Cryptocurrency Investing for Beginners
I don’t know how it started exactly, but it was just a few months ago. While aimlessly browsing my Facebook newsfeed I stopped to watch a video on cryptocurrency. Having been online since the mid-90s, I was, of course, aware of the rise of Bitcoin, but had largely let it pass me by. There was nothing particularly special about the content I was watching, but what it did do, was make me question why I was so lacking in knowledge on something that now seemed to be so important and widespread. I think I felt slightly embarrassed with myself for not having learnt more about Bitcoin, and its underlying technology, blockchain, and decided that I had to know more.
In truth, my quest was not so much to understand the technology for its own sake, but more to better understand why so much money is moving into this new form of value exchange, and to decide if it was a space into which I wanted to make an investment. The purpose, and reason for writing this piece, is to share my experience, and offer a point of view, gained only from some moderate [or perhaps now slightly obsessive] reading and watching of content, and to help others who may be trying to get started in cryptocurrency investing. What I will avoid, is trying to offer too much of an explanation into how the technology works, as I’m not qualified to do that, and there are far smarter people than me that can do that job. Instead, I focus on how I went from almost zero knowledge, to having at least an educated opinion, and how to go from having no investment to being invested in a small basket of crypto currencies within a space of 3 months.
So where does it start
Going back to that first video on Facebook. The piece of content was an interview with someone who was clearly knowledgeable and totally convinced on the importance of crypto as a currency of the future. He was asked the question, “if you had $10,000 to invest in cryptocurrency today, how would you spend it.” He then reeled off 5 or 6 coins, which I started typing into Evernote. It’s here that I nearly made my first newbie error. To continue, I need to try and break you into some of the basic terminology that surrounds cryptocurrency. The expert [if there actually is such a thing in this space] had said he would probably put his entire $10k into an emerging technology called Tezos. Ignore what Tezos is for the moment, as I use this as an example of what not to do as a beginner. My simple logic at this point was that if the expert was going to do that then so would I. Had I successfully invested in Tezos at the time, I probably would not have lost money, but that would have been more due to luck, than being smart. What I didn’t appreciate at the time, is that Tezos [and feel free to look it up], was one of the dozens, if not hundreds, of ICOs that have become so prominent in the last few months and years. ICO, you ask? Simple really, an ICO stands for Initial Coin Offering, and is the equivalent of a new company listing on the stock market via an IPO [Initial Price Offering]. The difference with ICOs, which is really in common with crypto as a whole, is that anyone can create their own crypto currency, and raise money by selling it to people who are keen to jump on the bandwagon.
This is one aspect of the industry that has seen it labelled as the new wild west, as a bubble, and even, as a giant Ponzi scheme. To put it in some kind of context, there are now close to 1000 [perhaps now more] different coins or crypto currencies. Investors, speculators, punters, call them what you will, can invest in any of these currencies by trading them, in a very similar way to stocks, shares or more traditional currencies, on an exchange. There are many exchanges, operating across different countries, and providing access to different coins. More on this shortly.
So why didn’t I take my first steps by investing in a new ICO, called Tezos? The truth is, that I wanted to, and nearly did. My very basic further research was enough to at least make me feel comfortable that there was at least a favourable chance to generate a positive return on investment. The only thing that stopped me was the difficulty I found trying to understand how to physically get funds into the offering. In most, or probably all cases, the mechanism to take part in an ICO is to buy with an existing cryptocurrency. To keep it simple, you would take some of your Bitcoin, and trade it for the new coin. In my case, I had no Bitcoin, and at this point in my journey, I had no clue where to get any!
