Investing in Bitcoin without buying Bitcoin

For what seems like the millionth time, the SEC last month once again rejected another attempt at forming a Bitcoin ETF. But for those people who want to invest in Bitcoin through a traditional brokerage like Charles Schwab or Fidelity, there is still the option of the Bitcoin Investment Trust which trades under the ticker GBTC. As of 2018, this is the only method to invest directly in bitcoin without actually buying bitcoin.

GBTC is operated by a company called Grayscale which owns 175,000 bitcoin. Each share of GBTC represents about 0.001 bitcoin. Grayscale runs a number of these investment vehicles also for Ethereum, Bitcoin Cash, XRP, Litecoin, Ethereum Classic, ZCash, and most recently ZEN. Of those, only Ethereum Classic is available for regular investors. The others are only available for “accredited investors”, aka rich people, aka not me. They also have what they call a Digital Large Cap Fund, which is looks like a mutual fund, or a basket of crypto currencies.

The weightings look like they are based off each coins market cap. This may be the closest to a crypto ETF that exists right now. I’d be curious to see if those weights are constant, or if they rebalance regularly. And if so, what kind of fees are involved when they rebalance.

So why would someone invest any of these?

Pros

With crypto exchanges getting hacked on a regular basis, investors may feel uneasy using exchanges to trade. On the other hand, you can protect yourself if you move your crypto off of an exchange on to a wallet. Some people may want to stick with their familiar online brokerage. I can certainly see the advantage of being able to track all your investments in one place.

Because you can purchase GBTC through your regular brokerage, you can buy them in your tax-savings account, like an IRA and Roth IRA. This could mean huge tax savings if bitcoin goes to the moon (assuming that people report gains on their crypto in the first place).

Cons

These investments are not approved by the SEC. Instead of being exchange traded, they are OTC traded, which stands for Over the Counter. This means less regulation and less standards. This means some possibly shady business. Although, considering how bitcoin was founded on the principle of less regulation and decentralization, it is ironic that people now want increased regulation.

Fees and premium. There is a 2% fee that Grayscale charges. Crypto exchanges have fees too, but nowhere near that high.

The price of GBTC doesn’t always correspond with Bitcoin’s price. In fact, it can be even more volatile. Maybe this point is a positive for some folks who don’t get enough of a thrill of watching bitcoin rise and drop 30% each week.

I pulled this from Yahoo Finance. You can see how GBTC has performed about 8% worse than bitcoin so far this year, but there were some instances where GBTC had outperformed bitcoin.

Overall, it doesn’t seem like a great product for more people, unless you want to own bitcoin in your IRA, which I think is a terrible idea. However, the crypto fund looks intriguing because it could allow folks to buy a diversified basket of crypto easily.

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What makes a good investor

Last year, those of us in the crypto-sphere were on top of the world. Crypto investors literally couldn’t lose. Throw a dart at the top 100 coin list, buy some of that coin, watch it rise 10x, rinse, repeat. We were geniuses and you made sure that all your friends and family knew that you were smart enough to buy into crypto. Fast forward to 2018, people ask, “weren’t you in to crypto?”. You reply, “Um, yeah, just a bit, it’s nothing really, haven’t checked it in a while.”

So reality has set in. I like reading personal finance blogs and learning about how the average person can manage their money effectively and reach financial goals. In particular, there are the FIRE blogger. FIRE stands for Financial Independence, Retire Early. By early retirement, this isn’t just retiring at 55 or 60. This is retiring by 40 or even 30. They can reach their goals because of disciplined savings and investing strategies. Their strategies are not rocket science. It simply involves savings large percentages of their incomes, upwards of 70% or more, and investing their savings into index funds. Index funds are just low-cost mutual funds which follow the overall market. Kind of the slow and steady approach.

However when these FIRE bloggers discuss the topic of bitcoin, they all discourage people from investing in bitcoin. They share the same old arguments that bitcoin is too volatile, too speculative, that it doesn’t have any inherent value, yada yada.

So, is it possible to be a good investor and still buy bitcoin? And as I alluded to in my last post, I would say yes. Now that bitcoin has come down, I think now’s the time to separate the gamblers from the investors. It’s important to remember that just because you lose money on an investment does not mean that you’re a bad investor or even that you’re decision to invest was bad. Is bitcoin speculative and volatile? Yes. Does anyone know if bitcoin is going to reach its all-time high again or tank to zero? No. But one could also say this about a lot of investments, particularly riskier investments like futures, alternatives, options, marijuana stocks. I think the qualities of a good investor include:

