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Markets crash every so often, whether it’s stock, commodity, or cryptocurrency. Just recently, Amazon stock has lost 25% of its value in a span of 3 months. Nearly 40% of Facebook’s share value has been wiped out since July; Google lost 19%. Apple is down by 26% since October. By and large, 2018 has been particularly bearish, not just for cryptocurrencies, but tech stocks as well – quite the opposite of what we’ve seen last year.
“What Goes Up Must Come Down”
Market cycles are normal with any type of investment vehicle. The price crash on both cryptocurrency and stock in Q4 strongly suggests that we are indeed going through a market downturn or a bear market. In other words, the fact that both cryptocurrency and investment funds are down suggests there isn’t anything wrong with cryptocurrency but instead it’s just a natural market fluctuation.
Bitcoin, has lost around 75% of its market price from its all-time high of $19,309 in December 2017. Speculation for Bitcoin’s price is considered as one of the main reasons for the run-up resulting in a price crash after further gains became unattainable.
Making the Most from a Price Crash
Market volatile in cryptocurrency is something experienced traders and investors have all been accustomed to. Truth is, what we’re seeing right now with Bitcoin and other cryptocurrencies is just one of the many examples of a price downturn in recent years. Here are some ways we can get by in a cryptocurrency bear market. As always, please note that this is not investment advice and is written solely for informative purposes.
HODL. Hodling is another one of those internet sensations that came about because of the immediacy of Twitter. For the unaware, it is essentially a “buy and hold” strategy used by cryptocurrency users and investors. Hodling can take a lot of patience, and mental resolve, with an almost stoical attitude towards cryptocurrency investment. In other words, they’re not into crypto just for the short-term gain, but look forward to using it more as it slowly reaches worldwide adoption.
Dollar Cost Averaging (DCA). Regarded as one of the most conservative and safer approach to cryptocurrency investing, which allows investors to accumulate crypto-assets over time. Similar to hodling, DCA requires discipline, and the ability to stick to the plan regardless of price actions in the market. It usually involves a fixed amount spread over a period of weeks or months. DCA can be considered as a “contrarian” approach to investing because investors can have more during a bear market and buy less during a bull market – the opposite of what most people tend to do which is giving in to fear of missing out (FOMO) and herd mentality.
Entry and Exit Strategies. A lot of cryptocurrency traders have an exit strategy such as placing stop loss orders below their entry points in order to minimize potential losses. Here’s an example of how an entry and exit strategy can be used during a bear market. Unfortunately, there is no guarantee that investors would be able to recoup their losses since it would all depend on future price actions. We’ll be using Bitcoin in this particular scenario.
From this hypothetical situation, it is entirely possible for traders and investors to recoup or even take some profit off of the bear market. However, it’s also possible for Bitcoin markets to go much deeper, exacerbating one’s losses and making it more difficult to recover. We don’t recommend this method unless you truly understand the cryptocurrency market and are quite familiar working with exchanges. Also, please bear in mind that selling cryptocurrencies for profit is a taxable event under state laws regarding cryptocurrencies.
Educate Yourself about Cryptocurrency. Spending some time learning about this emerging technology could be one of your most valuable investments in this day and age. Cryptocurrency will continue to evolve and will be more accessible to millions of users in years to come. Read books about cryptocurrency, enroll in blockchain and cryptocurrency courses, and steer clear from get-rich-quick schemes and cryptocurrency scams. Having a better grasp of cryptocurrency and its underlying technology (blockchain) helps clear out all the noise and drama surrounding cryptocurrency and allows you to make wise investment decisions.
**Please note that this is not investment advice and should no way be treated as such. It is for informational purposes only. Before you make any trade or investment you should consult a licensed financial advisor who is familiar with your current situation.
Many cryptocurrency critics believe that blockchain transactions are far too slow to be ever applicable for mass adoption within banking and financial institutions, failing to understand blockchain and cryptocurrency technology is still in its infancy. In this post, we’re going to look at the pros and cons of each system and explore the future of payment systems.
Banks and payment systems look in some ways more efficient than blockchain transactions, but in many cases, they’re actually more involved. In fact, as soon as they’re being used to make cross-border payments and settlements, they start to reveal some flaws. They, too, can become slow, expensive, or worse – they can lock people out through no fault of their own, and for no apparent reason.
Bank-to-bank transactions through SWIFT network take three to five working days to reach its destination, which is extremely slow by cryptocurrency standards. In contrast, an average person with no connection to a bank or money transfer service can securely send and receive Bitcoin anywhere around the world with just a smartphone and a stable Internet connection in as short as ten to fifteen minutes without the risk of being censored out by the system.
Wire transfers cost somewhere between $10 to $30, plus 6% spread on foreign exchanges. In other words, if you’re sending $5,000 from Australia to Canada, you’ll pay as much as $330 on that single transaction. This doesn’t account for differences in rates from country to country (fees for sending money from US to Africa can be as high as 15%).
Bitcoin’s transaction fees peak at around $55 in December 2017 during a massive buying spree. But most of the time, sending Bitcoin to someone anywhere around the world will only cost a fraction of a dollar, to as high as $10 depending on priority and network load. And since it’s considered a borderless, global currency, users can forget about foreign exchange rates.
Companies like Abra have been using Bitcoin as a cheaper alternative to international settlement systems. Interestingly, certain banks like the ones in the Philippines allow remittances using Bitcoin, and recipients can take their pesos straight out of the ATM without an ATM card or a bank account.
Within the cryptocurrency ecosystem, on-chain and off-chain implementations can have a significant impact both on energy consumption and transaction throughputs. As a general rule, the more it shifts toward decentralization, the more challenges it needs to deal with scaling; but as more features become centralized, the more scalable it becomes. How these challenges will be overcome in the next couple of decades is anybody’s guess.
Some of the proposed on-chain solutions is the move towards proof-of-stake consensus algorithm (e.g., Ethereum Casper), and delegated proof-of-stake (e.g. EOS and Cardano). Off-chain solution include Lightning Network (e.g. Bitcoin), and side-chains. Improving the blockchain’s inner workings not only helps with efficiency, but also makes energy consumption more manageable.
Cryptocurrency might not be as nimble as people would expect from banks when it comes to local micro-transactions. However, we’ve seen some progress lately, with SegWit adoption being used in 40% of all Bitcoin transactions, enabling shorter confirmation times, significantly lower fees, and Lightning Network integration. Users can start experimenting with Lightning wallets in their beta version (Eclair, Zap, RawTX, etc.), and buy small stuff from online stores like the ones made by Blockstream specifically for that purpose.
Cryptocurrency will only get better as time goes by, and we’ve already seen some progress from greener solutions, to mining hardware, and software development. There’s no limit to the number of ways cryptocurrency can solve many of its challenges. All it takes is an open mind and a little bit of creativity.
There’s been a change in the outlook for cryptocurrency during the past few months. People seldom talk about the markets or the price of Bitcoin. Volatility has been causing a lot of uncertainty, and mainstream adoption came to a virtual standstill.
Nonetheless, the cryptocurrency space showed remarkable resilience as blockchain projects continue to expand its borders with more lateral thinking and “out-of-the-box” blockchain solutions. We’ll explore some of their use-cases and find out whether these currencies and platforms are the next big thing.
Why People Invest in These Projects
Despite the recent lull in cryptocurrency trading and mining, blockchain projects and ICOs are very much in the business for 2018. Investors and tech companies remain optimistic about the future of the cryptocurrency space amidst tightening restrictions and negativity. In fact, according to Coindesk, the amount of money raised in ICOs in the first quarter alone exceeded the total amount last year.
