Okay, you’ve decided to take the big plunge and invest (or speculate) in the wild world of cryptocurrencies. The potential rewards are overwhelming but so are the choices. In this article, I’ll be covering the major strategies (as I see them) and what is involved. In part 2, I’ll be going over some specifics of how to implement some of the strategies below. Note: Mining is not included in this article as I touched on it in my Beginner’s Guide to Cryptocurrency.
Motivation and Goals
The first question to answer is what is your motivation and what are your goals? Are you just looking to earn a little extra or are you trying to save up to put your kids through school? Your individual situation will influence which strategy might be best to take.
The FOMO is real
In case you’re not up on your internet lingo, FOMO stands for Fear of Missing Out. Although FOMO might have its place (for example motivating you to learn about this stuff in the first place), if you make your investment and speculations based on FOMO, then you’re going to sell low and buy high and lose your shirt. Sometimes it’s better to just hold and wait for another opportunity.
Satoshis or Dollars or Something else?
Is your goal to accumulate satoshis (1 millionth of a bitcoin) or dollars. Trying to do both at the same time may lead to compromises that result in neither. Satoshi gatherers usually have a longer term view thinking that eventually cryptocurrencies will become a viable (if not dominant) way of buying goods and services. Dollar accumulators want the value of their investment to be worth more dollars even if it costs them satoshi value in the short term. Decide on a goal up front.
Strategy 1: The HODL
This comes from a famous misspelled forum post from back in 2013 that reads in part, “I AM HODLING. I type d that tyitle twice because I knew it was wrong the first time. Still wrong. w/e. BTC crashing WHY AM I HOLDING? I’LL TELL YOU WHY. It’s because I’m a bad trader and I KNOW I’M A BAD TRADER.”
The strategy is pretty simple. It’s basically Jeremy Siegel Stocks for the Long Run applied to cryptocurrencies. Choose a selection of crytpocurrencies that you think may have a future, and HODL them for all you’re worth through thick and thin. You probably want to hold some mainstream (Bitcoin, Litecoin, Dash, etc.) as well as some newer, cheaper, up-and-coming alt-coins.
This strategy probably the best one for people with limited time and tolerance for anxiety. Once you buy, don’t look at the price on a weekly, daily, hourly basis. Just check once a year. This strategy is also best for a longer time horizon.
Strategy 2: Sleep at night speculation
This is similar to the HODL strategy except that whenever a coin doubles whatever you put into it, you withdraw half and put it into another potential up and coming alt-coin. As an example, let’s say you buy 100,000 PurplePill coin for the equivalent of $0.001 (total of $100). The price of PurplePill goes to $0.002, now your PurplePill is worth $200. Sell $100 of it and use it to buy another new alt-coin.
If the PurplePill becomes worthless, you still have $100 in the new alt-coin. If the price of PurplePill goes up to $0.1, then your initial $100 is now worth $5000.
But if you hadn’t sold, then it would be worth $10,000!!! This strategy sucks!!!
The FOMO is real. Yes, you halved your potential profit, but you also preserved your original capital, and own a new alt-coin that might do just as well.
This has a couple of benefits over the HODL.
Over time your portfolio will become highly diversified.
This will limit your potential for catastrophic loss
AND put you in a position where you own lots of alt-coins which may one day breakout and make you “instantly” rich after you held them for however many years.
Strategy 3: Day trading
Just like it sounds, this involves frequent trading in and out of various alt-coins. People who do this are usually skilled in the dark art of Technical Analysis. It doesn’t take a huge effort to learn how, but boy can you lose your shirt fast if you don’t know what you’re doing. You can combine this with Strategy 2 to provide a short term and long term combined strategy.
Strategy 4: Masternode investing/speculating
Dash was the first coin to implement masternodes. These are computers that hold a large number of coin (1000 in Dash’s case) and are used to verify and speed transactions. In return, masternodes receive “interest” in the form of new coins. As of this writing, a Dash masternode receives about 200 new Dash each year, representing a 20% annual return on the initial investment.
Sounds like an awesome deal right? Plus if the price of Dash rises, the value of both your masternode and its interest rises. Unfortunately, at the current price of Dash, a masternode will set you back a cool million dollars. If you had bought your masternode just 12 months earlier, it would only have cost you $12,000.
This is the closest to true value investing (IMO) because you get an income as well as a speculative assest (even if you’re being paid in said speculative asset).
So the key is to look for solid up and coming coins that have the potential to go up in value. Good luck.
As a more speculative play, you can look for brand new coins that often pay out more than a 1000% interest. These will pay back the original cost of the coins within 15-40 days. So if the price can hold out for one month, you’ll have your initial investment back plus a masternode in that coin. Keep it or cash out and repeat.