  1. Diversification. I’ve talked about diversifying your crypto portfolio. But this also applies to all your assets as a whole. Cryptocurrency can’t be the only thing you invest in, and it shouldn’t even be where most of your money lies. Stocks, mutual funds, bonds, CD’s, real estate, heck, even baseball cards are all other places that you should consider diversifying your money. Unfortunately, there are a lot of people whose put a majority of their money into bitcoin.
  2. Patience. Why is patience difficult? Because humans are emotional people. When we see bitcoin soaring, we want to buy. When it sinks, we want to sell. That is a surefire way to lose money, not just in bitcoin but in any investment. Investing is about the long-term. Sure, some people made a boatload of money in 2017 from the crypto surge. But for most people that was more lucky than good investing. Although you can argue that it’s better to be lucky than good.
  3. Knowledge – If whatever you invested in drops in price, think about the reasons that you bought it in the first place. If those things still hold true, then there’s no rational reason to sell. If those things don’t hold true any more, then go ahead and sell. That’s why it’s important to research and learn about coins. What’s the problem it’s trying to solve? What’s the background of the founders? Who are its competitors? What’s the technology behind it?

I have a lot to learn about investing. As I’ve read about both personal finance and bitcoin, I believe there’s an overlapping space where both circles can intersect, and where the principles of disciplined personal financial management are applied to crypto investing.

 

What goes up must come down … down… down

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I’m back on the blog after a 4 month hiatus. I had some not-so-minor damage to my home, which perhaps I’ll detail in a future post. So that served as a distraction from the implosion of bitcoin this year. I remember back when I would receive monthly investment statements during the 2008 financial crisis and each statement would be covered with negative numbers and red marks. It wasn’t long where I just stopped opening the statements. Nevertheless, I still continued to invest money knowing intellectually that that was what I was supposed to do.

And so it goes with crypto. Since the beginning of the year, this is how the top 10 currencies have faired:

# Name Symbol Week 1 Week 22 % Change
1 Bitcoin BTC $17,131.27 $6,400.32 -62.64%
2 Ripple XRP $3.19 $0.33 -89.66%
3 Ethereum ETH $1,097.65 $295.90 -73.04%
4 Bitcoin Cash BCH $2,881.03 $553.01 -80.81%
5 Cardano ADA $1.01 $0.0997 -90.12%
6 Litecoin LTC $300.10 $57.08 -80.98%
7 NEM XEM $1.67 $0.1064 -93.63%
8  Stellar XLM $0.71 $0.2242 -68.36%
9 TRON TRX $0.17 $0.0215 -87.37%
10 IOTA MIOTA $4.01 $0.4960 -87.63%

And this doesn’t even fully capture the highs at the end of 2017 when Bitcoin was at $20,000. Bitcoin has been the “best” performer with only a 62% loss. This makes the 2008 financial crisis sound like a bad day at the office.

What are lessons to be learned here? When people talk about investing in bitcoin 101, they always say “don’t invest what you can’t afford to lose”. That’s easier said than done when returns are going to the moon. The NY Times had a sad article about folks losing their life savings. So how much have I lost? Based on CoinTracking, I’m down about 70% of my initial investment. There’s no way to sugarcoat it, it’s a pretty bad investment. But taking a step back, my original investment was less than 1% of my net worth. I wouldn’t recommend putting more than 5% of one’s net worth into something as speculative as bitcoin, and probably closer to 1%. Fortunately, the other 99% of my investments has increased about 6% so far this year, so overall my year has been doing fine. So my crypto investment will serve as a good reminder to myself of the volatility that is bitcoin.

Does that mean I’m going to sell what’s left of my crypto? Maybe I should. But at this point, I’m just going to let it ride. I still have a small chunk of change so I could call it quits, but this the technology is still fascinating and having some money invested into crypto will help me continue following the news. And I still believe that the crypto markets will come back up. Maybe not to their all-time highs of Dec 2017-Jan 2018, but there is still money to be made.

 

What the fork? Get your free coins

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Last week Litecoin Cash forked from Litecoin. A fork occurs when developers want to modify the code of a coin and create a new coin. Often this is due to disagreement among developers about how a coin should operate. For example, Bitcoin cash is supposed to be a faster, cheaper version of bitcoin. Sometimes modifications are substantial, such as with Bitcoin Cash. Other times the changes are smaller, like with Litecoin Cash and Litecoin.

The great things about forks is that it’s a chance to get free coins. Developers take a snapshot of the old coin’s blockchain right before the fork takes place. Whichever wallets have the old coin at that snapshot will also be eligible to receive an amount of the new coin. For Litecoin Cash, for every Litecoin you held, you will get 10 Litecoin Cash. Similarly when Bitcoin Cash forked from Bitcoin, for every 1 bitcoin someone held, they received 1 bitcoin cash.

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First of all, to get new forked coins, you need to have some of the old coins. The developers of the new coin will issue a date in advance for when the snapshot will be taken.

