cryptocurrency for beginnersWhen I first started taking an interest in cryptocurrency I thought I was so lost in this huge sea of unknowns. Where do I start? What are the useful keywords to look up and keep in mind? What are the available helpful resources? This cryptocurrency for beginners investing guide is written so that in just 20 minutes, you will have a sense of what to expect for your upcoming crypto journey, and how to best go about starting it. It might just be the most exhilarating ride of your life.

Rise of the Cryptocurrencies

As the tech literacy of the population increases, acceptance of crypto as a legitimate store of value follows, and it has boomed. Titles along the lines of Bitcoin Price Hits an All-Time High and Ethereum Price Surges are commonplace nowadays in the general public’s news feed. What we know for sure is that people who were once skeptical of Bitcoin and the technology behind it are slowly understanding and getting increasingly involved.  As write this, the market cap of Bitcoin alone is more than $150B USD. ALL cryptocurrencies combined were not worth that 5 years ago. What will it be in 5 years from now?

Current Makeup of the Cryptocurrency Space

You probably have heard of Bitcoin and altcoins. Back in the days of 2011, forks of Bitcoin appeared in the markets. The forks, or clones, each aspire to serve a niche area, aiming to be better than Bitcoin. Since then countless new cryptos have emerged, eroding away Bitcoin’s crypto dominance. These altcoins are gaining market share at an alarming speed. Ten times or more growth has been observed in a time span as short as six weeks.  That’s hundreds of percent increases in under 2 months.

The Relationship Between Cryptocurrencies, Stocks, and Fiat Currencies

The currencies we are used to are referred to as fiat. The dollar, the yen and peso are fiat currencies of the U.S., Japan and Mexico, respectively.  Every country has a fiat currency.  But although currency is in its name, cryptocurrencies share more similarities with stocks than fiat currencies. When you purchase a cryptocurrency, like Bitcoin, you are sort of buying some tech stock, a part of the blockchain and a piece of the network.

Cryptocurrency Exchanges

The most common place where people buy and trade cryptocurrency is on the exchanges. Exchanges are places where you may buy and sell your crypto, using fiat. There are multiple measures to judge the reliability and quality of an exchange, such as liquidity, spread, fees, purchase and withdrawal limits, trading volume, security, insurance and user-friendliness. Out of all these, I find Coinbase as the best exchange hands down. It has a beginner-friendly user interface, and an unbeatable 100% crypto insurance.

After setting up an intermediary bank account and verifying your details with Coinbase, you are only five simple steps away from a Bitcoin purchase:

  • Access the Buy/Sell Bitcoin tab
    Select the payment method using the drop-down menu
    Enter the desired amount
    Click Buy Bitcoin Instantly.
  • View your credited Bitcoins on your dashboard

Coinbase sells Bitcoin as well as several other cryptocurrencies.  Plus, there are other exchanges where you can buy one of other hundreds of cryptocurrencies.  Many of these actually require payment with Bitcoin rather than fiat currency.  Bittrex and Polo are two exchanges that offer a wide selection.  When signing up on these exchanges for the first time, do make it a point to verify your account with the required documents early.  You do not want to be caught in the middle of some tedious and slow admin work when a trading opportunity presents itself. Verification on these exchanges may take days, and purchase/withdraw limits may only increase gradually as you trade.

An additional point to note: if you are using a currency other than USD, do check out the exchange’s ease of funding and withdrawal. You do not want your exchange to come into fiat withdrawal problems.

Cryptocurrency Wallets

Exchanges have built-in online wallets that store the cryptocurrency you purchase. However, if you are familiar with the infamous Mt. Gox hack, you might be a little nervous about this. If you do not wish to keep your crypto holdings on the exchange, you have the option to either use a paper wallet service like myetherwallet.com or spend 99 USD on a hardware wallet like KeepKey. Both serve the purpose of removing platform risk, at the cost of taking up the responsibility of keeping your cryptocurrency safe.  If you lose your key or hardware wallet, your crypto is unrecoverable!