Learning the basics
If I’d taken more time to learn some of the basics, I would not have made my start point investing in an ICO. That’s because, they are inherently risky, and almost everything I have learned in the past few months, suggests that the best way to get exposure to crypto is to learn the basics. Going through that learning curve is very likely to lead to an initial investment in Bitcoin rather than something which is likely to be much more speculative. Given that Bitcoin has been around since around 2008, I really did have an irrational fear that I had already missed out, that it was too late to get involved. The truth is, cryptocurrency is very much in its infancy and anyone who has an investment in any form of crypto in 2017, is still very much an early adopter. I would say I’ve already gone from a point of no knowledge, to being reasonably convinced that crypto is not only here to stay, but is very likely to completely transform how we live in the future. I may not be quite as bullish as some of the YouTubers I follow [I’ll link to them later] who have invested their entire wealth into Bitcoin, but I can certainly see a gradual process of moving more and more of my total liquid assets into crypto in the coming years. That view is shaped simply by thinking about the fundamental benefits of having a new form of value exchange. I keep this part really simple, as it’s far better to stick on Netflix and watch a documentary on Bitcoin, but when you think about the current process of moving money from person to person, or business to business, it’s clunky, flawed, and subject to both unnecessary controls, and manipulation. Most of the banking system is dated, and is clearly being disrupted by developments that have been brought about by blockchain. To learn more about what blockchain is [it’s the building block of crypto currency, and the process by which transactions can be made securely and privately] please search elsewhere. Here’s a good start point — http://bit.ly/2nna7Ac . Just don’t pay much attention to the figure shown as the market capitalisation of Bitcoin as it’s very out of date. At the time of writing [and this will also be out of date within hours!] the total value of Bitcoin is close to *£71b.
*A great resource for checking coin values and prices is CoinMarketCap.com.
Most of us have a need to transfer money, either to another person, or to a business. Traditional currencies, the $, or £s we still depend on today, are actually pretty cumbersome. When we think about the way the internet has allowed us to exchange information freely and instantly, why can’t the same processes be used to transfer and exchange value? This is why some have called blockchain the new internet, and Bitcoin, digital gold. Why does it need to be so slow and complex to transact with money? It’s the way it’s always been, but it’s not the way it has to be. We will no longer need to accept that currency is subject to fees, transfers held up by banks, and higher powers manipulating and controlling exchange rates. The alternative is here with blockchain. Transfer of value can now be instant, secure and free.
So back to a focus on investing. Once you understand that the crypto space is made up of close to 1000 different coins or currencies, it’s a matter of trying to work out where best to place your bets. How much of a bet you want to take comes down to a number of factors. Much like any other form of investing, you need to take a view on risk vs reward, short-term vs long-term. Many of those new to the crypto world may not look further than Bitcoin as the only place to invest. That’s a perfectly valid strategy, but it’s useful to try and get an overall perspective on the total crypto industry. Bitcoin is the first mover, and the big daddy of the crypto world. To give you an idea of its dominance, at any given point of time, roughly half of the value of all cryptocurrency assets are held in Bitcoin. To highlight one of the most striking aspects of crypto, the price of Bitcoin has fluctuated wildly in the 3–4 weeks since I started writing this article. At the time of writing, Bitcoin has been close to $6000, or a new all-time high. When I first started writing in early September, one Bitcoin was $4200. It reached a low of around $3100 shortly after the JP Morgan boss, Jamie Dimon publicly called Bitcoin a fraud, and that he would fire any of his traders who bought Bitcoin. There was more downward pressure on the entire space when China decided to regulate the market by banning ICO’s and then closing down its domestic crypto-currency exchanges. These stories were nothing more than another bump in the road, with the overall trend surging higher again as we end October. Investing in crypto is likely to be more volatile than just about any other asset you will ever have been exposed to. One of the factors driving so much interest in crypto are the stellar growth figures that are usually latched onto by mainstream media. With one Bitcoin having been worth as little as $10 in 2011, you don’t need to be a mathematician to know that the growth in the last 6 years has been enormous. The pace of that growth has only increased, serving to constantly bring new money into the space. Many observers will point to Bitcoin as having the potential to skyrocket from current levels to numbers that may seem crazy today. Estimates as high as $1m in 10–15 years are suggested by those with an especially rosy outlook. At a very simple level, the reasoning behind the continued rise of Bitcoin prices is due to supply and demand. Bitcoin has an inbuilt limitation of 21 million coins. Bitcoins are created using a process known as mining. Once that last coin has been mined [not about to happen any time soon], there will be no more. That means, as supply reduces, demand increases, along with prices. I now hold a few Bitcoin, with a view to this being a long-term hold, and hoping that the bulls are right.
So now we know that Bitcoin is the largest component of the crypto industry, what does the rest of the market look like? Other than Bitcoin there is one other currency that commands a large share of the market. That currency is called Ethereum and is fundamentally different to Bitcoin, as it’s not actually a currency. Ethereum was created as a platform built on blockchain, and is used by many of the other crypto currencies as their foundation. From an investment point of view, all you need to know at this point is that Ethereum [ETH] is important, has also seen explosive value growth, and would be considered a good investment for a long-term hold.
