JOURNEY TO THE FUTURE OF MONEY – BITCOIN AND BEYOND
I share my journey as I've been asked more and more questions how to begin and where to start. Hopefully, this will make your first steps easier than it was for me.
Bitcoin – Future of Money
Value and Money
I wanted to know why, my friend thought $2500 was a very, very, very cheap price for BTC. Like a lot of people, I was skeptical. As a successful-investor-in-progress one of the fundamental questions I ask is, what is the underlying value of an asset long-term? I’m a value investor and so I wanted to understand what makes bitcoin or cryptocurrency valuable? What made it jump from a mere few hundred dollars to nearly $5000 in a year (at that time)?
As one of my friends said, first you need to understand money in order to understand bitcoin and what makes it valuable. I realized, bitcoin was extremely valuable not so much as an investment, but more so as an instrument of exchange that is independent of any centralized institution. That says it all for me: I want to be part of the revolution that will change this world with the future of money.
My First (Micro)Bitcoin
Geeks and fintechs make it sound so easy to buy bitcoin or other cryptocurrencies. It’s not as simple as it seems, unless you naively expose yourself to security risks and exorbitant fees. So, I bought a small amount of crypto just to try out the transaction and understand how it works.
Security and Storage
Once I was convinced of the value of bitcoin and the blockchain, my next concern was security. I heard that the early adopters — those who bought bitcoin when they were only a few dollars each — had two regrets: one, that they didn’t buy more, and two, that they didn’t take security seriously.
Bottomline: Exchanges automatically create a wallet for you but you don’t have to keep your crypto coins there. You can create as many digital wallets as you want independent of any institution.You can keep your wallet on USBs (offline) or on paper, so they can’t be hacked. The most recommended form of secure wallet is with cold storage (offline) with NanoLedger or Trezor.
To create your digital wallet, you need a bitcoin address. Go to www.bitaddress.org. Hover your mouse over the random texts until you see 100% on the numbers above. It will automatically generate for you a QR code with your public key and private key. For detailed instructions, watch this video on Intro to Paper Wallets and Cold Storage. Alternatively, you could create your free wallet at www.blockchain.info.
Exchange
Signing up to one is easy. I first signed-up with a European based exchange, but that requires an international wire transfer (I’m US-based). So, I signed up to a US-based exchange which allows deposits to a linked bank account with no fees. Also signed up on an Aus exchange for Aus cash so I don’t have to convert and pay currency exchange. Diversification is part of the security strategy. To hedge against risks involved with exchanges — such as hacks or technical hiccups — institutional investors tend to use multiple exchanges.
The most popular US-based exchanged is Coinbase because of its friendly user-interface and is recommended for newbies. Coingecko provides a comprehensive list of trading platforms or exchanges depending on the type of cryptocurrency you want to buy. Just click on the coin you want, scroll down to the middle of the page that shows tabs then click on “Trading Exchanges” tab. The site also provides the latest comprehensive price and other information for different cryptocurrencies.
Depositing/Withdrawing
1. Bank account – you could link your bank account to the exchange and transfer money that way; I opted out of this.
2. Wire transfer – I chose to deposit fiat currency into cryptocrurrency exchanges by wiring money from my bank account. In the USA, this is a very inefficient process as it requires going to the bank physically except for business accounts. Note that the exchange may not accept money wired from a bank account different from the registered account or name on the exchange. With my Australia bank, I could do an electronic funds transfer from my personal account. (I think it’s the same in Europe).I have not withdrawn cash but I have withdrawn BTC. All I needed was the public key of my digital wallet to transfer my BTC into (see Security and Storage above).
Buying
1. Credit card – buying crypto with a credit card is the same as purchasing anything online. I got started by buying a small amount (pennies) of BTC using a credit card. It is easy but it’s more costly.
3. Crypto-pairs – once you have purchased your BTC, you can now use it to buy altcoins like Ripple without using cash desposit or credit card. Binance and Bitstamp are examples of exchanges where you could buy Ripple with your BTC.
Fees
Did I Make Money?
