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CURRICULUM
Section 1: Introduction to Miner
When you see someone get a 1,000x return on their investment, turning $1,000 into $1 million, it’s hard not to take notice. Bitcoin, as Ethereum, or Ripple are constantly on the news, and every time the experts say it’s going to crash, it doubles in value. Clearly, the experts don’t understand what they’re talking about.
The real experts are out there on the web, making amazing things with the world’s first decentralized monetary platforms, often in obscurity. The experts are high school kids in China on Reddit, and CS professors pushing the theoretical boundaries of what cryptography is capable of. Wall Street is is just beginning to pay attention, and probably doesn’t even really understand what it is they’re dealing with. Put simply, cryptocurrency is the hottest asset class of modern time, and it is experiencing incredible growth as devaluation.
While crypto is a young market, and there will certainly be a fair amount of volatility in the crypto markets for long time ahead, it would be shortsighted not to take the time to understand why this asset class has attracted so much attention.
The internet was built to withstand thermonuclear warfare, and cryptocurrency was built to be slightly tougher than that. No government can control cryptocurrency (its not entirely true, and Mr.A will tell you why on Crypto Pro course), and even when they outlaw use by their citizens, these governments find it extremely difficult to enforce prohibition. Distributed digital assets are the future, and you can either get on board, or wish you did.
Cryptocurrency is something new in the world, born out of distrust for manipulative government monetary policies and onerous regulation, but governments are learning to play nice.
And, even in its infancy, it is already evolving and powering a new breed of decentralized autonomous applications (dApps), all powered by the innovations at the heart of cryptocurrency, blockchain and the trustless transactions that blockchain enables. Cryptocurrency might sound confusing at first, and that’s not unreasonable, because it absolutely does represent a new form of both software and money. But, like anything, it can be broken down into its component pieces and understood, even by a layperson with little investing or technical knowledge.
The goal of this course is to give you a solid education in the history and evolution of cryptocurrency up to the present. We’ll focus on Bitcoin, the cryptocurrency that got all of this started, Ethereum, Litecoin etc., and will quickly veer into the ever-expanding world of altcoins and dApps.
If you don’t know what I’m talking about, that’s fine, because you will. By the end of this course, you will have the knowledge and the tools to confidently own cryptocurrency, trade cryptocurrency, buy and sell goods in the real world with cryptocurrency, mine cryptocurrency, and do all of this with a solid understanding of how law and tax rules apply. And, if you do it right, you might just make your fortune.
Cryptocurrency is digital gold, and we’re about to give you the keys to the gold mine.
Now onto some Mining. . .
Section 2: Basics and History
You could also think of it as a public database in which only new records can be added, and each record is grouped and given a number.
The group number is the block, and each block contains many transaction records. Hundreds of thousands of individuals around the world store their own copy of the records in the blockchain, and every few minutes, they compare their copies with the group and update the shared record to the latest version. If all the copies are in agreement on a new record, that block becomes a permanent link in the chain.
When a new record is added to the end of a blockchain, there is a very small window in which it could potentially be challenged if another copy of the blockchain has a conflicting version. In this rare event, the version that more copies of the blockchain agree with would override the version that fewer copies of the blockchain agree with.
But again, once that window passes and all the copies of the blockchain agree on a final version of a record, it is basically impossible to change.
If you have ever registered an internet domain, you have used a service that is similar to a distributed blockchain. When you register www.mydomain.com, you point it at your files. That record then gets propagated out across the web to all the other ISPs, who all maintain a copy of which domain points at which files. For the internet to work properly, all the ISPs need to agree.
Blockchain works similarly, but with one crucial difference, which is that a blockchain that doesn’t agree with the others will not work. In China, the government can change ISP records to redirect traffic away from certain websites. This is done by altering their copy of the domain records, making it an inexact copy. This would not work with a blockchain. If someone were to alter a record on their copy of the blockchain, it would be overwritten by the other copies, or simply stop functioning.
For any copy of the blockchain to function, it must submit to global agreement and global majority rule.
The beauty of blockchain is that it is not, and cannot be controlled by any one government or entity. A blockchain is a permanent, public, global record of ownership. Anyone can sign up to be a miner and add blocks.
And, anyone can look at it, including you
Blockchain explorers let you open and examine any block in the chain, from the first block added by the creator of Bitcoin to the last. Because the ledger is public, it allows for some interesting analytics; it’s possible to view the entire history of every transaction on the chain.
Blockchain was employed for use in cryptocurrency because a global, virtual currency needed a bulletproof system of ownership to function. For strangers to trust each other, you need a system that requires no trust in others to work.
This is ideal for cryptocurrency, but the blockchain concept can be employed in many other contexts where the powers that are supposed to guarantee property rights can’t necessarily be trusted.
During war, governments may burn or destroy property records, making it difficult or impossible for the rightful owners of a property to reclaim it when the war is over. For a blockchain record to be destroyed, you would literally need to destroy the internet.
No system is infallible, but it is not unreasonable to ask yourself which entity you trust more to safeguard your property rights: a global decentralized system, or your local government. In a place like the USA, you might reasonably trust the government to safeguard your property rights, but in much of the world, property ownership by blockchain seems like a much safer bet than hoping the dictator or warlord in power this month will respect one’s property rights.
If you haven’t internalized this yet, one really important concept to grasp about blockchain is that a blockchain literally contains every single record, every single transaction, and every single user of the system.
If you buy or sell any amount of Bitcoin, it will be recorded forever in the Bitcoin blockchain. If you promise someone that you will pay them 100 BTC, they can look at the public record and see whether you actually own 100 BTC before they accept your offer (technically, the software does this, but you get the idea).
It is essentially impossible to bounce a Bitcoin check because all available Bitcoin is accounted for within the Bitcoin blockchain. There is no Bitcoin outside of the blockchain. The Bitcoin blockchain essentially IS Bitcoin.
Just as any app can be built on top of a database technology like SQL, any app can be built on top of blockchain technology, and store data records in a public, distributed, blockchain.
A problem that has plagued property rights on the internet is the ease of copying. If I email you an MP3 file, we now both have that file. Digital cash would have no value if I could email you a dollar, and then we both have a dollar. Every Bitcoin, however, is unique. By design, there will only be 21 million Bitcoins, ever.
The rate of their release decreases over time, until the last coin is mined sometime in 2140. The smallest unit of Bitcoin it’s possible to transact is 0.00000001 Bitcoin, and it is known as a Satoshi, named after the inventor of Bitcoin, Satoshi Nakamoto. Bitcoin is often abbreviated as BTC.
There were plenty of “e-cash” startups before Bitcoin that tried and
failed to create centralized digital currencies. Nakamoto’s major innovation with Bitcoin was to find a way to enforce scarcity on a decentralized system. Unlike a centralized e-cash bank, there is no central point of failure. Hackers and thieves can’t target the central bank because in a decentralized system, there is no bank, there are only individual wallets. Each individual is responsible for their own wealth, and that’s it.
Since Bitcoin launched in 2009, hundreds, maybe thousands, of other cryptocurrencies have been created. Some, like Ethereum, could be considered major improvements over Bitcoin (more on this later). Others are simply knock-offs trying to capitalize on the success of Bitcoin, and some are outright scams. It is imperative that anyone investing in the space educate themselves on the underpinnings of any cryptocurrency before investing.
Cryptocurrency Vs. Fiat Money
Think for a moment about the paper money in your pocket. Why does it have value? It’s just paper with a picture of someone you’ve never met on it. The money that governments issue is known as fiat currency, and the only reason it has value is because the government says it does.
Government issued currency started out much more like Bitcoin, where a gold coin was made from a scarce, mined material, and it was worth whatever the market value of its weight in gold was. The value of gold fluctuated, but it always retained some value.
When governments switched to the more practical paper currency, we moved to a more conceptual concept of money, which is the debt obligation. In an economy where a $100 paper bill represents $100 worth of gold, when we spend that money, we are essentially trading debt. If I hold a
$100 bill, the government owes me $100 worth of gold. If I give that $100 bill to you, I have transferred the debt obligation. The government now owes you $100 worth of gold.
Similarly, if I put $100 in a centralized bank, this relationship is based on debt. The bank now owes me $100. If I transfer $100 from my bank account to your bank account, the bank now owes you $100.
Similarly, if I put $100 in a centralized bank, this relationship is based on debt. The bank now owes me $100. If I transfer $100 from my bank account to your bank account, the bank now owes you $100.
The United States officially ended its adherence to the gold standard in 1973, which means that the value of money printed by the US government is now abstract. The value of a dollar bill is determined not by a reserve of gold, but by whatever the market is willing to pay for it. The US Treasury can print money out of thin air if it wants to lower the value of the currency, or it can destroy it if it wants to increase the value of the currency.
