A parent’s guide to buying cryptocurrency.

I wrote this as an email to my mum, for her and her brothers who’ve expressed interest in buying some bitcoin. Please don’t take this as investment advice. It’s opinionated, but i’ll happily take suggestions to make it better. I did consider putting this up on Github and accepting PRs.

Should you buy?

Nothing in this document should be construed as investment advice. Cryptocurrencies like Bitcoin are very volatile and can down by 20–50% overnight.

One way to think about cryptocurrencies is as a very efficient mechanism for redistributing wealth from people who freak out and sell when it “dumps” to people who hold on.

Don’t invest more than you can afford to lose half of.

Is it a bubble?

Yes.. but.. Here’s the thing. There are kinds of bubbles that never pop. One of these is the Social Security system. The money you pay into the government coffers isn’t actually stored until your retirement, it’s used immediately to pay for the care and retirement of current retirees, with the promise that the next generation will pay for yours..

This is pretty close to the definition of a ponzi scheme as well, but assuming there’s always another generation, it’ll work out fine right?

Bitcoin is interesting because, unlike the tulip bulb bubble, there are no “fundamentals” to end it’s growth. There’s no date after which the bulbs will start to bud. Infact Bitcoin is “more valuable, the more valuable it is…”

When all the bitcoin in the world was worth $1MM USD, you couldn’t buy much with it. You couldn’t buy much of it without the price going up.

Now bitcoin is worth $160Billion USD (at time of writing), so it’s pretty useful as a way of storing and transmitting value.

How much should you buy?

As long as you’re prepared to sit out the “dumps” when Bitcoin drops in price 20–50% then bitcoin seems to be a fairly stable store of value (for the last few years anyway).
Don’t invest more than you can afford to lose.

What should you buy?

Bitcoin is the one with the brand awareness, as the first Cryptocurrency it’s the one everyone knows. It’s technology is looking a bit aged now. Because of this, it’s expensive to buy and sell, and can take hours during busy times for your transactions to get committed.

People have tried to fix this by “forking” bitcoin.

Basically making new bitcoins with better technology. Unfortunately they do this by giving everyone who has bitcoin, some of the “new bitcoin”.. This means everyone wants to keep the original bitcoin, so they get the “forked coins”.

Counter intuitively this is making the original more valuable.

The other big cryptocurrency is Ethereum. It’s much newer, far more capable, and long term will do much more to change the world. The technology behind Ethereum promises to completely change how companies like banks build systems. Sara’s new job is in a company that’s working with this technology.

The Ethereum blockchain has it’s own currency called “Ether”. Sara and i have decided to hold 50% Bitcoin and 50% Ether.

When should you buy?

Bitcoin goes through periods of Pump (where the price goes up 10% a day) followed by Dumps (where the price drops 20–50%) followed by Dead Cat Bounces (where it recovers 25%) followed by Slow Bleed Outs (where it gradually loses value as investors give up and sell..)

If you want to buy Bitcoin, you should try to buy it just after a Dump (buy the Dip), or during the “Slow Bleed Out” phase.

Right now (Saturday 18th of November) is the top of a Pump, so don’t buy this week. Feel free to ping us on Whatsapp and we’ll tell you whether now is a good time to buy.

Who should you buy from?

We use Coinbase in the UK. Globally they’re the best, but not the cheapest.

I believe coinbase in Aus only let you buy with a creditcard (no bank transfer).. Because there’s a risk that you might “chargeback” the transaction, coinbase have to charge a premium for this.

This makes buying with a credit card an expensive way to buy.

If you can buy from another exchange that lets you buy with a bank transfer this should be cheaper.

Where should you keep your assets?

You have 3 choices, there’s advantages and risks for each:

Keep it in an Exchange

Most people when they start out buying Crypto, keep it in the exchange. This can be very convenient, but also very risky. The main 2 risks are:

  • Your account might get hacked, and you lose all your coins.
  • The exchange might get hacked and they go out of business.