The mechanics of getting started with Exchanges
…or how to make your first crypto trades.
Getting started as a crypto investor means getting started with exchanges. The easiest way to explain an exchange is to liken it to the old school world of currency exchange. Let’s make it easier by going back to times before the introduction of the Euro. If you were holidaying in Europe and visiting a handful of countries you might have visited an exchange bureau several times, turning pounds into francs, then francs into pesos, pesos into lira, and so on. The exchange was simply the place you went to turn one currency into another. Hypothetically, you might have found that not all forex exchanges would be able to convert between all currencies. Maybe that was because of low demand, or if they had run out of a particular currency. In the crypto world, the exchange serves the same function. Hundreds of different exchanges exist to allow buyers to turn one currency into another. With so many current and emerging crypto currencies, it’s easy to see why not all exchanges handle all currencies. As a new investor, I would repeat that the best starting point is always to learn the basics and start your journey with one of the larger currencies. If you go back to coinmarketcap.com you will see that the top 5 currencies by market value are, in this order, Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin. There’s a top 20 list that doesn’t change terribly much. Below that you have what are known as the alt-coins. This is where you can find the weird and wonderful, and the coins that may well show huge volatility. Many of these Altcoins are unlikely to survive over the long term, but there will certainly be winners amongst them. Doing your homework and understanding the business case, the team, and the valuation, are all key requirements before jumping into the world of Altcoins. With the top 5–10 coins, you can be more confident that they have been validated over a longer period of time, that relatively big money has flowed into them, and that they may just give you a great return over a longer period. What is a longer period in the world of crypto will vary depending on who you ask, but this author would suggest spreading your investment between those top 5 coins and planning on holding for 3–5 years might be one of the smartest investment decisions you ever made. Come back and thank-me if you follow this advice and it works out!
Here’s where I tell you how I took my first steps. I researched a few of the larger exchanges, looking at reviews, trying to get a feel for which were considered most reliable, where fees were reasonable, and where I could easily transfer in my fiat [think GBPs in my case — but more on this later]. I decided to start with an exchange called CEX.IO. https://cex.io/. Looking at their home page, they say all the right things — the “Bitcoin Exchange you can trust”, low-commissions, global coverage, blah, blah, blah. It all sounds great, and there is no doubt they are one of the biggest. My advice can only be based on my own experience, and that experience was far from good. Creating an account was easy, and even the verification process wasn’t too much of a problem. Note that verification is a requirement for sending, or trading, above a certain limit. Nearly all exchanges work this way, with different tiers of verification, depending on the amounts you wish to send, trade or exchange. In my case, I needed to reach a high enough level of verification to be able to send around 10,000 Euros. This was the amount I had decided to make my initial investment with. The biggest problem I had with CEX.IO was their terrible level of customer service. I’ve had plenty of experience of moving money between banks, both within one country, and cross-border. With CEX.IO it took 3 weeks for them to credit my account after having sent funds from my bank. In that time, they either ignored my emails, or were incredibly slow to answer. For that reason, I will never use CEX.IO again. My funds were eventually credited, but the process was painful and stressful. While waiting for my funds to arrive, I had no way to trade, so I had to watch as the price of the currencies I wanted to buy traded up, down and back up again.
With my funds [still in EUR] sitting in my CEX.IO account, I was ready to trade. What I would say about CEX is that it’s easy for a beginner to use. Look at https://cex.io/buysell and you can see that it’s a simple, clear interface, that makes buying quite straightforward. Despite the claims about low fees, there are far cheaper places to buy Bitcoin. Another reason I won’t be using CEX again. My first trade was into Ethereum rather than Bitcoin. My logic at the time being that I felt Bitcoin had already traded up, and that perhaps Ethereum offered more growth potential. I can’t tell you if that was correct or not, as both have risen by about 30% — 40% in the last few months. At this point, I’m now in the game. My Euros have been safely turned into ETH [Ethereum] and I’m comfortable with the process. Rather than give you a long-drawn out explanation of my particular trades from Day One, I will summarise the journey since. In my case, as I improved my knowledge, and my conviction in crypto and blockchain, has increased, I have invested more, across a basket of currencies, and intend to keep investing over the long term. I have moved some funds from the stock market into crypto, and firmly believe that being partly invested in crypto will be a good decision. I can only wish I’d invested sooner, but having seen paper gains of 100% in at least one of my trades, in the space of a few weeks, I can only say that the future of crypto currency is still in it’s infancy. You most certainly haven’t missed the boat.