Most ICOs and blockchain projects didn’t end up well for a lot of investors (more than 90% failed to deliver). However, there are a few examples like Binance and EOS which turned out as good investments. Binance became one of the leading cryptocurrency exchanges with a BNB market cap of over $1 billion – the second most valuable token on Coinmarketcap. EOS, on the other hand had a successful, albeit controversial mainnet launch, and is now a full-fledged decentralized application platform second only to Ethereum.
Smart investors consider the current state of affairs as a golden opportunity to hunt for new projects with the greatest potential, particularly in their early stages when they are mostly undervalued. Investing early on has the advantage of maximum gains with the least amount of exposure. For instance, a hundred dollars’ worth of investments at ten cents per token won’t break the bank if things go south. But if it turns out to be a real investment, gains will be exponential (e.g., BNB and EOS tokens are worth a hundred times more than their initial price in 2017)
Blockchain Projects to Watch for in 2018
Finding a good investment can be a real challenge since we’re dealing with dozens of new blockchain projects and ICOs every month. If you’re lucky enough, you might be able to land on some big winners from a list of projects. But before anything else, please bear in mind that this is not investment advice, and you are solely responsible for any gains or losses. That said, here are five of the most talked-about blockchain projects in 2018.
Zilliqa (ZIL). Launched in January, the project puts a lot of work in building a highly scalable decentralized platform using a method known as “sharding.” Unlike in Bitcoin, each node will be working in parallel within a group of nodes called “shard,” verifying a subset of all the transactions occurring at the same time (also called parallel processing). Sharding works perfectly in many centralized systems (Ultima Online, Google, etc.). However, it presents an immense technical challenge when applied on a decentralized environment. Ethereum has been working hard on it as part of its on-chain scaling solution in hopes of solving the security/scalability/decentralization trilemma. Zilliqa’s entry into the whole sharding scene threatens to steal the thunder from Ethereum by becoming the first to come up with a workable solution. Some estimates it to be around January 2019. Key features include:
faster transaction throughputs (speed improves as the network grows)
employs practical Byzantine Fault Tolerance as a consensus mechanism
reduced energy consumption (mining is spaced a hundred blocks apart)
maintains a decentralized network structure (a new shard is created for every 600 nodes)
Basic Attention Token (BAT). Cutting the middleman goes beyond peer-to-peer transactions to include decentralized, blockchain-based digital advertising in the form of an open-source, ad-free browser with its own currency. Brave Browser is one of today’s hottest Internet browsing software because it allows users to block ads and trackers completely free. In fact, as many as 3 million people have already been using Brave, becoming one of Google Play’s top ten in the Android browser category. The project is moving towards the creation a decentralized advertising platform using its own currency – Basic Attention Token – to incentivize both content creation and user attention. It works in some ways like Google Ads but in a more transparent and decentralized manner. The key advantages of BAT from an investor’s point of view include:
good potential for adoption (sold out BAT worth $35 million in 30 seconds)
strong support from the community (Brave browsing experience receive a lot of positive feedback from users)
Kin (KIN). Canadian messaging app company Kik Interactive is making headway into cryptocurrency adoption with the launching of Kinecosystem. The company hopes to build a community of users and developers sharing resources, and making digital goods and services. However, unlike most blockchain startups with no real users, Kin’s integration into the Kik Messenger meant its value could potentially rise with over 300 million active users. The company is now moving towards the next phase, inviting all developers and content creators in building the ecosystem for large KIN payouts. Gains will take time, but you might want to consider its advantages, namely:
KIN’s practical use-case as a digital currency on an existing application (Kik has been in use since 2010)
user base is mostly made up of digital-natives (teens, millennials, and active mobile users)
Kik’s emphasis on anonymity
DeepBrain Chain (DBC). Blockchain companies like DeepBrain Chain sees decentralization as the future of the AI industry. Development of AI applications use up a huge amount of computing power. DeepBrain Chain works by utilizing computational resources across millions of nodes on the neural network in building AI applications which are then published onto the blockchain. Nodes that successfully deploy mirror images will receive payouts in DBC. It plans on migrating out of NEO to its own mainnet in Q4, with its own consensus algorithm (proof of importance and delegated proof of stake). The goal is to become the deep learning machine for the AI industry. Successful adoption is achievable through:
growth in people’s interest in the AI industry
reduced computational cost of AI companies through resource-sharing
secure, decentralized method of storing AI information.
Wormhole. Bitcoin Cash might soon be able to run smart contracts through its proposed protocol layer known as Wormhole. Developers plan on forking the Omni Layer to create a platform for smart contracts on top of Bitcoin Cash. Much of it is still in the works as of this moment, but news is, they’re going to issue a token named “Wormhole Cash.” Investors and crypto-enthusiasts are keeping track of its progress since it is expected to have a very high demand upon release.
The cryptocurrency space has been constantly evolving even as the noise and the hype surrounding cryptocurrency have mostly faded. Cryptocurrency is here to stay, and we’ll be seeing more projects in the near future that will bridge the gap between the average user and blockchain technology.
Facebook hit the news when it back peddled on its decision to ban cryptocurrency ads outright from the social media platform. This has now made technology companies, cryptocurrency and blockchain communities optimistic this move will set off a precedent for other advertisers to follow, particularly Google and Twitter, who earlier warned of a similar ban on cryptocurrency ads.
What are the implications of Facebook’s reversing its view on cryptocurrency, and what are we to expect about the future of blockchain technology?
What Changed After the Update?
Facebook now accepts cryptocurrency ads, but only from pre-approved advertisers who filed their cryptocurrency products and services onboarding request. ICOs and promotions associated with deceptive high-yield investment programs are still banned from advertising.
The update took effect after a six-month hiatus in cryptocurrency ads on Facebook. Apparently, the tech giant have found compelling reasons for reversing some of its decision after being dismissive on anything crypto-related. (uhhh… money of course!) There are also some rumblings Facebook plans on stepping into the cryptocurrency space with their own initial coin offering.
So far, legitimate cryptocurrency businesses like Cointelegraph.com have not been able to boost their posts a day after the ban was lifted. It’s very likely that Facebook is implementing more stringent rules and are, indeed, checking on the advertiser’s credentials with painstaking effort. We’ll learn more about the specific details of the screening process as they unfold.
Not a Complete Turnabout
Facebook didn’t go all the way, and instead chose to “loosen” some its policy on cryptocurrency advertising. A recent post from the product management director indicates an eligibility check, which takes into account licenses and pertinent documents submitted by each applicant. Facebook wants to avoid another Bitconnect incident or turn it a breeding ground for ICO scams (70% of advertised ICOs failed to materialize).
There’s no guarantee that every cryptocurrency and blockchain businesses would receive their stamp of approval. The least they can do for now is hope they don’t get screened out or send the wrong signal to the management and mistake them for ICOs or HYIPs. Facebook is open to the idea of revising this policy as they see fit and encourages everyone to give their feedback.
More KYCs and Background Checks on Advertisers
All advertisers in cryptocurrency must be “pre-approved” before posting ads on Facebook. To do so, they have to disclose information about their company such as:
Facebook, basically, performs due diligence on advertisers on behalf of its users, which is a good thing for cryptocurrency. Done right, this might actually boost investor confidence. With stricter regulation in place, Facebook hopes to open more opportunities which could further mass adoption for cryptocurrency, and significantly increase ad revenue to the company.
