“Nothing ventured. Nothing gained.” – Benjamin Franklin
Over the past few months, I have been investing in cryptocurrency. Like most, I wanted to get in on the action and the crazy returns that took place over Winter 2017. I still have my original principal amount invested in multiple different cryptocurrencies and will continue to invest and trade for years to come. During this time I learned a lot of valuable lessons that I wish someone educated me on when I first entered this market. These lessons could have saved me a lot of money, time and headache. I am sharing these lessons with you because I strongly believe in the value of cryptocurrency and I want others to come into this market but with an educated mindset and a realistic understanding. This will allow cryptocurrency to continue growing in value and popularity while preventing novice un-informed day traders from screwing up the market.
1. Cryptocurrency is not Coinbase. Coinbase is not cryptocurrency.
Most people want to get in on the cryptocurrency action and do not want to download or go through a bunch of unfamiliar sites. Because of this, companies like Coinbase have created an easy platform for anybody to start investing and trading cryptocurrency. However, Coinbase is a very small part of the overall cryptocurrency market. Coinbase only covers the four main cryptocurrencies: Bitcoin, Bitcoin Cash, Etherium, and Litecoin. While Coinbase should be praised for allowing people easier access to get involved with cryptocurrency, it is important to understand that there is a whole other side to the market that is outside of Coinbase. There are over 1384 cryptocurrencies and 130 exchanges as of January 2018 and that number will definitely change grow over the next year. What this means is that when you hear about the overnight millionaires and the high rates of return these are most likely coming from individuals who have invested in cryptocurrencies outside of Coinbase. If you want in on that action and want large returns then you have to seek investments outside of Coinbase.
To put things in perspective. Over the past two months, the returns that I have seen on Coinbase was:
- Bitcoin: -1.45%
- Bitcoin Cash: 170%
- Etherium: 152%
- Litecoin: -7%
Compared to the returns for the same time period in other non-Coinbase traded cryptocurrencies :
- XRP: 792%
- Cardano: 790%
- NEM: 317%
When you compare these returns you can see that my investments in Coinbase dwarf in comparison to what I was earning outside. On a $1000 investment (distributed evenly) in Coinbase, I would have made: $284. This is an impressive return for two months. However, outside of Coinbase on a $1000 investment (distributed evenly), I would have made $5326. This is almost 19 times larger.
The reason I bring up this comparison is to understand that the overall cryptocurrency market is much broader than just Coinbase. Limiting your thinking and investing to just Coinbase will result in large returns but they will only be a fraction of what you could be earning outside of Coinbase.
2. You either believe in cryptocurrency. Or you do not.
After January 7th, 2018 people saw one of the largest crashes in cryptocurrency history. Within a few days, there was a 100-500% decline on most (if not all) cryptocurrencies. Bitcoin itself fell from a record high of $16000 all the way to $9500. During this time the true emotions of all cryptocurrency investors and traders came out. Many fair-weather investors and traders started to jump ship and start selling their cryptocurrency assets in hopes of cutting their losses. Buying of most cryptocurrencies halted. Media outlets start to label cryptocurrency as a bubble or hype that had just burst. This lead to even more fear and panic, resulting in even more selling of coin and less buying of it. Meanwhile, others sternly held onto their cryptocurrency with the strong belief that it will rebound better than ever and in some cases, these people even bought more while the prices were low.
The fact that cryptocurrency did not completely die, managed to stabilize and is slowly coming back proves that there are ultimately two groups of investors. Those that believe in cryptocurrency and those that do not.
For those individuals that are no believers in cryptocurrency, this is a quick money making scheme. They want to get in while the price is low and sell when the prices are high. Their ultimate goal is to find a low cryptocurrency, time the market when the price hits a high and then immediately sell. They do not care if that cryptocurrency has a substantial market cap, origin or lifespan.
Those that believe in cryptocurrency are in it for the long-run. They believe in the ideals of cryptocurrency and the power of block-chain technology. Their investment is seen as funding a paradigm shift in the way the world sees and treats money, from a centralized and highly controlled system to a decentralized and open system. When the market downturns and values fall they understand that this is natural because of how relatively new cryptocurrency is in the overall maturity. Furthermore, they are convinced as block-chain technology becomes more widespread and cryptocurrency becomes more widely accepted, the value of cryptocurrency will rise and they will see a big return on investment.
