Navigating the world of Cryptocurrency
A basic crash course on "how-to crypto".
This article discusses a few of the basic ways to get involved in Cryptocurrency..
Well you've heard of "cryptocurrency" and maybe something about "blockchain" but you don't really know what these things are or how they relate. This is the target demographic for this particular article, which aims to supply a snappy 'How-to Crypto*".
The first step is philosophical, understand where blockchain was born. The first iteration of a Blockchain was created by an anonymous person (or group of persons) named Satoshi Nakamoto. Blockchain was the technology Nakamoto created to solve the "double-spend" problem. This was an issue that cryptographers were trying to figure out since the days of Netscape navigator. So what is the double-spend problem?
On the internet, if I send someone a picture (an assembly of data), there is nothing stopping me from sending that picture to another person. No big deal if it's just a photo, but what if it were $20, the person that was receiving that $20 would want to make sure that I didn't send the same $20 to another person. That's the double-spend problem, and its why digital cash was such a tough walnut to crack. Satoshi Nakamoto figured out how. What resulted, was the world's first Blockchain, which is the underlying encrypted and decentralized public ledger of Bitcoin (BTC). Nakamoto enlisted the help of some fellow cryptographers and coders whom were interested in seeing if his code worked (called the cypherpunks), - Nakamota sent Hal Finney 1 BTC, and Bitcoin was born. Be sure and download Nakamoto's Whitepaper (whitepapers are a Thesis of Functionality explained for new cryptocurrencies), read it, or at least skim it, and keep it in your cryptocurrency file as a sort of rose, a symbol of how this all began...
Nakamoto's Whitepaper introduces the first Blockchain (Image Credit: reasonstobitcoin.com)
Step two, reputation check: you may have heard of Bitcoin in a dark corner or under hushed and judgmental breath over the last decade. Something about 'illicit activities' might have coupled your first recollection of this digital currency. For example, some illegal stuff was happening at this sort of 'ebay for pirates' website called Silk Road, which got shut down. But much to the general public's surprise, this was a mere blip in the valuation of Bitcoin, which continued to rise (thereby disproving many assumptions that 'illegal activities' -at least via that website- were a primary driver for the currency itself). Post Silk Road a lot of Bitcoin was confiscated and subsequently auctioned off by US Marshals, which in many ways, legitimized the ownership of Bitcoin. Generally speaking, the days of Bitcoin as a dirty word are long gone. Whereas, the days of Bitcoin emerging as a mainstream investment instrument are just around the corner.
If you're tired of the philosophy side, be glad it's done. Now the practical side. Step 3 assumes you like what you're hearing and wanna buy a little bitcoin and just hold for a while, but you don't want to comb through a dozen whitepapers trying to figure out the next best Cryptocurrency to buy. Well, Bitcoin is the leading cryptocurrency - think of it as the horse that pulls the wagon in the cryptocurrency world - and it's a great place to start. Simply download a Coinbase wallet, link it to your debit/credit card, and take a bite. If you'd like to take a bigger bite, you can link your bank account to Coinbase, and do just that. Coinbase is a San-Francisco based company with an easy UI/UX (User Interface / User Experience), which is why I use it. There are a myriad of other places you can buy cryptocurrency.
Okay, so once you have your Bitcoin in your Coinbase wallet, you can begin purchasing more, receiving and transacting with Cryptocurrencies such as Bitcoin, Ethereum and Litecoin. You'll have public "receive addresses" for all three, which you can give people to pay you in cryptocurrency. Coinbase makes it easy to send and receive Bitcoin, Ethereum, and Litecoin, these other two are newer and popular cryptocurrencies (which I will discuss in future articles). There ya go!
Coinbase was founded in San Francisco, California by Brian Armstrong and Fred Ehrsam.
But perhaps you are worried about security, that is storing your crypto in Coinbase's Wallet puts you at the mercy of Coinbase's security system. In this case you can take a large piece of the pie that you bought, or all of it and move it to a USB-Wallet called a Trezor (which stores your Bitcoin offline). It's really not as hard or overwhelming as it sounds, here is a simple step by step explanation on how to send your Bitcoin to your Trezor. Once your Bitcoin is "off the computer", be sure to keep it in a safe place. Note: the actual "wallet" is just a string of numbers, so you will want to copy them out and have a couple of back up "paper wallets" that you also hide in genius locations and which aren't susceptible to water damage, fire damage, or plumb forgetfulness... If you lose your unique wallet key, you lose your Bitcoin.
A different case scenario: what if you are strapped for cash, don't have money to invest, but are still interested in Bitcoin? Well, allow me to ask you another question, do you have any spare change in your apartment or home? Is it collecting value or depreciating value in coin jar? The answer is depreciating. Your "piggy bank" or coin jar at home, (beyond assisting with laundry), is a non-optimal way to store money. But guess what? There are now a few applications which will round your Credit/Debit card swipes up to the nearest dollar, save the spare change for you, and invest it into Bitcoin or Ethereum once a month, for a dollar. Services like Coinflash and Dust provide this ability.