Traders using Forex, the foreign capital exchange, trade one currency for another based on constantly fluctuating relative values. These values are tied to nothing but trust. The entire economy is based on the idea that we trust the government to cover its debt obligations and protect our property.
When you think about government issued currency in this way, and start to realize just how precarious the whole system is, you start to see why even conservative, rational individuals are hedging their bets by moving a portion of their stored wealth into gold and cryptocurrency.
Because Bitcoin exists entirely outside of a government controlled currency, it should theoretically hold or increase its value in the event of rapid fiat currency inflation or war. This quality makes Bitcoin a lot like gold.
Bitcoin was invented by a mysterious figure known as Satoshi Nakamoto in October 2008 when he published a research paper called “Bitcoin: A Peer-to-Peer Electronic Cash System”. There were plenty of attempts at making digital money prior to Nakamoto’s paper, but they all relied on a centralized system, similar to a bank.
Nakamoto was the first to use a blockchain as a way of establishing a decentralized system. There is plenty of speculation over who exactly Satoshi Nakamoto is, as that may not be his (or her, or their) real name.
2009
Nakamoto released the first version of the Bitcoin codebase in January 2009, and established the first block in the
Bitcoin blockchain, which allowed for mining of Bitcoins to first take place. The first exchange was between Satoshi Nakamoto and a developer named Hal Finney.
At first, Bitcoin had no exchange rate or
equivalency in fiat currency, but October 2009, it was established at the rate of $1 = 1,309 BTC. The exchange rate was designed to cover the cost of electricity that it took to mine and create Bitcoin.
2010
In February 2010, the first Bitcoin market, named dwdollar was created, and in May, the first transaction took place on it. A Florida developer named Laslo Hanyecz paid 10,000 BTC to someone in England, who in exchange, spent $25 to order a pizza for Laslo. At the time of this writing, 10,000 BTC is worth approximately $40,000,000 USD. We really hope that was a good pizza.
In August 2010, a vulnerability was discovered in Bitcoin that allowed hackers to generate 184 Billion Bitcoin. This briefly crashed the currency.
Bitcoin exchange MtGox was created, and Bitcoin ends the year with a market cap of a little more than $1 million USD.
2011
Silk Road, an illegal online drug marketplace, is established and accepts Bitcoin payments as a way to make anonymous transactions.
The value of Bitcoin quickly jumps, and for the first time 1 BTC is worth more than $1 USD.
2012
BitPay launches, allowing online merchants to accept payment in Bitcoin.
Wikileaks starts accepting donations of Bitcoin, pushing the currency into the media spotlight.
The first mining reward halving occurred on November 28, dropping the amount of Bitcoin received for mining from 50 to 25.
2013
Bloomberg starts experimenting with the inclusion of Bitcoin on their terminals, speculative trading of Bitcoin begins in earnest, and the value of Bitcoin explodes, ranging from $13 in January to over $1000 by the end of the year.
FINCEN releases initial guidelines regarding Bitcoin.
The US government worries about Bitcoin’s ability to fund terrorism, but recognises its usefulness and legality. A judgement in the Trendon Shavers Ponzi scheme case establishes that Bitcoin can legally be considered an asset of value with equivalent monetary value.
2014
US, UK, and China issue varying degrees of rules and regulation regarding the use and taxation of Bitcoin, which makes mainstream adoption by the financial industry possible. Enterprise and more mainstream adoption pick up as companies like Overstock.com and Microsoft begin accepting payment in Bitcoin.
In February, the major Bitcoin exchanges are hit with DDOS attacks, MtGox, the largest exchange, is hacked, loses millions of dollars worth of Bitcoin and quickly closes. This lowers the price significantly, but prices remain in the $200-$350 range and stabilize.
In July, the first regulated Bitcoin investment fund is launched by Global Advisors Bitcoin Investment Fund.
In October, TeraExchange executes the first bitcoin derivative transaction on a regulated exchange.
2015
Throughout 2015, the Bitcoin exchange rate remains relatively stable, and Bitcoin gains steam as a legitimate currency.
Ross Ulbricht, the founder of Silk Road, is sentenced to life in prison, signaling to the world that Bitcoin can’t be used for criminal purposes without consequence. New York State releases the BitLicense, the first ever comprehensive set of governmental regulations on Bitcoin. It includes the requirement that employees of companies with a BitLicense be fingerprinted for the FBI. Ironically, many Bitcoin exchanges and services around the world responded by banning New York users.
2016
The second mining reward halving occurred on July 9th, dropping the amount of Bitcoin received for mining from 25 to 12.5.
Bitfinex, a multi-signatory wallet provider, is hacked, resulting in a $72 Million loss.
The price of Bitcoin tops $1000.
2017
August 1st, Bitcoin developers do a hard fork of the Bitcoin blockchain, effectively creating two different types of Bitcoin, Bitcoin Classic and Bitcoin Cash.
Huge gains are seen as speculative trading drives the price of Bitcoin up past $4,000 per 1 BTC.
2018
The year Bitcoin speed rise (touching roughly $20,000 per 1BTC) and fall captures world’s attention, along the interest towards all the other cryptocurrencies. New cryptos introduce themselves to the open market. Worldwide governements force to introduce Crypto Regulations to control the market.
Section 3: Cryptocurrency Fundamentals
A user obtains a software wallet, which facilitates the buying, selling, and storage of coins.
Early in the life of a currency, a user might download the software that powers the peer-to-peer currency exchange onto their personal computer hardware, and get free currency in exchange for helping to power the network. This is known as mining.
As the currency matures, there is less free currency to be had, and mining becomes less lucrative, so a user is more likely to simply trade non-cryptocurrency for cryptocurrency (e.g. trade Dollars or Euros for Bitcoin).
Whenever cryptocurrency changes hands, the buyer’s wallet
interfaces with the seller’s wallet, and a unique transaction record is produced. This transaction record goes into a pool of pending transactions.
All the miners running the currency software have access to this pool of pending transactions. To process a transaction, they must solve a cryptographic puzzle. Once they solve the puzzle, they can add it to the blockchain.
The more puzzles they solve and transactions they add to the
blockchain, the more chances they get to earn “free” currency. This process is known as mining, and it powers the addition of records to the blockchain. Miners can augment their income by adding small transaction fees paid by the buyer and seller.
Once a pending transaction is added to the blockchain, it is basically permanent, and currency is considered to have changed hands.
Every cryptocurrency has a fixed set of rules, known as a computer protocol. When two computers communicate via API using JSON, they are using a predefined computer protocol. If the block of JSON code isn’t formatted correctly, or if the API Key is missing, the data transfer will not work. The Bitcoin protocol is similar, in that there is no ambiguity regarding the data that each computer involved in a transaction is expected to provide and receive.
Every coin has a unique identifier, just as every account has a unique public and private key. Even if someone else knows your public key and the unique ID of your Bitcoin, as long as they don’t know your private key, they can not access or change ownership of Bitcoin. Unless every piece of this puzzle is present and correct, the computer protocol will not function.
- Blockchain:
The Bitcoin blockchain quite literally contains every transaction ever made with Bitcoin. While the Bitcoin blockchain is the core of what Bitcoin is, it is also only a record of ownership, not a fully functioning cryptocurrency in and of itself. The Bitcoin codebase sits on top of the Bitcoin blockchain, and this software is what enables updates to the blockchain. For more info on what a blockchain is, refer back to the blockchain section.
- Wallet:
For a currency to be functional, there must be a mechanism for
exchange, and a secure way to store and access one’s currency. This is done with a wallet. A wallet is a piece of software that enables any individual that has one to buy, sell, or store their Bitcoin. The wallet is essentially the mechanism through which an individual interacts with the Bitcoin marketplace. The wallet has many important functions, including:
Assigning and storing a Public Key. The Public Key is like a User ID or Account Number. It looks like a long, random string of numbers and letters. When a record is added to the blockchain, it contains both the buyer’s and seller’s Public Key, as well as the amount transferred.
- Assigning and storing a Private Key:
The Private Key is essentially a password, and it too is a long, random string of numbers and letters. If anyone is able to steal a Private Key, they can steal anything in that account. For this reason, security of the Private Key is extremely important (read more about this in the security section).
Making transactions. A Bitcoin transaction happens when the buyer’s wallet sends an encrypted message to the seller’s wallet, the seller’s wallet returns an encrypted response, and a unique transaction ID is then generated and put into a pool of pending transactions.
- Cryptographic Hashing:
Cryptography is best known for spies sending encoded messages, or military headquarters sending encrypted messages to their submarines and planes.
