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Digital Currencies

5/24/2017 - Posted by joe

I recently got interested in Digital Currencies, such as Bitcoin and others and decided to start learning about what they were, why they're interesting, and how to invest.

There's a lot to understand about cryptocurrencies or digital currencies (DCs), and I'm just getting started learning about it. But if you want to learn more a good place to start is https://www.cryptocoinsnews.com which is just a place to learn about what's going on in the cryptocurrency world.

If you've never traded before there is a lot of good DCs specific trading information in this series: https://hacked.com/trading-101/

You should research DCs based on adoption, business, and technology then make a call based on whether you think they'll be successful in the future. Different DCs are trying to do different things. For example Bitcoin (BTC) was the first crypto currency and is the defacto standard to the point where most transactions start with BTC. So to get started buying bitcoin is a good start (and frankly a fine investment strategy. BTC has gone up 11% in just 24 hours, so if you put in $100 yesterday, you'd have $111 now, which is an insane return. Once you own BTC you can buy other coins, anything other that BTC is called an "altcoin." Take care though, historically DCs have lost significant value nearly over night BTC $1200 -> $200 and ETH from $30 -> $8.

Certainly do your own research, and none of these returns are guaranteed. Also, never invest more than you're willing to lose. There's a very real possibility that a coin could go to zero value and you could lose everything, of course that could happen in the stock market too.

Websites

  • https://www.cryptocompare.com - A good place to read up on DCs. Use their portfolio to track all of your DC in one place
  • https://www.coinbase.com - A good exchange for BTC, ETH, LTC
  • https://gatehub.net - A good exchange for Ripple, but difficult to use. Buy BTC from another exchange, and send it here through ShapeShift
  • https://shapeshift.io - Allows you to convert any asset to another with no account (just a fee)
  • https://www.gdax.com - The exchange behind coinbase, which gives you more information if you're into nerding out about the details and are a real trader.

DCs - each DC has a name and a symbol Bitcoin's symbol is BTC, but Ripple is XRP. There are also different version of coins with the same name but different symbols, so be careful to invest in the coin you think you're investing in.

Digital Currencies

Here are some popular coins:

  • Bitcoin (BTC): The first DC and the current standard. Good returns right now, that will likely continue into the next 6-12 months. I imagine BTC will stay around for a long time, and will stabilize to reduce volatility significantly. That said, there is a ton of internet drama surrounding BTC at the moment (including a potential Hard Fork, see below under warnings)
  • Etherium (ETH): This is the coin I'm most excited about. They took what BTC did and built on it a programming language which allows developers to build anything in the world on top of it. Without getting into the details, this allows ETH to be built into a lot of other areas, making it a financial framework for other systems.
  • Ripple (XRP): Currently the financial system uses a system called SWIFT, which was built on mailing and cashing physical checks. SWIFT is really slow, it's why transferring money from one account to another can take days. XRP wants to replace SWIFT. Right now XRP is the riskiest DC I invest in, but if they're successful in replacing SWIFT it could be really, really huge.
  • Litecoin (LTC): Litecoin is an interesting DC that could augment or replace Bitcoin in the very long term. I think it's interesting enough to watch.

There are a ton more DCs out there (seriously over 800 different DCs), but I recommend you stick to the top 20 to research (https://coinmarketcap.com/all/views/all/). Some other coins that might be interesting to research are: DASH, XMR, XLM, ZEC, and STRAT for different reasons.

Wallets

Wallets are where you hold your DCs. You can have an online or offline wallet. Online wallets have been known to get hacked, so only using a wallet tied to an exchange while trading is a good idea. Once you've made your purchases online, then move your DC to an offline wallet for long term storage. You can generate a paper wallet, which includes all of the information you need to use your DC again, or you can buy an electronic hardware wallet. I recommend the Ledger Nano S, which includes some really great security features to keep things safe.

One of the benefits of Digital Currencies is that there is no central authority, but this also means that if you lose your wallet or mess up the generation and cannot recover your own money, it is not possible to recover it.

Exchanges

You buy DCs through an exchange, not all exchanges allow you to buy any type of DC. I use two: coinbase.com and gatehub.net. Coinbase is nice and is pretty easy to connect your bank account to. You can also buy DCs with a credit card. It's fine to do that, but there are added expenses if you use a credit card.

Depending on where you're located http://poloniex.com is a good exchange that supports many DCs. They're not available in Washington.

You can convert almost any DC to any other DC using shapeshift.io without an account. This is really nice if you're buying anything uncommon like XRP.

Laws

You do need to report any gains to the IRS, so keep good books on your purchases and sales. You must follow all currency trading laws for your state as well, so read up on those. All of this is very early, and seems to be run by a bunch of kids, so don't expect your exchange to track your tax implication for you.

Mining

You may hear about mining, which is how many of these coins are created. So if you don't have any money, but you do have a bunch of computer power you can "mine" for coins instead of buying them. Most calculators show that it's not worth the power you put into it.

Warnings

There's a possibility that any of these coins could be "hard forked" which means that one coin could be turned into two incompatible coins. If your money is in an online wallet (like in an exchange) it's possible that the wallet could only support one of the currencies. If that happens you'll lose the other currency. You won't lose any current value, but you'll lose potential value of the unsupported currency. You can mitigate that by moving your currency into an offline or paper wallet. If you control your DCs you can know it's not lost.

Currently BTC is talking about a "hard fork" http://www.investopedia.com/terms/h/hard-fork.asp

Also, seriously, don't invest money you can't live without. Don't cash out your 401k, don't put up your rent money. Greed changes people, don't get too excited.