I wrote the following simple guide to investing in Bitcoin and Cryptocurrencies for my friends.
I have a fundamental belief in the technology behind it and want to share my experience. A few warnings though:
- There are people out there who know more than me. I don’t claim to be an expert; I am just sharing my experience. Please do your research too and do not invest in anything you do not understand.
- Do not invest anything you can’t afford to lose. Please don’t gamble your future away; I don’t want to be responsible for this. I have a significant portfolio myself now, but this has been in baby steps.
- If there is anything you do not understand, please feel free to ask.
- Sometimes I will flip between calling it a coin or a cryptocurrency; it is the same thing.
- Sometimes I will flip between £ Pound and $ Dollar references, the pound is my local currency and used for understanding value for me where as the dollar is used as a market measurement.
WHAT IS A CRYPTOCURRENCY?
A cryptocurrency is a digital currency which is traded and transferred online. It isn’t one thing but shares properties with other financial instruments:
- Money: you can spend the currency with retailers who accept it
- Stocks/shares: the value of the coin can change, so people use it as an investment
- Gold: in can act as a reserve for long-term investments similar to gold
The most well-known Cryptocurrency is Bitcoin, which is the leading coin by market cap and has received the most press and coverage. Market cap is the total market value of a coin; you can see the market cap of all the leading coins on https://www.coinmarketcap.com. Bitcoin’s market cap is over $50bn now, and the entire market is over $100bn (5th August 2017).
There are hundreds of cryptocurrencies, some of which are growing in value and awareness and others which are potential scams or a waste of money. Coins which are not Bitcoin are called Altcoins; the most notable of these are Ripple, Dash, Litecoin and Ethereum.
WHY I INVEST IN CRYPTOCURRENCY?
For me it is simple. Originally I was using cryptocurrencies as a long term investment for my retirement. My intention was to create a personal fund for myself later in life. I do not have a pension worth thinking about, so this was my original goal. Over the past seven months, I have come to understand the tech, its potential and learn how to trade profitably. I have now quit my job to trade full time.
Please note though: I may have been lucky or I may be smart, only in the long term will I be able to see how this plays out.
WHY ARE CRYPTOCURRENCIES IMPORTANT?
The technology which drives cryptocurrencies is called the Blockchain, which verifies payments. It is leading a new wave of Internet application development, which I believe will ultimately form the backbone of a large proportion of the Internet over the coming years. I suggest you spend some time reading up on and understanding the blockchain.
I won’t share my actual numbers, but my portfolio is up +900% in 7 months (as of August 11th, 2017). I do not promise you the same returns; I am merely highlighting the potential. If you choose to invest in crypto, then you do this at your own risk, and if you hit the market at the wrong time, you could easily lose money. Some people made millions in 2013, and some lost millions, it all came down to how they timed the market or how lucky/unlucky or smart/stupid they were. The market could crash again at any time.
WHERE TO START
To get started I recommend two things:
- Read as much as you can to build your knowledge. Read about the history of Bitcoin, how it works, how people use it, where the market has gone up and down and so on.
- Make your first investment, just a small amount as this will help you build your knowledge quicker.
There are many ways to buy cryptocurrencies, from specific websites to exchanges. I believe the best starting point is a website called Coinbase where you can buy Bitcoin, Ethereum and Litecoin. It is one of the largest sites for these coins with hundreds of thousands of customers, it is US based and regulated. I have no affiliation with Coinbase, I just like their usability, both on the website and with the app.
You can buy on their website either using a debit/credit card or by making a bank transfer. My first initial purchases were with my card, but I moved to bank transfers as the fees are much lower.
When buying coins, and especially with Bitcoin, you will notice that your purchase is in decimal. A Bitcoin itself is relatively expensive, over $3,500 at the moment (as of 11th August 2017). If you were to purchase say $1,750 of Bitcoin, you would at today’s rate be purchasing around 0.5 of Bitcoin. Do not ever worry about this; Bitcoin operates at eight decimals places. You do not need to own a whole Bitcoin or any coin for that matter. Consider it like pence in the pound or cents in the dollar, but with more decimal places.
