We have all heard about it. Blockchain and its related technologies will change the future. But we don’t know exactly how. This makes for exciting times. In the race to the future, the Wild Wild West of crypto trading is both extremely volatile and risky.
Welcome to the new cryptocurrency boom, a roiling, boiling mess of speculation, broken transactions, and confusion. And that’s just how the crypto lovers like it. – Techcrunch
What is Cryptocurrency Anyway?
In general, cryptocurrencies are digital currencies that are transferred from peer-to-peer, without a middleman. Transactions are recorded on a distributed public ledger called the blockchain and are encrypted using cryptography. The transactions are confirmed by miners who solve cryptographic puzzles to add the transactions to the blockchain, and are rewarded in crypto for their efforts. (Mining currently consumes an enormous amount of electricity.)
The teams and individuals creating the software and cryptocurrencies are generally attempting to improve something, somewhere. The most cited example is transferring funds. When you send money using Western Union, Paypal or even your bank, you are basically sending fiat currency in digital form. But there are limitations to what you can do. It can take time, and the middle-man takes a cut. Some cryptocurrencies attempt to solve this problem with instantaneous transactions, no middle-men, and low-to-no fees. The idea is awesome. But in reality, the crypto space has turned into something entirely different.
In 2018, the smartest move on the part of companies making ICOs and Bitcoin-related products will be to wean the public and the media off the “digital cash” concept. – Wired
The Definition Is Evolving… Fast.
All cryptocurrencies and technologies have different goals. There are different features for different purposes. Their goals are laid out in their whitepapers. The most common objection comes from those who insist cryptocurrency has no intrinsic value. The biggest obstacle to widespread adoption is acceptance. What good is a currency that you can’t use to acquire goods and services that you need? It’s like trying to use Euros to pay your rent in America. But this argument assumes that all cryptocurrencies are attempting to create a unit of value aimed at replacing fiat currency. People who hold this idea do not entirely understand what cryptocurrency has become since the advent of Bitcoin.
Many people think there has to be one winner – “one ring to rule them all.”
Bitcoin (BTC) will always be the grandaddy. Like the Mercedes of automobile history. You can’t argue with first. That being said, look at any slice of time in the 20th century during periods of intense innovation and you will see winners and losers (VHS vs Beta), as well as competitors which co-exist (Windows vs Mac). The implications for cryptocurrencies and distributed ledgers are endless. Think seamless and instantaneous international money transfers, options for the unbanked, the currency for the internet of things, smart contracts, units of transferable green energy, and more.
There are coins inviting the development of eco experimentation to seek solutions to environmental problems. There are those that propose real estate smart contracts. There is even a coin inspired by a meme to parody the Bitcoin hype, and is now worth more than a $1bn in market capitalization. The Wild Wild West of Crypto Trading is a crazy space where anything is possible, nothing is certain, and it moves at lightning speed.
“A danger is that Bitcoin could end up being the Friendster of the crypto world, while Facebook – the real winner – may still be in development somewhere.” – Barron’s Asia
In 2017, Initial Coin Offerings (ICOs) popped up in fields ranging from art to infrastructure. Traditional venture capitalists who remember the days of the dotcom bubble are divided. Some are screaming “ponzi,” while others are trying to get in front of the game by backing projects ahead of planned ICOs. “If investing is driven primarily by greed and fear, few subjects elicit either more greed or more fear among venture capitalists these days than cryptocurrencies.”
It’s clear that blockchain and its related technologies are not going away, ever. We are about to see our world change dramatically. This is just the beginning. However, many of the myriads of cryptocurrencies and their related technologies being created today in different sectors will fail. And the massive amount of energy consumed by mining still hasn’t been extensively addressed. People talk about the current volatile hype being a “bubble.” Perhaps, but so what? Who knows what technologies and services will evolve from this space. As long as the world is connected by the internet, the implications are endless.
“The dot-com bubble was messy, but if we look at some of the largest companies that exist today they are a result of the dot-com bubble and they are part of our everyday lives,” Mona El Isa, Founder of Melonport.
Regulation Is Coming… Or At Least They’ll Try.
While the SEC continues to warn investors about Initial Coin Offerings (ICOs), they are less vocal about trading coins on an exchange. There are zero protections in place for crypto investors. If you make a mistake while making a transaction, there is very little anyone can do for you. In addition, you are on the hook for capital gains taxes as in any investment. And the tax liabilities at this stage in the game are not easy to discern.