The goal of cryptography is to be able to send a private message over public channels and not worry about it being intercepted, since only the intended recipient can decrypt and understand the message. Any prying eyes viewing the encrypted message will see only a garbled bunch of meaningless characters.
- Cryptocurrency relies on cryptography for two distinct tasks:
Wallet-to-Wallet transactions: The buyer wallet and the seller wallet must send their owner’s Public Key and an encrypted version of the Private Key to each other. Each wallet validates the information in a way that does not reveal the Private Key, but does validate that the Private Key is correct. This is done through a complex mathematical equation known as a secure hash algorithm, or SHA-256.
Mining and adding records to the blockchain: Each transaction in the pending transaction pool contains a cryptographic puzzle. The only way to solve the cryptographic puzzle is with raw computing power cycling through every possible answer, and luck. This is known as Proof of Work.
- Mining:
Because cryptocurrencies are decentralized systems running on peer- to-peer networks, and there is no central server farm, it’s necessary to build into the system an incentive to get people to run the software that powers the system on their personal hardware. Mining also answers the problem of how to distribute the currency, by forcing individuals to work for it.
Miners must pay non-cryptocurrency for the computer hardware they use and the electricity that hardware uses. Miners with slow hardware will have trouble competing with those using large, custom-built farms of mining hardware. In the early stages of mining when a cryptocurrency is new, mining can be an easy way to earn. However, as mining become progressively more competitive, unsuccessful miners will probably spend more on electricity than they will earn in free currency. Once a miner successfully decrypts a transaction hash, it is added to the block. Blocks are added to the blockchain roughly every ten minutes, at which point the miner earns a set amount of Bitcoin. There are about 2000 transactions per block.
There is no guarantee that a transaction will make it into a block any time soon. In theory, it could sit in the pending pool indefinitely. This is where fees come into play. The first blocks that were mined produced a reward of 50 BTC per block. However, the system is designed to cut the number in half every 210,000 blocks. For a while, miners earned 25 BTC per block, but when it reached block 420,000 in 2016, it halved again, at which point the reward for mining became 12.5 BTC per block. As you can see in the image above, the most recent block at the time of that screenshot was 477,493. The reward for mining will remain 12.5 BTC per block until it reaches block 630,000, when it will halve again to 6.25 BTC.
- Mining Fees:
When a transaction goes into the pending transaction pool, there is no order to these transactions. A miner can set their minimum fee amount, choosing to work only on transactions that offer the minimum transaction fee they have set. In practice, this means that the larger the fee attached to a transaction, the faster it will be added to the blockchain.
As the amount of Bitcoin distributed to miners continually decreases, mining becomes less of an incentive for miners, and it is expected that the fees charged by these miners will increase to compensate.
Given that there is a finite amount of Bitcoin to be mined, and the last coin will be released in 2140, at some point, mining Bitcoin will be a thing of the past, and the individuals running the peer-to-peer Bitcoin software will essentially become brokers. We are already seeing the rise of hyper-efficient server farms dedicated to the decryption of Bitcoin transactions that earn more from fees than they do from mining Bitcoin.
If the blockchain bottleneck grows worse and fees rise too high, however, users may abandon Bitcoin for cryptocurrencies with faster and cheaper transactions, such as Bitcoin Cash or Litecoin.
- Putting it all together
The genius in the system that Satoshi Nakamoto put together is that he created a completely decentralized system that allows for completely transparent transactions, and by creating built-in incentives for a large number of people to run the system on their own hardware, the whole thing becomes a self-reinforcing feedback loop that strengthens the system.
The more people who use it, the stronger it gets. Even if your government somehow manages to cut off access to the Bitcoin blockchain through the ISPs it controls, you can still simply go to another country, or use a VPN to access an ISP outside of your country. Like the internet itself, cryptocurrencies are incredibly hard for any single party to control.
– Original blockchain organizations
– Apps or decentralized services that sit on top of the original blockchain organizations
– Enterprise blockchain organizations
– Complementary services to blockchain organizations
OG Blockchain:
These include but are not limited to Bitcoin, Ethereum, Litecoin, Dash, and Monero. At 8 years old, Bitcoin is the granddaddy of the cryptocurrency world, and many others have tried to improve on it. Litecoin is very similar to Bitcoin, but tries to remove the bottleneck of the pending transaction pool and speed up how fast transactions clear and get recorded to the blockchain.
Dash is similar to Bitcoin, but while Bitcoin is pseudonymous (your Public Key is your pseudonym), Dash is totally anonymous. Monero also offers more anonymity, and at the moment, seems to be the currency of choice for purchasing illegal goods on the dark web. Before we move on to apps that sit on top of the blockchain, we first need an in-depth primer on Ethereum. If you think Bitcoin is complicated, take a deep breath and go get a cup of coffee, because Ethereum is a level of magnitude more complicated.
The Ethereum codebase was designed to host and execute smart contracts, the outcomes of which get recorded to the Ethereum blockchain, and are powered by Ethereum’s native currency, Ether. Bitcoin is relatively
“dumb” by comparison, allowing only simple payments. Ethereum smart contracts, in contrast, allow developers to code IF/THEN statements into executable contracts that dictate when a payment is made and how much is paid out. A common analogy for a smart contract is a vending machine. IF a user inserts the correct amount of currency, THEN the vending machine will dispense a frosty can of coke.
Apps and Decentralized Services:
A relatively easy way to think about Bitcoin is that it functions like a peer-to-peer calculator app using a blockchain database. Ethereum, on the other hand, functions like a peer-to-peer computer/operating system that runs other apps.
This massive, distributed computer is known as the Ethereum Virtual Machine (EVM). Ethereum has its own currency, the Ether Token, but the apps that run on the EVM also have their own currencies (App Tokens). This is a huge conceptual leap from Bitcoin.
Ethereum apps are extremely hot right now, exciting both developers who want to push the boundaries of what computers are capable of, and investors wanting to get in on the ground floor of these start-ups. Listing just a few, we have:
- Cosmos, which calls itself “The Internet of Blockchains” and says it “is a network and a framework for interoperability between ”
- Swarm, which is a peer-to-peer web
- Storj, which offers peer-to-peer file
To help explain how these peer-to-peer apps work, here’s an example of how someone might use the Ethereum app, Storj. Storj is a file backup system, but instead of storing it on a corporate server like Dropbox or AWS that is vulnerable to attack, it encrypts and stores the files across a distributed peer-to-peer network of computers.
If you are familiar with BitTorrent it works in a similar fashion, except you’re the only person that can decrypt the files you add to the network.
Enterprise Blockchain Organizations:
This group of organizations look a lot like industry associations. They all aim to bridge the gap between blockchain tech and enterprise software.
The Ethereum Enterprise Alliance is the largest blockchain consortium, includes members like Cisco and Mastercard, and has a stated goal of “connecting Fortune 500 enterprises, startups, academics, and technology vendors with Ethereum subject matter experts.” Hyperledger is a similar organization, but focuses on open-source innovation for industry. They’re part of the Linux organization, and work to create open-source standards for building enterprise-class applications on top of blockchain.
Complementary services to blockchain organizations:
Cryptocurrency exchanges first came on the scene in 2012 and have been a huge success. Prior to the introduction of exchanges like Coinbase, one of the hardest things about cryptocurrency was exchanging it for fiat currency. Like a cryptocurrency FOREX, Coinbase makes it relatively simple to trade dollars for coins or tokens, or one token for another.
Exchanges and financial services that aid cryptocurrency traders are considered complementary services because instead of being focused on blockchain infrastructure, they are focused on layering useful services on top of existing blockchain infrastructure.
An important aspect of services like these that are based in the United States is that they have probably done the due diligence of getting licensed by the government, and in doing so serve as a bridge between regulated securities and unregulated cryptocurrencies. Trading through a licensed exchange does not remove liability or risk, but it can help you avoid running afoul of the law in the USA. If you prefer to live on the edge, or don’t live in the USA, many of the exchanges based elsewhere operate without government licensing. If you live in a country where you trust strangers on the internet with your money more than your government, this may not be a bad option.
Bitcoin payment services are another complementary service, allowing individuals to easily pay directly for goods IRL or online with Bitcoin. BitPay is one of these companies, and works in a very similar way to PayPal or Stripe, by providing easily implemented payment plugins. A good example of how this works in the real world is Shopify, the largest e-commerce platform.
When someone sets up a site selling goods on the Shopify platform, they have the option to implement payment plug-ins so their users can pay however they want. Stripe powers credit card payments, PayPal powers PayPal payments, and BitPay powers Bitcoin payments.
This is particularly convenient for the site owners, since they have the option to have Bitcoin payments sent to their Bitcoin wallets, or automatically converted to fiat currency and deposited into their bank accounts.