When you have purchased your Bitcoin or Ethereum, they are stored in something called your wallet. You have a separate wallet for each type of coin within Coinbase. They also have something called a Vault for Bitcoin, which is for long-term storage. Do not worry too much about that now.
I would suggest a simple starting point of say £100/$100. Buy a mix of Bitcoin, Ethereum and Litecoin, see how it works, see the coins in your account and get a feel for how your wallets work.
There are lots of different types of wallets: online, mobile and even paper wallets. A wallet is a string of characters which tells the blockchain how much of the coin you own. Make sure you research and understand what a wallet is.
IMPORTANT POINT: the markets are volatile, this is something you need to get used to. Big jumps and falls are possible on a daily basis. You will need to get emotionally used to this. If you make a small investment and there is a significant change in the coming days do not worry, be patient. You have only lost money when you sell and you have only made money when you buy.
I store the majority of my coins in something called a Nano S, which is like a USB stick and known as a hardware wallet. I highly recommend you buy one of these and keep your coins on one. You can read about them here:
https://www.ledgerwallet.com/products/ledger-nano-s
ADVANCED BUYING
When you are comfortable with both Bitcoin, Ethereum and Litecoin, you may wish to diversify and invest in other altcoins. My strategy is to invest in different coins based on where I believe they are at and I segment them into four tiers. You can read about my investment strategy here and see my portfolio here.
Note that some of the coins, are considered ‘scam’ coins, and there is no real high-quality development behind them. You can always read about each coin on Reddit too.
Some coins are subject to what is called a ‘pump and dump’, this where a significant group of people start investing in a coin to drive up the price and then exit while others are getting involved. Avoid pumps and dumps. Ignore them; a solid strategy can cut through these and will not affect your long term portfolio growth.
If you choose to diversify your portfolio then you may wish to use the following:
- Shapeshift.io — a website where you can swap coins for another.
- Poloniex.com — a website where you can trade coins on an exchange, be careful with Poloniex though as there are some concerns with how the exchange has managed to scale its significant growth in users. Personally, I am not worried about the liquidity of the business, I just think they are struggling with such rapid growth.
- Bittrex.com — another website where you can trade coins on an exchange.
- Liqui.io — Another website where you can trade coins, but they focus on Ethereum tokens.
IMPORTANT POINT: research the different websites and exchanges, these are just my favourites.
Consider Bitcoin as the base layer coin for the market as many of the exchanges price their altcoins against Bitcoin. Also, Bitcoin is often used as your base currency to get started with an exchange. What I mean by this is you will not be able to buy with your normal credit card, you will need to transfer in your Bitcoin and use that as the currency to purchase.
SECURITY
Security should be your highest priority. Digital coins can be hacked, so it is important you read up on and understand how and where to store them. As mentioned previously I store most of my coins on a Nano S, but this does not support all coins. Some of my coins are stored on exchanges, some in paper wallets and some on computer wallets.
If you choose to keep some stored on an exchange or a website such as Coinbase, then ensure you complete a full security setup and ALWAYS setup Two Factor Authentication. This is done using an app like Google Authenticator, where you can create a random number string each time you log in to protect yourself in case someone can get hold of your username and password.
IMPORTANT POINT: always use a solid, high-quality password, a random collection of characters, numbers and cases. NEVER use the same password for more than one website.
When setting up on your computer, I would always ensure that you have a high-quality security programme running and clean your machine before any purchase, something like Bitdefender.
I would also encourage writing down your username and passwords offline, and also keep a copy of your private key for each wallet. If you lose your access and lose your keys, then you lose your coins. Don’t worry; this will all start to make sense once you start.
