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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
The ultimate guide to the world of cryptocurrencies! While the cryptocurrency market is known for its volatility--and this volatility is often linked to the ever-changing regulatory environment of the industry--the entire cryptocurrency market is expected to reach a total value of $1 trillion this year. If you want to get in on the action, this book shows you how. Cryptocurrency Investing For Dummies offers trusted guidance on how to make money trading and investing in the top 200 digital currencies, no matter what the market sentiment. You'll find out how to navigate the new digital finance landscape and choose the right cryptocurrency for different situations with the help of real-world examples that show you how to maximize your cryptocurrency wallet. * Understand how the cryptocurrency market works * Find best practices for choosing the right cryptocurrency * Explore new financial opportunities * Choose the right platforms to make the best investments This book explores the hot topics and market moving events affecting cryptocurrency prices and shows you how to develop the smartest investment strategies based on your unique risk tolerance.
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Veröffentlichungsjahr: 2019
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Cryptocurrency Investing For Dummies®
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2019 by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2019930733
ISBN 978-1-119-53303-0 (pbk); ISBN 978-1-119-53305-4 (ebk); ISBN 978-1-119-53307-8 (ebk)
Cryptocurrency Investing For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Cryptocurrency Investing For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: Getting Started with Cryptocurrency Investing
Chapter 1: What Is a Cryptocurrency?
Beginning with the Basics of Cryptocurrencies
Gearing Up to Make Transactions
Making a Plan Before You Jump In
Chapter 2: Why Invest in Cryptocurrencies?
Diversifying from Traditional Investments
Gaining Capital Appreciation
Increasing Income Potential
Fueling Ideological Empowerment
Chapter 3: Recognizing the Risks of Cryptocurrencies
Reviewing Cryptocurrency Returns
Risk: Flipping the Other Side of the Coin
Glimpsing Cryptocurrencies’ Reward versus Risk
Digging into Different Kinds of Risk
Exploring Risk Management Methods
Chapter 4: Looking Under the Hood: Blockchain Technology
Breaking Down Blockchain Technology Basics
Perusing Problems with Blockchain
What Can Blockchain Be Used for?
Chapter 5: How Cryptocurrencies Work
Explaining Basic Terms in the Cryptocurrency Process
Cruising through Other Important Crypto Concepts
Stick a Fork in It: Digging into Cryptocurrency Forks
Part 2: The Fundamentals of Investing in Cryptos
Chapter 6: Cryptocurrency Exchanges and Brokers
Distinguishing Crypto Exchanges
Considering Brokers
Looking at Other Methods for Buying Cryptos
Chapter 7: Using Cryptocurrency Wallets
Defining Cryptocurrency Wallets
Looking at Different Types of Wallets
Choosing a Crypto Wallet
Keeping Your Wallet Secure
Chapter 8: Different Types of Cryptocurrencies
Celebrating Celebrity Cryptocurrencies by Market Cap
Cryptocurrencies by Category
Chapter 9: Identifying Top Performing Cryptocurrencies
Introducing the Invest Diva Diamond Analysis
Using Fundamental Analysis to Pick Cryptocurrencies
Choosing Cryptos with Sentimental Analysis
Trying Technical Analysis to Select Cryptos
Chapter 10: Diversification in Cryptocurrencies
Breaking Down Some Basics on Diversification
Using Cryptocurrencies in Long-Term Diversification
Tackling Diversification in Short-Term Trades
Part 3: Alternatives to Cryptos
Chapter 11: Getting Ahead of the Crowd: Investing in ICOs
Understanding the Basics of Initial Coin Offerings
Investing in an ICO
So You Want to Start an ICO: Launching an ICO Yourself
Chapter 12: Cryptocurrency Mining
Understanding How Mining Works in a Nutshell
Discovering What You Need to Mine
Chapter 13: Stocks and Exchange Traded Funds with Cryptocurrency Exposure
Looking for Stocks with Exposure to Cryptos
Considering Cryptocurrency and Blockchain ETFs
Chapter 14: Cryptocurrency Futures and Options
Focusing on the Fundamentals of Futures
Introducing the Basics of Options
Understanding Cryptocurrency Derivatives Trading
Chapter 15: Dealing with the Dollar and Other Fiat Currencies
Considering the World’s Reserve Currency: The U.S. Dollar
Examining the Euro and Other Major Currencies
Comparing the Forex Market and the Crypto Market
Part 4: Essential Crypto Strategies and Tactics
Chapter 16: Using Technical Analysis
Beginning with the Basics of Technical Analysis
Spotting the Key Levels
Picking Out Patterns on a Chart
Smoothing Charts Out with Moving Averages
Chapter 17: Short-Term Trading Strategies
Distinguishing Three Short-Term Time Frames
Trying Short-Term Analysis Methods
Managing Short-Term Trading Risk
Chapter 18: Long-Term Investing Strategies
Time Is on Your Side: Getting Started with Long-Term Investing
Creating Long-Term Strategies
Considering Limit and Stop-Loss Orders
Chapter 19: Minimizing Losses and Maximizing Gains
Keeping the Losses Down
Letting the Profits Rise
Chapter 20: Using Ichimoku and Fibonacci Techniques
Getting a Handle on Ichimoku Kinko Hyo
Introducing Fibonacci Retracement Levels
Combining Ichimoku and Fibonacci Techniques
Chapter 21: Taxes and Cryptocurrencies
Distinguishing Three Types of Crypto Taxes
Minimizing Your Crypto Taxes
Evaluating Taxable Income from Crypto Transactions
Part 5: The Part of Tens
Chapter 22: Ten Considerations Before Getting Started with Cryptocurrencies
Don’t Get Too Excited
Measure Your Risk Tolerance
Protect Your Crypto Wallet
Find the Best Crypto Exchange/Broker for You
Determine Whether You Should Invest Short Term or Long Term
Start Small
Follow the Cause
Mull Over Mining
Look into Investing in Other Assets First
Get a Support Group
Chapter 23: Ten Possible Moves When Your Crypto Portfolio Is Down
Do Nothing
Reevaluate Your Risk Tolerance
Look at the Big Picture
Research the Fundamental Reasons the Crypto Is Down
Consider Hedging
Diversify within Crypto Assets
Diversify across Other Financial Assets
Exchange with a Better Crypto
Think about Adding to Your Current Position
Contemplate Cutting Losses
Chapter 24: Ten Challenges and Opportunities for Crypto Investors
New Cryptos on the Block
Finding Economic Data
Regulations
Hackers
Bubbles
A Down Market
New Currencies and Projects
Diversification
Falling in Love with a Crypto
Using Invest Diva Diamond Analysis
Part 6: Appendixes
Appendix A: Resources for Cryptocurrency Investors
Exploring Top Cryptocurrencies
Cryptocurrency Information Websites
Cryptocurrency Marketplaces and Wallets
Charting and Tax Resources
Appendix B: Resources for Personal Portfolio Management
Making Your Money Work for You MasterClass
Taking a Look at Textual Investment Resources
Index
About the Author
Advertisement Page
Connect with Dummies
End User License Agreement
List of Tables
Chapter 8
TABLE 8-1 Some Top Ten Cryptos As of 2018
TABLE 8-2 Some Top 100 Cryptos as of 2018
List of Illustrations
Chapter 2
FIGURE 2-1: Dow Jones 70-year historical chart by year.