Yes and no.Yes, I made money on paper. No, I have not made money until I cash in. Just want to be clear, IRS has no reason to tax me just yet. I came in at the right time in October 2017. From the time I bought bitcoin (or fractions thereof), the price has tripled and almost quadrupled. I also bought Ethereum, and it has since tripled in price from when I bought in November 2017. Will I keep buying? Probably. I continue to look for “winners” — those that I truly believe are valuable.
Use-case – Determining Real “Value” of Bitcoin and AltCoins
Valuation is to stocks as use-case is to cryptocurrencies. Use-case determines how valuable a cryptocurrency is. Educate yourself and read about your cryptocurrency that you want to invest in. Ask yourself what is the technology for? Who are likely going to use it? What is the adoption likely to be? Some use-cases maybe more robust than others. Know the difference between what is adoption-ready and what is yet being tested.
For example, Bitcoin use-case is already tested with many businesses already accepting bitcoins for payment of goods and services. (See here list of those that accept bitcoin) Ethereum has adoption enabled by the Ethereum Alliance, and Ripple is backed by more than a 100 banks. The three are all different. Only Bitcoin is truly decentralized with no one single (or institutional) owner.
Risks – Misinformation, Volatility, Tax, Caveat Emptor and Tech Hiccups
High volatility is inherent with cryptocurrencies. It is not advisable to invest money you can’t afford to lose. That said, of course, you invest to “win”. It is important to understand the landscape of cryptocurrencies and what to look out for.
Caveat Emptor (Buyer Beware) – cryptocurrencies are unregulated. Manipulation of the market and fraudulent exchanges are possible. There are no safeguards, no insurance like you would in putting your money in the bank. Choose recommended sites and be alert of any phishing. Essentially, with bitcoin, you are your own banker.
Exchange issues – exchanges can get hacked just like with Mt Gox, the largest exchange back in 2013. More than “850,000 bitcoins belonging to customers were lost valued at $450million.” (Wikipedia). Technical issues are not uncommon, such as delays in transactions and verification, especially during surges of trading. DO NOT leave large amounts of cash or cryptocurrency in the exchange. Always move your coins into offline or cold storage. (See Security adn Storage above).
Tax is something to consider when trading. In USA, BTC or cryptocurrencies are considered ‘property”. They are subject to capital gains tax. Once you sell or convert your BTC into fiat or another crypto, it is considered a taxable event. See Investopedia: Bitcoin IRS Tax Guide.
Disclaimer: I am not a tax professional nor a certified financial planner.
Resources to Educate Yourself and Get Started
I’ve spent countless hours on youtube videos, sites, articles and forums. I found the following as useful quality resources to begin educating yourself:
Bitcoin and the History of Money – a five-minute overview.
Reddit on bitcoin – community forum, well-informed contributors and comments.
CoinGecko – provides comprehensive chart, prices, rating and individual coin background information.
ChrisDunnTV – Chris is a trader and he has very good quality and easy to follow videos, check out his series on
Bitcoin Basics – Bitcoin Explained for Beginners
The Future of Money – A TED talk by Neha Narula
The Death of Money – Interview of Andreas Antonopolous, one of the most respected thought leaders in the bitcoin. community, click here for the full interview. This explains the philosophical and socioeconomic antecedent of bitcoin.
The Economics of Bitcoin and Virtual Currency – by Susan Athey of the Stanford Graduate School of Business
What Some Financial Leaders Say About Bitcoin and/or Blockchain:
Bill Gates – believer of blockchain and bitcoin.
Jack Ma (CEO of Alibaba) – not a fan of bitcoin, he doesn’t know it but believes in blockchain.
Richard Branson (interview starts at 6:00) – leader of Virgin brand, invested in Bitcoin, Ethereum and others.
Warren Buffet – admits doesn’t know much about cryptocurrencies but thinks it will come to a bad end.
Charlie Munger – partner of Warren Buffet, thinks bitcoin and cryptocurrencies are a bubble.
Mike Novogratz – institutional investor in (and strong believer of) Bitcoin, Ethereum and others.
This hopefully inspires and informs you enough to take your first baby step in the journey to the future of money!
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