The 3 Don’ts for new crypto-investors

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According to surveys, while 6 in 10 Americans have heard of Bitcoin only 5% of Americans actually own bitcoin. However, 20% are looking to get into bitcoin soon. If you’re in this 20%, here are some pointers to get into the right mindset:

Don’t invest more than you can lose. Everyone says this, but then you hear people of putting their life savings into bitcoin or maxing out credit cards. Hopefully you’re not in that extreme, but how much is too much to put in? If you’ve never invested in anything before before, I wouldn’t recommend getting into cryptocurrency. It’s way too volatile. I also think that investing in crypto bears a lot of similarity to investing in the stock market, so the stock market is a good place to learn. I would recommend to not put more than 5% of your net worth and probably closer to 1%. So if all you have is $1000 of savings, then I wouldn’t put more than $10-$20 into bitcoin. The other 99% you should be for emergency savings. If you have $100k, then put a thousand in bitcoin and put the rest in an index mutual fund.

You may think that bitcoin is easy money. But according to Cointracking.info’s user statistics, over 20% of cryptoinvestors have lost money, some over $3,000.

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Red is BAD

Don’t quit your day job. Even if you don’t lose money on crypto, you’re not going to become rich over night. Don’t get me wrong, I think there are still plenty of gains to be made. But if you’re just buying bitcoin, you might get a good return, but you’re probably not going to get insanely rich. With bitcoin hovering around 10k to 14k, even if it goes to 100k, that’s at most a 10x on your return. Unless you’re investing 100k, you’re not going to get to $1 million on bitcoin alone. So if you want to get a high return, you’re going to have to look into altcoins, and that involves research and investing time to sift through the thousands of cryptocoins.

Don’t chase the hottest crypto. At any given moment, there’s likely going to be some coin that’s going up 20% in an hour and you’re going to want to throw your money into some trendy coin. I looked at the data of the top 50 largest coins of each the last 10 weeks. Of those coins, I looked at the #1 performing coin of the week and looked at how they performed the week after. So from the below chart, the #1 performing coin on Nov 19 became the 45th performing coin the following week.

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n/a means that the coin dropped out of the top 50 performing coins the following week. Only once did the #1 coin repeat the following week as a top performing coin (Jan 7). People inevitably sell off pretty quickly once their coin makes a huge jump, especially if said coin is an obscure coin.

That said, some people think it’s too late to get into bitcoin, but we’ve barely scratched the surface in terms of what blockchain can do. Not only are profits to be made, but also the chance to get in early on a potentially societal-altering technology. Check out my post on how to get started. Invest wisely!

 

 

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How to diversify your crypto-investments

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I’m a big fan of mutual fund investing. It provides instant diversification so that I don’t have to analyze and research individual stocks. And it allows me to allow in broad sectors. So I can buy a technology mutual fund, so that I don’t have to choose amongst Facebook, Amazon and Netflix and worry about choosing wrong and have FOMO.

Coinmarketcap lists nearly 1,500 different cryptocoins. It can be difficult to sort through all these coins to figure out which ones you want to invest in. So similar to stocks, I find it helpful to divide them into categories, like the ones I list below. This is by no means comprehensive.

Currency – This is where the original bitcoin falls and perhaps the easiest to understand. All coins can technically be used as currency, i.e. holders of monetary value and a method of payment, but these coins are designed for this purpose alone. This is not only bitcoin but also it’s forks, Bitcoin Cash and Bitcoin Gold, as well as Litecoin. I’ll also include cross-border payments here too. This is for Ripple and Stellar Lumens which were designed to easily and quickly do currency exchange.

Platform – Ethereum, Neo, EOS, Cardano. These coins are used as a platform to design applications. The cost for building and running the applications is paid in these currencies. If you want to build a decentralized app or create smart contracts, developers will turn to these coins. Personally, I see this as the biggest opportunity for growth.

Privacy – Bitcoin is not anonymous. For more and more people, privacy is of utmost importance and coins like Monero, ZCash, Dash, Verge are all meant to be completely untraceable.