You also need to have access to the private keys of the wallet where your coins are stored. For this, you will like have to make sure they are not on an exchange. Because when your coins are on an exchange, the exchange holds the private keys so you don’t know what the private keys are. I’m not the most knowledgeable in wallets, but I’ve found that paper wallets the easiest in terms of giving you access to the private key. For some software wallets, it’s not always easy or even possible to access the private keys. There are a lot of paper wallet tutorials out there, but it’s basically a piece of paper that has both your public and private key written on it. So simple.

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Who needs technology when you have paper

Once you have the private key, you have to wait for the new coin’s wallet to come out from the developers of the new coin. This can take weeks or months. Once you have the wallet, enter the private key that held your old coins into the new coin wallet. This is used to verify how many old coins you had and subsequently transfer the appropriate number of new coins to you. But before you submit your private key, be sure to transfer your old coins somewhere else. Otherwise some unscrupulous developer could use your private key to take all your old coins.

There really is no risk in claiming new coins, as long as the private key you are using to claim the new coins does not have any old coins in it. The worst case scenario is that the new coins you get are worthless and you’re back where you started.

Getting free coins can be a quick way to make money. When bitcoin cash forked on Aug 1, 2017, 1 BCH was worth about $470 while BTC was at $2,700. So for every bitcoin you held, you got an extra $470, or an immediate 17% return. Since then BCH has gone as high as $4,000.

You also have to look at the psychology of coin forking. Because people know in advance that a coin will work, there is often a sudden spike in price of a coin before the fork because everyone is buying in. Some people will immediately dump the coin after the fork which causes a drop in price. Other will even sell off the coin before the fork, anticipating a drop after the fork and foregoing getting any of the new coin. I think most people will try to sell off the new coin immediately after claiming them to pick up some free money. But perhaps the most savvy investors will see others dumping the new coin and pick up the new coin at the low price, see bitcoin cash, and hodl long-term. (This reminds me of the Princess Bride poison scene.). How you act on this depends on how successful the new coin will be. Not all new coins end up being worth much.

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Look out for the next bitcoin fork, Bitcoin Private which is scheduled to fork on Feb 28. This is going to be an anonymous version of Bitcoin. The interesting thing about this is that it is forking both bitcoin and ZClassic (ZCL). That is the most likely reason that ZCL has been surging since December. The Bitcoin Private fork will distribute the new coin to both bitcoin and ZClassic holders at a 1:1 ratio. For every 1 Bitcoin and 1 ZCL you hold, you will get 1 bitcoin private. With ZCL only costing about $150, if your goal is to load up on bitcoin private, you will want to load up on ZCL, rather than BTC which is around $10,000. If you don’t want to risk buying ZCL and you already have bitcoin lying around, just make sure your bitcoin is on a wallet where you have the private keys and you’ll at least get some bitcoin private.

Happy forking!

Intro to Ripple

With the multitude of altcoins out there, it’s hard to sift through all the info. I hope to do some coin intros, to at least process what I’ve learned about certain coins.

Time to talk about Ripple. XRP is the coin that Ripple, the company, created.

XRP is comfortably the third largest coin sandwiched between Ethereum and Bitcoin Cash. It’s currently less than half the market capitalization of Ethereum. Hard to imagine, but as recent as Jan 8, it was higher than Ethereum and sat just behind Bitcoin.

I’ve done my best to read up on Ripple. Fortunately, there is a lot of information out there about Ripple which isn’t the case for a lot of coins.

Ripple is marketed toward banks that conduct cross-border payments. I remember when I had to move money from Canada to the US, I had to open a USD account in Canada, write a check to myself to deposit in the US, wait for 3 weeks, then I finally unexpected got charged a $50 fee. Ripple would have been perfect for this. If my two banks used Ripple, they would have sent XRP from my Canadian bank to my US bank. I would have deposited CAD into my Canadian bank and it would magically become USD in my US bank. The banks would have transacted in XRP behind the scenes for me.

XRP is fast. While Bitcoin transactions can take hours to complete, Ripple transactions take seconds. This is because it does not use mining or “proof of work”. Mining involves thousands of computers solving complex math problems in order to confirm a transaction. Instead of math, Ripple uses the “consensus” method. A group of “trusted servers” decide whether or not a given transaction is confirmed. If enough of these servers agree that the transaction is valid, then the transaction is confirmed.

Ripple is cheap. A bitcoin transaction can cost upwards of 20-30 dollars. A ripple transaction costs less than a penny.

Ripple often gets criticized for not being as decentralized as bitcoin. As I mentioned above, there are these “trusted servers”. So who determines which servers are trusted? Well, Ripple (the organization) does. This really bothers bitcoin diehards who don’t trust anyone, let alone large companies. Another way that ripple is not decentralized is that Ripple (again, the organization) owns about 60% of all XRP. Because XRP is not mined, this makes people worry that Ripple could flood the market with XRP to keep the price down.