FIGURE 2-2: Forex metaphor: Australian dollar dancing against U.S. dollar.
FIGURE 2-3: Bitcoin price between 2013 and January 2017.
FIGURE 2-4: Bitcoin price between 2016 and July 2018.
Chapter 3
FIGURE 3-1: Bitcoin’s price action versus the U.S. dollar from 2017 to 2018.
FIGURE 3-2: Demonstrating why patience is a profitable virtue.
Chapter 4
FIGURE 4-1: Three main elements of a block.
FIGURE 4-2: Simplified version of how a blockchain works.
Chapter 5
FIGURE 5-1: An example of a hard fork.
FIGURE 5-2: An example of a soft fork.
Chapter 7
FIGURE 7-1: Popular cryptocurrency wallet types.
Chapter 9
FIGURE 9-1: Five points of the Invest Diva Diamond Analysis (IDDA).
FIGURE 9-2: Locating exchanges that carry XRP on coinmarketcap.com.
Chapter 10
FIGURE 10-1: Binance exchange cryptocurrency pairing options.
FIGURE 10-2: Correlation between the top 12 cryptocurrencies and Bitcoin as BTC ...
FIGURE 10-3: Correlation between the top 17 cryptocurrencies and Bitcoin as BTC ...
FIGURE 10-4: The top 17 cryptocurrencies are less correlated in the seven-day ti...
Chapter 12
FIGURE 12-1: High-end computers in a mining farm.
FIGURE 12-2: Snapshot of mining profitability list in September 2018.
FIGURE 12-3: High-end gaming rigs that can be used for mining.
FIGURE 12-4: Example of a simple mining calculator.
Chapter 13
FIGURE 13-1: OSTK share prices throughout 2018 show correlation to Bitcoin price...
FIGURE 13-2: The stock price of Interactive Brokers (IBKR) dropped on December 1...
FIGURE 13-3: BLOK, BLCN, and KOIN ETF comparison in 2018.
Chapter 15
FIGURE 15-1: U.S. Dollar Index (DXY) price action compared to BTC/USD.
FIGURE 15-2: Trading GBP/JPY between key support and resistance levels of 144.85...
Chapter 16
FIGURE 16-1: Line chart of BTC/USD over one day.
FIGURE 16-2: Bullish and bearish bars.
FIGURE 16-3: Candlesticks showing the general market movement in a chart.
FIGURE 16-4: Daily candlestick chart of ETH/USD.
FIGURE 16-5: Bitcoin’s key support level at around $6,000.
FIGURE 16-6: Bitcoin’s key resistance levels in September 2018.
FIGURE 16-7: How to draw uptrends and downtrends.
FIGURE 16-8: Basic forms of channels.
FIGURE 16-9: Examples of bullish reversal chart patterns.
FIGURE 16-10: Examples of bearish reversal chart patterns.
Chapter 17
FIGURE 17-1: Cryptocurrency trading sessions based on international time zones.
FIGURE 17-2: A simplified range-trading strategy.
FIGURE 17-3: Buying at the pullback in an uptrend market, taking profit at resis...
FIGURE 17-4: BTC/USD 30-minute chart on September 5, 2018.
FIGURE 17-5: BTC/USD hourly chart on September 5, 2018.
FIGURE 17-6: BTC/USD four-hour chart on September 5, 2018.
FIGURE 17-7: BTC/USD four-hour chart strategy performance.
Chapter 19
FIGURE 19-1: An example of a cryptocurrency investment log.
FIGURE 19-2: Using the Ichimoku-Fibonacci combo to identify bottoms.
FIGURE 19-3: A double bottom chart pattern forming on XRP/USD daily chart.
FIGURE 19-4: A double bottom chart pattern confirms, and XRP reaches profit targ...
Chapter 20
FIGURE 20-1: Ichimoku Kinko Hyo components.
FIGURE 20-2: Ichimoku Kinko Hyo applied to the XRP/BTC four-hour chart.
FIGURE 20-3: Fibonacci retracement levels applied to an uptrend on the XLM/BTC c...
FIGURE 20-4: Using Ichimoku and Fibonacci to create a bearish trading strategy.
Guide
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Table of Contents
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Introduction
More than 2,000 cryptocurrencies currently exist at the time of writing. Cryptos gained a lot of mainstream hype in 2017, when Bitcoin’s value increased 1,318 percent. This surge was nothing compared to the gains of some other digital assets, such as Ripple, which went up (hold your breath) a whopping 36,018 percent. These returns are more than what a stock investor could normally make in a lifetime, and they generated enough interest to create a true frenzy.