Decentralized exchanges – So the irony of trading altcoins is that many of us rely on centralized crypto exchanges to make trades and even hold our cryptocoin. It feels almost inevitable that crypto moves toward decentralized exchanges. Decentralized exchanges use coins like 0x, Kyber Networks and AirSwap.

Cloud Storage – You may already have used Dropbox, Google Drive or Microsoft OneDrive. Coins like SiaCoin, Storj, and Maidsafe are looking to create decentralize cloud storage. Some call these the Airbnb of your hard drive where you can get paid for others to use your empty hard drive space. It’s an interesting concept, but it may take a while for people to feel comfortable having their private files scattered across random other people’s computers.

Sector specific – There are also some very sector specific coins. Like Dentacoin for the dental industry and Funfair for casino gambling. I’m not surprised to see casinos pushing blockchain given the popularity of online gambling. Dentists on the other hand… My dentist’s office plays oldies songs and has a wall of paper file folders to track patient records.

 

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I promise, this won’t hurt…

So when you are deciding on whether or not to buy a certain cryptocoin, check how it compares with other coins in the same sector. Look into how this coin differentiates itself from others in the same sector. Or maybe you think the sector is so hot that you just want to buy up a slew of coins in that sector, or avoid one sector altogether.

Let me know if there are any other broad categories for cryptocoins!

 

 

How I track my crypto using CoinTracking.info

So now that you’ve bought your bitcoin, what’s the best way to track how it’s doing? I started out using Excel but once you start trading bitcoins for altcoins, it becomes a nightmare. There are a number of software and websites available, but I’ve only used cointracking.info. There is a lot of functionality which can make it a bit steeper learning curve, so I put together a simple cheat sheet below. There also is also an iOS and Android app. It’s free for up to 200 transactions uploaded. I haven’t hit the limit yet, so I might look at other tracking tools as I get near the limit.

Upload your transactions

Under the Enter Coins tab, click on Exchange Imports. Most exchanges have a way to download your transactions in csv format. Select your exchange and upload this file and you’re all set. You can manually input your transactions, but it’s a time-sucking activity.

3 Useful views

These are the 3 main views that I use:

Dashboard View

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1 – This is the value of all your coins

2 – This is how much cash, in my case US dollars, I’ve put in. So -680 means that I’ve invested $680 into my coins. If say, I cash out $100, then this will become -$580.

3 – This is simply circle 1 + circle 2, or your net profit (or loss). In the above picture, I’d be up $113.

Realized & Unrealized Gains

This is found under the Reporting tab

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Circles 4 and 5 give you the Unrealized and Realized gains/losses. Unrealized represent the change in value of the coins. Realized gains/losses is the amount you profit/loss after you’ve sold a coin. If you start trading your bitcoin for altcoins, these can be difficult to calculate on your own. Much easier to let cointracking crunch the numbers.

 Current Balance

This is also under the Reporting tab.

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This tells you the balance of your coins, as well as the most recent performance on the right hand side (similar to coinmarketcap.com).

There are a load of other functions, but you can get started using the above.

Hope that is helpful. If you have any other tracking tools to recommend, let me know in the comments.

What to do when (not if) Bitcoin crashes

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I am now a grizzled veteran of 2 bitcoin market corrections (or crashes, I don’t know what the technical difference between the two are). This most recent correction happened several days ago around Jan 16 when bitcoin dropped 32% from over $14k to mid-$9k. The correction previous to that was in mid-December when bitcoin price dropped 40% over 5 days. (It’s interesting to note that crashes of 20% in the stock market happen only once every 3.5 years and crashes of 40% happen about once every 12 years).

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The last two crashes (from coinmarketcap.com)

On the first correction, I went from $1,000 in profits to 0 and this most recent correction my profits went from $1,500 to 0. The important thing to note is that within a couple weeks after the first correction my profits climbed up from 0 to $1,500. So far the market has come back up so that I’m now about $800 back in the black. So fortunately it has bounced back quickly. Of course, that’s no guarantee either. Will bitcoin break $20,000 again? Probably. Will it happen by April because that’s when I have to pay my next rent installment? Who knows. And if you need the money to pay rent, don’t buy bitcoin. The first time bitcoin hit $1,000 in 2014 it lost 80% of its value and took 3 years to get back to that level. Of course, if you held it until now, you’d be feeling pretty good about yourself.