Coinflash was founded by Louis Lappat. Learn more about Coinflash here.
It's a pretty sweet deal, and the idea of buying cryptocurrency (like ethereum or litecoin) for pennies today, over a decade, could very well turn into nickels, dimes, quarters, or even dollar type returns, if you get my drift. Investing your change is a great "non-committed" and "passive" way to be an ally for the bourgeoning world of cryptocurrency. Dip a toe in the water, and if you like it, it is easy to go further from there. For example you can easily set up automatic transfers so your "investing" requires no "further action". Now, with no promise that this will ever happen again, permit an example. If you had saved in your room, under your mattress, or in your sock drawer, $16.43 in spare change, once a month, over the last eleven months you would currently have $180.73 (that's pretty good). But if you had invested $16.43 once a month in Bitcoin (BTC) over the last eleven months you would have (as of BTC's price yesterday of $5,572.20) $821.44. That means if you had turned your spare change into Cryptocurrency you would have beaten your "sock drawer savings plan" by $640.71. Not bad for some spare swipes...
Pennies typically don't make much cents.
Arguably, a similar type of evolution that has occurred with Bitcoin is underfoot for Ethereum (ETH) and/or Litecoin (LTC), which CoinFlash and Dust let's you invest in as well (from your spare change rounded up to the nearest dollar amount and purchased once a month). If you want to use Coinflash like I do, this link will get you the first three months free.
Now, if you still have fear uncertainty and doubt (FUD) with respect to regulatory issues, taxation, estate planning, and larger economic trends, you can even purchase through a traditional Financial Instrument. There is now a Bitcoin Trust called GBTC - Greyscale Bitcoin Investment Trust (which charges a 40% PREMIUM - YOU READ THAT RIGHT). Currently GBTC has a corner on the mainstream Bitcoin market, but will likely deal with price drop as competitors arrive and lower their market leverage.
You may ask why would someone would ever pay a 40% premium on Bitcoin when you can buy it on Coinbase App today at cost? Good question. Well there are a couple reasons that could make it viable. Number one, this investment shows up on your traditional portfolio with your Financial Advisor in the exact same way any regular buy order shows up, which takes some of the "mystery" and "confusion" out of Bitcoin, and it also assures that you'll be "on the up and up" with respect to taxation and regulatory issues. Although this mainstream method doesn't protect you from the volatility of this new cyrptocurrency, it does enable you to purchase it with your Roth IRA and/or 401(k). As these types of financial instruments are seen in play over a course of decades, and which offer certain tax benefits, if one were quite bullish on Bitcoin it may make sense to apply this instrument in acquiring it (and to think people have said they first bought Bitcoin from a stranger at Starbucks with a bag of cash)!
Moreover, a traditional instrument would open the conversation with your financial advisor about why the premiums are so high, and for them to be aware you are looking for something better. Lastly, if you purchased GBTC with your regular money (that is not via a Roth or 401K), you would have quick and painless access to transferring high gains, if any, (in excess of 10,000) to your bank account. Here is an article that discusses this in more depth. Although with these benefits stated the best piece of advice I believe I've heard thus far in researching and discussing this new world of cryptocurrency, is to get the money you can spare into crypto, and never convert it back into fiat (unless you need to).
Bittrex.com is a popular site used for trading cryptocurrency.
As far as Step 4 on the how-to tip, maybe you are ready to trade. Well, you can sign up for a Cryptocurrency exchange like Bittrex, and then transfer your money from your Coinbase wallet to your Bittrex account, at which point you will have access to making trades in Cryptocurrency. Bittrex seems to have a good legal team, and aims not to trade or list any coins that aren't legitimate (as in may become suspended as securities by the SEC).
The world of trading cryptocurrency is a fledging, perhaps even likened to a wild-west, that is possibly not dissimilar to the Gold Rush, but while a person can make a fortune on the right buy they can also lose their shirt faster than you can say Chicken Dinner. So this new economic world requires extensive practical research and heavy due diligence. In an upcoming post I will discuss the trading world, and some high cap, mid cap, and low cap coins that I deem undervalued because of the utility they can provide. None of this article constitutes financial or legal advice, please consult your Financial Advisors and Legal Counsel before making any decisions. With that said, there seems to be no issue in the US with buying legitimized cryptocurrency, in fact the SEC, in light of the Bitcoin license created for the State of New York back in 2015, seems to be seeking ways to make it work. Lastly, there was a fire at a Landmark FED building in Manhattan just last week. Apparently it was caused by an over-active generator on top of the building. Rumors that it was due to their rapid printing of money were quickly debunked, but that didn't deflate the comedic value of the symbolism.
Frank America is a blockchain researcher. You can follow him on Twitter.
*= This is not financial advice, please consult the necessary parties.