More people around the world are becoming interested in cryptocurrencies.
Cryptocurrencies are based on blockchain technology and function differently to regular fiat currencies.
Before investing or trading in cryptocurrency, users must follow safe security practices and know the risks involved.
While this article focuses on Bitcoin, the information applies to other cryptocurrencies like Ethereum, ZCash, and LiteCoin.
Use a secure exchange
The first step in buying Bitcoin locally is registering on an exchange which allows you to purchase Bitcoin with rand.
The largest Bitcoin exchange operating in South Africa is Luno, which also offers Bitcoin storage.
Exchanges like Luno facilitate Bitcoin-to-rand trades between registered users, and all users are required to verify their identity before using the platform.
Unlike Bitcoin wallets, users access their Luno account with a username and password instead of a private key. You can further secure your banking details and Bitcoin balance by adding two-factor authentication to the account.
Storing your Bitcoin
If you plan to hold your Bitcoin for a while, there are several storage options available – besides Luno’s built-in wallet – with varying degrees of security.
Keeping your Bitcoin in an exchange is not as secure as holding your Bitcoin yourself, as large exchanges have been hacked in the past.
A popular option is for users to transfer their Bitcoin to an online wallet, although the safety of these vary depending on their access methods and history.
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 provider being able to access their wallets.
Online wallets scams have happened in the past, and due to the lack of regulation surrounding cryptocurrency, scammers are looking to target users.
The safest method for storing Bitcoin is to run a blockchain node and store your funds on physical hardware.
Hardware wallets are not as accessible as online wallets, but are far more secure.
Users can also purchase specialised hardware designed to make secure, offline wallets accessible to average consumers.
Understand blockchain transactions
Purchasing and storing Bitcoin safely is important, but users should also familiarise themselves with how a blockchain-based cryptocurrency functions.
A blockchain functions as a decentralised public ledger, meaning any user can add a transaction to the public list of transactions and it is verified by the consensus of other users.
Each user has their own copy of the blockchain which is constantly syncing with others, and anyone attempting to add a fraudulent transaction would have it rejected by other users with the correct version of the blockchain.
As Bitcoin payments boil down to certain amounts of Bitcoin being sent from one address to another, it is important that anyone transacting ensures there are no errors in the destination address.
There is no way to reverse Bitcoin transactions if a mistake is made, and the addresses are long strings of letters and numbers.
Another feature of blockchain-based currency is that while Bitcoin addresses are individually anonymous, any user can track transactions by examining the blockchain.
Cryptocurrencies are secure in the sense that they are resistant to fraud, error, or logical flaws, but are not truly anonymous unless a user never converts from or to fiat currency using a verified exchange.