Guide to Cryptocurrency Investment

Bitcoin is currently trading above 3,800$S and many people have asked me about how they can participate in the cryptocurrency crazy. My short answer is usually don’t. Bitcoin and its derivatives such as Etherium and Dogecoin are complex, cumbersome, and highly volatile investments that require a good amount of research to be successful. The anonymous and decentralised nature of blockchain means that it's incredibly easy to lose everything without any legal recourse. For those who are not scared away Bitcoin offers an opportunity to reap massive profits and to engage with a bleeding edge technology.

Getting your first bitcoin:

For the sake of brevity, I assume the reader has already set up their own wallet and are ready to get their first BTC. Buying cryptocurrency can be the riskiest part of the entire lifecycle because there is a degree of opacity in the market. The biggest tip I can give to a first time user is to not buy from another person directly if you can’t do the transaction in person. I have seen far too many enthusiastic users lose tens of thousands of dollars through scams. Even I conducted my first large transactions in person during the early days of BTC.

This advice might seem a barrier to new members of the community but fortunately, the industry has matured and there are now many reputable sites where you can purchase your first currency. The simplest option for those in Singapore or Malaysia is CoinHako (www.coinhako.com). After a short setup, you can purchase BTC in SGD with very little hassle. I have used coinhako several times but there are some drawbacks. The site reportedly has liquidity issues from time to time, especially during peak periods, which might affect one’s ability to purchase or sell BTC. The SGD to BTC rates are also not great at times. However, their service is great and will suit most users. Personally, I make use of a cryptocurrency called tether (USDT). Tether (www.tether.to) is a cryptocurrency 100% backed by a fiat currency(USD in this case). Tether are 100% redeemable for their backed currency so it's much more convenient for advanced users that want to move between currencies rapidly without first returning to fiat currency on certain markets.

Making Money from Bitcoin:

There are 3 ways people make profit on blockchain: Mining, Speculation, and Trading. Ignore mining. The days of individuals making it big from home-based mining are long gone. Speculation, while requiring some consideration around wallet security, boils down to buy and hold so there isn’t much to explain. That leaves trading. Trading cryptocurrency is pretty much the same as trading any commodity so I won’t elaborate on strategy. Cryptocurrencies are traded across various markets and there is no central exchange. Each market has its own nuances tailored to a specific demographic. There are numerous opportunities for arbitrage for the intrepid trader but they are a potential minefield for the uneducated user. If you store your cryptocurrency on an exchange and that exchange goes bust or simply turns off (Mt.Gox) then you will lose your entire investment with zero legal recourse. 

The biggest exchange is Coinbase (www.coinbase.com). Coinbase is a US-based exchange backed by reputable investors that is the entry point for the majority of cryptocurrency novices. It provides a simple and transparent way to purchase and trade Bitcoin(BTC), Etherium(ETH), and Litecoin(LTE) which suits the majority of users. Its quirk is that it is operating as a bank connected with blockchain. As a bank, coinbase is under US jurisdiction. You will not be able to conduct large transactions or cash out positions without providing you identity to satisfy local AML/KYC laws. There are possible tax implications as well. The IRS is launched a massive investigation into coinbase this year to identify those who did not properly report their profits. All of these requirements are familiar to investors but bring trading on coinbase closer to trading on traditional US markets.

I prefer to hold a portfolio purely comprised of cryptocurrency so I use Poloniex(www.poloniex.com). Poloniex has no connection to fiat currency. All transactions are conducted in cryptocurrency so users must acquire the assets elsewhere. (BTC/USDT are the primary holders of value). I prefer polenix because it allows me to hold positions in over a dozen lesser-known cryptocurrencies. The real money made trading is through finding profitable positions in more obscure cryptocurrencies (e.g. Lisk, Augur) and converting profits to BTC and USDT.  Poloniex also has more advance features such as margin trading or peer to peer lending. The site is in the US but since there are never direct USD transactions it is able to circumvent many of the requirements of coinbase. I recommend first-time users.

Keeping your currency safe:

The nastiest aspect of a virtual commodity is the vulnerability of being hacked, scammed, or otherwise lost through negligence. I have seen >10,000$S lost because a friend formatted their PC without realising that the local wallet was the only record of ownership. I implore new adopters to plan their storage before considering their first purchase to prevent such heartbreaking losses.

Your portfolio will consist of three layers:

  • The Exchange
  • The Wallet
  • The Vault

All exchanges require you to deposit currency with them. This is to facilitate speedy transactions and protect users. Each exchange will provide you with an address to deposit funds. The key thing to understand is that exchanges are not wallets. Do you keep all of your money in a trading account? Do not do the same with your cryptocurrency. Only deposit what you need for your positions and transfer profits back to your wallet.

Think of your wallet like your checking account; the place where you keep some amount of currency for day-to-day use. If you plan to purchase anything more than a bitcoin, do not use a local desktop wallet. The lack of redundancy will catch up to you. You can use a site like bitcoin.info (over 8 million users) however you are still vulnerable to hackers at both the personal and website level. The safest is to invest in a dedicated wallet with my recommendation being a Trezor. Hardware wallets are secure, can be recovered if lost, and are nearly immune to hackers.

The vault is your cold storage solution. Sites like coinbase offer a vault for long term storage but again, websites and accounts can be hacked. A Trezor can act as a vault but I do not like being so dependent on a single point of failure when dealing with large volumes of cryptocurrency. I prefer the old-fashioned method of creating paper wallets. Paper wallets store the public/private portion of a BTC as QR codes which can be stored offline. This method is only vulnerable to hackers during the export or input of the coins which is a completely controllable risk (I have a PC dedicated to this purpose that is hardened to the extreme). The paper slips are essentially bearer bonds which can be spent by scanning the codes back into your wallet so adequate physical security is required as with any real asset. I generally keep 20% of my cryptocurrency on exchanges, 20% on my hardware wallet, and 60% stored in a safe deposit box on paper. 

Going forward:

The lessons above are only the tip of the iceberg. I hope this article eases your first steps into the world of blockchain-based currencies. The biggest takeaway should be the need for scepticism. I've touched several times on the need to stop, think, and examine at each step of the process to ensure your coins are not stolen. You will have an excellent experience trading and transacting using cryptocurrencies if you can muster a bit more paranoia than usual.