Every country has its own stance on crypto. For example, in their quest for a cashless economy, Denmark does not view cryptocurrency as property and thus does not impose capital gains taxes. However, in the US, although the IRS has not officially updated their position since 2014, cryptocurrency is treated as property rather than currency. This means you are on the hook for capital gains taxes of 10%-37% based on your tax bracket. If you hold onto your crypto for more than one year, it becomes a long-term gain and is taxed at 0%-20%. The GOP’s new tax bill will muddy the waters even further by taxing on every trade.
“Transactions that are routine to experienced crypto enthusiasts—like hard forks, or swapping between coins at the tap of a button—are fiendishly complicated when it comes to reporting to the Internal Revenue Service.” – Quartz Media
Before You Start, Read This.
Ask yourself why you’re jumping onto this crazy train to the Wild Wild West of crypto trading. Some crypto investors are merely speculating and want to make money. But there are also those who believe in the future applications of cryptocurrencies and are literally betting on which technologies are going survive. Of course, they want to make money as well, but they have more of an interest in how these technologies will shape the future and solve specific problems. In this sense, many investors of certain technologies that propose to resolve specific problems are quasi-impact investors. Either way, it’s a wild ride. Everyone is rooting for their favorite coins, technologies, and ideas. But nobody really knows what is going to happen.
Investing in cryptocurrencies for those not technically inclined is difficult, and can be downright dangerous. But it’s not impossible. You can learn anything on the internet. But be prepared to spend a bunch of time doing your own research (DYOR). It is important to engage with and learn from the crypto communities, but equally important to keep your head together. There are more opinions than there are coins, and most people commenting on crypto are pursuing their own interests. A continually updated and extensive collection of resources can be found on Github. You will have to register (it’s free). Which brings up another issue: be prepared to manage a massive amount of logins, passwords, and private keys.
Anyone interested enough to enter the crypto space should be interested enough to first read Satoshi Nakamo’s original 2008 whitepaper which was released in the wake of the financial crisis. The whitepaper is only 8 pages long. Satoshi is the mysterious father of Bitcoin. (A coin’s value is measured in “satoshis.” One satoshi is 100,000,000th of a Bitcoin.) Reading Satoshi’s whitepaper is the best way to decide whether you want to spend any more time in this space. While you don’t necessarily have to be a programmer or mathematician to invest in crypto, you should at least try and wrap your mind around what it is, or nothing will make sense to you. You will also need to learn some new terminology.
The very basics for researching a coin starts at a datafeed like coinmarketcap.com. A datafeed gathers data from exchanges, social media and news sources. It is where traders can view specific cryptocurrencies, find links to their websites, charts, historical data, the exchanges they are listed on and their social media feeds.
While social media is a must for research, it is important to remember that what you read will be highly subjective. Use your head. Always look at a coin’s website. What are its goals? What is it trying to accomplish? Always read a coin’s whitepaper. Is it realistic? Does the team behind it have a roadmap for how they plan to achieve their goal? Always investigate the team of a project. Who are the people behind the scene? Google them. Look them up on LinkedIn and YouTube. Look for interviews. Read the blog on their website. Find them on social media.
Read everything. Diversify your resources. Avoid getting too hyped by a couple of random YouTube guys. Don’t let yourself take action because of a single tweet or Instagram post. Control your emotions. Do not let a perceived fear of missing out (FOMO) hurry you into an unplanned action. Otherwise, you could pay more for a coin than you should. Slow down. Be curious. Double check your sources. Get both sides. Get all sides. You will hear extreme opinions all over the place, but at the end of the day, it’s your money and your call. If the idea of spending hours working out when to sell which coins and when to buy others while keeping your emotions in check doesn’t appeal to, you may want to avoid the Wild Wild West of crypto trading.
Alternatively, you can do your research, pick the coins you think will win the long game, hold onto them (HODL) offline in a hardware wallet, and wait to see what happens. Taking this approach rather than actively trading can save you from the transactions fees imposed by exchanges. (Though you won’t escape withdrawal fees.) Did you pick a winner? Who knows. But you will have a better chance if you do your due diligence. And you will feel much better about your investment and be able to ride out the lows if you believe in the project you have invested in.
Beyond the world of actually buying and trading coins, there are the technicalities involved in holding them. Currency exchanges, wallets, computers and cell phones can and do, get hacked. Wallets are continually tweaked in real time. People have lost their investments by not understanding how to move coins from an exchange to a wallet. People have lost coins trying to move them from one exchange to another. People have lost coins trying to move them from one wallet to another. People have lost their pin or private keys. Make sure you understand what you are doing before you do it. Once you pull the trigger, there is no turning back.
There are all kinds of characters hovering in any space where money is being made. You will see sketchy marketers come out of the woodwork to try and sell you information. People claiming to be insiders and crypto-gurus will try to convince you that you need to buy their newsletters, classes, books, videos, or crypto signals apps. Here’s an alternative. Sign up for a course on Udemy or Coursera instead. Whipping out your credit card with the idea that someone will speculate for you is foolish.