STRATEGY
So my strategy. There are two types of strategy to consider:
- Holding (known as Hodling in the community)
- Trading
Trading is high risk and scary, I would not recommend this until you are highly confident with what you are doing, and even then be careful. When trading you are up against automated bots, market movements you can’t predict and large trading groups who can pump and dump coins.
I buy and hold, though I rebalance my portfolio regularly to take advantage of market movements. You can read about my strategy in more detail here.
My core strategy is simple and is as follows:
- I believe in the technology and believe it will continue to be adopted for real-world business use and as such the coins will support this driving natural supply and demand economics.
- I believe in the technology as a way of spending and transferring funds outside of banks, and thus consumer adoption will continue to grow.
- THEREFORE: I believe the entire market will continue to grow.
- I can’t predict which coins will and won’t grow, so I invest in the market as a whole and have a diverse portfolio.
- I just want to be clear on this; I have a diverse portfolio across all the major coins I believe in. If the market grows then so will my investment. I am also not at risk for a single coin failure.
As such: I recommend just buying, holding and sitting on your hands in the short term until you get a feel for the market. Do not enter something spiking and use hold as a strategy forever. You need an exit strategy too. The markets can be quite volatile at times; you can see movements of 25% with major coins in a day of big news either way and up to 100% or higher on smaller altcoins.
Do not get too emotional about big market movements. Don’t get too excited by a big move up because it can easily come down, don’t get too upset by a big move down as it can always come back. Invest in the long-term growth if you believe in the market.
My investment is in tiers which you can read about here.
WARNINGS
This is not a get rich quick scheme. While my returns have been great this year, I also had a six-week period of stagnation. Whenever you enter the market, it could be on the rise, in a drop or be stagnating. I have also had days and weeks where I have seen a significant decline in my portfolio. I can’t predict the market for when you enter. Please invest for the long term. This is much more volatile and risky than the stock market.
Spend time researching the market and the history. Take a look at what happened with the exponential growth of Bitcoin in 2013 and the following crash. I recommend reading Digital Gold, about the history of Bitcoin and key players.
Do not invest anything you can’t afford to lose. Just start with a small amount, £100, £1,000, whatever you are happy to attempt with.
Sometimes it is also easy to get sucked into a coin on the move and buy at the top; it is also just as easy to panic when a coin moves down and sell at the bottom. Be patient and be sensible.
It does not matter at what point you enter the market for a coin if you believe in the long term. Bitcoin was once expensive at $1; it was then expensive at $10; people could not believe it when it hit $100; it is close to $1,500 today, it could be $10,000 or more in the future. My only advice here is not to chase something during a parabolic upwards move because it will almost certainly come back down.
Cryptocurrencies are deflationary by nature, and this is good for any investment.
MY TOP TEN TIPS FOR NEW CRYPTO INVESTORS
- Start simple with a Coinbase account, register, set up your security and buy a small amount of Bitcoin, Ethereum and Litecoin.
- Start researching the market, follow the news on these and other coins and get a feel for what is happening.
- Spend some time understand the technology and security, so you understand what you have invested in.
- Buy a hardware wallet, such as a Nano S and transfer your coins to this, this will protect the security of your coins but also show you how coins move.
- Do not get emotional with moves up or down. When you get emotional, you may make bad decisions.
- Do not get sucked into opinions on websites, you may read about a coin dying or a coin being the next big thing. These are personal opinions, ignore them.
- Invest for the long term, buy, hold and then ignore. When something spikes consider flipping some of your investment into other coins or taking money off the table.
- Create a Reddit account and then subscribe to the sub-Reddit for each coin you are interested in. Follow the news but ignore idiots with personal opinions.
- Download the Blockfolio app and add your coins for tracking.
- Create a spreadsheet and keep good records of what you buy and sell, the current rates and what you have made. Only with good records will you know what you are doing.
DO NOT INVEST WHAT YOU CAN’T AFFORD TO LOSE. When you risk money, then you will likely make emotional decisions, and this will probably end badly. This could all blow up at any point.
If you have any questions then please get in touch, I answer every email.