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(from coinmarketcap.com)

During the December market correction I definitely had thoughts of selling all my coins. This latest one, I bounced back and forth between selling my coins and wanting to buy in more at a cheap price.

Now that the market has calmed down a bit, I’ve tried to write down a few thoughts on how to best handle these market corrections. As I mentioned, there are a lot of similarities between crypto investing and stock market investing. Here’s what to keep in mind when the crypto market crashes:

1. Find out if there a specific incidence that caused the crash. Sometimes corrections come naturally and there’s nothing that had really caused it. If this is this case, I think you have less to worry about. But maybe something concrete happened, like last September when China announced a crackdown on cryptocurrencies. That caused a crash which lasted a couple weeks, but bitcoin has more than recovered from that. So when South Korea announced desires to regulate bitcoin, it caused a slight dip but I think we didn’t really have to worry too much about bitcoin’s long-term future since it already weathered China’s ban.

2. Look for bargains. Imagine in mid-December when the price of bitcoin was nearing $20,000. You probably wished that you bought in at $10,000. Well, here’s your chance! In fact, you’re this is even better than buying in the first time bitcoin was at $10,000 because now you’re buying while knowing that it’s possible for Bitcoin to break $20,000 because it already has.

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3. Before markets crash, have a strategy in place. E.g. you might not be willing to lose more than half your initial investment. Don’t feel like you need to buy & hold until your investment is worth zero. That would actually be a terrible strategy. Whenever you buy a crypto coin, have an idea of how much loss you can stomach or how much profit you want to take in. If you wait until the market crashes to put together a plan, your emotions will take over.

4. Diversify. This is a little trickier with crypto coins because the price of altcoins all tend to follow the price of bitcoin. When bitcoin goes up, most coins go up. When bitcoin goes down, most coins go down. But coins go up and down at different rates. So maybe you missed out on Ripple the first time around before it shot up 1000% while Bitcoin only went up 20%. Now might be a good time to get into Ripple now that it’s tumbled back down.3562f68

5. And finally, get ready for friends to laugh at you. This is part of the deal. When bitcoin is shooting upwards, you get to brag about how smart and forward thinking you are. When it crashes, they get to laugh at you for throwing your money away.

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Know that corrections and crashes will come. The key to getting through crashes is to act rationally and of course never invest more than you can stand to lose.

Developing the crypto-investing mindset

If you get the same web ads that I do, you’ve seen this ad of this picture of a Bill Gates look alike promising to sell the secrets of Bitcoin trading. Apparently, this guy has made so much money trading bitcoin that he has to take a side gig of selling bitcoin ads. While I won’t pay money for secret bitcoin strategies, I have signed up for some free spam bitcoin trading guides.

These “can’t-miss” day trading advice I’ve read (in numerous places) all go something like this:

  • Buy low and sell high, just like this:
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So simple! Anyone can be a crypto-millionaire.

 

Most of my investing is done with boring index funds and a few mutual funds. But I’ve found some similarities in stock market investing that carry over to cryptoinvesting.

Just like stock markets…

buy and hold is still your best bet. Investopedia says“In a typical six-month period more than 80 percent of day traders lost money, and only 1 percent of them could be called predictably profitable.” I suspect that crypto day traders likely face the same fate. Don’t try to time the market. I don’t think holding a coin long-term necessarily means holding on to it for over a year, but hold it long enough to see if the coin can survive a few drops in the market which inevitably happen.

…you need to do research and understand the fundamentals of the coins you want to invest in. Who are the teams leading the development of the coins? What partnerships do they have? What problem are they trying to solve? While some altcoins are scams, a lot of them are startups trying to use blockchain technology to solve a real world problem.