Since that first move into Ethereum, I have made more trades, increasing my position in Ethereum, buying Bitcoin, and making some smaller trades in IOTA, and Binance. What, why, how you might be asking? If you’ve got this far, and you own either Bitcoin, or Ethereum, it’s very likely that you will start to explore the world of Altcoins and ICO’s. My decisions on Altcoins investing were made after reading more about, and doing some very basic chart analysis. Just as with stock trading, chart analysis plays its part in crypto.
There are numerous sites that will let you play with charts to see patterns over time, and to perform basic technical analysis. If that sounds too technical, follow some YouTube videos on crypto or seek out content on basic technical indicators for crypto. For every coin you see listed on coinmarketcap.com you will be able to find some key pieces of information. As well the current live price [crypto trades 24/7] you can find the exchange where it is trades, [there may be several exchanges trading the same coin], the link to the coin or token web site, and the trading history chart. You may also find a link to a forum where enthusiasts of the coin will be asking or answering questions. To close the loop on my own choice of investments, IOTA, is a coin that has been developed to add an exchange mechanism to the Internet of Things. See https://iota.org/. It is based on a concept called Tangle, widely considered to be technically superior to the Blockchain. I bought IOTA on an exchange called BitFinex — https://www.bitfinex.com.
Here’s a quick lesson on how to get started with coins other than BTC or ETH. Usually, or almost always, buying another currency is based on using an exchange that offers liquidity [a market] between a pair of currencies. In short, it’s not as simple as saying, Marcus is buying IOTA so I will spend my 100 GBPs on IOTA too. In order to follow me into a position on IOTA you will need to transfer your fiat [GBPs etc] into another crypto-currency [ETH or BTC] then send your crypto into the exchange that supports the alt currency you wish to buy. In this case, you might buy some ETH [Ethereum] and then send your Ethereum from wherever you bought it. Once It arrives in your wallet [that’s your secure, only assigned to you, digital wallet on each exchange] you can then trade ETH into IOTA. Phew…take a breath. It does sound a little complicated, but it’s not really, and once you understand this process, you are well on the way to understanding how the entire crypto space works. My IOTA investment was only around 10% of my invested portfolio and I intend to hold longer term. i.e. perhaps 5 years, unless I see some explosive growth between now and then.
The other Altcoins I invested a small position in is called Binance — https://coinmarketcap.com/currencies/binance-coin/. I bought Binance [BNB] based on a recommendation from a channel I follow on YouTube and some further research. It has probably been the most volatile of my holdings, having moved from around 99 cents to close to $2 just after my purchase. At the current time it’s hovering around $1.50, having been as low as 80 cents approx., immediately after China started banning ICOs and regulating domestic exchanges. Binance.com is itself an exchange. The Binance coin was created as a currency that could be used to pay for exchange fees. It is based on having a limited supply, initially set to 200m coins, but with an interesting twist. The exchange plans on buying back half the supply, and destroying those tokens, in order to limit the eventual supply to 100m coins. It may sound odd, but Binance is not the only coin that works this way. Several ICOs also plan on destroying a percentage of their own currency in order to restrict supply.
My investments in ETH, IOTA and Binance were all made in a relatively short period of time, around August 2017. I had wanted a position in Bitcoin, and saw the drop to around $4100, from close to $5000 in September as a good time to buy. That didn’t seem too clever after the China and Jamie Dimon FUD [it means Fear, Uncertainty, Doubt — another crypto parlance you will quickly get used to!] saw BTC drop to the low $3000s. As I’ve noted earlier, volatility is just about the only thing guaranteed in the world of crypto, so I’m currently very happy to see BTC pushing new all-time highs on the way to $6000. My entry at $4100 now looks quite good. I have no plans to sell BTC and will be adding to my position over time.