Do this strategy over and over with various new coins. After 1 year of this, you’ll have 6-10 masternodes providing an interest return in that many new coins. Now if just one of them doubles or quintuples in value…. well, you get the idea.
Personally this is my favorite strategy. It does take a little server administration know how to set up a masternode, but you can learn it or outsource it fairly easily.
Warning!! Danger Will Robinson!!!
NEVER NEVER NEVER put your coin in a wallet on the masternode. Never give anyone the private keys to your wallet. Your wallet should reside on your own computer, and the masternode just references the wallet. People have been scammed out of their coin by people they hired to set up their masternode. Don’t fall prey to it.
Bonus: How to evaluate a cryptocurrency
No matter which strategy you adopt, you need to be able to analyze a potential alt-coin investment. Here is a handy checklist that you can use to evaluate the worthiness of a potential investment/speculation.
What are the coins fundamentals?
What problem is coin or project trying to solve? How is their approach different?
Does the project have a compelling story?
Who is on the team? A 30 person team with experience is more credible than a project of 2 people with no experience.
Who is the leader of the team.
What partnerships does the project have in place? It’s one thing to claim a future benefit to…someone. It’s another thing to have a client signed up in advance.
What is the community response to the project?
How much capital is backing the project? Technology is wonderful but without capital to back it up, there’s no there there.
Are there any anticipated events (such as the CEO being featured on a cable news show)?
What exchanges is the coin listed on? This can dramatically affect the ability of the someone to acquire the coin.
What is the volume of trading? Be very very wary of purchasing coins with low volume. You might not be able to sell it at any price.
It’s practically impossible to ignore Bitcoin and Cryptocurrency lately with the media touting as the largest bubble in the history of the world…even bigger than tulip mania!!! But finding hard facts can be difficult. When you look on Facebook, Youtube, and Google, it seems that 90% of the content is trying to sell you on some kind of get rich quick scheme.
So this little (okay probably not so little) article distills the basics right down to earth in a language that everybody here can easily understand.
So what exactly is a Bitcoin?
At its core, Bitcoin is a distributed ledger system. Thousands of computers all over the world keep a copy of the ledger, which makes it extremely difficult to counterfeit. This distributed ledger system technology is known as the Blockchain. “Owning Bitcoin” is basically owning the ledger entry. In order to record new transactions into the ledger, computers have to solve very difficult math problems.; this is called mining.
As their reward miners get a small percentage of transactions. Addionally mining will occasionally result in a new Bitcoin being discovered. The math is set up in such as way that the problems become progressively harder so that there will be that there will only be 21 million bitcoin ever created/discovered. Early on, it was relatively easy to mine them, and individual miners could mine multiple bitcoin. Now the math is so complicated that most mining is done in “pools” with multiple miners sharing the resulting Bitcoin.
21 million doesn’t seem like it’s enough.
Luckily Bitcoin is fractional, which means that you can own as little as 0.00000001 Bitcoin. (Just like you can own one dollar, or 0.01 dollars (aka a penny).
Where does Bitcoin get its value?
Like all economic questions, the answer is both simple and complicated. I’ll keep this short and dedicate an entire article to it later. The simple answer is supply and demand. As seen above, there’s a limited supply. So where does the demand come from? Well, Bitcoin is useful for keeping track of who owns it, and it can’t be artificially inflated like a traditional government-issued fiat currency (dollars, Pesos, Cruzeiros). Bitcoin set out to be a better and more secure currency than traditional government-issued money.
If you think about your bank account and credit cards, dollars for the most part today are just computer entries of who owns them or who owes them. The problem is that nothing prevents the government or Federal Reserve from just creating additional electronic entries out of thin air. In fact, this is how the banks were bailed out in the 2008 Financial Crisis. Let’s hear it right from the head of Federal Reserve (at the time) Ben Bernanke:
The U.S. dollar has lost 95% of its purchasing power over the last hundred years due to money creation by the government, and it’s considered a bastion of stability compared to the Thai Baht, Mexican Peso, Argentine Peso, Brazsilan Cruzeiro…uh Cruzado…uh New Cruzeiro…uh…Real. You see the point. The demand isn’t just from Americans; the demand is international, partly as a hedge against inflation, and partly as a way to get your money across borders. Bitcoin can be sent anywhere in the world in a matter of minutes.
But isn’t Bitcoin a bubble?