The only exchange that i’d consider leaving coins on long term is Coinbase, the rest of them are too risky.

If you do keep your coins on Coinbase, make sure you have 2FA (that’s “Two Factor Authentication”). Basically Coinbase will send you a text message before you can login or send your coins. This stops hackers getting into your account.

Self custody.. — keeping crypto on your phone.

Once you’ve bought some Bitcoin (or Ether), you can Withdraw it onto a mobile wallet. Basically you can store your cryptocurrency on your phone. In reality though, it’s not really stored on your phone, through the magic of mathematics, the coins are really stored in a 12 word secret phrase.. Who ever has that 12 word secret phrase can spend the coins.

This is why they’re called “Crypto Currencies”.. Crypto means secret, and it’s the 12 words that are the secret. One cool thing is the same 12 word secret can be used to store lots of different crypto currencies like Ether and Bitcoin.

If you decide to store your coins on your phone, you have have have have to make a paper backup of your 12 words.. Not an email to yourself.. An actual written down on paper and kept in your safe backup. This is so when your phone is stolen or breaks, you can get your coins back.

As long as you have this 12 word backup you won’t lose your coins.

A good wallet app to use on iPhone or Android is Jaxx.. That’s what Sara and i mostly use.

Get a paper wallet or hardware wallet.

There’s limits to how much crypto i’d be happy keeping in my phone. There’s always a risk that someone might get your phone and guess your pin number. For Sara and i we decided it’s ok to keep £1000 worth of coins on our phone. The rest goes in a Hardware wallet.

Hardware wallets are a special USB powered stick that is actually a small single purpose computer. Because it only runs one program, it’s unhackable. They cost about $100 and you can store millions of dollars of coins safely on them. If you decide to go big into Crypto, this is what you want.

Paper wallets are another way of creating an offline store of coins. Basically it’s a way you can send currency to a wallet that has never existed on a computer, and so can’t get stolen.

What’s the dangerzone?

Here’s a list of all the ways you can lose your coins.

  • Forgetting your password.
  • Getting scammed for your private keys.
  • Losing your private keys.
  • Having your phone lost or broken.
  • Sending your currency to the wrong address.

Forgetting your password, or 12 word passphrase is the most common way to lose everything. Because there’s no Bank or company that runs bitcoin, there’s no one you can go to to get your coins back, they’re gone forever. Luckily there’s a safe way to never forget a password.

Write it down.. A good old piece of paper in an envelope, stored in your file is a perfectly good secure way to store your password, passphrase or 12 word backup. Just make sure no one steals a look at it or they could steal your coins.

Similarly there are lots of sites on the internet now that will try to trick you into giving them your 12 word backup.. You should NEVER NEVER type your 12 word backup into any site on the internet. You should only ever use it to restore your wallet onto a new device (Say if you lost your phone.)

Lastly, Cryptocurrencies are very easy to lose if you send coins to the wrong address, Never try to type out an address, always use the QR code if there is one, or copy/paste if not. If you do copy paste an address always check the last 4 or 5 characters to make sure it’s the right address. If you can, always send a small amount before sending a larger amount. Sending $5 and checking it’s received before sending thousands is a great way to ensure you are sending to the right address.

If you’re sending to someone and don’t trust them to actually check that they’re receiving it, try sending an amount but not telling them exactly how much you sent, then ask them to tell you how much they got.

What do bitcoin addresses look like.

A bitcoin address looks something like this “1EkhamnU8x15uDpCoisYvzAD53V23L7Rzi

Because it’s hard to type something like that, they’re often formatted as a machine readable QR code like this. Don’t use this one below, it’s just one i made up as an example.

An example QR code

Never ever type an address, it’s too easy to make a mistake and lose your coins.

Ethereum addresses usually look like this: 0x5b2CcFAFaDF0B62aEe5bc0f89a92eA512ed48F88