5 things I learned investing in Bitcoin
Cryptocurrency is awesome. At some point we all hear about that, the media is talking, our friends are talking and some important people agree that this is the future. So, in the beginning of this year I decided put myself into this and see if the future is really that awesome. I didn’t knew much about the market, or exchanges, or wallets, or trading (and I still don’t know much about this). But before we dive into my experience, let’s talk a bit more about Bitcoin.
Bitcoin is a form of digital currency, created by a person (or group) under the pseudonym Satoshi Nakamoto in the paper “Bitcoin: A Peer-to-Peer Electronic Cash System”. The platform is built on the concept of “proof of work” data that is expensive and time-intensive to produce but can be easily verified. In Bitcoin’s case, proof of work is created through the process of “mining.” To mine a bitcoin, a computer must complete a complicated algorithm, essentially going through the work of an extensive calculation in exchange for some newly minted currency.
Bitcoin derives its unique value from the fact that despite its lack of official backing or wide acceptance, it has generated an ecosystem in which many people are willing to trade and accept it. Also, because there is a cap set on the total number of bitcoins that will ever exist, the currency cannot be devalued through inflation as others can. Finally, a key benefit of Bitcoin is known as “censorship resistance,” its ability to be used for transactions that could normally be censored by other payment networks.
It sounds and looks amazing, but don’t be caught under the spell. And is not just me who says that, Mike Hearn, 5 years Bitcoin developer, not just once said this:
Bitcoin is an experiment and like all experiments, it can fail. So don’t invest what you can’t afford to lose.
This leads us to the first thing I learn:
#1 — Don’t put all your savings in Bitcoin
This is a warning. Don’t be mistaken by the recent rise of the price, Bitcoin was and is a high risk asset, and you should never store money that you cannot afford to lose.
When deciding your investment found there is a important concept: diversification. We can use this as a tool to reduce the risk of your investments without losing profitability. The principle of diversification consists in choosing assets that react differently to certain circumstances, that is assets that have a low correlation between each other.
#2 — Buy low, sell high
The price of a bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. I’m in this in almost four months and I already see the price rise into $1300 and fall in the next second to $960.
Don’t be too anxious in buy or sell your coins and make money off it. Trading is a very simple and complicated thing, you can do it without previous knowledge, but I ensure you this is not the right way of doing. If you don’t have the time or the patience to study and wait for the bests opportunities, don’t try to get into this. Of course, you will make good deals, but you will also make really bad ones too. So the balance at the end of the day will be negative until you end up learning what you should and shouldn’t do and by then you already lost money.
This thing called market knowledge is a lie and don’t risk more than you should.
#3 — Mining Bitcoin is not a viable option in 90% of the cases
Bitcoin mining has grown from a handful of early enthusiasts into a cottage industry, into a specialized industrial-level venture. The easy money was scooped out a long time ago and what remains is buried under the cryptographic equivalent of tons of hard rock.
For the past few years mining Bitcoin is only profitable if done at large scales. This means you will need to get expensive mining equipment and hopefully have access to free electricity. Also, it’s usually much more cost effective to buy Bitcoin with this money instead of using it to buy mining equipment.
So since mining at home is not viable, cloud mining seems like a good solution — you “rent” some computing power that is (supposedly) located in a remote location and just enjoy the profits without all of the hassle. Except for the hardware cost and maintenance, that takes almost half of o your daily reward. Except when you’re in face of a pyramid schemes like Bitcoin Savings and Trust which managed to steal almost $40m.
At the beginning, I confess, I’ve fall for cloud mining. I buy a minimal hashrate power, just for experimentation, it looked good and easy and now 6 months later still didn’t recover the money I invest.#4 — Information is power — Look in the right places, not Google and stuff
#4 — Information is power — Look in the right places, not Google, and stuff
This is a serious topic because information about Bitcoin is spread all over the internet and you can’t believe everything you hear. Focus in the community, the folks who are really involved with Bitcoin, participate of slack groups, listen to podcasts, read the blogs of the core developers, follow these folks on twitter. Bring yourself to this ecosystem, not just of Bitcoin, but cryptocurrency in general.
Right now, while I writing this post, Bitcoin is fallen, oh god, fallen hard, as we approach of August 1. Why? Bitcoin’s scaling dispute appears to be heading for a climax, the next couple of weeks could prove pivotal. Bitcoin Improvement Proposal 148 (“BIP 148”), is scheduled to trigger activation of Segregated Witness (SegWit). So this means I’m selling my Bitcoins? NO! Actually, depends on your perspective of the future and you only can have a perspective if you have at list a base knowledge.
#5 — There are other cryptocurrencies
Bitcoin continues to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. The currencies inspired by Bitcoin are collectively called altcoins. Over the past years, hundreds of new crypto currencies came on the market. Most of them are just copy cat or only have a few features that make them different. While some of these currencies are easier to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. Some example are: Litecoin, Ethereum, Dash.
Well, was an amazing 6 months and looking forward to seeing what August 1 reserves for us.