The cumulative effect of all these services is to normalize these new payment options. When non-technical people feel just as comfortable paying in Bitcoin as they do paying with a credit card, that will signal a tipping point in the ubiquity of cryptocurrency use.
Self-regulation: The Hard Fork
Every once in a while, something happens that forces all the power users of a cryptocurrency to come together and collectively agree to break the blockchain. This is known as a hard fork, and it’s important to
understand what this means. Let’s say I figure out how to steal $20 Billion worth of Bitcoin from an exchange.
I stole the exchange’s private key, and transferred all their assets to my own account, then submitted a new block. It was a valid block, since I had all the proper keys, so it went through and was recorded to the blockchain.
At this point, the entire world of cryptocurrency users would collectively freak out, and all the miners and exchange owners would get together and decide whether or not to do something about my theft. Inevitably, there would be two camps: the purists, and the hard forkers.
The purists would insist that it’s heresy to mess with the blockchain, and the theft should stand. The hard forkers would want to roll back the block, and restart it at the block before the theft occurred.
This works kind of like the Time Machine backup function on a Mac. If your computer gets infected by malware on Wednesday, you can go into the backups and return to the version of the machine that existed on Tuesday, pre-malware infection.
In the case of blockchain, if there was a massive theft in block number 500,001, everyone can agree to roll back their copy of the blockchain to 500,000 and start a new version of the blockchain that begins with a new version of block 500,001.
This is a hard fork, and it’s exactly what happened to both Bitcoin and Ethereum.
Types of Cryptocurrency
- Bitcoin
The first cryptocurrency to emerge was Bitcoin (BTC), based on the SHA-256 algorithm. This virtual commodity was conceptualized in a whitepaper written in 2009 by a pseudonymous author who went by the name Satoshi Nakamoto. Over the course Bitcoin’s first four years, the market price of a single Bitcoin has fluctuated from below $0.01USD to over $250USD. The highly volatile price has made Bitcoin an attractive investment alternative for traders seeking to profit from market speculation, while at the same time the market volatility has made long term investors and daily users hesitant to participate for long periods of time.
A single Bitcoin can be spent in fractional increments that can be as small as 0.00000001 BTC per transaction. The smallest increment of a Bitcoin is known as a Satoshi, named after the original whitepaper author. The protocol allows for incremental transactions in the event the value of BTC to rises to the point where micro transactions will become commonplace. The rise in the value of BTC is anticipated because there is a limit to the total amount of Bitcoin will ever be created. Once the Bitcoin blockchain is completed, users can only circulate the coin that still exists on the network. As time goes on, Bitcoin will be lost and destroyed through daily use. The principles of supply and demand economics will come into play, increasing value of remaining Bitcoin.
Bitcoin is currently the most reputable of all cryptocurrency, as it is the oldest, and has been the subject of mainstream media coverage due to rapid market fluctuations and an innovative technical concept. At the time of writing, Bitcoin can be interpreted as being the ‘gold standard’ of cryptocurrency because all alternative cryptocurrency market prices are matched to the price of BTC.
- Litecoin
Litecoin (LTC) can be considered the ‘silver standard’ of cryptocurrency, as it has been the second most adopted cryptocurrency by both miners and exchanges. Litecoin makes use of the Scrypt encryption algorithm, as opposed to SHA-256. One of the goals of Litecoin was to have transactions confirm at a faster speed than on the Bitcoin network, as well as make use of an algorithm that was resistant to accelerated hardware mining technologies such as ASIC. At the time of writing, the Scrypt algorithm is resistant to ASIC mining due to intense RAM requirements.
The total amount of Litecoin that is available for mining and circulation is four times the amount of Bitcoin, meaning there will be quadruple the amount of Litecoin available to Bitcoin. Additional details about the history of Litecoin can be found on the official Litecoin website and the official Wikipedia entry.
- Altcoins
Altcoin a is slang term for the dozens of project forks that have emerged within the cryptocurrency software development community. Altcoins are ‘forks’ of either Bitcoin or Litecoin, meaning they make use of SHA-256 or Scrypt encryption algorithms and feature their own unique properties. Names of various altcoins range from memorable to comical (Feathercoin, Terracoin, P2PCoin, BitBar, ChinaCoin, BBQCoin). The profitability of mining and trading altcoin varies on a daily basis. Some altcoins exceed the profitability of Bitcoin at times, while others are less profitable.
It is believed by some cryptoeconomists that altcoins contribute to a diverse cryptocommodities marketplace, which is a good thing as there is more opportunity for speculative arbitrage and mining difficulty levels are spread over many different networks. Other cryptoeconomists disagree about the beneficial aspects of altcoins, citing overuse of the cryptocoin concept will dilute widespread adoption and restrict the use of the technology to speculative trade markets instead of daily commerce.
Section 4: The Government vs. Cryptocurrency
The government can either ignore, criminalize, or attempt to solve these issues with regulation if they want their governmental systems to continue to function. The US government currently does a mix of all three of these.
First, we need to consider: is Bitcoin money, or is it pretend money like Monopoly money? For a government to regulate a cryptocurrency as money or a security, they need to first recognize it as such. Unless they legally classify Bitcoin as a recognized currency or security, they can no more regulate it than they can regulate Monopoly money.
This was put to the test in the courts when a Texan named Trendon Shavers created a Bitcoin Ponzi scheme designed to defraud investors. When he was caught, he argued that it wasn’t really fraud, since Bitcoin isn’t really money. The government decided that Bitcoin still qualified as an asset (if not legal currency) and sent him to jail for 18 months anyway.
Getting conceptual for a minute, let’s talk about the nature of crime. Crime is simply defined as being whatever the government with current geographical jurisdiction over you has decided is illegal.
To ensure that everyone in the USA is earning their money through legal means, the government demands that you report the source and amount of all your income. The government’s system of taxation would break down if they did not do this, since taxes are based on percentages of income, spending, and property ownership.
The government can’t enforce perfect compliance, but to make sure that the majority of people follow the rules the majority of the time, the government criminalized the possession of unreported income or assets. If they determine that you have income or assets that are unaccounted for, it is assumed that these are either ill-gotten gains or a deliberate attempt to avoid taxation.
Successful criminals, those that don’t get caught in the act, tend to end up going to jail for nonviolent crimes like tax evasion rather than their violent crimes. A good way to think about cryptocurrency from a legal perspective is gambling.
If gambling is illegal in your state, you’ve broken the law as soon as you convert your fiat currency to chips, whether or not you win or lose. Let’s say you go to Las Vegas, where gambling is legal, and win $10,000. The government requires that you report your winnings and pay 25% tax on it. It might not sound fair, and you might get away with breaking the law by not reporting your winnings, but it is the law nonetheless.
Another big reason that governments typically have for not liking cryptocurrency is that it’s easier to break the law when you can pay for illegal goods using a currency the government has no control over. If you buy heroin with your credit card, you create a record of the transaction, and a paper trail the government can follow if they want to investigate you.
When Bitcoin was still new, it became infamous for being used as a supposedly untraceable method for buying and selling drugs on the dark web site Silk Road.
Even though there was a relatively small subset of Bitcoin holders using it to buy drugs illegally, the media hype was huge, and the government absolutely hated it. As we now know, Bitcoin is not entirely untraceable, and the government was able to shut down Silk Road and send Ross Ulbricht, its creator, to prison.
It should shock no one to learn that mailing drugs to your home address is a really bad idea. You also have to remember that if a server is on the grid, it is subject to governmental jurisdiction.
In the case of Silk Road, the government was able to find the server and get copies of the site files using a warrant served to the hosting company.
Intrigue and drama aside, what came out of all this was some interesting legal precedent. When the FBI shut down Silk Road, they seized the Bitcoin accounts of the people they arrested, then auctioned them off as assets, just like they would seize and auction off the Corvette of an arrested drug dealer. By doing this, it solidified the legal designation of Bitcoin as an asset with real world value.
It is absolutely not against the law to hold, trade, or buy goods with cryptocurrency in the USA as long as you report it and pay taxes on it. It is, however, just as illegal to buy black market drugs with Bitcoin as it is to buy black market drugs with cash. As my mother would say, “make good choices kids”.
- Tax specifics.
While we can’t say this for sure, it’s easy to guess that a big part of why the US government decided to recognize Bitcoin as an asset having value is so that they can tax it. This helps to drag Bitcoin into the government-controlled economy.
While it’s certainly possible to have a Bitcoin account and never report it or pay tax on it, just like it’s possible to have an all-cash business and never report it or pay tax on it, it’s definitely illegal.
If you’re reading this, we assume you’re not interested in breaking the law, and want to play nice with the US government. While these rules will probably change, and you need to do your due diligence when tax season rolls around, we can offer some guidelines for dealing with tax on your cryptocurrency holdings in the USA.
