Investing into Cryptocurrencies
Get rich or die tryin’ – 50 Cent
There has been a lot of discussion about cryptocurrencies in the past few months. From the hype, the future of money, to bubble, to the biggest scam ever — the range of opinions is broad.
It just depends on who you ask and where you look. Mainstream media is watching and reporting from the sidelines. Bankers say it will fail, prices will implode, and people will lose everything. Enthusiasts say it is the future of money and it will go through the roof.
It is hard to say who is right; time will tell. My personal opinion is there is something to it that is at least worth looking into.
I believe the underlying blockchain technology is a great concept (the decentralized storage of data). The idea behind blockchain is not easy to understand, and not many can explain it in just one sentence, so I don’t even try. Just Google it and you will get a lot of explanations. I kind of like this video of the world’s economic forum:
It is undeniable that cryptocurrencies have seen amazing development over the last few years. The best, well-known cryptocurrency is Bitcoin.
It was launched based on a white paper published in November 2008. The first 50 Bitcoins were mined in January 2009, but there were no exchanges where you could trade them. Bitcoin back then and their value was negotiated by individuals on the BitcoinTalk forums. That’s also where one of the most famous Bitcoin transactions ever took place.
Laszlo Hanyecz, a developer on the BitcoinTalk forum sent 10.000 Bitcoin to someone in the UK and in return this person ordered Laszlo two pizza, probably worth $25. Laszlo wanted to try if he can get something “real” in return for the Bitcoin he mined. In the end, he got his two pizzas, and the first Bitcoin transaction was done!
Who knows where Bitcoin would be today without this transaction.
So early 2010, those 10.000 Bitcoins were worth $25, meaning a single Bitcoin was just worth $0.0025. Fast forward to October 2017, a Bitcoin is worth $5,800. Let’s just hope the guy who ordered Laszlos pizza kept them.
We all know the “if” stories. If I had invested in this or that, I would be rich now. Who would have been so mad and invest money into something you cannot see or touch, pay with and that you will never get out of an ATM?
For years, I invested in stocks that I understand. After Apple launched the iPod in 2001, I invested some spare money into Apple stocks. Sadly I did not keep them till today, but I tripled my investment at least (€1,000 became €3,000). Right now I have stocks of Facebook (bought them after I understood their business model and after they fully focused on mobile), Tesla, Apple (again) and Alphabet (Google). I like those companies; I use their products every day (except Tesla), and I understand what they do. I also hold a little bit in a Nasdaq ETF, which basically exactly replicates the development of Nasdaq. All those have developed nicely over the last year.
But I am always curious in new technologies. And if I invest money into something, I have to engage and spend some time with it.
I think I heard of Bitcoin the first time around 2013. In December 2013, I opened an account at Bitstamp (more on exchanges below) and deposited $9,6026 and bought 1.395 BTC at a valuation of $685$. But not much happened; the price decreased, and I sold at a valuation of $596. So I lost a few dollars, but nothing major.
I had no time and no cash to keep an eye on Bitcoin; instead, I invested every single euro I had into my own company. Investing in yourself and your own company is probably the best investment you can make. In mid-2015, I sold my company.
By the end of last year, I had felt like it was time again to spend some evenings getting my head around cryptocurrencies.
What had changed since 2013? How did things develop? I was surprised about how many cryptocurrencies are available these days. There are hundreds out there. The biggest ones by market capitalization are Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin. On the CoinMarketCap site, you can get a good overview of more than 1,000 cryptocurrencies!
Concentrating on probably the five biggest cryptocurrencies makes a lot of sense if you start investing. That’s what I did.
I started with Bitcoin again. But first, I needed to get some answers to a few questions. Where could I buy Bitcoin? How could I store them? How could I sell them again and get euros back in my bank account?
There are a lot of exchanges out there. I already had an account at Bitstamp. I could have used that. But I looked further and signed up for Coinbase. It is perfect for beginners. You can trade Bitcoin, Ethereum, and Litecoin on the platform. They have a great app, and their website is easy to use. And if you want to trade more, they also have a professional trading platform called GDAX.
Later, I also added accounts in Kraken and Bittrex. I am not going into all the details of what you can do with those for now.
So, if you want to get started, I think you cannot go wrong with Coinbase. Just open an account and get verified. Verification of your identity might take a few days, but that is a onetime procedure.