Yes and no. The spike in demand is creating interest that in turn fuels additional demand as speculation. But there are so few bitcoin in the world compared to the number of people who may want them, that it’s hard to say what will happen in the long term. My best guess is that Bitcoin has a long way to go up before it comes down. There will be dips and corrections along the way to be sure, but unless Bitcoin is hacked (unlikely given its nature and track record) or the development team does something really stupid, chances are good that it will remain a valuable commodity for a while. There are some issues with Bitcoin that may limit its ability to be used for every day transactions (see below), but I think that it will still be used for larger transactions and wealth transfers.
Ultimately, the “bubble” exposure is good for Bitcoin and other Cryptocurrencies as the news coverage exposes people to them (and impells me to write articles like this). The more people know about it and own it, the more likely people are to begin using them for transactions, which will turn stabilize the pricing and preventing a future crash.
So what’s a Cryptocurrency?
Let’s sum up first. Bitcoins are ownership of ledger entries in a distributed blockchain. The process of discovering new ledger blocks and verifying new entries for existing blocks is called mining and based on solving complicated math problems. So…those really hard math problems? They’re based on codebreaking, aka Cyrptography.
Bitcoin was the first “currency” to use blockchain technology. There have been several others that are based directly off Bitcoin or developed their own similar (but different) approaches. Collectively these are call Cryptocurrency. Because it’s the oldest and most well-known, it’s become the de facto standard, and all the others are called alt-coins.
Some of the alt-coins are just competitors to Bitcoin that seek to eventually become the most used by addressing problems that bitcoin has. Others just hope for a piece of the action. And some are trying to do something completely different such as become a way to track real estate deeds or educational transcripts or which websites are most trusted.
Some of the most popular alt-coins include:
Litecoin: is essentially bitcoin 2.0. It was designed to be a faster, cheaper Bitcoin. It’s probably technologically superior in every way. It currently serves as a testing ground for Bitcoin development. The Bitcoin developers can see how a proposed solution to a problem plays out in the real world before deciding whether to incorporate it into Bitcoin.
Ethereum is actually a blockchain development platform. It’s main purpose is to serve as a base for potential applications of blockchain to do interesting things.
Dash is designed to be a cheap, fast, and anonymous (if desired) currency for making transactions. The Dash team is heavily marketing themselves. They’ve been targeting the medical marijuana community, since many banks will not do business with them.
Zcash is supposed to be a cheap, fast alternative to Bitcoin.
Monero emphasizes complete anonymity.
You keep saying cheaper and faster. What do you mean by that?
Remember that miners get a fee for verifying transactions (new ledger entries). In Bitcoin, new entries are recorded every ten minutes. To be confirmed, you need at least two separate blocks to show your entry (to prevent double spending of the same Bitcoin). This means that it takes about 20 minutes to get confirmation of a transaction. That doesn’t really work for instant transactions like paying for a cup of coffee, but it’s a heck of a lot better than waiting three hours for a wire transfer or 3-5 days for an electronic funds transfer (EFT).
Furthermore, each block can only record so much information, which means that your transaction may not be recorded in the next block at all. To ensure faster processing, you can offer a larger mining fee. Alt-coins that want to be cheaper and faster have different ways of addressing these two big problems with Bitcoin.
Many people predict that as a result of these issues, eventually Bitcoin will become used as a store of larger wealth, while another alt-coin will be used more for daily transactions.
Stick a fork in it.
When a proposed change to Bitcoin or another Alt-coin is disputed, sometimes the coin will fork. This means that it becomes two separate coins with two separate block chains. As an example, recently there was a dispute over the way to solve some of the issues listed above. So some of the Bitcoin developers forked the Bitcoin project, and called their new coin Bitcoin Cash. When this type of fork happens, if you own some bitcoin, you end up owning your original Bitcoin and the new coin too, so don’t fear the fork.
Okay, so how do I get my mitts on some Bitcoin?
There are essentially three (and a half) ways to obtain Bitcoin. (These will apply to pretty much all of the alt-coins to some degree).
The first is to mine it as described above. (The half is to mine another cryptocurrency and then exchange it for Bitcoin). I have a tutorial on how to get started mining the easy way, so if this interests you, then click here for the tutorial.
The second is to take Bitcoin (or other cryptocurrency) as payment for goods and services. This is actually remarkably easy. Bitcoin is probably best used for someone you know and trust, because of the speed of transaction issue. Another coin that is faster would probably be better for a one-off transaction like buying something off Craigslist. It’s as simple as having a QR code that the person paying scans, enters the amount, and presses send. Even easier than Venmo. Use Google to find local groups. For example, in West Palm Beach, there are number of Bitcon Meetups.