However, the bubble burst at the beginning of 2018, leaving many late investors, who bought cryptocurrencies at a very high price, at a loss. That was enough for some newbie investors to label the whole industry a scam and either give up on investing altogether or go back to traditional financial assets like stocks. Regardless, the cryptocurrency market continued evolving, became more stable, and caught the attention and support of many major financial institutions globally and in the United States. As more people get their hands on cryptocurrencies, more sellers feel comfortable accepting them as a payment method, and that’s how the whole industry can flourish.
The foundation of cryptocurrencies such as Bitcoin lies in a new technology called the blockchain; it’s the infrastructure that cryptocurrencies are built on. Blockchain is a disruptive technology that many argue is bigger than the advent of the Internet. The applications of blockchain don’t end with cryptocurrencies, though, just like the applications of the Internet don’t end with email.
The unique thing about cryptocurrency investing and trading is that a crypto is a cross between an asset (like stocks) and a currency (like the U.S. dollar.) Analyzing the fundamentals behind a cryptocurrency is very different from analyzing any other financial asset. The traditional ways of measuring value don’t work in the crypto industry, mainly because in many cases the crypto data isn’t stored in a central hub somewhere. In fact, most cryptocurrencies and their underlying blockchain are decentralized, which means no central authority is in charge. Instead, the power is distributed among the members of any given blockchain or crypto community.
About This Book
You may have heard of some of the famous cryptocurrencies, like Bitcoin, but the industry doesn’t end there — far from it. And although the crypto market has a ton of volatility, it also has potential for you to make real money by investing wisely and developing strategies that suit your personal risk tolerance. In this book, I tap into the risks involved in cryptocurrency investing and show you the different methods you can use to get involved.
The topic of cryptocurrencies and their underlying blockchain technology can be a bit confusing. That’s why I try my best to keep Cryptocurrency Investing For Dummies easily accessible and relatable and free of intimidating terminology. But it does contain some serious information about strategy development, risk management, and the whole industry in general.
As you dip into and out of this book, feel free to skip the sidebars (shaded boxes) and the paragraphs marked with the Technical Stuff icon. They contain interesting information but aren’t essential to becoming a crypto investor.
This book contains a lot of web addresses to get you additional information about certain topics. Some of the web addresses are affiliate links, meaning that if you click them and start using a company’s services through that specific web address, I may earn an affiliate payment for making the introduction. You also may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending as though the line break doesn’t exist. If you’re reading this work as an e-book, you’ve got it easy — just click the web address to be taken directly to the web page.
Foolish Assumptions
I’ve made some assumptions about you and your basic knowledge of investing and the cryptocurrency market:
You may have heard of or even own some cryptocurrencies, but you don’t really know how they work.
Though you may have invested in other markets like the stock market before, you aren’t necessarily familiar with the terminology and the technical aspects of trading and investing cryptocurrencies.
You know how to operate a computer and use the Internet. If you don’t have high-speed access to the Internet now, be sure you have it before trying to get involved in the cryptocurrency market. You need high-speed access to be able to work with many of the valuable online tools I recommend in this book.
Icons Used in This Book
For Dummies books use little pictures, called icons, to mark certain chunks of text. Here’s what they actually mean:
If something is particularly important for you to take away from this book, I mark it with this icon.
Watch for these little flags to get ideas on how to improve your crypto investing skills or where to find other useful resources.
The cryptocurrency market and investing in general have many risks. Some mistakes can cost you a ton of money, so I use this icon to point out particularly dangerous areas.
This icon designates some interesting facts and sometimes funny anecdotes that I feel you may enjoy reading but that aren’t essential to your crypto investing journey.
Beyond the Book
In addition to the material you’re reading right now, this product also comes with some access-anywhere goodies on the web. When you just want a quick reminder of basics like what you need before you invest and how to check crypto fundamentals, check out the free Cheat Sheet at www.dummies.com; just search for “Cryptocurrency Investing For Dummies Cheat Sheet.”
Where to Go from Here
Cryptocurrency Investing For Dummies isn’t your typical book, where you start from the beginning and read through the end. Depending on your interest, knowledge on the matter, and investment goals, you can start anywhere you want. For example,
If you’re already familiar with cryptocurrency basics and know how they work, where to buy them, and where to securely store them, you may want to start with
Part 4
to explore different investment and trading tactics.
Chapter 22
gives you an overview of things to consider before you start your cryptocurrency journey and cross-references to other chapters if you need further information.
Chapter 3
is a great (and essential) place to explore methods of risk management before pulling the trigger and jumping on the crypto wagon.
If you’re looking for alternative ways to get involved in the cryptocurrency market, check out
Chapter 12
for crypto mining,
Chapter 11
for initial coin offerings (ICOs), and
Chapter 14
for crypto futures and options.
Part 1
Getting Started with Cryptocurrency Investing
IN THIS PART …
Know what you’re getting into before buying, investing, or trading cryptocurrencies.
Understand the risks involved in the cryptocurrency market and how to manage them.
Discover how the underlying technology behind cryptocurrencies (the blockchain) makes them unique and revolutionary.
Familiarize yourself with how different types of cryptocurrencies operate.
Chapter 1
What Is a Cryptocurrency?
IN THIS CHAPTER
Looking at the what, why, and how of the advent of cryptocurrencies
Getting an overview of your first steps before starting your crypto journey
So you’ve picked up this book, and your first question is probably this: “What the heck is a cryptocurrency, anyway?” Simply stated, a cryptocurrency is a new form of digital money. You can transfer your traditional, non-cryptocurrency money like the U.S. dollar digitally, but that’s not quite the same as how cryptocurrencies work. When cryptocurrencies become mainstream, you may be able to use them to pay for stuff electronically, just like you do with traditional currencies.
However, what sets cryptocurrencies apart is the technology behind them. You may say, “Who cares about the technology behind my money? I only care about how much of it there is in my wallet!” The issue is that the world’s current money systems have a bunch of problems. Here are some examples:
Payment systems such as credit cards and wire transfers are outdated.