To transfer your crypto from exchanges to your hardware wallet for long term storage, simply follow these steps, using Coinbase and KeepKey as an example:

  • Plug in your KeepKey USB cable
  • Open your KeepKey Client (on Google Chrome under Apps)
  • Find your wallet address on the KeepKey Client UI
  • Access Coinbase Send/Request tab and input your KeepKey wallet address
  • Confirm amount and click Send Funds

Take note to first send a tiny amount (e.g. 0.0001 BTC) for testing before sending the bulk, lest an error occurs and the transfer amount is lost. A small network transfer fee might be charged.

Personally, I own a hardware wallet, as I love the feeling of a having around a tangible reminder of my crypto holdings. Also, the hardware wallet’s user interface makes it easy to keep multiple coins, which is especially handy when you participate in ICOs (Initial Coin Offering) in the future.

Cryptocurrency as a Percentage of Your Investment Portfolio

This part will be wildly subjective. Crypto has already created many rags to riches stories, but also riches to rags stories!  As a precaution, the money you put in crypto should be money that you are fine with losing. I cannot emphasize the importance of this as we often underestimate how the volatility affects our emotional capacities. The upside is huge, but it comes with lots of risks and potential emotional torment.

I present a reasonable percent of crypto vs. traditional investments here:

  • < 30 years old (max) 30% Crypto, 70% Traditional Investments
  • 30 – 40 years old (max) 20% Crypto, 80% Traditional Investments
  • 40 years old (max) 10% Crypto, 90% Traditional Investments

This is not meant to be age discriminatory but considers the fact that one takes up more financial responsibilities (mortgage, family) as he grows older.

Within the designated crypto share of your portfolio, you may diversify your coins based on your risk appetite.

How Do I Pick the Winner? How Do I Avoid Picking the Loser?

Note that crypto is now in a huge bull market and anything could rise over time. Also, do not dismiss the possibility that we may be in a bubble like the-dot-com boom back in 2000. Still, ask yourself these questions before you decide to invest in a coin:

  • Are my investments safe with the development team?
  • Can you trust the development team with your money?
  • Are you about to leave your money with founders who have been involved in previous scams?
  • The coin’s price might grow for, but is it worth it to put your capital at risk?
  • Does my coin of interest have a long-term plan?
  • What is the team trying to achieve?
  • Do they have the means to meet their goals?
  • What are the timelines and milestones?
  • Does my coin of interest seem like a well-marketed crypto with no real plan?
  • Are they able to deliver?
  • How long should I stay in this?
  • Do I have an exit plan?
  • Does it have a real-world use or is just a get rich quick scheme?

Mining

For those who are more comfortable with a predictable form of reward, mining is the answer. Mining involves GPUs or CPUs and an investment in electricity. Mining is only possible on cryptocurrencies that follow the Proof of Work Protocol. It takes some effort to setup and gets things running, but it is attractive as a long-term passive income as long as you frontload the work.  Basically, you are finding coins electronically.  This is perfectly legitimate and is in fact the way coins come to be.  For most however, the cost of equipment and electricity can be near or even exceed the reward in coins.

Staking

Staking is the other version of mining. Think of this as making dividends on your stock. The reward rate and staking method differ greatly among Proof of Stake coins, but in general, it takes less effort as compared to mining.

Arbitraging

As you get a hand in multiple exchanges, you may wish to buy from one exchange and sell on another to make arbitrage gains.  Take note of two things if you wish to do so:

  1. Factor in fees. Don’t make a trade if trading fees will put you in the red!
  2. The price could change when you are transferring your coin between exchanges, especially during volatile times.

In Summary

The truth is, you could make a fortune in cryptocurrencies.  Also, the truth is, you could lose a fortune in cryptocurrencies.  So be smart about it.  Do your homework and only invest what you can stand to lose because you very well could lose it.  But it might be worth the risk to you to potentially make some huge returns.