… you need to diversify. Don’t put all your money into the latest and greatest coin that went up 100% last week. Spread your investments across several coins. At the same time, don’t over-diversify into so many coins that you can’t keep track of them. Just like with stocks, you should keep tabs on the news for your coin. What are any new developments with your coin? Did China ban my coin?

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Unlike stock markets…

… cryptomarkets are open 24/7. Bitcoin doesn’t take holidays, doesn’t sleep, doesn’t break for dinner. I think this contributes to the hype because there is no downtime. What better way to start your morning than finding out that your coin went up (or down) 50% over night!

… cryptomarkets are global. If I wanted to invest in a Hong Kong stock I’d have to open an account with a stock exchange in Asia, which would likely require an address and a Hong Kong dollar bank account there. Cryptomarkets have a much lower barrier to entry (for now). So I’m trading with people all over the world. This means that I have to stay on top of the global news a lot more closely. For example, when South Korea talks about increasing bitcoin regulations, that directly can cause the bitcoin price to drop.

90% of altcoins might be at best good idea that fail anyways, or at worst scams. Imagine if every publicly listed companies were high-risk startups. You might hit the next Facebook, or you might end up with Friendster. This is a reminder to not invest more than you can afford to lose!

.. and if you haven’t noticed already, cryptomarkets are like the stock market on steroids. In the last 24 hours as I type this, the price of Bitcoin has dropped 18%. If the stock market dropped that much in once day, it would qualify as the second largest percentage drop ever. (The biggest single day percentage drop for the stock market goes to Black Monday at 22%. Here in crypto-land it’s just a regular Monday).

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Bitcoin, where the journey is just as important as the destination!

In conclusion, while crypto-markets are extremely young and unpredictable, I think it is still possible to invest (relatively) wisely and strategically. As I continue to formulate my own investment strategies, I’ll keep posting them.

The 4 big untruths about Bitcoin

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Bitcoin is going to revolutionize the way we pay for things because it’s quick, cheap, anonymous, and decentralized. Well, not quite. It turns out that this is kind-of-not-completely true. I wouldn’t say a lie, but more like … an untruth(Da da da. Cue suspenseful music..)

Quick and cheap – By design, the Bitcoin network processes 3-6 transactions per second. Sounds fast! But for reference, Visa handles 47,000 transactions per second. When the number of Bitcoin transactions worldwide was low, this wasn’t a problem. Now that Bitcoin has skyrocketed in popularity it is not uncommon for wait times of 30 to 60 minutes. Anecdotally I had a transaction that I made at 3:30pm which didn’t get confirmed until I woke up the next morning.

 

 

Also, in order for a transaction to be processed, there is a transaction fee that used as incentive and reward for the miner to process the transaction. Not including any transaction or too low a transaction fee has the risk of waiting for a long time for your transaction to be processed. Again, due to high levels of transactions and the laws of supply and demand, people have seen fees upwards of $30. So imagine waiting half an hour for your cup of coffee, and paying an extra $30 for the privilege of paying with your Bitcoin.

AnonymousAs I’ve already mentioned, Bitcoin is not truly anonymous. This is because the blockchain is open and public, so even though you don’t know which address belongs to who, anyone can see the balance of any Bitcoin address. You can also actually trace the flow of Bitcoin. For example, picture the scenario where Alice pays Bob and Bob in turn pays Charlie. You could see that funds flowed from Alice’s bitcoin wallet through Bob and onto Charlie.

Decentralized – Ok, so this one is still true, BUT it’s not 100% impossible to circumvent, and we are nearing a situation where decentralization could be compromised. There are thousands of Bitcoin computers aka miners around the world. Bitcoin needs them to be independent because they are confirming transactions essentially by voting. If over 50% of miners say a transaction is valid, then it gets confirmed You can imagine a handful of rogue miners submitting false transactions. Those transactions would get rejected by the other thousands of miners who would disregard those miners’ transactions. Phew… as long as more than 50% of the miners don’t band together to conspire to confirm false transactions.

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Beware of evil miners!