The third way to obtain Bitcoin is to buy it with dollars. The easiest way to do this is with Coinbase. Coinbase is criticized in the Cryptocurrency community (sometimes unfairly, see below), but it’s still the easiest on-ramp to Cryptocurrencies. You sign up for an account, and then you can buy Bitcoin, Litecoin, or Ethereum with either a credit card or electronic fund transfer from your bank. Once you own some coin, transfer it to your own wallet (see below).
Tell me what’s wrong with Coinbase?
The unfair complaints have to do with privacy as Coinbase complies with IRS regulations that govern financial institutions. That’s what allows them to take dollars in the first place.
Other complaints include that it’s relatively slow and the fees are higher than other services. This is somewhat true, but it’s still the easiest way to acquire some Bitcoin.
Finally, the Bitcoins held in Coinbase are not actually held by you. They are held by Coinbase on your behalf. So if something happens to Coinbase, it’s possible that someone could abscond with your bitcoin, but it’s certainly no less secure than Equifax or Target.
One last complaint is that their website “keeps breaking.” This is primarily due to the overwhelming increase in demand in recent days. They are working to try and resolve these issues as quickly as they can.
Recommendations for dealing with Coinbase (and pretty much any online exchange)
Enable two-factor authentication. (When you sign in, they will require verification that it’s you via your phone.)
When you place your order, the price is locked in even though it takes about 5 days for electronic funds transfers to process.
Once your funds have cleared, transfer your coins to your own private Bitcoin wallet.
What’s this about a wallet?
Bitcoin is “owned” by being recorded to a particular Bitcoin address (series of letters and numbers). A Bitcoin wallet generates an address (or multiple addresses) and calculates how much bitcoin is recorded to each address to generate a spendable balance. When you pay someone, your wallet authorizes the transaction.
The magic is contained in a pair of keys, called public and private keys. The private key verifies that the transaction is being generated by the rightful owner of the address. As such, you need to guard your keys. If someone has access to them, they have access to your bitcoin. If you lose them, then you lose your bitcoin!!!
I can lose my Bitcoin? This doesn’t sound very secure.
Well, it’s certainly not idiot proof. But it’s not all that insecure as long as you’re careful. Your wallet will generate a seed, a code or series of words that can be used to regenerate the private key. For the love of God, protect this code. That way, if you lose your phone, or someone throws you in the pool, the bitcoin stored in your phone’s wallet won’t be lost.
One other thing to be aware of is that if you’re dealing with multiple currencies, don’t send the wrong currency to the wrong. For example, if you send litecoin to a bitcoin address, there’s a good chance that they’ll be lost, possibly forever.
Choose a secure wallet, such as an offline wallet to store the majority of your Bitcoin. Then transfer a little bit to an online wallet (whether your phone or computer) for walking around money. If you practice this protocol, if you do ever lose your online wallet or have your computer hacked, you might lose the small amount stored there, but you won’t lose your savings.
The most secure wallets are called hardware wallets. They are typically a USB device that runs the wallet software and authorizes transactions. Since the private key is stored in the device, when it’s unplugged there is no chance that anyone can electronically still your Bitcoin. Make sure you configure a passphrase for the hardware wallet to prevent someone who finds your hardware wallet after if fell out of your wallet from taking your bitcoin. Keep the seed separate from the. The Ledger Nano S seems to be the most popular hardware wallet at this time. The Trezor is never in stock and is a bit more expensive. The Keepkey is another alternative.
You don’t need a hardware wallet, so don’t let that stop you from getting started. You can also create a paper wallet for free.
You need a wallet for each currency you want to own.
Some wallets are called Multi-Wallets because they can handle multiple crytpocurrencies. Others are specific to a single type of coin. Before you buy a hardware wallet, make sure that it can handle the currencies you want to use.
Two popular software multi-wallets are Jaxx and Exodus. Jaxx can be used on your phone and computer. There are some security concerns with the way that it stores your private key, so don’t go doing stupid things like getting a virus, and see Wallet Practices above. One of the nice things about the Jaxx wallet is that it integrates Shapeshift, which is an exchange for Cryptocurrencies. So say, you have Litecoin in your wallet, but the person you’re buying from wants Dash. The Jaxx wallet can convert it for you via Shapeshift, and then send the Dash. Exodus also integrates with Shapeshift, but is not available for phone and tablets.
Bottom line: Take Action Now
I’ve know about Bitcoin for at least 7 years. I kept thinking, you know, I should figure this stuff out and buy some…maybe $500. If I had done that back in 2010 or 2011, or 2012, I’d be a millionaire. If I had even done it in early 2017, my $500 would now be worth about $8000. It was the inertia and learning curve that did me in.