As we’ve said before, the US government treats Bitcoin as an asset. Here are some examples of how the IRS views the buying, selling and trading of assets:
– If you buy something (stocks, bonds, a house, a ferrari, etc.) and then sell it for a profit, there are lots of rules in place dictating how much tax you must pay on that profit.
– If you flip Bitcoin for short-term profit, any profits will be subject to short-term capital gains tax, whereas if you hold Bitcoin for over a year, then sell, any profits will be subject to long-term capital gains tax.
– Whether you pay someone for a job or services in cash or in trade, you must report that payment or trade on a 1099 or W2 form. As much as we wish this was legal, it’s not possible to legally avoid paying income tax by accepting payment in Lambos (or Bitcoin).
– A wash sale (converting/trading one asset into another asset of similar value) is not a taxable event. This is still gray area, but in theory, you can trade one virtual currency for another, and it would be a wash sale.
– It would only become a taxable event once you trade the virtual currency for a fiat currency, with profit calculated by subtracting the original purchase price.
– The IRS considers mined virtual currency to be income, so the safe option is to report its total value as income at the time it is earned, then also report any increase in value as capital gains at the time it is converted into fiat currency.
– As long as your virtual currency stays virtual, you will not have to pay taxes on it. However, the second you convert it to something tangible in the real world, such as a hamburger or cup of coffee, that is a taxable event.
Always remember that it is your responsibility to ensure compliance with the IRS (as in every one of your countries).
Keep in mind that the statute of limitations is six years (in U.S.) if you partially report or accidentally incorrectly report earnings (e.g. they can’t legally come after you after six years if you fudge your reporting). However, if you attempt to evade taxation, there is no statute of limitations. They can come after you for the rest of your life, and penalties are much more severe.
A great place to start is by using a cryptocurrency tax calculator site like the one listed below, but it’s always a good idea to consult your country IRS website directly.
Section 5: Hands On - How To Invest in Cryptocurrency
We see over and over again that these new currencies are prone to previously unimagined problems, such as DDOS attacks on exchanges, vulnerabilities that allow thieves to steal millions from supposedly secure software wallets, and malware that gives hackers access to Private Keys. You can make a lot of money, but you can lose it just as easily if you’re not careful.
Remember that there is no one in charge, and no one to help you when things go badly. Bitcoin is not like a credit card where you can complain to the credit card company, or like a bank where the FDIC insures your
deposits. If your Bitcoin gets stolen, it’s gone. If you get cheated, there is no one to complain to. If the value of Bitcoin plummets, you will lose money.
These are the realities of dealing in a decentralized unregulated currency.
However, the second rule of investing is just as true, the more you are willing to risk, the greater the potential reward. Within the world of
cryptocurrency, Bitcoin is just one of many currencies, and it isn’t even close to being the most interesting one. Even if you think Bitcoin offers limited future gains, or is overvalued, there are dozens of other methods for investing in amazing early stage blockchain-based technologies. Remember that this world is very new.
You can think of the coins issued by blockchain startups a lot like the internet stocks of the late 90s and early 2000’s. For every Pets.com bust,
there’s an Amazon.com boom, and a lot of people made a lot of money on those web 1.0 IPOs. We believe that the Amazons of tomorrow are today’s blockchain startups, and that by doing your due diligence and investing in a portfolio of these companies, anyone has the potential to make 1000x return on their investments.
This section will start with some Bitcoin investment strategies because Bitcoin tends to be more straightforward. This will offer anyone new to investing with easily executable trading strategies. However, the profit potential and strategic complexity will increase as we progress.
Whether you simply want to buy and hold $100 worth of promising cryptocurrencies, or execute complex trades on futures and derivatives, I have some ideas for you.
Anyone familiar with Forex, or the foreign exchange for trading international currency, will quickly recognize where these cryptocurrency exchanges got their inspiration. It is more or less the same thing, the only difference being that the fiat currencies were created by governments while the cryptocurrencies were created by decentralized groups of individuals.
Picking a cryptocurrency exchange is a lot like picking a bank or online trading platform. If you want anonymity, you will probably not want to pick a company based in the USA, but if you care more about ease of use and security, you should. If you want low fees, you will probably sacrifice ease of use or security, while exchanges with higher fees may offer more features.
It’s really up to you in the end to determine which company hits the right balance for you of service, anonymity, ease of use, advanced functionality, and safety. It’s not a bad idea to shop around and see who’s offering the best deal when trading. There are lots of exchanges out there, but we’ll look at the top five. As you pick one (or more) to work with, make sure you consider all of the following:
– Reputation: Will this company be around in two years? Five years? If they fold or get hacked, what happens to your money?
– Low fee vs. high fee: Are lower fees worth sacrificing safety, features, and reputation?
– Exchange rate: If working with more than one comparable exchanges, check the exchange rates. One may have a better exchange rate at the moment you want to make a trade.
– Geographic footprint: Does the exchange support your country?
– Fiat currency and payment methods: Does the exchange support your currency? How easy or hard is it to convert fiat currency to cryptocurrency?
– Cryptocurrencies offered: Does the exchange just support the top cryptocurrencies by volume, or does it offer new and low-volume cryptocurrencies and tokens?
– ID Verification: This is a requirement in many countries, including the US and UK. It protects against fraud and scams, but means giving up anonymity.
– Platform: Does the exchange have an app for Android, iOS, or does it just work on a web browser?
– Security: Is your cryptocurrency stored digitally, where it’s vulnerable to hackers, or do they pull it offline into cold storage when not in use?
Founded in June 2012, Coinbase is one of the first big exchanges established in the US. It was born in the Y Combinator startup incubator with serious Silicon Valley cred, including Series A funding by Union Square Ventures. Since then, the NYSE, USAA, and even some big banks have invested in Coinbase.
The reason that all this is important is that if you’re forking over your money to a stranger, you want to make sure that stranger is credible, and Coinbase is about as credible as it gets in the world of legal, licensed, US- based cryptocurrency companies.
The other reason we love Coinbase is ease of use. The US has strict reporting standards for banks, all of which are aimed at combatting crime, particularly money laundering and funding terrorism.
Coinbase makes it fairly simple to create an account, include a cryptocurrency wallet, attach your bank account (just like you would do in PayPal), and verify your identity. If the US government thinks you’re using Coinbase to launder money, they will comply with requests for info to stay compliant with US law.
The Coinbase exchange is called GDAX, and amazingly, they offer FDIC insurance on any USD balances kept with them (up to $250,000) just like any other big bank. It’s important to note that FDIC doesn’t cover non-USD currencies, so once you convert to a cryptocurrency, there are no guarantees. Still, for a cryptocurrency startup, this is basically the gold standard of companies.
Given how buttoned up Coinbase is, if you’re a budding crime lord hoping to start a drug empire on the dark web, Coinbase probably isn’t for you. However, if you’re non-technical, and/or an investor looking for an easy way to hold or trade cryptocurrency, Coinbase is fantastic. We use it, so should you.
Kraken
For more experienced traders, or individuals outside the US, Kraken is a particularly popular exchange. It is supported in more countries, and does the highest volume of trades in Euros. Similar to Coinbase, it can act as a cryptocurrency wallet, a bank account, and a currency exchange. Unlike Coinbase, Kraken offers margin trading and more advanced trading features. Kraken supplies users of the Bloomberg terminal with all their cryptocurrency valuations.
Cex.io
Based in London since 2013, Cex.io is another good option for UK- based traders looking for personalized dashboards and margin trading. It has a reputation for ease of use, good trading tools, good exchange rates, and worldwide support. However, it also has a drawn out deposit process and expensive fees on deposits.
ShapeShift
For more advanced users, ShapeShift is an exchange based in Switzerland that does not offer trades between fiat currency and cryptocurrency. It only allows trades between cryptocurrencies. It’s a much more stripped down exchange that offers fast trades with minimal fees, and a huge variety of currencies.
To get up and running on the ShapeShift exchange, you would first have to use an exchange like Coinbase or Kraken to trade your fiat currency for Bitcoin or Ether, then move your new cryptocurrency over to ShapeShift.
Because ShapeShift does not handle fiat currency, there’s a lot less regulation and hassle involved with using them, and they have been vocal about resisting attempts by government regulators to de-anonymize their users.
Poloniex
Similar to ShapeShift, but based in the US, Poloniex is another fast, low- fee cryptocurrency exchange with low fees, but no support for fiat currency. They offer over 100 cryptocurrencies and specialize in high-volume trading between cryptocurrencies and provide advanced trading tools and analytics.
If you live outside of the US or UK, or are just curious, there are many other cryptocurrency exchanges out there. They are not always stable, and are prone to hacks, but depending on your particular needs, may offer a better option than one of the top five exchanges.