BUT due to cheap electricity costs, most Bitcoin is mined in China, an estimated two-thirds of all Bitcoin. Having such a large percentage of miners in one country puts decentralization at risk. While I can’t imagine how the Chinese government would be able to take control of all the miners inside the country, this is also the same country that has shut down access to Facebook and Google to over a billion people, so there is definitely a greater than 0% chance. And keep in mind that decentralization is what makes Bitcoin valuable. So there you go, it IS possible (albeit still very very unlikely) to destroy Bitcoin.

So where does this leave Bitcoin?

Well, Bitcoin is still the godfather of cryptocoins, and is by far the most recognized and has the most potential to hold value. But this is one of the reasons why there are hundreds of other cryptocoins out there. We are already on the second and third generation of cryptocoins, each one seeking to shore up Bitcoins weaknesses. Litecoin can process about 50 transactions per second while Ripple claims a ridculous 1500 transactions per second. Other coins like Monero and Dash focus on privacy and provide the anonymity that Bitcoin lacks.

As always, invest wisely!

 

 

 

 

How did the top ten cryptocoins fare in 2017?

While Bitcoin is the talk of the town, it wasn’t even close to being the best performing cryptocoin of 2017. Bitcoin increased almost 1400% in 2017. That means if you bought $100 of Bitcoin on Jan 1, 2017, that would be worth $1,400 today. But $100 of Ripple on Jan 1, 2017 would now be worth $47,900 today.

How did other coins fare in 2017? Well, I’m glad you asked. Looking at CoinMarketCap.com which not only has current prices of coins, but also historical prices, I looked up the top 10 largest coins based on their market capitalization on Jan 1, 2017 and checked their price increase over the span of 1 year.

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As you can see, if you had put money into any of 2017’s original top ten largest coins, you would’ve seen your investment rise significantly. The average increase in 2017 was 8,935%. Even $100 of the “worst” performing MaidSafeCoin (MAID) would have been $1,100 today. (Interestingly, Bitcoin itself grew only the 9th most). In comparison, if you had invested $100 into Boeing, which was 2017’s best performing stock of the Dow Jones, you would’ve had a paltry $189 today.

Did every altcoin kick butt in 2017? Well, you would have to go to 20th largest coin (based on Jan 1, 2017 market caps) to find a loser. The honor goes to E-dinar Coin (EDR). A $100 investment of EDR would have left you with $2 today, which is pretty much as bad as you can get. A few quick google searches about EDR reveals that it might have been a scam anyways.

Got it. So are you saying I should just invest in the current top ten largest coins and I should expect big bucks? Well, one year of data is small sample size. Let’s see what happened to the top ten largest coins in 2016.

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Still a decent amount of success, with an average increase of 121.54% in 2016. But nowhere near 2017’s average of 8,935%. Also, worthy to note that there were two losers in the top ten of 2016 in Peercoin and Nxt.

Alright, I’m on a roll now, let’s look at the top ten of 2015. Now it starts to look a little painful.

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The average return for the top ten of 2015 was -34%. So even though Bitcoin had an impressive 53% return, most of the other top coins tanked (I’m looking hard at you, PayCoin!).

A few other interesting observations:

  • Stellar was a top ten coin in 2015 and 2016, disappeared for most of 2017, but is now a top coin again in 2018.
  • I didn’t realize Ripple had been around for so long as the second largest coin. It dropped a few spots in 2017 but has recently at the end of 2017 returned as the second largest coin.

So back to what to invest in for 2018. I strongly believe in diversification. If there was a mutual fund of the top largest coins, I would probably just buy that fund instead of trying to pick individual coins. Most of my cryptocoin is already in Bitcoin, Ethereum and Litecoin. If you don’t have time to research and delve into the details of which coins to invest in, you could certainly just buy the top 10 coins of 2018 and hold them for a year.

Despite the volatility of cryptocoins, I still believe that there is potential for large increases. Maybe not as much as 2017, but still increase nonetheless.

What do you think of these trends over the past several years?

(Obligatory disclaimer: I am no financial advisor nor investment professional. Only invest what you are willing to lose.)