In most cases, a bunch of middlemen like banks and brokers take a cut in the process, making transactions expensive and slow.
Financial inequality is growing around the globe.
Around 3 billion unbanked or underbanked people can’t access financial services. That’s approximately half the population on the planet!
Cryptocurrencies aim to solve some of these problems, if not more. This chapter introduces you to crypto fundamentals.
Beginning with the Basics of Cryptocurrencies
You know how your everyday, government-based currency is reserved in banks? And that you need an ATM or a connection to a bank to get more of it or transfer it to other people? Well, with cryptocurrencies, you may be able to get rid of banks and other centralized middlemen altogether. That’s because cryptocurrencies rely on a technology called blockchain, which is decentralized (meaning no single entity is in charge of it). Instead, every computer in the network confirms the transactions. Flip to Chapter 4 to find out more about the blockchain technology that enables cool things like cryptocurrencies.
In the following sections, I go over the basics of cryptocurrencies: their background, benefits, and more.
The definition of money
Before getting into the nitty-gritty of cryptocurrencies, you need to understand the definition of money itself. The philosophy behind money is a bit like the whole “which came first: the chicken or the egg?” thing. In order for money to be valuable, it must have a number of characteristics, such as the following:
Enough people must have it.
Merchants must accept it as a form of payment.
Society must trust that it’s valuable and that it will remain valuable in the future.
Of course, in the old days, when you traded your chicken for shoes, the values of the exchanged materials were inherent to their nature. But when coins, cash, and credit cards came into play, the definition of money and, more importantly, the trust model of money changed.
Another key change in money has been its ease of transaction. The hassle of carrying a ton of gold bars from one country to another was one of the main reasons cash was invented. Then, when people got even lazier, credit cards were invented. But credit cards carry the money that your government controls. As the world becomes more interconnected and more concerned about authorities who may or may not have people’s best interests in mind, cryptocurrencies may offer a valuable alternative.
Here’s a fun fact: Your normal, government-backed currency, such as the U.S. dollar, must go by its fancy name, fiat currency, now that cryptocurrencies are around. Fiat is described as a legal tender like coins and banknotes that have value only because the government says so. Get the scoop on fiat currencies in Chapter 15.
Some cryptocurrency history
The first ever cryptocurrency was (drumroll please) Bitcoin! You probably have heard of Bitcoin more than any other thing in the crypto industry. Bitcoin was the first product of the first blockchain developed by some anonymous entity who went by the name Satoshi Nakamoto. Satoshi released the idea of Bitcoin in 2008 and described it as a “purely peer-to-peer version” of electronic money.
Bitcoin was the first established cryptocurrency, but many attempts at creating digital currencies occurred years before Bitcoin was formally introduced.
Cryptocurrencies like Bitcoin are created through a process called mining. Very different than mining ore, mining cryptocurrencies involves powerful computers solving complicated problems. Flip to Chapter 12 for more on mining.
Bitcoin remained the only cryptocurrency until 2011. Then Bitcoin enthusiasts started noticing flaws in it, so they decided to create alternative coins, also known as altcoins, to improve Bitcoin’s design for things like speed, security, anonymity, and more. Among the first altcoins was Litecoin, which aimed to become the silver to Bitcoin’s gold. But as of the time of writing, over 1,600 cryptocurrencies are available, and the number is expected to increase in the future. Check out Chapter 8 for just a sampling of cryptocurrencies available now.
Key crypto benefits
Still not convinced that cryptocurrencies (or any other sort of decentralized money) are a better solution than traditional government-based money? Here are a number of solutions that cryptocurrencies may be able to provide through their decentralized nature:
Reducing corruption:
With great power comes great responsibility. But when you give a ton of power to only one person or entity, the chances of their abusing that power increase. The 19th-century British politician Lord Acton said it best: “Power tends to corrupt, and absolute power corrupts absolutely.” Cryptocurrencies aim to resolve the issue of absolute power by distributing power among many people or, better yet, among all the members of the network. That’s the key idea behind blockchain technology (see
Chapter 4
) anyway.
Eliminating extreme money printing: Governments have central banks, and central banks have the ability to simply print money when they’re faced with a serious economic problem. This process is also called quantitative easing. By printing more money, a government may be able to bail out debt or devalue its currency. However, this approach is like putting a bandage on a broken leg. Not only does it rarely solve the problem, but the negative side effects also can sometimes surpass the original issue.
For example, when a country like Iran or Venezuela prints too much money, the value of its currency drops so much that inflation skyrockets and people can’t even afford to buy everyday goods and services. Their cash becomes barely as valuable as rolls of toilet paper. Most cryptocurrencies have a limited, set amount of coins available. When all those coins are in circulation, a central entity or the company behind the blockchain has no easy way to simply create more coins or add on to its supply.
Giving people charge of their own money:
With traditional cash, you’re basically giving away all your control to central banks and the government. If you trust your government, that’s great, but keep in mind that at any point, your government is able to simply freeze your bank account and deny your access to your funds. For example, in the United States, if you don’t have a legal will and own a business, the government has the right to all your assets if you pass away. Some governments can even simply abolish bank notes the way India did in 2016. With cryptocurrencies, you and only you can access your funds. (Unless someone steals them from you, that is. To find out how to secure your crypto assets, flip to
Chapter 7
.)
Cutting out the middleman:
With traditional money, every time you make a transfer, a middleman like your bank or a digital payment service takes a cut. With cryptocurrencies, all the network members in the blockchain are that middleman; their compensation is formulated differently from that of fiat money middlemen’s and therefore is minimal in comparison. Flip to
Chapter 5
for more on how cryptocurrencies work.
Serving the unbanked:
A vast portion of the world’s citizens has no access or limited access to payment systems like banks. Cryptocurrencies aim to resolve this issue by spreading digital commerce around the globe so that anyone with a mobile phone can start making payments. And yes, more people have access to mobile phones than to banks. In fact, more people have mobile phones than have toilets, but at this point the blockchain technology may not be able to resolve the latter issue. (Flip to
Chapter 2
for more on the social good that can come from cryptocurrencies and blockchain technology.)