Bitcoin is the largest market cap crypto coin, and is somewhat unique in that it is considered both digital “gold” and digital “cash”. What that means is that Bitcoin has gold-like properties because it generally holds or increases in value over time, making it a good asset to buy and hold, and yet it is also very easy to make everyday transactions with Bitcoin, giving it cash-like properties.
Unlike trying to pay with a brick of gold, you can walk up to the counter at a coffee shop and pay for your coffee with Bitcoin. It’s worth thinking about this for a moment: is the cash in your wallet gaining value while it sits there?
Ethereum is the next biggest cryptocurrency in terms of market cap, but as we discussed in the last chapter it works a little differently from Bitcoin and is quite a bit more complex. The Ethereum Virtual Machine (EVM) is a decentralized computer platform that was designed to run smart contracts powered by it’s own cryptocurrency, Ether, not just a cryptocurrency in and of itself. You can think of Ethereum a bit like a video game arcade where all the video games run on proprietary tokens.
To play, you trade your fiat currency for tokens, then feed those tokens into the different machines when you want to use them. Similarly, when you trade your fiat currency for Ethereum, you can then use those Ether coins to power smart contracts that run on the EVM.
There are basically three things you can do with Ethereum Coins, which are:
– Buy and hold hoping speculators will bid up the price.
– Use Ethereum as a currency to pay others via a smart contract.
– Trade Ethereum Coins for distributed app (dApp) Tokens.
While Bitcoin is very useful for small, uncomplicated transactions, like buying a cup of coffee, Ethereum is the better option for big, complicated transactions, like trading options, buying a house, or paying a group of programmers to all contribute to a central project.
Developers have just begun to scratch the surface of the possibilities for building new and innovative smart contracts with Ethereum, so the hype around it is probably justified.
Even if you have no interest in using smart contracts on Ethereum, it’s still an interesting investment for multiple reasons.
As a relatively young and promising currency, it still has a lot of upside and potential to be bid up by speculative traders. As buy-and-hold strategies go, holding Ethereum is definitely not a bad idea.
Trading Ethereum for dApp Tokens takes a bit more explaining, but it’s an important concept and potentially the most lucrative way to invest indirectly in Ethereum. When someone builds a distributed app (dApp) that runs on the EVM, that dApp is powered by its own coins. For example, Storj is built on the EVM, and if you want to use the Storj dApp for decentralized file storage, you would need to trade Ethereum for Storj coins, which then get paid to Storj for usage of their app. Convoluted? Yes. Potentially very profitable? Also yes.
Just like Ether coins, Storj coins are susceptible to speculative trading and can potentially skyrocket in price.
There are dozens of dApps running on Ethereum like these, most of which issue their own coins.
If you believe that one of these apps has the power to transform an industry, the same way AirBnB or Uber did, you would be wise to hold on to some of their coins. On the other hand, if the company tanks, they may take your money with them.
Keep an eye on the top coins by market cap at coinmarketcap.com. The long tail of smaller cryptocurrencies changes often, but the big ones tend to stick around. Consider the enormity of this market: all of the top 10 cryptocurrencies have market caps exceeding $1 Billion!
If someone obtains your private key and moves coins from your wallet to their own, even though you will be able to see which account your coins go to, due to the anonymous nature of cryptocurrency it would be extremely difficult to track that individual down.
We will list a lot of options here for keeping your currency stored safely, but the best option will always be to diversify and spread your coins around in different wallets, and even different types of wallets.
Remember the old adage, don’t put all your eggs in one basket? Don’t put all your coins in one wallet.
Coin storage can be considered either cold or hot. Cold storage essentially means that your private keys are stored in a way that is not internet connected, making it difficult for hackers to get at them using malware or through exploits of software bugs. Hot storage means that your private keys are stored in an online service, like an exchange or software wallet, where hackers could potentially get at them.
As a general rule of thumb, you should only keep coins in an online location (hot storage) while you’re trading, and only what you’re trading. Once you’re done trading, move your coins out of hot storage into cold storage.
Cold storage can be as simple as printing a piece of paper with your public and private keys on it, or storing them on a USB device. A hacker can’t get at it via the web, but your roommate, your mom, or your maid can. With cold storage, you have complete control over your bitcoin since you’re “storing” them on a physical object that is in your possession.
However, with cold storage you are also your own worst enemy.
If you opt for cold storage of large amounts of cryptocurrency, treat it like a brick of gold and put it in a safe or safe deposit box. Whatever you do, don’t lose it.
It might be hard to wrap your head around this at first, but keep in mind that cryptocurrency is not like normal money. It’s not physical, and
you don’t need a bank to have an account, any more than you need a bank to own a hunk of gold. The one and only thing you need to safeguard is your private key.
As long as you have your private and public keys, you can access the blockchain. Without them, anything the blockchain says you own is inaccessible. If you buy Bitcoin, then lose your private key, you can no longer access that currency. It’s locked away for good in the blockchain, accessible only with your private key. If someone uses your private key to transfer your Bitcoin to their own account, it’s gone. There’s nothing you can do to get it back.
What all of these wallets are designed to do, with varying degrees of security, is to hide your private key(s) from prying eyes. Before you get too freaked out, don’t think that everyone needs super high levels of encrypted security.
One of the quirks of the blockchain is that it’s possible for anyone to look at the ledger balances and see how much currency each public key holds. You can think of those public keys as unique wallets.
A hacker probably isn’t going to bother hacking into your wallet if it only has a couple thousand dollars worth of coins in it, unless it’s part of some larger hack. Hackers will go after the wallets with many millions of dollars in them, so they can get as much as possible as quickly as possible, before the hack is discovered and the vulnerability corrected.
For the average person, the convenience of some of the less secure options will probably outweigh the inconvenience of the more secure options.
Let’s go through some different types of wallets, going from least- secure / most-convenient to most-secure / least-convenient.
Companies that provide online wallets generally make their money through small fees earned by selling wallet users their coins.
The big downside to using an online wallet is that you are forced to trust that service provider.
They have access to your private keys, and these online wallet services are very tempting targets for hackers. Most providers do a lot to try to mitigate the risk by insuring their digital currency holding against theft, storing the vast majority of the digital assets in secure offline storage, and adding additional security features.
If you’re trading currency on a regular basis, or simply want the convenience of being able to access your account from any web browser anywhere in the world, online wallets are a great option. However, if you are holding on to large amounts of currency and want to make sure it’s stored securely, you will want to transfer your coins to a more secure wallet.
Mobile Wallets
A mobile wallet is simply an app on a smartphone. They can be standalone apps that store all your information on the actual phone, or they can connect to an online wallet account. Many of the online wallet providers offer iPhone and Android apps that allow users to access their accounts remotely. Other apps like actually store all your keys on your phone, but have encrypted online backups just in case you lose or destroy your phone.
Mobile wallets are the best option for anyone that actually wants to use Bitcoin as a currency out in the real world. With a mobile wallet, you can actually walk up to a counter and pay for a coffee with Bitcoin. It’s not impossible to hack a mobile wallet, but it’s difficult. If you login with a fingerprint, someone could steal your phone and lift your fingerprint right from the phone itself.
Desktop Wallets
Similar to mobile wallets, these computer apps store your keys securely on your computer, often with some sort of encrypted backup option in case of hardware failure. Desktop wallets were popular in the early days of Bitcoin but have largely fallen out of favor.
The original Bitcoin Core software not only mined for Bitcoin, it also created wallets for the first Bitcoin users.
The reason they are used less is that desktop wallets don’t offer the convenience of a mobile or online wallet, and assuming your computer connects to the internet, can be hacked fairly easily.
If your computer gets infected with malware that records your keystrokes, hackers can pretty easily get into your desktop wallet account and steal your coins. For new users and the non-technical, we would not recommend a desktop wallet. However, advanced users might want to dig a little deeper.
Armory is a desktop wallet software that specializes in highly secure desktop wallet setups, but to use it, you have to have both an air-gapped (not connected to the internet) computer to store your private keys and an internet connected device to actually make transactions. This is a pretty solid option for anyone willing to go through the hassle of setting up an air-gapped machine and getting the system working. But, there’s still a risk of someone physically stealing your air-gapped computer. Nothing is foolproof.
Hardware Wallets
Hardware wallets are ingenious devices that act a bit like a mobile, encrypted, air-gapped computer. They tend to be small enough to fit in your pocket, and when needed, can be plugged into an internet connected computer to move currency around, or to create an encrypted backup.
Trezor makes one of the better hardware wallets.