Wrapping Up — My Top Tips for Getting Started in Crypto Investing
If you’ve read this far it probably means you have more than a passing interest in Bitcoin, and the wider world of crypto currency. As a beginner, I found it less than easy to know where to start. There’s little doubt that the process will get much easier over time. New entrants are emerging with a mission to make the transition between fiat currency and crypto much easier and more accessible. The crypto currency market is now large enough that the mainstream media is taking much more of an interest, and it’s not going to be long before investing in crypto via ETFs [Exchange Traded Funds] is likely to see ever larger chunks of money moving from other investment categories into crypto. To coin a phrase [pun intended], Fortune favours the Brave. Don’t wait. Get started now, taking small positions in any of Bitcoin, Ethereum, Ripple, Litecoin or Bitcoin Cash, and either holding for the long term, or taking the time to explore the world of Altcoins and ICOs. Just be prepared for volatility.
Top 10 tips I’ve learned from reading, watching, and participating over the last 4 months
1. Find an exchange you are happy with. One that quickly gets you verified to the tier you need. Without verification you may be limited to small trades, and you won’t be able to transfer more than around 2000 Euros/or $s at a time. Even if that’s your starting level you may want to make larger trades later so verification is a good idea. It’s quick and easy. Following my bad experience with CEX.IO I found Kraken.com, and have been much happier with them. My SWIFT transfers are usually available for trading within 24 hours.
2. Get started with the mainstream coins based on the top 10 coins by market cap listed on coinmarketcap.com. Don’t invest in alt-coins or ICO’s unless you’ve taken the time to understand their business proposition, the team behind the coin, and the valuation metrics. If you invest in either alt-coins, or ICO’s be prepared to either win-big, or lose big. The more research you do the better.
3. Follow the advice of experts who have been in crypto for a long time [5+ years] and use a method called dollar cost averaging [see http://www.investopedia.com/terms/d/dollarcostaveraging.asp] It’s a method of slowly and steadily investing over time in order to arrive at an average price. Many in crypto will buy every week, regardless of the price. If you believe the market will go up over the long-term, this is a sound strategy.
4. Learn that exchanges are based on pairs of currency. An early lesson I learned was that not all currency pairs had a market. For example, I sent GBP to my Kraken account with a plan to buy more ETH. I later found out that Kraken didn’t have liquidity for GBP/ETH so I had to bring the money back to my bank, and send EUR instead. The same applies to many of the alt-coins. Check which currency pairs your chosen exchanges support.
5. Decide on your strategy and stick to it. My strategy is to take a long-term position in the expectation that crypto-currencies are here to stay, and that there is a very strong possibility of good capital appreciation over the next few years. I don’t expect to trade very often. Your approach might be different. Maybe you have a high tolerance to risk and will focus on speculative ICO’s and alt-coins. If you like risk you might want to monitor the trending coins on marketcap.com — https://coinmarketcap.com/gainers-losers/. Wow — did YoCoin really go up 4000% in 24 hours!
6. Learn the discipline of not storing your coins on the exchange for any great length of time. While hacking incidents are rare, it is much safer to take control of your coins by storing them on your own wallet. Ideally, consider buying a hardware wallet such as the Nano Ledger S. You can find them here — https://www.ledgerwallet.com/r/afe6. If you prefer, you could also consider a software based wallet such as Exodus — https://www.exodus.io/
Read, watch, learn as much as you can. I’ve subscribed to a handful of YouTube channels and have learned a great deal by spending a few hours a week watching and listening. Some of these channels have as much entertainment value as educational value. Here are a few links I would recommend;
ByteSize Bitcoin — https://www.youtube.com/channel/UCnePINazJJpbn9FWaq_skQA. Run by a very amiable Korean American called Peter. He bought Bitcoin in 2011 for pennies and forgot about them. Also runs a great forum called TheBitcoin.Pub. He’s a little crazy but also very smart. Currently publishing a program called B90X which is 90 days of videos for beginners.
DataDash — https://www.youtube.com/channel/UCCatR7nWbYrkVXdxXb4cGXw
One of the larger channels with more than 65k subscribers. Very educational.
Crypto Bobby — https://www.youtube.com/channel/UCt_oM56Ui0BCCgi0Yc-Wh3Q
Rob from Crypto Bobby is often seen drinking beer while giving a run-down of the day’s crypto news.
Crypto Daily — https://www.youtube.com/channel/UC67AEEecqFEc92nVvcqKdhA
Another producer that goes the extra mile to add some entertainment value to crypto news.
Written by Marcus — http://ma.rcus.co.uk in October 2017