By Frank Corva
Buying cryptocurrencies like Ether (ETH), the native asset on the Ethereum blockchain, is just about as easy as buying a share of a stock, but buying ETH is just the first step in the process of truly owning and unlocking the potential of the asset.
Most people buy ETH through a crypto exchange like Coinbase or Binance or through finance apps like Cash App or Robinhood. What most don’t realize, though, is that until they take the private keys for their ETH out of the hands of these platforms, they’ve only purchased an IOU for their ETH.
Since the ethos of crypto revolves around being your own bank and transacting in a peer-to-peer (p2p) fashion, it’s important to learn how to truly take ownership of your ETH.
From IOU to ETH
Almost all of us are guilty of leaving our ETH on exchanges for longer than we should. We make a purchase, we say we’ll move it off the exchange soon, and we take our sweet time doing so – if we ever actually do.
However, until we’ve moved our ETH from the exchange to a wallet for which we hold the private keys, we’ve technically only purchased an IOU for our ETH.
Actually, the ETH doesn’t move anywhere. It’s stored on the blockchain in what I can best describe as a virtual safety deposit box – it’s all about who holds the keys.
While your ETH is in the custody of the exchange through which we purchased it, that exchange has the keys to our virtual safety deposit box.
Keep in mind that crypto exchanges are not FDIC insured and that, in extreme cases, governments can freeze your crypto exchange accounts. Plus, there’s always the risk of a crypto exchange being hacked, losing your crypto and then going under (see Mt. Gox).
I don’t share this information to alarm you. I bring it up because it’s better to be safe than sorry. And the first step in being safe is learning how to self-custody your ETH.
Self-custodying your ETH
There are three types of self-custody wallets: hot wallets, cold wallets and paper wallets. Hot wallets are always connected to the Internet, whereas cold wallets, which operate like a USB drive, only need to be connected when the wallet is being used for transactions. Paper wallets provide the most security against such things as hacks as they are disconnected completely from the Internet.
If you are looking to simply hold your ETH as a long-term investment, you might want to download a mobile or desktop hot wallet like Exodus or Atomic Wallet or, to be even safer, buy a cold hardware wallet like Ledger or Trezor.
But if being as safe as possible is your top priority, do things crypto OG style and record the private key to your assets in a paper wallet that you then store in a physical safety deposit box in an undisclosed location.
If you do choose a digital wallet option, you’ll be prompted upon setting up the wallet to write down a 12- or 24-word secret private key recovery phrase. This phrase gives you access to your private key, which you need to access your ETH on the blockchain.
It’s imperative that you don’t share your private key or your recovery phrase with anyone, not even support staff for these wallets, as anyone with your private key can access your ETH.
Once you’ve moved your ETH off of an exchange, you’ve taken your first step in becoming a crypto pro (not to be mistaken with “bro”; those guys aren’t so cool); you’ve become your own bank.
ETH is yours; use it
Once you’ve taken your ETH into your own custody, you can now consider using your ETH to help govern the Ethereum blockchain, generate yield, purchase goods and more.
Stake your ETH
Ethereum will be transitioning from a proof of work (PoW) to a proof of stake (PoS) blockchain as early as August of this year when the merge is scheduled to take place.
For proof of stake (PoS) blockchains, network participants – or ETH holders – can stake their ETH as a means to enhance the security and influence the development of the blockchain.
In exchange for staking your ETH, you get to vote on Ethereum network update proposals and earn a yield in ETH. Earning this yield in ETH is akin to earning a dividend from a stock.
You can stake your ETH via centralized exchanges like Kraken or Coinbase, but again, you run the risks associated with leaving your ETH in the custody of an exchange.
To avoid these risks, you may want to stake your Ethereum in a decentralized way.
To do this, download a browser extension wallet like MetaMask, send your ETH from the exchange through which you purchased it and then stake your ETH in a pool through Lido.
Please note, though, that there are still risks involved with staking your ETH like this. Your MetaMask wallet can get phished or your staked ETH can be stolen in a smart contract hack. Again, I don’t share this info to frighten you, but more to just remind you that there are risks involved in participating in crypto, the Wild West of finance.
Farm your ETH
If you want to generate an even greater yield using your ETH (i.e. graduate from crypto pro to “DeFi degen”), you might consider yield farming via a decentralized exchange like SushiSwap. Yield farming is a bit of a riskier and more complicated process, though.
To yield farm, you first have to create a liquidity pool (LP). Many LPs on SushiSwap feature Wrapped ETH (WETH) as a component. You can swap your ETH for WETH on SushiSwap’s swap page. Both assets trade for just about the same price.
Once you have your WETH, you combine it with another crypto asset that trades with ETH on SushiSwap.
In doing this, you are providing trading-pair liquidity to the decentralized exchange. In other words, you are providing the marketplace with tradable assets. For doing so, you receive rewards in the SUSHI token.
If yield farming sounds too complicated for you, maybe just consider focusing on self-custodying or staking your ETH for now.
Shop with your ETH
Don’t forget that you can use your ETH to purchase NFTs through sites like OpenSea or Nifty Gateway. Shopify also now enables merchants on its platform to accept ETH as payment.
If you want to spend your ETH in real life, you can now do so at a range of establishments including Gucci, Nordstrom, Ulta Beauty, Barnes and Noble Education and Overstock.com. There’s a shopping avenue for every kind of spender.
Initially, purchasing ETH is just about as easy as purchasing stocks online.
Once we purchase our ETH, most of us – even those of us who know better – get lazy and leave the keys to our ETH in the hands of the exchange through which we purchased it.
To maximize the potential of our ETH, we have to start by taking it off of exchanges and into our own custody. Once we do that, we can begin down the path to becoming full-blown crypto enthusiasts, or crypto degens, short for degenerates, as the joke in the space goes.
Lastly, if you do use your ETH to yield farm or to make purchases, remember that there are capital gains tax implications associated with using and spending your ETH. But the topic of crypto taxes is a whole bag of complexity and sadness for another day.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.