Advice to Beginners on Trading Bitcoin and Other Crypto Currencies
So you have read the newspaper about the meteoric rise of crypto currencies such as Bitcoin or Ripple. You want to get in on the game and make some money. What do you do?
Let me just start by saying, this is all very high risk. Don’t invest what you can’t afford to lose. It is not just risky because the prices of the currencies are volatile but because the technology is unfamiliar to most people. Don’t treat this as buying stocks or gold, at big established companies. This is the wild west, although we are seeing things mature a lot over the last years.
Step One: Understand the Basics of the Technology
While boring and you want to just make some quick cash by signing up to a crypto currency exchange right away, you might end up regretting that dearly later.
You can watch videos and read about this many places. One way would be to watch one of my videos on youtube. In particular watch the video about the basics of cryptography. There is no math there and I am explaining with lego guys so this should be accessible to anybody.
You need to become familiar the bare minimum of what public keys and private keys is all about in cryptography, because if you don’t grasp this you wont understand how your crypto currency money is stored and safeguarded.
Money is stored in what we call a wallet, but it is nothing like a physical wallet. You need to understand what this is all about otherwise hackers could steal your money.
Step Two: Get a Crypto Currency Wallet
A common beginner mistake is to simply sign up to a crypto currency exchange and start buying crypto currency and then keep the money at the exchange.
Have you hear all those scary hacker stories about bitcoins being stolen by hackers? That happens because people keep their money at exchanges long term.
It is worth clarifying here that, if you store your money properly in a secure wallet, then you are very safe. Hackers won’t suddenly get hold of your money. At least that is very rare.
However for larger amounts I highly recommend using a cold wallet. That means a wallet not on the internet. It can be stored on paper, on a USB stick, offline computer or a special hardware wallet.
I have personally started using a hardware wallet called Trezor. It is a tiny device you connect through USB to your computer.
I must confess I had wished I had gotten a hardware walled sooner. As you hold more crypto currency, you easily end up paranoid about security, you easily lose sleep over it. You think you might not need it, but then suddenly your crypto currency quadruples in value, and suddenly it is enough money that you get scared of losing it.
Then you want something which is:
- Easy to use
Hardware wallets are just that. You can store crypto coins quite safely offline on e.g. paper (paper wallets) however these are extremely impractical in use. Any time you need to use it, you are exposing yourself.
The benefits of hardware wallets is that you can use them at any time to perform transactions without exposing your wallet to danger. Even if your computer is infested with viruses, trojan horses, malware and hackers, it is not dangerous to use a hardware wallet connected to your computer.
When choosing a hardware wallet also consider what kind of crypto coins you are going buy. E.g. I am realizing my Trezor is problematic, since it doesn’t store Ripple. So I have ordered Ledger Nano S instead. It supports a lot more currencies through extensions. Trezor is quite neat in that it can be used as a login and password keeper as well. So I’ll probably keep it still.
What if my hardware wallet gets destroyed or lost?
You write down a seed, which is a long list of random words, which you can use to initialize any new hardware wallet you buy to the state of your previous one. You don’t need to keep writing down this. You just write it down upon first time use of your hardware wallet. Of course the seed has to be kept safe. Probably more dangerous than thieves for most people, is a risk of losing or misplacing the seed. Or perhaps your house burns or whatever and the paper is lost. To be absolute certain I prefer to use solutions such as crypto steel. It allows you to store your seed words in steel letters. They are safe from water and fire damage. Alternatively you store copies in bank safety deposit box or e.g. at your parent’s house.
Aren’t you being too paranoid?
Of course we don’t handle our bank accounts or stocks in this manner so you might question the need for these security precautions. The reason is that with crypto currency everything is tied to a secret number. But with banks and stocks we are dealing with a trusted third party which you can talk to and reason with. Should you forget your account number, you can talk to your bank to sort it out. The balance in the database recording how much money you have, is something they in principle can change to whatever they want. Of course we trust them not to do that. But in principle it means they can make any necessary adjustment should some mistake have happened, not so with crypto currencies. There is no central authority which can undo a mistake you do with your transactions or help you if lose your crypto wallet.
Step Three: Sign up with a Crypto Currency Exchange
There are lots of crypto currency exchanges, and I will refrain from recommending anyone in particular. Personally I have used Bitstamp and Kraken in the past. Depending on where you live and what you want to trade neither might be the best option for you. Regardless, do you research on the one you settle for, e.g. have they had problems being hacked?
Having been hacked in the past doesn’t necessarily mean it is a bad choice. It depends on how they dealt with it afterwards. Did they refund all customers who lost money? Did they improve their security? And of course it matters how they got hacked. Mt. Gox was exposed as having absolutely horrible security and not caring about it. Even if they had done a full refund, I would not have trusted such an exchange.
It is useful to find out a bit about how your exchange secures your money. E.g. Coinbase, keeps 90% of customer funds in cold storage. Meaning, the wallets are mostly stored physically offline.
Step Four: Transfer Funds
Perhaps I am paranoid, but having sent lots of bitcoins the wrong address in the past, I think you can never be too careful. You need to make a bank transaction from your bank to a crypto currency exchange to buy crypto currencies. I would recommend doing this in multiple installments. In my experience this is not always smooth. Some people end up waiting for quite some time before it arrives or some currency exchange you didn’t want happens. Lots of stuff can happen in it sucks to lose a nights sleep worried sick about this. So do it in steps.
Same goes for withdrawing cash from the exchange to your bank account. Once you got the crypto currency and you want to sit on it for a long time, you should transfer most of it to your secure wallet (preferably a hardware wallet).
This is where you DON’T want to screw up. I always make a smaller transaction first and wait to see that it gets to my wallet, before making bigger transactions. If you send it to the wrong address, then there is a high likelihood you have lost the money forever.
What Crypto Currency to Pick
This depends entirely on how you want do you trading. Many people trade entirely speculative by just following news, trends and psychology. This is for short term trading. You can certainly do this, but that means you need to keep attention all the time on what happens in the market and read all the news on crypto currencies.
I advice instead, to do your research and determine which technology you think sounds most promising. Also check how well run the company behind the currency is, what kind of people or talent they got onboard, and what sort of contracts they have with other companies. That says something about long term potential.
E.g. I’ve invested previously in Bitcoin mainly because it has momentum and network effects. Lots of services have been built around it, and it is well known. However I don’t think the technology is that great anymore.
I’ve picked Ripple/XRP because they have managed to make deals with a lot of important players. They got many banks and financial companies onboard using their technology. They also work actively with regulators, while their technology has a lot going. E.g. Ripple is not merely a crypto currency but also a payment system for any currency.
However both of these are older technologies now. There are newer crypto currencies which technologically speaking looks more impressive. However it is hard to know if they got the manpower, talent, marketing skills etc to become dominant. But obviously among the less known currencies is where the biggest potential is, but also the highest risk.
UPDATE: I have added a new story describing the main differences between various crypto currencies. This makes it easier to navigate the market. But remember I am not a financial advisor. My focus is on the technology and how that might affect success in the market.