Meanwhile, cryptocurrency and ICO scams might have a hard time after the update, but that doesn’t necessarily mean Facebook won’t have any of those. In fact several cryptocurrency and ICO scams were still able to get through, ironically, even after the ban on cryptocurrency ads.
What Changed Their Mind?
Facebook wasn’t so clear about the reason for partially lifting the ban on crypto-related ads. People have their own views and offer some explanation as to why this is the case.
Missing Out On Revenue. At times, Facebook is more worried about optics then revenue. This isn’t necessarily a bad thing but when it comes to crypto, Facebook has constantly missed the boat. This is evident when Facebook took a massive hit in market value recently. One of the main reasons for the price dip is the lack of awareness in its underlying technology; censoring out everything crypto-related from their platform could only serve to aggravate the situation. By encouraging users to learn more about the cryptocurrency through ads and meaningful social interaction, they might as well rack up huge profits along the way.
Facebook’s Launching Its Exploratory Blockchain Group. For a tech company this huge, it’s not difficult to imagine Facebook having its own native currency in the near future. Their announcement about the launching of an exploratory blockchain group has led to some rumours about their future involvement in the cryptocurrency space. If true, then this could mean adoption on a massive scale with its two billion plus users worldwide.
Facebook’s decision to lift the ban on crypto-related ads is a statement on cryptocurrency’s future utility as a store of value, or even as a medium of exchange. There’s no denying that cryptocurrency and blockchain technology has become a major force in shaping our current financial system. They might, as well, be a part of it instead of closing doors on an opportunity which could probably give them a decisive edge along the way.
If you’d like to know more about cryptocurrency, blockchain and minning, you can pick up the Living Book HERE
Whenever you see red flags, it’s best to stay away and not get involved. How do you detect so-called red flags? Most often than not, it’s a gut feeling that something is not right or something is off. That’s all great, you might say, but what if you don’t have very good intuition. If that’s the case we’ve put together a list of signs you can watch out for.
Exaggerated claims or guaranteed payouts.Unfortunately, there’s no such thing as a “guaranteed” payout in most kinds of investments. There’s always the risk of losing. In fact, out of every 10 trades, only one or two of them turn out to be winners. Some investors do get lucky, but they account for less than 1% of the population. To put into perspective, if someone assures you of winning the lottery, you’re pretty sure the game is rigged or the person is a scammer.
Nonexistent businesses or fake photos of their premises. Investment scams are easily caught when doing a fact-check on their base of operations and business offices – you won’t find any. That alone tells you they don’t want to be found by people asking for their money when the scam blows up.
A lot of unverified facts and/or shady past:. Doing a fact-check on these people behind the scams can also raise a red flag. It’s either they don’t exist or they have a previous history of scamming other people and being involved in one of their elaborate displays of opulence and extravaganzas. Remember their names and steer clear from anything that has to do with them.
You see a lot of complaints when you Google search. Scammers are cleverer these days, using the word “scam” as one of their SEO keywords to trick people into clicking these links to know if they really are. Instead, they end up going to one of their landing pages or paid reviews and articles promoting their company or explaining why they are not a scam. This might not always be true with all companies and cryptocurrencies that has the word “scam” in search suggestions, but suffice to say, scammers are using this tactic to get people involved.
Tech-savvy investors can turn the tables on these scammers by using the same tool they trick people with – the Internet. Research and cryptocurrency education are your best allies to thrive in today’s technology-driven world.
That said, we’ll end this blog post with a cryptocurrency investment “hall of shame.” These are companies that have unfortunately scammed people of their money and disappear with the profits.
The Hall of Shame
Gladiacoin – founded in November 26, 2016, this ponzi scheme promised to double Bitcoin in 90 days, which include 2.2% payout dividend. It folded on June 2017 with investors losing millions of dollars. Gladiacoin can no longer be reached in their now-defunct website https://www.gladiacoin.com/. Their coin was never listed in Coinmarketcap.
Onecoin – a ponzi scheme which promoted a cryptocurrency with a “private blockchain” and run by people who have been previously involved in these shady investment scams. Authorities began shutting down Onecoin’s offshore offices in 2017 and have people arrested and filed appropriate charges to perpetrators, including the CEO.
Bitconnect – generally regarded as a pump-and-dump and ponzi scheme for its high-yield investment program. It reached an all-time high when it was listed as one of the top 20 cryptocurrencies in Coinmarketcap at $460 apiece, and folded in January 2018 at only $5.92. Thousands have lost their savings, retirements, and are now in huge debts for buying cryptocurrencies which is now a little more (or less) than a dollar. It is now ranked 554 in Coinmarketcap at $0.9 apiece.
Cryptocurrency can have a lot of potential as an investment if you have an informed and disciplined approach. You could invest in the long term, or as a one-time goal. Whatever the reason for investing in cryptocurrency, you should always have the reason why you’re investment top of mind. Maybe it’s a holiday tour in Europe, a luxury cruise in the Caribbean, or perhaps that amazing sports car, or home theatre system you’ve always wanted.
Perhaps you want to start out your own business when you retire, or create multiple streams of income with your cryptocurrency investments. Whatever your reason why is, cryptocurrency seems to be a very promising investment proposition. Your “why” will help you stay focused and committed to the task at hand. If you stay connected to your goals, you’re less likely sell because of panic or over-extend yourself.
The Internet has no shortage of success stories about Bitcoin, from the legendary pizza shop in UK selling two boxes of pizza for 10,000 BTC, the college dropout from Brooklyn who made the first dedicated ASIC miner, the teenage-school-boy-turned-Bitcoin investor from Idaho, to the Bitcoin millionaires and entrepreneurs the likes of Jered Kenna, and the Winklevoss Twins. But don’t pay attention to the hype. You’re not likely to become an overnight success story. You’ll have to do your homework and make smart decisions, otherwise you’ll run the risk of losing out big.
It’s Never Too Late
When talking about investing in cryptocurrencies at this point in time, people often speak of “missing the boat.”
“Bitcoin went insanely high in 2017, and I missed the boat.”
“If only I have bought Bitcoin and Ethereum back when they’re still pretty cheap. Now, it’s too late.”
Truth is, cryptocurrency is a relatively young industry. It entered the scene in 2009 and it’s continuously growing and improving for the last nine years. Sir Richard Branson is only one among many influencers who believe there might be currencies in the future that would match or even surpass Bitcoin as a digital asset and as a medium of exchange.
Just think back to the beginnings of Myspace. A lot of investors thought it was too late to invest in or create a new social media because Myspace was dominating the internet. Now Facebook is dominating and looks to rain supreme in the foreseeable future.
Vitalik Buterin proved cryptocurrency can be more than just a medium of exchange when he created the first platform and currency with a programmable blockchain – Ethereum.
Soon, Bitcoin will be more accessible to millions of everyday users, commercial establishments, and businesses worldwide through a second layer, known as the Lightning Network, which could render transaction speeds ten times or even a hundred times faster.
These are cryptocurrency’s first wobbly steps in creating a better way to transact and store value in a completely decentralized financial system.
In comparison, many of our industries today are decades-old and have already produced some of the world’s technological breakthroughs; things we often take for granted like the cars we drive at work, the phones we take our pictures with, or the Internet we use every single day.
These industries just keep getting better with each passing year. The automotive industry didn’t stop with Ford’s “Model T” or Mercedes-Benz’s “Motorwagen”; today we have hybrid, electronic and self-driving prototypes by Tesla and Google.