Common crypto and blockchain myths
During the 2017 Bitcoin hype, a lot of misconceptions about the whole industry started to circulate. These myths may have played a role in the cryptocurrency crash that followed the surge. The important thing to remember is that both the blockchain technology and its byproduct, the cryptocurrency market, are still in their infancy, and things are rapidly changing. Let me get some of the most common misunderstandings out of the way:
Cryptocurrencies are good only for criminals.
Some cryptocurrencies boast anonymity as one of their key features. That means your identity isn’t revealed when you’re making transactions. Other cryptocurrencies are based on a decentralized blockchain, meaning a central government isn’t the sole power behind them. These features do make such cryptocurrencies attractive for criminals; however, law-abiding citizens in corrupt countries can also benefit from them. For example, if you don’t trust your local bank or country because of corruption and political instability, the best way to store your money may be through the blockchain and cryptocurrency assets.
You can make anonymous transactions using all cryptocurrencies.
For some reason, many people equate Bitcoin with anonymity. But Bitcoin, along with many other cryptocurrencies, doesn’t incorporate anonymity at all. All transactions made using such cryptocurrencies are made on public blockchain. Some cryptocurrencies, such as Monero, do prioritize privacy, meaning no outsider can find the source, amount, or destination of transactions. However, most other cryptocurrencies, including Bitcoin, don’t operate that way.
The only application of blockchain is Bitcoin.
This idea couldn’t be further from the truth. Bitcoin and other cryptocurrencies are a tiny byproduct of the blockchain revolution. Many believe Satoshi created Bitcoin simply to provide an example of how the blockchain technology can work. As I explore in
Chapter 4
, almost every industry and business in the world can use the blockchain technology in its specific field.
All blockchain activity is private.
Many people falsely believe that the blockchain technology isn’t open to the public and is accessible only to its network of common users. Although some companies create their own private blockchains to be used only among employees and business partners, the majority of the blockchains behind famous cryptocurrencies such as Bitcoin are accessible by the public. Literally anyone with a computer can access the transactions in real time. For example, you can view the real-time Bitcoin transactions at
www.blockchain.com
.
Risks
Just like anything else in life, cryptocurrencies come with their own baggage of risk. Whether you trade cryptos, invest in them, or simply hold on to them for the future, you must assess and understand the risks beforehand. Some of the most talked-about cryptocurrency risks include their volatility and lack of regulation. Volatility got especially out of hand in 2017, when the price of most major cryptocurrencies, including Bitcoin, skyrocketed above 1,000 percent and then came crashing down. However, as the cryptocurrency hype has calmed down, the price fluctuations have become more predictable and followed similar patterns of stocks and other financial assets.
Regulations are another major topic in the industry. The funny thing is that both lack of regulation and exposure to regulations can turn into risk events for cryptocurrency investors. I explore these and other types of risks, as well as methods of managing them, in Chapter 3.
Gearing Up to Make Transactions
Cryptocurrencies are here to make transactions easier and faster. But before you take advantage of these benefits, you must gear up with crypto gadgets, discover where you can get your hands on different cryptocurrencies, and get to know the cryptocurrency community. Some of the essentials include cryptocurrency wallets and exchanges.
Wallets
Some cryptocurrency wallets, which hold your purchased cryptos, are similar to digital payment services like Apple Pay and PayPal. But generally, they’re different from traditional wallets and come in different formats and levels of security.
You can’t get involved in the cryptocurrency market without a crypto wallet. I recommend that you get the most secure type of wallet, such as hardware or paper wallets, instead of using the convenient online ones. Flip to Chapter 7 to explore how these wallets work and how you can get them.
Exchanges
After you get yourself a crypto wallet (see the preceding section), you’re ready to go crypto shopping, and one of the best destinations is a cryptocurrency exchange. These online web services are where you can transfer your traditional money to buy cryptocurrencies, exchange different types of cryptocurrencies, or even store your cryptocurrencies.
Storing your cryptocurrencies on an exchange is considered high risk because many such exchanges have been exposed to hacking attacks and scams in the past. When you’re done with your transactions, your best bet is to move your new digital assets to your personal, secure wallet.
Exchanges come in different shapes and forms. Some are like traditional stock exchanges and act as a middleman — something crypto enthusiasts believe is a slap in the face of the cryptocurrency market, which is trying to remove a centralized middleman. Others are decentralized and provide a service where buyers and sellers come together and transact in a peer-to-peer manner, but they come with their own sets of problems, like the risk of locking yourself out. A third type of crypto exchange is called hybrid, and it merges the benefits of the other two types to create a better, more secure experience for users. Flip to Chapter 6 to review the pros and cons of all these types of exchanges and get to know other places where you can go cryptocurrency shopping.
Communities
Getting to know the crypto community can be the next step as you’re finding your way in the market. The web has plenty of chat rooms and support groups to give you a sense of the market and what people are talking about. Here are some ways to get involved:
Crypto-specific Telegram groups.
Many cryptocurrencies have their very own channels on the Telegram app. To join them, you first need to download the Telegram messenger app on your smartphone or computer; it’s available for iOS and Android.
Crypto chat rooms on Reddit or BitcoinTalk:
BitcoinTalk (
https://bitcointalk.org/
) and Reddit (
www.reddit.com/
) have some of the oldest crypto chat rooms around. You can view some topics without signing up, but if you want to get involved, you need to log in. (Of course, Reddit isn’t exclusive to cryptos, but you can search for a variety of cryptocurrency topics.)
TradingView chat room:
One of the best trading platforms out there, TradingView (
www.tradingview.com/
) also has a social service where traders and investors of all sorts come together and share their thoughts, questions, and ideas.