Skepticism is your friend. The list of people who have been duped into sending their money to someone who claimed they would trade for them grows daily. In addition, people have been tricked by logging into fake websites. People have logged into fake wallets and lost their coins. Coins have disappeared from online wallets services. People have invested in ICOs that disappeared. Slow down. Be skeptical. Double check everything before you click.
Do Not Gamble Your Living Expenses
As with any investment, never trade with money you need for living expenses. Do not burn through your emergency savings. Always assume that you will lose your investment. Make sure that the loss won’t hurt you. If you don’t heed this warning, chances are you will be trading with your emotions. Trading and investing brings out all of your emotions. Trading with money you can’t afford to lose intensifies this.
This brings up another important point. Some crypto exchanges take credits cards. Don’t do it. Leave your credit cards alone. You won’t want to end up paying interest on a crypto loss.
This is a game of strategy – sort of – because anyone’s strategy could be wrong.
There is very little rhyme or reason to the rise and fall of altcoins. A lot of it is hype and excitement generated by the very people investing in it. Anyone who is holding a lot of one coin hypes it up. Just like anyone holding large amounts of stock in a company would likely endorse that company. Conversely, people may also try to spread fear, uncertainty, and doubt (FUD) about a competing coin to make it appear inferior in order to promote their own preferred coin. Or short the other coin. Or people just freak out and spread fear, which freaks other people out enough to where they could sell off their coins prematurely. Dig behind the FUD. See DYOR.
There are many factors involved in the volatility of a coin. Discerning between valid information and rumors that drive prices up and down is extremely difficult. Announcements of corporate partnerships, government regulations, and big movements by large holders called “whales” who manipulate cryptocurrency prices by buying or selling in massive amounts, can all disrupt the markets. Exchanges can flash crash leaving traders holding the bag in mid-transaction. And bots can create pump-and-dumps by manipulating prices.
Many technologies will fail. Some will be abandoned. Some will become obsolete. We don’t know who will win and who will be relegated to the increasing list of dead coins. Currently, there is more speculation than utility in cryptos. This means that the demand is coming more from speculators rather than actual users of the technology, products or services underlying the coin.
Due to the differing speeds and locations of exchanges, the opportunities for arbitrage profits far outpace those of the traditional trading space. This is drawing the attention of Wall Street. They won’t stay out for long. Of the 100 funds created over the past 6 years, 84 of them came from 2017. It’s just a matter of time before the big guys move in and make it more difficult for retail investors to compete. This is driving many retail investors to jump in before the big boys do. Currently, there is no all-around Bloomberg Terminal in the crypto space that pulls together data, newsfeeds, and information into one real-time investment system. Wall Street has that stuff. It’s coming. (Unless crypto gets there first.)
“Bitcoin has rocketed over 1,500% against the dollar in 2017, spurring huge amounts of interest from both institutional and retail investors.” – Business Insider
If, in spite of all of this swirling chaos you still want in, make sure that you are actually interested in the technology enough to wade through reams of information, read (or learn to read) financial charts, follow multiple forums, and weigh diverse advice with your own critical judgment while keeping your head in check. Crypto trading can be psychologically taxing due to the emotions involved. In short, it can turn into more than a hobby. Obsessive Cryptocurrency Disorder is already a thing.
Right now, cryptocurrencies are only worth what everyone agrees they are worth, and this changes in nanoseconds. There is a market for this highly speculative thing called cryptocurrency because someone is willing to buy and someone else is willing to sell. Yes, people have made a lot of money trading cryptocurrencies, but people have lost a lot, too. At Well Wallet we are choosing a neutral position on this. We neither encourage nor dissuade you. But we remind you, as with all investment vehicles, there is risk. And with crypto, that risk is extreme and unpredictable.
Final Rules of Thumb
If you do decide to jump in, and since the Wild West of Crypto Trading has no rules, here are some final parting thoughts before opening an account on any crypto exchange:
- Do not trade more than you’re willing to lose. Seriously. The prices can move 50% or more in either directions … in one day.
- Be aware that transaction fees vary from exchange to exchange and they change frequently. These fees can eat up gains, so be sure to check an exchange’s fee schedule.
- Do not use credit cards. It is imperative that you not use high-interest debt (or any debt) to fund a highly speculative investment.
- Once you do make your initial investment back, take it out and play with the house’s money (i.e. your gains).
- Enjoy the ride and know that this bubble could burst at any moment.
We’d love to hear from you. What are your thoughts about cryptocurrency trading?
Photo by Mathew Schwartz.
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