The Internet didn’t stop with email, TCP/IP and packet-switching; now, there’s Worldwide Web, HTTPS, cloud computing, streaming media, free Internet calls, video conferencing, mobile apps, and a host of other features people thought were not possible with the Internet (back then, it took several hours to upload/download a single jpeg image).
And let’s not forget our mobile phones which started out as clunky, metal-and-plastic bricks with large keypads and small monochrome backlit screens. Today, we have Apple and Android Phones which crosses between mobiles phones and mini-computers with HD cameras, internet and browsing capability.
People still invest in these technologies despite some of them being half a centuries-old. Cryptocurrency isn’t even half as old as many of our industries. Much of our cryptocurrency and blockchain space is uncharted territory, waiting to be explored, and harnessed to its full potential.
So, is it too late to invest in cryptocurrencies? Of course, not. In fact, we’re just getting started.
Knowing Your Investment Goal
Generally, we want to invest our discretionary income (disposable income minus living expenses) into something we want to enjoy much later. It’s the kind of money we can part with or set aside, and won’t have any hard feelings if everything goes south.
We don’t want to use money we pay our bills and mortgages, or buy groceries with. Or, heaven forbid, owe huge sums of money from banks at interest just to buy cryptocurrencies and ICOs. More often than not, this attitude of chasing the hype and FOMO will get people crushed.
People often invest in cryptocurrencies as a retirement option. This is not a good idea. Cryptocurrencies are highly volatile and should not be relied upon to retire with. A safe and conservative approach is to set a small amount of discretionary income, say fifty to a hundred dollars a month, (depending on your income) to buy Bitcoin and other large-cap currencies – also known as dollar-cost averaging. Investors stick with that amount regardless of how often or how much the markets turn. It’s like a savings account, in a way, but in cryptocurrency.
Some people don’t wait for retirement and want to get out as soon as they have the opportunity. They want to store up some money as an employee so they can start out on their own. Maybe a small business, an S-corp, or an LLC. And what better way to grow capital than to invest?
Cryptocurrency exchanges are a good place to start when studying markets that would potentially grow in value. You can take short courses in financial literacy on how to invest in stocks and apply those concepts in cryptocurrencies such as asset allocation and portfolio management. Or, you can take it to the next level by learning some codes and understanding how cryptocurrencies work under the hood.
Some investors become full-time cryptocurrency traders and investors over time. These are usually angel investors, and venture capitalists – people who make risky financial decisions in order to make a lot of money. Returns can vary widely from zero to ten times the initial capital. Investment options include ICOs and new or emerging cryptocurrencies. The goal is to maximize returns while minimizing risk exposure.
Other reasons for investing in cryptocurrencies is simply to gain first-hand experience. Few people were lucky enough to have hit the jackpot, or bought in just before the big breakout out of sheer luck. However, these are just rare occurrences, and we need to be aware of “survivor bias” when it comes to personal stories and testimonials about people who got rich trading or investing in cryptocurrencies. Most people hear about 1% of the population who actually made it, but forget the 99% who failed.
A Smart Way to Invest
Your investment capital will depend on your age, income, priorities, and investment goals. Tax laws can also impact your ROI. You can check the legal status of cryptocurrency in your country from Coin.dance’s site (https://coin.dance/poli), or seek competent legal advice about the possible implications of investing in cryptocurrencies.
That said, here’s a sample of how you might want to structure your cryptocurrency investment. Let’s look at it from the perspective of a middle-class employee earning a net income of $3,500 a month.
The first step is to subtract the living expenses from the net income. What you’re left with is your discretionary income which you can freely use to plan for your future or hedge against financial losses. (Note: Do not invest all of your discretionary income. You should put it aside for entertainment, holidays, emergencies, and donations to good causes.)
$ 3,500.00 net/disposable income (after-tax)
2,500.00 living expenses
= $ 1,000.00 discretionary income
Another option is to have multiple income streams, or side jobs aside from your typical 9-5. From here we’ll set up an account and possibly allocate our resources, thus:
Here is a good way to look at our income. The first two (emergency and freedom/savings) are considered a necessity because of the fact that life is unpredictable. Anything can happen, so it’s always best to prepare for the unexpected. Remember Murphy’s Law: “If something can go wrong, it probably will.”
Your emergency and freedom account act as your “safety net” against life’s unpleasant surprises. An emergency account is used to cover your expenses like medical bills, repairs, etc. Others may spend them on health, car, and home insurances, which is also a viable option.
Freedom/savings account will cover your living expenses for six to twelve months in case you get laid off or choose to leave the company (some companies may offer a severance package, but not always).
The last two (capital investment and trading/speculating) is where you make crucial financial decisions that could potentially change your life or move yourself upward in today’s economy. You can have a choice between entrepreneurship and becoming a full-time trader/investor.
Being an entrepreneur gives you greater control over your finances. In the context of a cryptocurrency or blockchain-based business, you could run a cloud mining rental service, pool mining website, or cryptocurrency exchange. Once your company gains traction, you can start growing your business by raising capital through crowd-sales (check the legal status of ICOs in your country). Some start-ups may go with crowd-sales straightaway.
You can become a full-time cryptocurrency trader and invest heavily in cryptocurrencies where you’re constantly on the lookout for trading and investing opportunities, such as breakouts, funding blockchain start-ups, and ICOs. Beginners are often discouraged from getting involved in cryptocurrency trading and investing particularly those with very little or no background in dealing with financial markets. We don’t recommend this option unless you have an entire backup plan. Full-time cryptocurrency traders should have millions of dollars in fiat currency just in case they lose everything.
Some look at investing as the polar opposite of entrepreneurship, requiring a different strategy and mental disposition. For one thing, investing is market-dependent and may not necessarily have a steady cash flow, whereas in an entrepreneurship, cash flow is the difference between growth and going out of business.
Finally, the last 10% of your investment might be used for trading in a speculative market, particularly new, or small to medium cap currencies, tokens, and altcoins. Bitcoin and Ethereum are worth less than a dollar at launch; today, they’re valued by the hundreds and thousands. Although we can’t compare them with new, emerging currencies, we can’t discount the possibility of such a currency taking the same path in the near future (think EOS, Monero, and Dash)
Revenue agencies around the world are scrambling to figure out a way to tax cryptocurrency as governments are beginning to realize they are losing out on a vast source of revenue.
We’re now seeing how cryptocurrency would fit into our economy, and more people from institutions and the mainstream society starting to acknowledge them as a store of value and as a medium of exchange. Consequently, this would also mean tax obligations for miners, buyers, traders, merchants, and everyday users.
Here are things we need to know to prepare ourselves for the tax season. We’ll cover some important issues, fundamentals of taxation and how they would apply to our cryptocurrencies. But before we start, here at CryptMin and CryptEdu, we encourage you to always pay your taxes and report your capital gains to the government. It’s never fun having the taxman after you.
Tax Laws Are after It
Despite what people tell us in social media and cryptocurrency websites about privacy and anonymity, dealing with cryptocurrencies can leave behind footprints for the CRA or the IRS. Blockchain transactions are public records – everybody sees it, including your taxman.
The truth is blockchain transactions are more transparent than our traditional banking system. The key difference is the use of public keys instead of real names, which makes every transaction pseudonymous. However, since no two public keys are alike, once it gets tied to a real person’s name or company, authorities can easily track every transaction that was ever made with that public key. (Note: some “underground” cryptocurrencies encrypt their true addresses on the blockchain ledgers like Monero and Zcash, and thus more difficult to track.)