Invest Diva’s Premium Investing Group:
If you’re looking for a less crowded and more investment/trading-focused place to get support, you can join our investment group (and chat directly with me as a perk too) at
https://learn.investdiva.com/join-group
.
On the flip side, many scammers also target these kinds of platforms to advertise and lure members into trouble. Keep your wits about you.
Making a Plan Before You Jump In
You may just want to buy some cryptocurrencies and save them for their potential growth in the future. Or you may want to become more of an active investor and buy or sell cryptocurrencies more regularly to maximize profit and revenue. Regardless, you must have a plan and a strategy. Even if your transaction is a one-time thing and you don’t want to hear anything about your crypto assets for the next ten years, you still must gain the knowledge necessary to determine things like the following:
What to buy
When to buy
How much to buy
When to sell
The following sections give you a quick overview of the steps you must take before buying your first cryptocurrency.
If you’re not fully ready to buy cryptocurrencies, no worries: You can try some of the alternatives to cryptos that I describe in Part 3, like initial coin offerings, mining, stocks, and more.
Select your cryptos
Over 1,600 cryptocurrencies are out there at the time of writing, and the number is growing. Some of these cryptos may vanish in five years. Others may explode over 1,000 percent and may even replace traditional cash. In Chapter 8, I go through all different types of cryptocurrencies, including the most famous ones right now, such as Ethereum, Ripple, Litecoin, Bitcoin Cash, and Stellar Lumens.
As I discuss in Chapter 9, you can select cryptocurrencies based on things like category, popularity, ideology, the management behind the blockchain, and its economic model.
Because the crypto industry is pretty new, it’s still very hard to identify the best-performing cryptos for long-term investments. That’s why you may benefit from diversifying among various types and categories of cryptocurrencies in order to manage your risk. By diversifying across 15 or more cryptos, you can stack up the odds of having winners in your portfolio. On the flip side, overdiversification can become problematic as well, so you need to take calculated measures. Flip to Chapter 10 for more on diversification.
Analyze, invest, and profit
When you’ve narrowed down the cryptocurrencies you like, you must then identify the best time to buy them. For example, in 2017 many people started to believe in the idea of Bitcoin and wanted to get involved. Unfortunately, many of those people mismanaged the timing and bought when the price had peaked. Therefore, they not only were able to buy fewer bits of Bitcoin (pun intended), but they also had to sit on their losses and wait for the next price surge.
Now, I’m not saying that by going through Part 4 of this book, you’re going to become some sort of new-age Cryptodamus. However, by analyzing the price action and conducting proper risk management, you may be able to stack the odds in your favor and make a ton of profit in the future.
Chapter 2
Why Invest in Cryptocurrencies?
IN THIS CHAPTER
Comparing cryptocurrencies to traditional investments
Building capital appreciation
Boosting income potential
Empowering people with cryptocurrencies
Whether you’re a seasoned investor who has been exposed only to investment assets other than cryptos or you’re just starting to invest (in anything!) for the first time, you’re probably wondering why you should consider including cryptocurrencies in your portfolio. You’ve probably heard about Bitcoin here and there. Heck, you may have even heard of other cryptocurrencies such as Ethereum and Litecoin. But what’s the big deal about all these funny-sounding coins anyway? Is Litecoin just a very light coin that won’t take much space in your physical wallet? Is a Bitcoin made of bits and pieces of other valuable coins? Why on earth should you invest in bits of coins?
You can read all about the different types of cryptocurrencies, what they’re made of, and what their purpose is in Chapter 8. Here, I give you a general overview of the market as a whole. That way, you can decide whether the cryptocurrency industry is the right route for you to grow your wealth.
Cryptocurrency investing may make sense for many investors, for a growing number of reasons — from things as simple as diversification to more exciting stuff like joining the revolutionary movement toward the future of how we perceive money. In this chapter, I show you some exciting features of this new investment kid on the block.
Although you can read this book in any order, I encourage you to read Chapter 3 right after this one. That’s where I explain the other side of the coin, which involves the risks surrounding cryptocurrencies.
Diversifying from Traditional Investments
Diversification is the good ol’ “don’t put all your eggs in one basket” thing. You can apply this advice to literally anything in life. If you’re traveling, don’t put all your underwear in your checked-in luggage. Put an emergency pair in your carry-on in case your luggage gets lost. If you’re grocery shopping, don’t buy only apples. Even though they say “an apple a day keeps the doctor away,” you still need the nutrition in other kinds of vegetables and fruit.
You can go about investment diversification in so many ways. You can diversify with different financial assets, like stocks, bonds, foreign exchange (forex), and so on. You can diversify based on industry, like technology, healthcare, and entertainment. You can allocate your investment by having multiple investment time frames, both short-term and long-term (see Chapters 17 and 18 for details.) Adding cryptocurrencies to your investment portfolio is essentially one way of balancing that portfolio. Especially because the cryptocurrency industry is vastly different from traditional ones, this diversification may increase the potential of maximizing your portfolio’s growth. One of the main reasons for this higher potential is that the cryptocurrency market may react differently to various global and financial events.
In the following sections, I explain more by briefly looking into some of the traditional markets and exploring their differences from the cryptocurrency market. (Find out more about diversification in Chapter 10.)
Stocks
The stock market gives you the opportunity to take a bite of the profits a company makes. By buying stocks of that company, you become a part-owner of that firm. The more stocks you buy, the bigger your slice of the cake. And of course, the higher the risk you face if the whole cake is thrown out in the garbage.
The stock market is perhaps one of the most appealing investment assets. Novice investors may pick up a stock or two just because they like the company. For most investors, the charm of stock investing is the possibility that the prices will increase over time and generate significant capital gains. Some stocks even provide you with a periodic income stream through something called dividends. (I explain more about capital gains and dividend income in Chapter 3.) Regardless, for most stocks, the dividends paid within a year are nothing compared to the increase of the stock’s value, especially when the economic environment is upbeat.
This is precisely what stocks and cryptocurrencies have in common: When their respective markets are strong, you can generally expect to benefit from price appreciation.