The basic idea behind it is that all your info is stored on this encrypted little machine that never really sees the internet. To use it, you manually
punch your PIN into a screen on the device. It’s somewhat complicated, but the idea behind all this is that even if you plug it into a malware infected
computer to make a trade, hackers still can’t get at your private keys. Whenever you use the wallet, an encrypted backup is stored online. The only way to decrypt that backup is with what’s called a “recovery seed” which is basically a complicated set of random words the user manually prints on paper.
So, if you ever lose or destroy your Trezor device, you can create a new wallet and access your coins using the recovery seed. Obviously, the recovery seed is the intentional Achilles heel of the device, so be sure to keep it stored somewhere extremely safe.
Paper Wallets
This is the least technologically advanced option, but probably the easiest. Simply put, someone wanting to put their Bitcoin into cold storage could sign into a service like bitcoinpaperwallet.com, and generate a printable PDF with two QR codes, one that will pull up the public key, and another with the private key. This PDF or printed piece of paper serves as the only record for that Bitcoin on the blockchain.
From a security perspective, the biggest problem with printing sensitive information onto paper is the act of printing itself. A PDF can be password protected and stored offline, but the act of printing that PDF opens you up to some vulnerabilities. You’ll need to delete the file after printing, and when printing, consider whether thieves can access the printer itself. A network connected printer is even less secure than your network connected PC. A printer may even save the file locally where anyone with access can reprint it. You definitely don’t want to print these at work, where your IT guy can probably pull up every file that goes through the printer network.
Paper can burn, the ink can fade, or it can get too wet to read, so be really careful if you decide to use a paper wallet. Your paper wallet may be safe from hackers, but is it safe from you? On the other hand, a paper wallet would make a pretty cool present if you want to give some coin to an uninitiated friend, or physically pass coins to another person.
Generally speaking, the experts agree that a hardware wallet is the way to go. The best options keep changing, so do a little homework before you invest.
Big heists involving hundreds of millions of dollars worth of Bitcoin have temporarily crashed the value of Bitcoin markets. Between 2011 and 2014, hackers stole over 700,000 BTC from the hot wallet of the biggest Bitcoin exchange at the time, Mt. Gox. In 2016, hackers stole $70 Million worth of Bitcoin from the Bitfinex exchange.
In a couple cases, the dollar value of these thefts were so high that trading was suspended, the blockchain was forked, allowing for the blockchain to actually be rolled back, removing and invalidating the hacked blocks from the chain. There have been thousands of other mid-range thefts and hacks that involve malware, and exploiting flaws in wallet software.
We can talk about how to avoid the most obvious pitfalls, but the smart move is to assume that even the best security can be beat, and to diversify your security strategies.
As we mentioned when talking about wallets, cold storage, or offline storage, is much harder for hackers to access than hot storage, or online storage. Using wallets that offer offline storage is definitely the first, best place to start.
Another vulnerability is your password. When logging in to a service that stores your public and private keys, such as an online or software wallet, you log in using a username and password, just like you would when logging on to a bank website. Should someone steal your password, they can control your account.
Turning on two-factor authentication (2FA) is the most common way to avoid giving a password thief access to your account. Most bank websites, email providers, and web hosts already offer 2FA. The most common way that 2FA works is when a second piece of information is required to login, in addition to the password, usually a text message with a unique code sent to the user’s phone. While this is certainly better than nothing, phone numbers can easily be hacked too.
It’s common for hackers to call the phone carrier and talk an unwitting agent into giving them access to a target’s mobile account–something to think about the next time you sign up for two-factor authentication.
To provide hackers with a bit more of a challenge, try using the 3rd party 2FA app Authy. Alternatively, just use one of the hardware wallets we suggested, Trezor or Ledger, since they have 2FA built in. When setting up the device, it will prompt you to create a recovery seed. The device will produce a random set of twenty four english language words, which you then write down on a piece of paper (and hide somewhere safe). Using that list of words, it’s possible to access your backup should you lose your wallet.
Finally, when storing Bitcoin, you can use a wallet service like Armory to create a multi-signatory wallet. In other words, instead of creating just one password, it will create multiple passwords, and all of those passwords must be presented to actually spend or transfer the Bitcoin.
Armory allows for up to seven signatures. Imagine the look on a would-be thief’s face when they realize they are six signatures short of being able to spend their ill-gotten gains.
Tracking your investments
Assuming you paid attention to the last section, you’re
convinced that it’s a bad idea to pile all of your cryptocurrency into a single trading account, where it would have been easy and convenient to track. So, if you have multiple currencies spread out over multiple wallets in hot and cold storage, and are possibly even using multiple exchanges, how do you keep track of everything?
A good option is to use blockfolio.com. Blockfolio works a bit like Mint, aggregating information about all of your accounts, and has a convenient mobile app to help combat any FOMO you might be experiencing as prices soar and plunge (and they will).
If you just want to keep an eye on the current $USD values of the big currencies like Bitcoin and Ethereum, you can find these in the built-in stock tracker apps on your iPhone or Android device.
Cryptocurrencies to Invest
In the time it took to write this chapter, the price of Bitcoin has ranged from $6200 to $6700. By the time you read this chapter, Bitcoin could be worth $2000 or $10000. We don’t know. What we do know is that investing
in cryptocurrency is not exempt from the first law of investing: buy low and sell high. Any of the top 20 are good bets, but do your research on them.
We’re not here to give you an equivalent of a “stock tip,” so if you don’t want to dig into the details of each coin, buy some of the top 20 coins and hold onto them.
If you want to really know what you’re investing in, which we recommend, read the whitepapers provided by the team developing the coin, look at the developer team’s credentials, see what people are saying on reddit threads and twitter, etc.
Section 6: Initial Coin Offerings (ICOs) and Inside Info/News
An Initial Coin Offering, or ICO, is a recent invention. Developers looking for funding for their dApp projects running on Ethereum came up with a novel idea: why not sell the tokens that will run the dApp before building it? It looked like a win/win: the startup would hand out their newly invented tokens in exchange for cryptocurrency with very real value, like Bitcoin or Ethereum, which they could convert to cash and fund development. These early token buyers could buy up tokens for pennies, potentially making big gains as the coins gained in value. The term ICO is intentionally intended to mimic the acronym IPO, or Initial Public Offering (of stock on a regulated stock exchange). Realistically, however, an ICO is quite different. Simply put, an ICO is really a pre-sale of coins that only have three possible uses/functions:
1) to pay for usage of the dApp;
2) to make early buyers of the coins rich once speculators bid up their price, and (optionally);
3) to act as proof-of-stake (way more on what this means in the mining section).
Because the product often hasn’t been built at the time of the token sale, ICOs really are more like Kickstarter crowdfunding campaigns than IPOs. Think of it like an arcade game maker pre-selling tokens for a penny each that will only work in the future on the arcade game they intend to build. ICOs truly are more of a pre-sale mechanism than a stock-like investment. However, the amount of speculative trading that occurred around these tokens generated enough attention that it attracted the interest of the US government.
ICO Regulation
In July 2017, the SEC decided that ICO Token sales are considered securities, and should be regulated as such. In other words, if you live in the USA, it just got a lot harder to participate in an ICO. And, startups that want to use an ICO to raise funds will need to be careful, which means that if
they’re based in the USA, they need to follow the SEC guidelines and only sell to accredited investors.
If they’re based outside the USA, they are probably better off not dealing with US-based investors at all. It is not uncommon for startups wanting to hold ICOs to base themselves in Switzerland, where regulations are lax, and refuse anyone with a US-based IP address.
The impact of this move by the SEC doesn’t really affect investors directly, but it has very big implications for any startups wanting to fund themselves via ICO. SEC regulation makes ICOs much riskier fundraising vehicles, since a wrong move could mean jail time. This won’t stop ICOs, but it will have a cooling effect, and decrease the total number of ICOs.
Startups may look for alternative methods of funding that involve less risk, or simply exclude the US. US-based companies issuing ICOs are becoming a LOT more careful about KYC (know your customer) laws, and are making sure to collect info to verify customer identities.
The SEC, for better or worse, claims that it is helping to protect investors with regulation. Because ICOs were completely unregulated, it is possible for absolutely anyone to dream up and launch an ICO. When there are no gates or gatekeepers, scammers and fraud inevitably show up.
However, many would argue that external regulation was unnecessary given that the industry was actually doing a relatively good job of self- regulating. Similar to crowd-funding a project on Kickstarter, it’s possible that the promised product will never materialize, but the best projects do tend to get more funding and actually happen. Crowdfunding is, by its very nature, a vote for what people think will succeed.
Launching an Ethereum Token ICO
When a team of developers decides that they want to launch a new Ethereum dApp, they may choose to use an ICO as a way to get funded. Here’s how an ICO works, in a nutshell:
– A group of developers write a whitepaper, detailing what they plan to build, why it’s important, and what the potential market looks like. This is similar to a startup pitch deck or business plan.