Some places where the CRA or the IRS can get a hold of your identity are cryptocurrency exchanges, online wallets, cloud mining sites, mining pools, and the social media. Although gateways are largely unregulated these days, it’s only a matter of time before governments and regulators will require each one of them to disclose information they have about their customers upon request.
Coinbase, for instance, are required to conduct KYC on their customers before they can start buying, selling, or trading on GDAX. Same is true with cloud mining sites when accepting payments from customers using their credit card or bank account. Genesis Mining does so whenever customers buy their mining contracts. They’ll have their customers’ public keys as well for payouts.
From the governments’ perspective, these are all treasure troves when looking for information about people who owes them money. Depending on the exchange, cloud mining company or the country they’re in, government agencies can have access to these customer data.
They could also set their sights on social media, particularly content creators in YouTube, Facebook, or Twitter who display their public keys for accepting donations, or even online stores who take cryptocurrency as payment for goods and services. And while customers and everyday users might get away with it by putting them in cold storage (mobile, hardware, or paper wallet), sooner or later, regulators will find a way to catch up on them as well.
Conflicting Views on Cryptocurrency
The IRA and CRA treats cryptocurrencies just like any asset. Their value may fluctuate from time to time, but until they go out and are sold in exchanges for fiat, holding these currencies is not a taxable event. A Capital gain tax will apply when selling cryptocurrencies in exchanges. However, determining the exact price on the date of acquisition is necessary to properly assess how much capital gain the seller is obliged to pay taxes for during the re-sell.
As you might expect, getting the numbers right on a person’s capital gain is going to take a lot of work and making sure every transaction in cryptocurrency exchanges are properly documented. It’s possible, for instance, that Coinbase would be asked to disclose their records for taxing purposes on each buy and sell and the dollar valuation on each individual transaction to see how much capital gain a customer has.
When using it to buy goods and services, or trading them with other cryptocurrencies, bartering laws will apply. This is where it gets a little tricky when you consider capital gains on your cryptocurrency for every purchase. For instance, you bought a thousand dollars’ worth of Bitcoin and decided to buy furniture with it when the value goes up by 50%. The next month, you buy your furniture with Bitcoin which is currently priced at 1,500 USD. According to law, you’ll also have to pay for the gain tax as it is with bartering goods. In essence, you’re paying tax twice for buying furniture with Bitcoin – gain tax on Bitcoin and GST/HST on the furniture. And since you’re exchanging your digital asset on a short-term gain, it will be taxed just like a regular income which is the highest for capital gain tax.
Businesses will have to deal with the same problem when accepting cryptocurrency payments. If clients chose to pay with Bitcoin, which by definition is property/digital asset, they’ll have to report it as income (see the confusion?). This carries a lot of risk for business owners due to the volatility of cryptocurrencies. They might end up paying taxes on the sale despite the fact that the value of cryptocurrencies have already gone down.
Tax Implications for Miners, Traders, and Buyers
Regulators are catching up on cryptocurrencies fast. There will probably come a time when every cloud mining company, exchange, and wallet service in every country will be required to keep records about their customers in order to run their business. In this case, we need to prepare ourselves to avoid getting burned when the tax bill arrives.
Cloud mining companies can take advantage of tax deductions by writing off electrical and maintenance expenses in running their cloud mining facilities. This is a lot better than dodging regulations and taking a lot of risk of being caught and paying huge penalties or even losing the whole business. Technically speaking, cloud mining companies don’t pay out their customers – it’s a rental service. Whatever payout their customer receives depends on the mining pools they choose to join in and the currencies they want to mine with the hash power they bought from the cloud mining service. They might also take a cut from the mining rewards as a service charge on top of the rental fee or contract price (all depends on the cloud mining company). This is considered a taxable event, and laws regarding cryptocurrency transactions will apply.
Mining pools also take their share of the mining rewards as their service fee, usually around 1-4%, and hence, it is a taxable event according to laws on bartering, i.e. cryptocurrency for mining service. Exchanges and traders will be hit the hardest, especially day traders and swing traders. Under existing tax laws, short-term capital gains (assets acquired below one year) will be taxed as regular income. This applies, not only when cashing out and locking in their profits with fiat, but when buying other cryptocurrencies with it, e.g. buying Bitcoin with Ethereum.
Everyday users might also have to deal with this when buying or using cryptocurrencies for everyday transactions. Some complications may arise for buyers and business owners as mentioned earlier in this article.
Tax laws regarding cryptocurrencies still needs a lot of refinement; implementing it at its current state can be problematic and cause a lot of confusion. Sooner or later, our governments might come up with better tax laws regarding cryptocurrencies and begin the process of pursuing anyone who gets their hands on them. When the time arrives, we would have already prepared for such eventuality.
Interested in mining? Learn the basics of cryptocurrency mining at CryptEdu.com or start hassle-free cloud mining at Cryptmin.com today.
Cryptocurrency gives people a glimpse of what our financial system could look like in the next five to ten years. From its infancy, we’ve already seen the potential of cryptocurrencies like Bitcoin and Ethereum to revolutionize traditional banking through a system of payment which doesn’t require intermediaries.
This method is proving itself as a fast, reliable, and cost-effective means of communicating value, touted by enthusiasts as the Internet of money, far better than our centuries-old banking system with its painfully slow and costly transactions. However, in recent years, we’re starting to see some of its growing pains as it goes through the slow process of mass adoption.
Developers are now looking into these problems with a renewed sense of urgency as cryptocurrencies gear towards mainstream integration. It is expected for the next couple of years to be the most turbulent in all of cryptocurrency history, and one which will decide the fate of our status quo.
In Search of the Missing Piece
Blockchain protocols lend to the blockchain’s immutability and varying degrees of decentralization. Like any software, they are far from being perfect. There are over a thousand cryptocurrencies in circulation today, and all of them will have to somehow deal with their own issues one way or the other.
Bitcoin has had a number of BIPs to solve this lingering problem of slow confirmations. By mid-2017, they managed to increase the block’s capacity by almost double without causing compatibility issues with old, existing wallets. With the adoption of Segwit, Bitcoin accomplished two things at once: fixed a software glitch (transaction malleability), and reduced confirmation times.
However, such measure won’t guarantee a long-term, let alone permanent solution, to Bitcoin’s transaction woes. At the time of writing, there are over **50,000 pending transactions in Bitcoin’s blockchain mempool, waiting to be confirmed, and they’re constantly piling up at a rate of 2-3 unconfirmed transactions per second. Developers have been working round the clock testing and finalizing Lightning Network for Bitcoin, the success of which will enable Bitcoin to break the sound barrier and bring this whole debate of scalability into a close.
(**That number went down to <2,000 unconfirmed transactions, probably due to increased Segwit adoption by wallet users and providers, or to some early adopters of the Lightning Network.)
Ethereum has had its own share of problems and fixes, most notably the Decentralized Autonomous Organization (DAO) attack of June 2016 and the hard fork that ensued to prevent further loss of funds. Smart contracts is one of Ethereum’s major selling point which enabled contracting parties to make an agreement that executes after satisfying certain conditions, or rolls back if it hasn’t.
Ethereum’s biggest hurdle is the ominous “difficulty bomb” built into the system which makes it nearly impossible to mine without incurring losses to miners after a certain point in time. Hence, the only solution is to migrate from a “proof of work” to a “proof of stake” method of confirming transactions. With the release of the Casper update for Ethereum, they hope to achieve exponential rate of confirmations and scalability in preparation for worldwide adoption.