Make no mistake, though, both markets have their bad days and sometimes even bad years. The stock market has a longer history that can guide investors through navigating the future. For example, even though it may not always seem like it, bad days happen less often than good ones. Figure 2-1 shows that for the 70 years between 1947 and 2017, the Dow, one of the main stock market indexes, ended the year at a lower price only 28.6 percent of the time (20 years). The other 71.4 percent (50 years), it went up.
Source: Macrotrends.net
FIGURE 2-1: Dow Jones 70-year historical chart by year.
However, stock investing naturally has some disadvantages. For example,
Stocks face different types of risks.
Even the most awesome stocks have risks that you can’t easily eliminate, such as the following (see
Chapter 3
for details):
Business and financial risk
Purchasing power risk
Market risk
Event risk
Government control and regulations
Foreign competition
The general state of the economy
The stock selection process can be a pain in the neck.
You have literally thousands of stocks to choose from. Predicting how the company will perform tomorrow can also be very difficult. After all, the price today only reflects the current state of the company or what the market participants perceive it to be.
By investing in the cryptocurrency market, you may be able to balance out some of the preceding risks. The cryptocurrency selection process is also different from that of stocks, as I explain in Chapter 9.
The final disadvantage of stock investing, however, is similar to that of crypto investing. They both generally produce less current income than some other investments. Several types of investments, such as bonds (which I discuss in the following section), pay more current income and do so with much greater certainty.
Cryptocurrency investing is quite asymmetric. Rightly timed, crypto investing can produce an enormous return on investment (ROI). For example, NXT has a 697,295 percent ROI, Ethereum has a 160,100 percent ROI, and IOTA has a 282,300 percent ROI since their initial coin offerings (ICOs; see Chapter 11). There is no other investment in the world that can top that. The best-performing stock is Netflix, and that’s around 64,000 percent in ten years!
Bonds
Bonds are also known as fixed-income securities. They’re different from cryptocurrencies and stocks in that you loan money to an entity for a period of time, and you receive a fixed amount of interest on a periodic basis. Hence its categorization as “fixed income.”
Just like with cryptocurrencies and stocks (see the preceding section), you can also expect capital gains from bonds. But these capital gains work a bit differently. Because the companies issuing bonds promise to repay a fixed amount when the bonds mature, bond prices don’t typically rise in correlation with the firm’s profits. The bond prices rise and fall as market interest rates change.
Another similarity among bonds, cryptocurrencies, and stocks is that they’re all issued by a wide range of companies. Additionally, many governmental bodies issue bonds. So if you’re looking to diversify only within the bonds market, you still can choose from a range of relatively safe ones to highly speculative ones.
Compared to cryptocurrencies and stocks, bonds are generally less risky and provide higher current income. But they still are subject to a variety of risks. Some of the risks involved with bonds investing are similar to those of cryptocurrencies and stocks — namely, purchasing power risk, business and financial risk, and liquidity risk. Bonds have an additional type of risk known as the call risk or prepayment risk. Call risk is the risk that a bond will be called, or retired, long before its maturity date. If the bond issuer calls its bonds, you’ll have to find another place for your funds.
The potential for very high returns on bonds is much lower compared to cryptocurrencies and stocks, respectively. But the risk involved with bonds is also comparatively lower. You can find more about cryptocurrency risks in Chapter 3.
Forex
Here’s an alternative investment that may be even riskier than cryptocurrencies. Forex is the geek term for the foreign exchange market. It’s the first thing I ever invested in. I’ve written books about it (Invest Diva’s Guide to Making Money in Forex [McGraw-Hill Education] and Ichimoku Secrets [CreateSpace Independent Publishing Platform]). In fact, my company’s original name was Forex Diva! We then switched to Invest Diva, literally in order to emphasize the importance of diversification.
By participating in the forex market, you buy and sell currencies. Not cryptocurrencies, but fiat currencies such as the U.S. dollar, the euro, the British pound, the Australian dollar, or any other currency any government issues. A fiat currency is a country’s legal tender that’s issued by the government.
Before Bitcoin became the celebrity of financial assets in 2017, most people associated cryptocurrencies such as Bitcoin with the traditional forex market because “cryptocurrency” includes the word “currency,” and crypto owners hoped to use their assets to make payments. However, as I mention earlier in this chapter, cryptocurrencies also have a lot in common with stocks.
When you participate in the forex market, you don’t necessarily invest for long-term capital gains. Even the most popular currencies such as the U.S. dollar are subject to a ton of volatility throughout the year. A good U.S. economy doesn’t always translate into a stronger U.S. dollar.
Heck, sometimes some countries, such as Japan, prefer to have a weaker currency because they rely heavily on exports. If their currencies are stronger than the currency of the country they’re trying to sell stuff to, they get a lower rate to sell the same product abroad than domestically.
Participating in the forex market as an investor mainly consists of short-to-medium-term trading activity between different currency pairs. You can buy the euro versus the U.S. dollar (the EUR/USD pair), for example. If the euro’s value appreciates relative to the U.S. dollar’s, you make money. However, if the U.S. dollar’s value goes higher than the euro’s, you lose money.
Analyzing the forex market needs a very different approach when compared to stock and cryptocurrency analysis. When looking at the forex markets, you need to focus on the issuing country’s economic state, its upcoming economic figures such as its gross domestic product (GDP, or the value of the goods produced inside the country), unemployment rate, inflation, interest rate, and so on, as well as its political environment.
However, just like the cryptocurrency market, you need to trade forex in pairs. In my online forex education course, the Forex Coffee Break, I compare these pairs to dancing couples — international couples who push each other back and forth. Traders can make money by speculating which direction the couple will move next. You can see this metaphor in Figure 2-2, where the Australian dollar (AUD, or Mr. Aussie) is dancing against the U.S. dollar (USD, or Ms. USA).
Source: InvestDiva.com
FIGURE 2-2: Forex metaphor: Australian dollar dancing against U.S. dollar.