I don’t know what the future holds specifically, but I can tell you that blockchain technology is going to revolutionize the way we do business and make purchases. Chances are very good that Bitcoin will continue to rise in value along with some other alt-coins.
It’s not too late. There’s still a lot of up Bitcoin before there’s a down. But don’t be stupid. Start small. Learn how it works. Become familiar with the issues. Then you’ll be prepared for what comes.
Go out to lunch with a friend. Have them pay in dollars and you pay them in Bitcoin.
Use Google to find other local people who use Bitcoin.
Once you’ve done these things, now you’re ready to snatch the rock from my hand and go out into the world. In my next article I’ll lay out some investment and speculation strategies as well as share some resources for learning more.
In the wake of the recent run-up in Bitcoin, and then LiteCoin, and then Ethereum, you may be thinking, “Well I’d like to get involved in this, but I can’t afford that.” So then you learn that you can “mine” for cryptocurrencies, but it all seems ridiculously complicated.
Well, it turns out there’s a ridiculously easy way to get started mining.
Minergate is a mining pool, which means that when you join it, any computers that you use to mine with them get added to a group of other computers, and you each get a reward proportional to your computing power. They’re not necessarily the “best” mining pool, but they are the easiest to get started with, and done is better than best.
I’ve created a short video. You can be up in mining within about three minutes. Written Instructions are shown below the video. If you found this guide helpful, consider using my link to sign up for Minergate. I’ll get a small commission at no cost to you.
Run the install program and just choose the default prompts.
Run the Minergate program.
Choose start mining.
By default, Minergate will try to mine whatever coin it thinks was most profitable in the last hour and supposedly switches to keep you profitable. Some things to consider.
You can choose the number of cores to mine with. Most computer processors these days are “multi core” which means that the processor is made up of multiple processors.
There is a dropdown that allows you to choose the number of cores to use. The more cores, generally the faster you can mine, but also the more heat you generate and quicker you may wear out your processor.
Some people report that using one or two cores fewer than the maximum number sometimes results in a higher hash rate (indicator of mining progress), so you may want to experiment a bit.
CPU vs GPU Mining
Bitcoin and most of the alt-coins are mined more efficiently with graphics processors (GPU) than with the central computer processor (CPU). However, a few -coins, such as Monero (XMR) and Aeon were designed specifically to be mined with a CPU. This means that if you’re on a laptop (or cheap desktop), chances are good you should stick to Monero and Aeon. If you have a gaming computer, chances are good that you have a GPU and should use it to mine a different -coin, such as Zcash.
There are so many coins, AAAGGGHHHHH
Don’t freak out. You don’t have to become a crypto-savant to do this. Just choose automatic mode, and Minergate, and you’ll be mining. But if you want to take things to the next level, you can learn more about the different types of crypto-currencies. At the time of this writing, the best bests are: 1) CPU mining…either Monero or Aeon. 2) GPU mining…Zcash.
Okay I’m mining; how do I get paid?
Look in your Minergate dashboard on the website, and you’ll see something that looks like this:
This is your overall account balance. You can choose to see its value in Bitcoin, US Dollars, or Euros.
This is the total value of what you have mined in your account (not sure the exact time frame). Same denomination choices.
This is the amount of whichever coin you’re looking at that you have mined and its value in Bitcoin, USD, or Euros. Note that this amount of coin is yours but it’s being held in Minergate’s wallet, not yours at this moment in time. You can use the buttons next to this number to change your mined coin into another currency. For example, if you’re mining Aeon, you can use Changely to exchange your Aeon into Bitcoin or Litecoin.
This is the total number amount that you have mined and how much of it has been confirmed. Confirmations can take a few minutes to several days depending on how fast your machine is and other factors. It’s not really yours until it’s confirmed.
This is a choice you have in terms of fees. It takes longer to confirm the PPLNS but there’s a lower fee. If you’re going to be mining for a long period of time, you’re probably better off leaving it as PPLNS.
These buttons can be used to move the dashboard of the coins you’re mining upward or lower for your viewing convenience. Put the coins you’re mining at the top.
As noted in Number 3, the mined coin is being held for you in Minergate’s wallet. To truly make it yours, you need to transfer it to your wallet. Click the Withdraw button to transfer the coin to your private wallet. (Note: you have to have a wallet for that currency to use this option. Otherwise, use Changely to exchange your mined coin for a currency for which you do have a wallet.
Here’s a video explaining some of the more advanced options and how to get your money out.
That’s it for the moment. There’s more to learn though. It’s reported that the GUI miner is not as efficient as the command line (console) miner, so in a future post, I’ll walk you through setting up a console miner.