For those of you who have not been paying attention to one of the biggest trends in investing and tech, cryptocurrencies are digital currencies using encryption techniques that regulate the generation of currency and verify the transfer of funds, operating independently of a central bank. Units of currency are created through a process referred to as mining. In the case of Bitcoin, miners run computer programs in order to verify the data that creates a complete transaction history of all Bitcoin. This process of verification is made possible by a technology known as the blockchain, which is used to create irreversible and traceable transactions. Once a miner has verified the data (which comes in a block, hence, blockchain), they are rewarded with some amount of digital currency, the same currency for which they were verifying the transaction history. So mining Bitcoin, for example, would earn you Bitcoin.
Cryptocurrencies are experiencing a moment of unprecedented attention and speculation for a number of reasons. 1) The value of Bitcoin has been steadily climbing through 2017, with Ether seemingly poised to overtake the cryptocurrency giant any day; 2) Blockchain technology has uses above and beyond cryptocurrency, and has been hailed by some as the backbone of the future financial system; 3) The increasing number of people who see cryptocurrency as a form of investment similar to gold. If cryptocurrencies stabilize in value, buying Bitcoin or Ether has the potential to be a worthy venture.
If you want to trade in digital currencies, you are going to need a platform on which to trade them, and an intermediary to communicate with the network. Most of us do not have the technological wherewithal to communicate with the blockchain, or to store our digital currency. That’s where Coinbase comes in.
Coinbase is a global digital asset exchange company (GDAX), providing a venue to buy and sell digital currencies, as well as send information about those transactions out to the blockchain network in order to verify those transactions. Coinbase serves as a wallet, too, where the digital currencies can be stored. The application operates exchanges of Bitcoin, Ethereum, Bitcoin Cash and Litecoin, as well as other digital assets with fiat currencies in 32 countries, and Bitcoin transactions in many more countries. According to their website, Coinbase has served over 10 million customers, and facilitated the exchange of more than $50 billion worth of digital currency.
Essentially, if you are interested in trading in digital currencies but don't want to get bogged down in the underlying technology, products like Coinbase are a way to begin a foray into a new form of currency speculation and investing. You do, however, lose some of the advantages of trading in a cryptocurrency and through the blockchain. On Coinbase, you have no psuedoanonymity - your name is attached to your Coinbase account and so is your bank account, so transaction history is relatively easy to track down. And if you're not working on the blockchain, there's not much you can do to ensure that the verification of your transaction history or your account is taking place on the blockchain. You are, instead, placing trust in the intermediary; in this case, Coinbase.
Buying and Selling Cryptocurrency
In order to purchase cryptocurrencies, Coinbase requires you to link a bank account, or credit or debit card to your Coinbase account. Using a bank account allows for higher limits ($100/transaction, $2,500/week), but it also takes longer to verify transactions, so you will not see money in your Coinbase wallet for two to four days (depending on your bank). And when selling Bitcoin, once the sale is confirmed, it takes two to four days for the proceeds of that sale to show up in your bank account. With a credit or debit card, limits are lower ($200/week), but you can purchase digital currencies by simply transferring funds from that bank account to the site. For these transactions, Bitcoin shows up in your Coinbase wallet instantaneously. You can also sell Bitcoin to your PayPal account, effectively cashing out, as your Bitcoin will be exchanged for local currency. This transaction, too, is instantaneous.
Despite the intricate technology associated with and necessary for cryptocurrency investing, speculation and possession, Coinbase has created an apparatus that makes this process remarkably easy and familiar, almost like buying and selling stocks. This screenshot from the Coinbase site shows real-time cryptocurrency prices, and doesn't look too different from your ordinary online stock tracker.
(Image courtesy of coinbase.com)
This gif shows what it looks like to buy and sell Bitcoin on Coinbase. Pretty simple, and similar to online banking. (image courtesy of coinbase.com)
Security and Insurance
To ensure the security of your cryptocurrency assets purchased and stored within Coinbase, the platform stores 98% of customers funds offline. On their website, Coinbase assures customers that "sensitive data that would normally reside on our servers is disconnected entirely from the internet." Data is then encrypted, and transferred to USB drives and paper backups, and distributed in safe deposit boxes vaults all over the world.
The other 2% of customer funds, held online, are covered in the event of a breach of Coinbase's online storage. Also, Coinbase holds all customer fiat currency in custodial bank accounts, on behalf of customers. So, if you have fiat currency in Coinbase, in a USD wallet, it is covered by FDIC insurance up to $250,000 (just like a "regular" bank). This protects customer assets (so long as they have been converted to fiat currency) even in the event of Coinbase becoming insolvent.
If you do have this much money tied up in Bitcoin, though, you may want a more secure space to store it. If this is the case, Coinbase offers a Coinbase vault, which has time-delayed withdrawals (giving you 48 hours to cancel a withdrawal) and the option of multiple approvers, increasing security by ensuring that all withdrawals are approved by multiple people. They also offer a multisig vault, which is basically an even more involved and more secure vault, requiring multiple keys to unlock.
Word of Caution
Because the blockchain works by verifying transaction history, and this verification process is labor-intensive and slow, only so many transactions can be verified in a certain timespan. So, if you sell your Bitcoin, but the purchase isn’t confirmed by the blockchain network, and the price of the currency changes, the sale won’t process. You'd have to sell your Bitcoin at whatever the new rate is (if you so choose to sell). Also due to the reality of blockchain, as well as for other reasons thus far unidentified, the Coinbase payout system can sometimes be unreliable. There have been reports of extensively delayed payout periods, and bugs sometimes keep the site from running as efficiently as it could or should. A word to the wise: if you are going to invest in and speculate on cryptocurrencies, do so carefully.