Once your account is verified, you are ready to go. Buying your first bitcoin is very easy. You just wire money to a bank account at Coinbase. It never took more than 24 hours to get the money in my account. Once it is there, you are ready to invest. You can easily buy and sell now.
For any purchase of Bitcoin/Ethereum or Litecoin, you pay them a fee of 1,49% on the value of your order. This is too high if you trade a lot. But you can look for alternatives later (Kraken, for example, has much lower rates, and buying on GDAX is another good option). For the start, convenience is probably more important.
Coinbase (and Bitstamp) handle everything for you. They store your investment and take care of security (make sure to set up two-factor authentification before you do your first trade). That is pretty convenient, but it is not the most secure way to store your assets.
If Coinbase (or any other exchange) gets hacked or bankrupt, your investment might be lost. If you stay with one of the big exchanges, chances are rather low that this happens, but you never know. So if you invest more, you need to consider how to store your cryptocurrencies well and safely.
There are plenty so-called wallets out there. Some store your assets on your PC, others store them on your mobile. I don’t use anything on my laptop. I have Copay on my mobile, but I don’t store anything of value it — not more than 0,1 bitcoin. Those are wallets that are always connected to the Internet, and those are called “hot wallets.”
After a lot of investigation, I decided to go with a “cold wallet.” Those are devices that store the keys to your assets (they do not store your coins; those are “in the blockchain.” The key is kind of your access code to your coins on the blockchain) offline. These external devices (most of them look like a USB stick and have a small display) are protected by an individual PIN (usually eight digits). You need both the device and the eight-digit key to access your coins. If you lose the device, you can recover it by entering 15 words that you saw on your initial set up. These words need to be stored super securely. If you lose them, you cannot recover your coins. They will be lost forever. If someone gains access to these 15 words, they can take control of your coins. So make sure not to store those words online, in the cloud, or anywhere else where someone can get hold of them easily. The most secure place is probably a bank vault, where you can write down the words on a piece of paper and lock it away.
I use a Ledger Nano Pro, and it works perfectly for my needs. I have two of them (you can configure the second one to work exactly the same as the first one with the 15 secret words). This way, I can quickly remove my coins to another safe place if I lose one of my hardware wallets.
How do you get your coins into your wallet? Your cold wallet’s software (Ledger uses a Chrome extension) generates an address to which you can send your coins from, for example, Coinbase. And if you want to sell your coins, you just send them back to any exchange.
That’s basically it. It’s not that complicated anymore.
There are a few other tools that are very useful if you are starting to spend more time with cryptocurrencies:
Tradingview — this site is great if you want to dig deeper into the science of charts, or if you just want to keep an eye on the price development of your favorite cryptos.
Cointracking — this site helps you to keep an eye on your investment and how it is developing over time. But more importantly, it helps you with regards to taxes. Yes, you’ll probably have to pay taxes if you make a profit with your coins.
Wirex — If you want to spend your Bitcoins, it is rather hard. There are not many places where you can actually pay with Bitcoins. Wirex takes the pain out of that. Just open an account and you get a virtual Visa card instantly that you can pay in Euros or Dollars by using your Bitcoins (you just send a number of Bitcoins to your Wirex wallet, and once the coins have arrived, you can use the Visa card. Of course, you can also get a physical Visa card).
If you want to know what happens in the crypto world, one of the best sites I have seen so far is Cointelegraph.
One big question that is open and that you probably have is: Is now the right time to invest? We can’t go back, that is for sure. We can only look forward. Will Bitcoin and the other coins be 10x the value they are today in a year? Or in two years? Or will they go down to zero?
I don’t know. No one knows. This is the tough thing about the future: no one can predict it. But to me, there are enough signs that interest in blockchain technology will grow. With that, I think comes a much stronger interest in cryptocurrencies. I doubt that all of the more than a thousand coins will survive. But the top five probably have a good chance. I strongly believe that, in a few years, we will look back and say: Damn, why didn’t I invest back in October of 2017!
If not, I can at least say I have tried and learned a lot of new and interesting things. Just make sure you don’t invest more than you can afford to lose!
PS: Between December 2016 and March 2017, I bought a few Bitcoin, Ethereum, and Litecoin. I haven’t touched them since then.
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