You can apply a similar concept to the cryptocurrency market. For example, you can pair up Bitcoin (BTC) and Ethereum (ETH) against each other. You can even pair up a cryptocurrency such as Bitcoin against a fiat currency such as the U.S. dollar and speculate their value against each other. However, in these cases you need to analyze each currency, crypto or fiat, separately. Then you need to measure their relative value against each other and predict which currency will win the couple’s battle in the future.
You can also consider cryptocurrencies as a cross between stocks and forex. Though many investors invest in cryptocurrencies for capital gain purposes, you can also trade different cryptocurrencies against each other, the way you can in the forex market. I explore cross-cryptocurrency trading in Chapter 10.
Precious metals
Time to compare one of the most recent manmade means to buy stuff (cryptocurrencies) to one of the most ancient ones! No, I’m not going back all the way to bartering, where people exchanged their goods and services to fulfill their needs. In the following sections, I talk about the stuff with a bling. Before the advent of paper money, precious metals such as gold and silver were long used to make coins and to buy stuff.
The precious metals comparison is actually the best argument when someone tells you cryptocurrencies are worthless because they don’t have any intrinsic value.
Getting a little background
Back in the days of bartering, people would exchange stuff that provided real value to their human needs: chickens, clothes, or farming services. Supposedly, people in the ancient civilization of Lydia were among the first to use coins made of gold and silver in exchange for goods and services. Imagine the first shopper who tried to convince the seller to accept a gold coin instead of three chickens that could feed a family for a week. This change was followed by leather money, paper money, credit cards, and now cryptocurrencies.
Some may argue that precious metals like gold do too have intrinsic value. They’re durable. They conduct both heat and electricity and therefore have some industrial application. I know I used some gold and silver in experiments back in the day when I was studying electrical engineering in Japan. But to be honest, most people don’t invest in precious metals because they’re trying to conduct electricity. They primarily buy them to use as jewelry or currency. Today, market sentiment mainly determines the value of gold and silver.
Silver has more use as an industrial metal than gold does. Silver is used in batteries, electrical appliances, medical products, and other industrial items. However, despite the additional demand, silver is valued lower than gold. For example, at the time of writing, silver is priced at $16 per ounce, while gold is traded above $1,250 per ounce.
Keep in mind that England didn’t establish gold as its standard of value until 1816. (Standard of value means tying the value of the currency to its value in gold.) In 1913, the United States finally jumped on board through its Federal Reserve system. It backed its notes by gold and aimed to ensure that notes and checks would be honored and could be redeemed for gold.
Even though precious metals don’t have an arguable intrinsic value, they have long been a favorite investment tool among market participants. One of the main reasons is their historical association with wealth. Often, when investments such as bonds, real estate, and the stock market go down or the political environment is uncertain, people flock to precious metals. People prefer to own precious metals at these times because they can actually physically touch metals and keep them in their homes right next to their beds.
Comparing precious metals to cryptocurrencies
Besides the fact that you need to mine in order to get your hands on precious metals and some cryptocurrencies, one key similarity between precious metals and cryptocurrencies is that both categories have unregulated characteristics. Gold has been an unregulated currency at various times and in various places. Unregulated currencies become more valuable when investors don’t trust the official currency, and cryptocurrencies just seem to be another example of this trend. (I talk about cryptocurrency mining in Chapter 12.)
Investing in precious metals comes with a number of risk factors you need to keep in mind. For example, if you’re buying physical precious metals as an investment, you must consider their portability risk. Transferring precious metals can be expensive given their weight, high import taxes, and the need for a high level of security. In contrast, you don’t need to make a physical transfer with cryptocurrencies, besides the hardware crypto wallets I discuss in Chapter 7. But moving cryptocurrencies is much faster and less expensive, even with a hardware wallet, than transferring precious metals.
On the other hand, cryptocurrency prices have been more volatile in the short time they’ve been available on the markets than all precious metals combined have. The 2017 volatility in particular was due to the hype in the market, as I explain in Chapter 3. As cryptocurrency investing becomes more mainstream and more people use it for everyday transaction, crypto prices may become more predictable.
Gaining Capital Appreciation
Capital appreciation refers to the increase in the price or value of cryptocurrencies. And it’s one of the reasons many investors (and noninvestors, for that matter) look to jump on the cryptocurrency train. Initial Bitcoin owners sure waited years before they saw any sort of capital appreciation. Personally, I was one of the skeptics of the whole thing. Back in 2012, one of my investor friends in Switzerland told me to buy some Bitcoin. I arrogantly ignored him — and boy, did I regret my arrogance later! I started investing in cryptocurrencies when the price of Bitcoin had surged significantly. However, with some research, I was able to find more affordable cryptocurrencies that were expected to have similar capital appreciation.
In the following sections, I look at the history of capital appreciation for cryptocurrencies and discuss their growth potential — a big reason to consider investing in them.
With great expectations of capital appreciation and huge growth potential come great expectations of capital losses. That’s why I strongly recommend reading Chapter 3 before starting your trading activity in the cryptocurrency market.
Historical returns
Most of the gains in the cryptocurrency market up to 2017 were a result of market hype. In 2013, for example, many people bought Bitcoin as its price approached $1,000 for the first time. As you can see in Figure 2-3, shortly after, its price crashed to around $300, where it stayed for the following two years. The next big wave of growth came in January 2017, when Bitcoin’s price broke above the $1,000 level.
Source: tradingview.com
FIGURE 2-3: Bitcoin price between 2013 and January 2017.
If you had bought one Bitcoin at $300 at the end of 2015, by January 2017 you would’ve had $700 worth of capital appreciation (when the price hit $1,000). But of course, the gains didn’t stop there. As you can see in Figure 2-4, after the break above $1,000, Bitcoin’s price managed to go all the way up to close to $20,000 by the end of 2017, when it came crashing down to a range around $6,000.
Source: tradingview.com
FIGURE 2-4: Bitcoin price between 2016 and July 2018.
