find an exchange offering the token you want, create an account and obtain your address on that exchange. Copy it, and then go to Coinbase and paste that address into the send box. Within a few minutes, your money will show up on that exchange.
3. Set up two-factor authentication on your account, but not with your phone number.
This is an incredibly important step, and the part about not doing this with your phone number is key. Do not skip this step and do not use your phone number for security unless you are willing to let hackers come and steal your coins, which they will do.
They have been targeting people both well-known and not well-known in the crypto space and plundering their accounts on centralized exchanges. Their method is to persuade a customer service rep at a telco that they are their target (say, you) and that “you” want to move the money from, say, Sprint to T-Mobile (in reality, their device). Once all the phone numbers and cell phone messages meant for you are going to their phone, they then go to your crypto and other accounts (such as your Kraken or bank account or Gmail or Twitter or Dropbox) and select “forgot password.” If you have two-factor via SMS or text message enabled, they now change your password, lock you out and move your bitcoin or ether to their own wallet — and since crypto transfers are not reversible, you will then be out of luck.
4. Exchange your BTC or ETH for the token.
Once your tokens on a centralized wallet are safe from being whisked away by two-factor via SMS, find the trading pair you want. Let’s say you have bitcoins and want to exchange them for REP, the coin of the prediction market Augur, which launches this August. Choose how many tokens you want to buy, and if you’re making a limit order, how much bitcoin you’d like to pay per REP.
5. Store them securely on a hardware wallet.
If you’re not planning to trade, transfer your new coins to your own hardware wallet as outlined above. Then, be sure to secure that, perhaps putting it into a safety deposit box at a bank and keeping your recovery backup in more than one geographically distinct and secure locations.