I originally started as someone who did not believe in cryptocurrency. I was skeptical about the longevity of it. I only got into trading it because I wanted to get-in on the big returns that everyone else was talking about. However, as I did more research on cryptocurrency and listened to people like Andreas M. Antonopoulos, I started to become a believer and supporter. During the mid-January crash, I did not sell and even doubled-down on my investments when the price hit lows. This paid off in a big way because as the market started to stabilize and recover, I still hold onto my original investment and have not lost a single dollar. If/when the market recovers to the prices prior to the crash, I will gain interest on the low prices that I purchased. This will allow me to break even at the very least. If/when the market exceeds the prices before the crash then I will start to earn interest on my original investment. This will allow me to earn even more interest. Overall, I learned that I am a believer in cryptocurrency, I will invest for the long-run and when this crash is over, I will either walk away with a zero-sum or even more returns than prior to the crash.
3. It is a 24-hour/365-day market.
Typical exchanges like the New York Stock Exchange or London Stock Exchanges run during set business hours and days of the year. They close daily allowing trades and transactions to stop. The benefits of this are:
- Preventing run-off/un-interrupted loses or gains
- Equal opportunity and timing window for investing and trading
- Stabilization time for investors to regain thoughts and strategies before the next open window of trading and investing
Cryptocurrency exchanges run 24 hours a day. They do not close and they do not suspend for holidays. This means that at every given moment your investments are in flux. Any trades or investments that you process will be made at the rate of that moment. There is no close price or open price. There are positives and negatives for this.
On the positive, if the market is doing well and booming, there will be a run-off growth with no closing or interruptions to slow it down. This also means that you can better time the market. You can leverage arbitrage (simultaneous purchase and sale of an asset to profit from a difference in the price) through alerts or a computer program to make money on the constant volatility of the market. A currency that is constantly trading will always have peaks and valleys.
On the negative, if the market is doing poorly there will be run-off losses with no-closing or interruptions. The January crash is a good example of this. As losses started taking place, a 24-hour market allowed people all over the world to sell and dump their cryptocurrencies at all hours. Another negative is that as and when events in the news unfold about the cryptocurrency market, the market will react. In the case of South Korea closing multiple mining operations, within an hour of the news spreading, people were able to immediately sell their cryptocurrency in fear. Those in the other countries woke up to see their investments dropped even further while they were asleep and helpless to do anything about it.
What I learned from this was: 1. Set price alerts. I set alerts for notifications when the price dropped or jumped to a certain value. This allowed me to buy or sell during peaks or dips. 2. Stop checking the prices of my investments every few minutes. I used to constantly check my phone for the price to see the increase or decrease. Understanding that the market was 24 hours, I put my faith in the price alerts and enjoyed the peace-of-mind of not constantly checking my phone.
4. You can gain cryptocurrency in other ways than just mining and buying
Most people believe that the main ways to acquire cryptocurrency are by mining it or buying it. Although this makes up the ways that the majority of cryptocurrency is acquired, one other key method of acquiring is often overlooked. Earning. Cryptocurrency is a currency and the major purpose of it is to provide the means to purchase a good or service. Thus, cryptocurrency can be acquired by selling something and collecting cryptocurrency as the payment. People often overlook this because: 1. They still do not trust or believe in the system 2. They treat cryptocurrency as security (Negotiable financial instrument that represents some type of financial value like a stock, bond or mutual fund) rather than a currency. They see investment as a stake rather than a purchase.