Unlike a lot of other coins, there is no question that Ripple is a legitimate company. They have have legitimate partnerships with American Express, UBS, CIBC, Santander to name a few. They also have big investors like Accenture and Google, which again makes bitcoin diehards skeptical of too much power and influence in the hands of large organizations.

I also like how their CEO, Brad Garlinghouse, and lead developer, David Schwartz, are all over the place promoting ripple. They are well spoken and confident in their product. They are all over Quora answering people’s questions. There’s a great Youtube video of David Schwartz describing how ripple works. He looks and sounds like a computer genius and you can tell that he’s annoyed that he has to try to answer questions to common folks. The comments are also pretty funny.

Is XRP worth buying? I think it’s a relatively safe investment, emphasis on relatively. When crypto crashes, XRP is certainly not immune. However, it did grow 32,000% in 2017. Can it repeat this kind of growth? Probably not. It sits around $1 today after being over $3 several weeks ago. If right now it went up 3.5x, Ripple would have the same market capitalization as Bitcoin. So while you might double or triple your investment, you’re probably not going to get rich on it, but it’s a good addition to a crypto-portfolio.

The Disciplined Investor

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Crypto has been crashing all around. Oddly enough, the safest altcoin to be in was the one that is being subpoenaed by US Trading Commission, Tether (USDT).

For the past several days, a general pattern emerged where coins would drop 20% then recover slightly up 5%, then drop another 20-ish% and so on.

Anyone can invest when the markets are surging, but only the disciplined investor can make it through the downturns. A few thoughts from the past week.

With the huge drops come huge discounts. Coins are essentially at 60 to 80% off from their all-time highs making it a good time to buy in, especially if you think that the prices will eventually go back up. But the question is when to buy in? If I buy now, maybe the prices will keep going down. People ideally want to buy at the absolute bottom, But since no one knows, the best way is to dollar cost average. If you have $500 that you want to invest, split it up into 2 or 3 buys spread over the course of several days or weeks.

Dollar cost averaging takes discipline. Inevitably, there are some spikes. When you see the prices spike, there is an urge to have to get all your money in because of FOMO. Don’t do it. There is usually a slight pull back after a large spike, so you end up buying high. This is basically just chasing trends and is the reason why day trading fails for a majority of people. Stick to your game plan. If you plan to put in $250 today and $250 next week, just wait until next week. It does feel like every time, I try to perfectly time a buy, the price immediately drops when I buy, to the point where I feel like I can actually make the market crash by just buying in.

Take the news with a grain of salt. It seems that every other article has a theory as to why the crypto markets are crashing. Facebook ad bans, India expressing concerns, stock market correction, the SEC hearing (which actually went well for crypto), Tether scams, North Korea, and of course, there’s always China. It’s probably a bit of all of the above, in addition to a possible regular market correction. Given the huge run up throughout 2017, this could all just be much ado about nothing. But it does seem like the media is just jumping on every little reason to cast doubt on crypto.

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Have an exit strategy. I still believe that buy and hold is the best way to go. But that doesn’t mean you never sell. When a coin is dropping, ask yourself, has anything changed about the fundamentals of the coin? Do I think the coin will rebound? Is there a better place to put this money? Or sometimes it’s ok to just think “No matter how great this coin is, I’m not going to lose more than 50%”. On the other side of the coin (pun intended), don’t be afraid to take profits. If you’ve doubled your initial investment, take sell a portion of your holdings that you can even use to buy back in when the market decides to dip.

Of course, this is all easier said than done. Will I buy when prices spike? Yes. Will I panic sell when prices have bottomed out? Undoubtedly. Will I hold on to coins too long? Yes Yes and Yes. But I think it all comes down to being a disciplined investor and taking the emotion out of the picture.

January Review aka Crypto crashes and burns

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January was one of the worst performing months for cryptocurrencies in a long time. At the start of the month, bitcoin was worth almost $15,000. Today it fell below $9,000. Over the past 4 years, this was the 3rd worst performing month for bitcoin.

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Keep some perspective. This 25% drop in bitcoin comes on the heels of some insane returns from the latter half of 2017. If you were fortunate enough to buy in during those times, then this January drop is only making a small dent into your profits.

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And if you’re curious about that -7.44% last September, that was due to China announcing the banning of crypto exchanges. That led to similar doom and gloom as today, but as you can see, bitcoin bounced back to have record returns the following months.

Interestingly enough if you look at the past 3 January’s, you’ll notice a definite pattern. Some people speculate that it’s related to Chinese New Year being in January and traders in Asia sell of their crypto to buy gifts for the holiday.

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So how did the other coins do in January?

Most of the top 10 coins also crashed, except for Lumens and Ethereum.

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Of the top 50 coins in January, these were the ones that were positive and there was still some good gains, especially if you held VeChain.

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Most of my profits were wiped out, but I fortunately had Eth and XLM to keep me afloat. Here’s hoping for a better February!