The Proof of Work Concept
Proof of work had its roots in the early 90s to deter users from launching denial of service (DoS) attacks performed by spamming websites and establishments with superfluous requests. Interestingly, proof of work was also coined from the standpoint of giving value to a currency like the shell money used by inhabitants of the Solomon Islands.
Proof of work underpins major currencies such as Bitcoin, Etherium, Bitcoin Cash, and Litecoin in confirming transactions on a blockchain, which can only be achieved through mining. Proof of work helps create a system which is resistant to fraud and hacking since there are no viable means to circumvent the process except by brute-forcing through an inordinate number of trial-and-error.
In proof of work, only truth matters, in this case, the correct nonce and the corresponding hash which would allow transactions to be confirmed. In return, miners are rewarded for their efforts and new units of currencies are created and added into their accounts (hence the idea of mining).
Such method opens up the possibility of individuals with the most powerful mining hardware taking control, and in effect centralizing all the hash power to an elite few. Thus, a self-regulating mechanism was put in place to assure that only a specific number of confirmations can be done at a given time (difficulty increases/decreases with the network’s hashing capability).
Bitcoin also has several BIPs to increase network efficiency, such as the inclusion of mining fees. With this, they hope to alleviate congestion by putting a premium on higher transaction fees and eliminating the possibility of saboteurs spamming the network with high volumes of worthless micro-transactions.
As it turns out, some solutions can also have unforeseen consequences down the line, namely, difficulties with scaling. The first cryptocurrency, Bitcoin, was not really intended for everyday use but only as an alternative means of exchanging value outside the realm of government regulations. Scaling would not have been an issue back then. However, much has changed, and more countries and businesses are looking towards cryptocurrency as the way forward to their old and antiquated monetary system.
Proof of Stake and Its Potential Risks
Proof of stake adds another twist to the way transactions are confirmed. Similar to mining, participants validate and confirm transactions which are added on top of the blockchain. However, instead of using hash power, they would stake their currencies and lock them up for each round of staking. It also requires continuous uptime in order to be chosen by the algorithm, and, by being chosen, confirm transactions, and receive their rewards.
There are many nuances on how proof of stake are implemented in various cryptocurrencies based on how they try to mitigate the risks associated with staking, e.g. monopolozing, inflation rates, and network stability. Most prominent among cryptocurrencies which use proof of stake includes Peercoin, Blackcoin, Nextcoin, Bitcoin Plus, Cardano (premined) and soon to be Ethereum Casper update.
Staking is touted by several crypto-enthusiasts as the only road to scalability and worldwide adoption because it solves a lot of issues with associated with mining which uses proof of work such as power consumption and confirmation times. Although plausible with proof of stake being cost-effective and faster than proof of work, it could quickly turn into a can of worms if not implemented correctly.
Proof of stake tend to favour “stakers” (the equivalent of “miners” using proof of work) with huge quantities of currencies in reserve as they could handily beat small-time stakers with the increasing level of difficulty. Stakers can do the same thing as did every miner, creating a pool of stakers or the so-called master nodes to consolidate all their assets and have a fighting (or “winning”) chance of being randomly selected by the algorithm to confirm transactions.
Some proof of stake implementation prevents monopoly by capping the amount of currency that could be staked, “coin age,” and ticket waiting times. Putting a limit to staked currencies is intended to level the playing field for everybody and encourage more people to participate in staking. On the other hand, coin age and ticket waiting times regulate the frequency participants can stake, Peercoin, for instance, is set to a minimum of 30 days and a maximum of 90 days.
Inflation and network stability are some of the common issues with a proof of stake protocol. Developers are careful enough not to overdo one aspect over the other and seal off potential gaps and loopholes that can cause instability or discourage people from participating. Most proof of stake protocols and algorithms are still in the process of development and rigorous testing. The much anticipated Casper update for Ethereum could be released anytime this year, effectively moving to proof of stake through a hard fork.
Ripple and the Consensus Protocol
Consensus seems to be the antithesis of a decentralized method of confirming transactions which rely on proof of work or proof of stake. At its core, it is a trust-based method whereby transactions or any form of agreement between two parties are validated and confirmed by way of consensus. The result is almost instantaneous confirmations, averaging at a rate of 1500 transactions per second.
Ripple breaks the mould by being the first to implement the cryptocurrency version of the “hawala” system, allowing it to deliver lightning fast transactions outputs consistently at only fractions of a penny. However, there is an obvious downside with this kind of method. Despite having the trappings of decentralization as one of the cryptocurrencies listed in exchanges, it is, by all accounts, a centralized currency backed by tech giants and financial institutions.
Unlike mining and staking, there are no incentives as a “validator,” except that fact you earn more trust and contribute to the stability of the whole network. Validators are usually large entities like banks and commercial establishments which might benefit from it through cross-border transactions. However, since all the currencies that will ever exist are already pre-mined, the currency’s value and every asset tied to it are at the mercy of whoever holds the majority of it (hint: 55% is held in escrow by Ripple).
The Lightning Network and the New Bitcoin
The proposed Lightning Network solution for Bitcoin, Ethereum’s plan on moving to proof of stake, and Ripple’s meteoric rise towards the end of 2017 sends a strong signal to the cryptocurrency community and to the world that a major change in the current financial system is forthcoming.
Lightning Network, if successful, will usher the golden age of Bitcoin and cryptocurrencies in general. In so doing, we might also have a slightly different view about the new Bitcoin, particularly with its strong stance for decentralization. We might have to welcome the possibility of having off-chain payment channels and smart contracts to communicate with the blockchain instead of having every wallet users transmit countless numbers of micro-transactions to the blockchain every single time. The result would be a dramatic increase in transaction outputs, and the ability to scale with a fast-growing number of users.
Lightning Network could be the missing piece of the puzzle, the final solution to Bitcoin’s scalability issues, and the last hurdle towards worldwide adoption. But it is, by no means, the only way. If, for some reason, Lightning Network failed to materialize, it would not be the end of the road for Bitcoin. It would just be the beginning of a long journey towards perfection and worldwide adoption.
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The growing optimism of financial institutions with blockchain technology has spurred a lot of interest within the cryptocurrency community. They’re now exploring the possibility of using cryptocurrency as a global currency, much like its real-world counterpart, but without the need for governmental intermediaries.
This, however, requires nothing short of a compromise since the technology used in cryptocurrencies, which were meant to cut off intermediaries, will now be used in the interest of banks and financial institutions they initially sought to eliminate.
Financial Institutions on the Use Blockchain Technology
The challenge with decentralized currency is the way which central banks create money. Cryptocurrency protocols which gave birth to Bitcoin, Ethereum, and Litecoin uses “proof of work”, hashpower/electricity to mine currencies until they reach a fixed limit. And, unlike central banks, anyone with adequate resource and hashpower can participate in the process of increasing money supply.
But not all cryptocurrencies follow this convention. Some currencies are neither mineable nor obtainable by any other means except through exchanges. Ripple (XRP), for instance, is one of those few currencies with such peculiar characteristics.
First, it has no need of miners to keep the system stable and secure, and does the exact opposite each time transactions are made: a specific unit of XRP is “destroyed” (around 0.00001 XRP or 10 “drops”) per transaction. Accordingly, this would discourage people from spamming the system. Maximum supply is programmed at 100 billion XRP, 55% of which is held in escrow.