I have learned that earning cryptocurrency is much easier, quicker and cheaper than buying some on an exchange. When you buy on an exchange you have to face transaction fees and you are subject to the price at the time of sale. When you sell goods and services for cryptocurrency, you are able to negotiate the terms and price. Although cryptocurrency is priced against the US Dollar, it is not backed by any government or commodity. As such, the true value of the cryptocurrency is in the purchasing power it yields. As such, you can set an amount for a good or service that you see fit. You do not have to price the USD equivalent in cryptocurrency. In fact, you can charge a premium for accepting cryptocurrency over USD. For example, if I am an artist and I make a painting. I can set the price for that painting differently based on the currency. I can accept $10000 USD or I could accept 1 Bitcoin (current exchange into USD is $10,650). Since I face risk and volatility in accepting Bitcoin and because the cryptocurrency is still not widely accepted, I charge a premium. And there are many people who are willing to pay that premium. They pay that premium because they face the same risk and volatility in converting it to USD.
The key takeaway I learned is that cryptocurrency can be and should be earned. It is one of the easiest ways of acquiring more, avoiding transaction fees and getting more than the USD equivalent if you went through an exchange. Moving forward, as I sell items on craigslist, I will start to check the “Will accept bitcoin” option.
5. For cryptocurrency to grow. Blockchain has to grow.
As mentioned in the previous point, “Although cryptocurrency is priced against the US Dollar, it is not backed by any government or commodity. As such, the true value of the cryptocurrency is in the purchasing power it yields”. Cryptocurrency is a fiat currency. The US Dollar and most other currencies are fiat. A fiat currency is: a currency without intrinsic value established as money, often by government regulation. It has an assigned value only because the government uses its power to enforce the value of a fiat currency or because the exchanging parties agree to its value. This means that the value of a fiat currency is determined by the entity which backs or the agreement of the exchanging parties. For cryptocurrency, the backing entity is block-chain technology. As block-chain technology becomes more widespread, used and trusted, the value of the cryptocurrency increases. Thus, if we want the cryptocurrency to grow in value, the value of the blockchain has to be grown.
The fundamental way of growing blockchain is simply to perform more transactions using cryptocurrency. The more we buy and the higher the amount, the more trust and validation is put in blockchain. Why do we have supreme faith in the USD? Because we know that for big transactions or small it is accepted and trusted as a form of payment. Conversely, cryptocurrency has only been used for small purchases. Once, the world sees large transactions go through successfully, the credibility of blockchain increases and the value of the cryptocurrency rises. Blockchain is still a relatively new concept to most and it has yet to scale on a mass level to show people that it can withstand millions and billions of simultaneous transactions without faulting or breaking down. As we start to carry out more and more transactions using cryptocurrency, blockchain gets put to the test. If blockchain gains enough trust and credibility we can expect big institutions to start using it like banks or the New York Stock Exchange. When that happens, we are bound to see all cryptocurrencies boom and get treated as legitimate currencies.
I often think back to Laszlo Hanyecz, a Florida man who exchanged 10,000 Bitcoins for two Dominos pizzas. We criticize this individual, making jokes about the fact that his 10,000 are now worth over $104 million USD and that he mad the biggest mistake of his life. From what I have learned and explain in this point, I firmly believe that without Laszlo Hanyecz and his purchase, Bitcoin would not even be worth half of what it is worth today. The year after his purchase Bitcoin started to grow on an exponential scale and jumped all the way from $0.06 to $11.19. This is an18650% growth. During these days, Bitcoin was relatively unknown and not priced against the USD. Thus, the value/purchasing power for this fiat currency was purely established by Laszlo’s purchase. His purchase was so fundamental and important to cryptocurrency because it showed that this computer-generated currency has value in the real world and offers a decentralized form of payment outside of the federal government. It is my firm belief that is what drove investment into Bitcoin and got us to the prices we see today.
As an investor in the idea of blockchain and cryptocurrency, I will start to sell items on craigslist and check the “Will accept bitcoin” option. The more I can contribute to the mainstream use and acceptance of cryptocurrency and blockchain, the more profit and growth we will all see reflected in the markets.
What lessons have you learned from cryptocurrency?
What I’ve shared above are learning from investing, listening to podcasts and reading literature on cryptocurrency. However, I am always in search of new information that can broaden my understanding of the subject. I would love to hear what important lessons you have learned or if you have any corrections to my points.. Feel free to comment below with some examples. Please share so we can learn and grow.