Although “decentralized,” Ripple is backed by big institutions primarily Google (Google Ventures), and other venture capitalists such as Standard Chartered, Siam Commercial (SCB Digital Ventures), Japan’s SBI Holdings, CME Group, Seagate Technology, and Venture 51. The focus of blockchain adoption was not so much on creating a global decentralized currency envisioned by Bitcoin, but in making transactions “frictionless” and resistant to hacking.
Banks and financial institutions loved the concept and saw in Ripple the potential of using blockchain technology to make money transfers many times faster, a lot cheaper, and more secure than conventional banking and money service business. In fact, Ripple protocol is already supported by hundreds of banks and financial businesses across the globe, including American Express and SBI Holdings.
Use Cases of Blockchain Technology in Business
Banking & Money Service
Blockchain technology is the key to solving the age-old “Byzantine General’s Problem” when it comes to trust-based peer-to-peer transactions, one of which is the problem of “double spending.” In a traditional banking system, transactions between accounts and different banks have to be cleared to preclude the possibility of fraudulent transactions going through, especially now that most transactions involve digital cash and electronic money transfers over the Internet.
Although quite secure, they’re not essentially 100% hack-proof. The Bangladesh Bank Heist of February 2016 proves the vulnerability of a centralized method of transaction over the Internet (hackers employed the Dridex malware to send instructions to the Bangladesh Bank at the Federal Reserve Bank of New York through the SWIFT network.)
Banks and financial institutions are now looking to adopt a decentralized, consensual way of confirming transactions – one of the defining features of cryptocurrencies and distributed ledgers – to make cross-border, bank-to-bank transactions that are virtually hack-proof. To address the issue of congestion due to slow rate of confirmations, they’ve opted for cryptocurrency protocols which take mining out of the equation, i.e. pre-mined currencies.
The fact that tech giants, like Google, have invested in blockchain technology could be a strong indication that we are, indeed, looking into the future of cashless transactions. IBM also works with a pre-mined cryptocurrency, Stellar (XLM), to make cross-border payments more efficient and secure. Using this platform, they hope to eliminate the “costly, laborious, and error-prone process of making global payments.”
Microsoft retracted in their previous decision to stop accepting Bitcoin payments. Volatility and high transaction fees during peak hours can make Bitcoin payments troublesome for most businesses. But because of its high-yield potential for long-term investment, some businesses prefer Bitcoin over much stable but dormant pre-mined cryptocurrencies like Ripple and Stellar.
Several countries in North America, Europe, and Asia have brick-and-mortar businesses that accept Bitcoin payments with the same goal in mind. Since Bitcoin is regarded as a rare, highly-prized commodity, accepting them as payments is a viable way to make long-term cryptocurrency investments.
Some people went as far as using Bitcoin to acquire properties like one of Malaysia’s top entrepreneur who bought a piece of land for half a Bitcoin, and a property developer in the UK who sold two luxury homes for Bitcoin.
Internet Sites & Social Media
Blockchain technology can also have a positive impact on Internet sites and social media because of the massive traffic they generate. Having a cryptocurrency for users and subscribers seems to be the way forward. Facebook CEO, Mark Zuckerberg recognized the potential of having a cryptocurrency for its 2 billion users and subscribers.
Online stores and online services would also benefit from cryptocurrency payments for the very same reason banks and money service business are using it with the Ripple currency/protocol.
Implications of Institutionalizing Cryptocurrencies – Two Sides of the Story
Based on these observations, two possible scenarios are starting to emerge. Blockchain technology is undoubtedly the next generation of secure, peer-to-peer transactions. But as to the control of money supply and the ability of users to store value outside the realm of government regulation, the issue of decentralization could reach a stalemate between institutionalized cryptocurrency like Ripple, and a truly decentralized cryptocurrency like Bitcoin.
In such a case, we might be seeing two types of cryptocurrencies serving two different purposes – one as a fast and secure method of payment and money transfer (akin to fiat currency), and another as a store of value. Ripple has its merits as a payment method because of its liquidity, stability, and abundant supply. Bitcoin could also be used for the same purpose, but until it creates a permanent solution to scalability issues, transaction fees, and slow transactions, it might be best to keep it as a store of value or as an investment option.
Another possibility would be one of them prevails over the other. In the case of Ripple taking the lead as the dominant cryptocurrency, we might see a resurgence of centralized money in the form of a peer-to-peer currency based on trust. If Bitcoin, however, stays on top and manages to solve the issue, the other type of cryptocurrency could weaken or fall into disuse.
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There are currently three ways a person can buy cryptocurrency: mining, buying from online wallets and exchanges, and buying or receiving from others.
In this article, we’ll be focusing about the ins and outs of buying cryptocurrencies from online wallets, exchanges, selling online, and walk you through the whole process with a step-by-step illustrative guide on some of the most popular online wallets, exchanges, and marketplace.
Cryptocurrencies vs. Fiat
Cryptocurrencies have unique properties which make them a lot different from our fiat currencies. They exhibit both properties as a medium of exchange for paying goods and services and as a commodity like gold and other precious metals that have intrinsic value.
It takes hours and huge amounts of computing power minting (or ‘mining’ in cryptocurrency parlance) these digital currencies, the same way gold is mined with hundreds of man-hours using expensive tools and equipment.
In comparison, fiat currencies use very little resources, if at all. Banks don’t even have to print or stamp paper bills and metal coins these days; they simply type in an arbitrary number on their computers to create more money.
Why People Buy Cryptocurrencies
In some countries where inflation has severely diminished the purchasing power of fiat currency, people turned to cryptocurrency and mining as their sole refuge against the rising prices of commodities and the unrestrained creation of money by banks and financial institutions.
Others view cryptocurrency as an opportunity for investment, particularly Bitcoin and other major currencies like Ethereum. Bitcoin’s value has been going up unabated for nearly a year, and more people are starting to look into it as a result of its rising demand, popularity, and to some extent, the use and promotion of cryptocurrency education.
For some users, they see it as a more affordable and secure way to send and receive money without going through any bank or financial institution. It’s almost like sending an email from one person to another where information is shared only between the sender and recipient.
Whatever your purpose is, you can always have an edge if you know the different methods of buying cryptocurrencies and how to take advantage of the differences in pricing, volatility, wallet features, and other factors.
Factors Affecting a Cryptocurrency’s Price
A casual visitor at coinmarketcap.com will quickly notice how fast the price of a certain currency changes – in a matter of seconds! (Check out the site and reload the page once every 5 minutes and see for yourself.)
This rapid movement in price is attributed to the cryptocurrency’s volatility. The fewer there are in circulation, the more volatile a certain currency is. Conversely, as a currency gains widespread adoption due to its abundant supply, price starts to become more stable.
Supply and demand also determines the current price of a particular currency.
In some instances, the relationship between supply and demand and the current price is a direct result of fear of missing out (FOMO). This is the typical bandwagon mentality people get into when something new or ‘trending’ comes along. Bitcoin is not a new thing, except for the vast majority who never heard of it. But towards the middle of 2017 when everything people talked about is Bitcoin, suddenly, everyone is dipping their hands into it.
Similarly, fear, uncertainty, and doubt works in much the same way, but with opposite results. People can succeed in convincing millions to sell their Bitcoin or face massive loss and cause huge price dip as people sell them in panic.
We can infer if a certain news or upcoming event has, or will likely cause fear when it coincides with sustained price drop such as the Bitcoin hard fork of August 1 where Bitcoin price went down unimpeded for 3 days, two weeks prior to the split, and on September 12-15 where Bitcoin came crashing down to USD 2947.69 with China’s ban on Bitcoin exchanges and ICOs a week later.
Price spread which is determined by comparing prices of cryptocurrencies in exchanges all over the Internet can also affect how a particular currency is priced. Exchanges work in some ways like trading where buyers and sellers negotiate on bid and ask price.
Price variance within the exchange itself is often negligible as both sides are given the average price by default (this can be changed by buyers and sellers as they wish). However, when comparing the average price from one exchange to another, we start to see a significant difference in pricing. (Clicking the link under ‘Volume’ at Coinmarketcap allows you to see this in real time.)
Opening/Installing Your Wallet
Your wallet is the key (no pun intended) to the world of cryptocurrency. This software allows you to make transactions with other wallet users and interact with the blockchain ledger using a pair of keys known as the private and public keys. For a detailed discussion about cryptocurrency wallets, go to Everything You Need to Know About Cryptocurrency Wallets.
Creating an Online Wallet Account
Setting up an online wallet is as easy as signing up for an email or social media account. Here are the steps in creating your Coinbase and Blockchain wallet.
To get started with Coinbase, go to their signup page and type in your name, email address, and wallet password. You will be sent a verification email by Coinbase. Go to your email and click Verify Email Address to activate your account.
Coinbase currently supports Bitcoin, Ethereum, and Litecoin. It generates your private and public keys for all three of them when you sign up to their wallet service. However, you don’t have access to your own private keys; only your public keys/wallet address.
You can start sending and receiving Bitcoin, Etherium, and Litecoin with your wallet account. However, if you want to buy cryptocurrency with fiat from Coinbase using your bank account or credit/debit account, you need to go through their payment verification process.
Blockchain.io is a block explorer for Bitcoin which allows everyone to see the status of every Bitcoin transactions ever made and are constantly being made in real time. To provide Bitcoin users, traders, and miners with an online wallet to store their private and public keys, they’ve also introduced their own Blockchain Wallet for Bitcoin.
(Update: as of August 2017, Blockchain began supporting Ethereum.)
Blockchain Wallet generates your private and public keys when you sign up to their online wallet service. However, unlike Coinbase, Blockchain allows users to export/import their private keys.
To create your online Bitcoin wallet account, go their signup page and type in your email address and a strong wallet password. A popup notification will inform you that your wallet and wallet ID has been created, followed by a welcome message.
(Note: your wallet ID is different from your wallet address/public key. This is just a series of numbers and letters that you’ll use every time you log in to your Blockchain Wallet account.)
Check your email and click ‘YES THIS IS MY EMAIL’ to complete the setup.
Installing a Desktop or Mobile Wallet
Desktop and mobile wallets require you to download and install the app on your device. They are considered more secure than online wallets because your private keys are stored within the device and have backup features.
Some desktop and mobile wallets are ‘open source’ which means tech-savvy wallet users can see exactly how the wallet works under the hood. Depending on how you look at it, open sourcing a wallet can be good or bad (e.g., transparency vs. phising/hacking, etc.).
Here are the steps on how to install an Exodus desktop wallet and Jaxx mobile wallet.
Exodus is one of the popular multi-currency, desktop wallets available online. It’s compatible with Windows (64-bit), Mac, and Linux, has backup features.
Download and install the app to your computer. Read the onscreen popups and click OK. You can start using your wallet to send and receive currencies. To buy cryptocurrency with fiat, you may open an online wallet account like Coinbase, or an exchange account like GDAX or Poloniex.
Jaxx is an open source, multi-currency, mobile wallet and is compatible with Android and iOS. It also doubles as desktop wallet when installed in Windows, OS X, and Linux.
Go to Google Play or iTunes on your mobile device and search Jaxx Blockchain Wallet. Download and install the mobile app.
To set up for first use, choose Create Wallet and use the Express Setup. If want to pair this wallet with your laptop or PC, choose Pair/Restore Wallet and enter the 12-word Backup Phrase. You can see your Backup Phrase in Menu>Tools>Backup Wallet>View Backup Phrase.
Caution: view your backup phrase only when necessary and make sure no one else is looking. People can use your backup phrase to re-generate your wallet on their device and have access to all your funds.
Setting up a Hardware Wallet
Hardware wallets like Trezor and Ledger Nano S are considered the most secure of all types (excluding paper wallets). However, they’re not cheap and setting them up are not as easy as as the other types of wallets.
To use your hardware wallet, you need to hook it up to a computer or mobile device using the the USB cable that comes with it.
Here are the steps in setting up your Trezor and Ledger Nano S wallet.
Before setting up any kind of hardware wallet, check for any sign of tampering to make sure it runs completely free of any third party software or hidden app.
Go to wallet.trezor.io on your browser and plug in your Trezor wallet. Type in your Device Label and enter your 4-digit PIN.
To be able to restore your accounts in case of damage, loss, or theft, you’ll be required to write down the 24-word recovery phrase on a piece of paper or the small booklet that comes with it. Enter your PIN to complete the setup.
Trezor currently supports Bitcoin, Ethereum, Ethereum Classic, ZCash, Litecoin, Namecoin, Dogecoin, Dash, and all ERC-20 tokens.
Setting up a Ledger Nano S is a little different from Trezor, but the process is essentially the same.
Here, you’ll be using the two buttons and the LCD screen of the hardware wallet.
Plug in the device on your laptop or PC and choose between configuring a new device or not. Choose yes (P) and type in your new password twice.
Next, you’ll be asked to write down the 24-word recovery phrase to backup your wallet. After scanning and writing down all the words, your device is now ready to use.
To use more features for your Ledger Nano S, connect your hardware wallet to your laptop or PC, go to their download page and choose between wallet apps and management apps for your Ledger Nano S.
It currently supports 18 currencies including Bitcoin, Ethereum, Bitcoin Cash, Ethereum Classic, Dash and Litecoin.
BUYING FROM AN ONLINE WALLET
To get the feel of having your own assets stored in the cryptocurrency network, you need to need to buy them with fiat currency.
For Coinbase, you need to add a payment method by going through their payment verification process, after which you can start buying Bitcoin, Ethereum, and Litecoin using your credit, debit, or bank account.
Buying cryptocurrencies with fiat will incur some fees (4% when using credit/debit account, and around 1.49% with bank accounts).
This feature is available only in 32 countries including Canada, UK, and Australia.
BUYING FROM AN ONLINE EXCHANGE
People can buy cryptocurrency directly from online exchanges. GDAX is an online cryptocurrency exchange run by the same company that operates the Coinbase online wallet.
Buying from GDAX also requires identity and payment verification process via Coinbase. To start buying, you need to fund your GDAX with your account balance from Coinbase, bank account, bank wire, or BTC address.
Some users can get away with paying less (or zero) transaction fees when buying their cryptocurrencies from online exchanges like GDAX. However, it also comes at the expense of speed and convenience.
To keep your currencies safe, you may choose to send them to your desktop, mobile, or hardware wallet after accumulating a substantial amount from exchanges. It’s always risky to keep your currencies in exchanges.
BUYING FROM A MARKETPLACE
Paxful is a popular cryptocurrency market for Bitcoin buyers and sellers online. However, unlike exchanges, buyers and sellers can interact with each other and negotiate with the price and payment methods – it’s basically an online marketplace.
The most commonly used method is through PayPal and uses Escrow for secure transactions. Buyers can narrow down their search when buying a particular amount of Bitcoin.
Interested in mining? Learn the basics of cryptocurrency mining at CryptEdu.com or start hassle-free cloud mining at Cryptmin.com today.