– The group registers their domain and posts their whitepaper, along with information on when the ICO will occur, and how to invest.
– At the appointed time, they will open the ICO, and anyone who wants to can send them Ethereum in exchange for their new coin (let’s call it XYZ CoinU).
The exchange rate for XYZ CoinU is set at a favorable rate, so early investors get a lot of XYZ CoinU in exchange for their Ethereum.
Once the funding goal is met, the ICO is over, and if everything went well, the startup now has millions of dollars worth of Ethereum in their wallet, which they hold on to, pay their workers with, or trade in for any currency they like.
Investing in ICOs
Putting aside the limitations we’ve discussed, ICOs and early stage dApp tokens are still a very promising vehicle for investment. If you live in the US, it’s definitely legal to invest in ICOs if you’re an accredited investor. The law gets a little murky about whether or not the average US crypto trader can legally participate in an ICO, but they can definitely trade any new tokens listed by an exchange shortly after an ICO, which is very nearly the same thing.
We can’t endorse these tactics, but if you’re willing to risk breaking some laws, by using a VPN (like the free Chrome plug-in Hola) and
anonymous cryptocurrency like zCash, it’s relatively easy for U.S. citizens to participate in ICOs happening overseas, even from US soil. Decentralized, anonymous systems naturally make enforcement of regulation of individual participants extremely difficult. Not impossible (the government will track
you down if it decides you’re worth the effort), just difficult.
ICOs are risky investments, and as such, you should follow the two golden rules of speculative investing: 1) Don’t bet money you can’t afford to lose, and 2) Diversify, diversify, diversify. You’re trying to find the Google of the decentralized age, and maybe you will, but you’re probably going to find a lot of stinkers in the process. Like any VC fund, you’re more likely to succeed with lots of small bets instead of one big one. If one good bet gets a 30,000% return, that’s going to take care of a lot of those bad bets (and a scenario like this is not all that uncommon).
While ICOs are definitely risky on a lot of levels, it is also important to remember that some of these new dApps really do have the potential to reshape entire industries, particularly the first-movers coming onto the market now. Investing small amounts in coins for a variety of these startups via their ICO, or shortly after the ICO during a price dip, could be the best investment of your life, akin to getting in on the IPO a decade ago of one of today’s modern internet giants.
There are lots of ICOs out there, and many are US-based and accept participation by US citizens, pending some KYC paperwork. In the end, it’s really up to the ICO issuer, not the investor, to ensure they are following the rules set forth by the SEC. Be careful, but not so careful, you fail to take advantage of some great opportunities.
Evaluating ICOs for Investment
The first thing you can do is look at the project whitepaper, particularly if you’re relatively technical and feel like you can tell the difference between
a great idea with huge monetization potential and a scammy work of science fiction. Nearly any dApp startup planning an ICO (or not) will have a whitepaper on their website outlining what the dApp will do, and how they plan to develop it.
If you feel the idea is sound, the next step is to evaluate the legitimacy of the developer team. If the team is anonymous, walk away. They should be listed with their real names and pictures, and ideally a link to their LinkedIn or GitHub profiles so you can verify that they are real people and are qualified to create the software they’re promising.
Finally, check the internet for the opinions of others, keeping in mind that online opinions are generally worth what you pay for them. It’s best to find a few consistently good sources and ignore random claims from suspect sources. If someone is telling you this is going to make you a
billionaire overnight or that it’s a giant scam, be skeptical. The answer is usually somewhere in the middle. You can keep reading and see our list of trusted sources below.
The point is, you need to do your homework. ICOs can be extremely lucrative if you find a good one and play it right, but there’s also a lot of crap out there, and potential legal liability.
Section 7: Trading Crypto and Advanced Strategies
from Forex trading, or trading foreign currencies. Let’s look at a simple example.
In this chart above, we’re looking at the exchange rate for the Euro against the US Dollar over the course of a day. A Forex day trader with $10,000 and a 10x leverage account could potentially buy 85,470 Euros at $1.17 for
$100,000, then quickly turn around and sell those 85,470 Euro at $1.175 a few hours later for $100,427. This trader would have netted $427 in just a few hours without doing much work. Using leverage and time, they turned
$10,000 into $10,427. It is more or less free money.
In this chart above, we’re looking at the rate for Bitcoin against the US Dollar.
It is nearly identical to the Forex chart. But, let’s do the math again. Let’s say a crypto trader did the same thing, and using $10,000 and a 10x leverage account bought $100,000 worth of Bitcoin at $3150, then sold it a few hours later at $3380 for $107,301. On the exact same day, in just a few hours, using roughly the same amount of money, this trader would have made $7301.587 compared to the Forex trader who made $427. This trader, using the exact same method, turned their $10,000 into $17,301. That is not insignificant.
Obviously, the culprit here is volatility. The value of cryptocurrency is much less stable than the values of fiat currency, so there are huge swings on a regular basis. For day traders, this is an ideal situation. It is not uncommon for some of the altcoin currencies to change in value by anywhere from 10% to 1000% in a single day. As long as the timing is right, it’s possible to make a lot of money on these swings.
In addition to buying and selling crypto with dollars or euros, you can trade between cryptocurrencies to maximize profits that way too. The two biggest cryptocurrencies are Bitcoin and Ethereum, and while their independent values in USD tend to trend together, there are constant changes in their values relative to each other.
The value of cryptocurrency is often affected by media coverage, so even though Bitcoin and Ethereum trend together, a media report of an Ethereum hack, or some new Bitcoin millionaire, might spike or tank the value of one currency compared to the other.
This provides a great opportunity to trade between cryptocurrencies, essentially trading an overvalued currency for an undervalued currency under the assumption that the currencies will normalize, and the net fiat currency trade-in value will increase over time relative to what the original currency would have been worth if you’d just left it alone.
Aside from pure profit, one of the big advantages of trading cryptocurrency over Forex is the ease of entry and exit. The biggest hurdle is simply creating an account and trading your fiat currency for cryptocurrency, but even that can be done in less than an hour. It can take weeks to set up a Forex account.
Once you have an account and have currency loaded into an exchange, trading is a simple matter, and once you’re done, you simply leave the exchange. You don’t need to leave your currency in the exchange account, you can just load it onto your cold storage wallet and leave.
While there is no guarantee that this will last forever, another reason to prefer trading cryptocurrency to Forex can be smaller fees and spreads. The amount of money going to the exchange or other middleman is generally smaller when trading crypto.
For more experienced traders, many of the features you know and love can be found in the world of crypto as well, along with different kind of strategies while all will come together as mr.G explains in his Crypto Pro course.
Margin trading and leverage trading may be offered by your exchange, allowing you increased buying power by borrowing money you don’t have at a small interest rate. The assumption, of course, is that the interest rate is covered by increased gains thanks to trades of greater volumes.
These strategies can quickly amplify gains in a bull market, but also amplify risk. If the currency loses value, you’re on the hook for both the loss and the interest.
When choosing your exchange for trading, a good place to start is always going to be an exchange that offers low fee trades of fiat currency for cryptocurrency. But if you intend to keep keep trading between
cryptocurrencies, buying Golem with Bitcoin, for example, you’re better off moving to a crypto-only exchange that offers lower fees and better exchange rates. There’s no penalty for having accounts on multiple exchanges–quite the opposite.
Some traders report that they have found profits just through variations in the exchange rates between exchanges. The practice of simultaneously buying on one exchange with a lower exchange rate, while selling on another exchange with a higher exchange rate is known as arbitrage, and it’s just about the lowest risk form of trading possible.
All one needs to do to make money with arbitrage is to keep an eye on the exchange rates across multiple exchanges and take advantage of any differences as they appear.
Trading a major cryptocurrency for another, smaller cryptocurrency, is known as altcoin flipping.There are thousands of altcoins, most of which have values that are a fraction of the price of the established coins, Bitcoin and Ethereum. Just looking at a random sample, they have names like ripple, dogecoin, synero AMP, steem, bitshares, golem, gridcoin, stratis, and pinkcoin.
Like penny stocks, a little traction in the market can produce small fluctuations in price that result in altcoin prices doubling or tripling overnight. The trick, of course, is picking them.
Any developer team that wants to can create an altcoin currency, and these software developers range from being brilliant visionaries to outright scammers. So, if you want to speculate on altcoins, how do you choose?
First, consider the reputation of the developers behind any altcoin. If a team full of famous developers is launching something new, that altcoin has a high probability of success. If the altcoin comes from some shady corner of the web with unknown developers accompanied by promises that sound too good to be true, it’s best to avoid it.
If you don’t want to do the work of combing through linkedin profiles and reading about developer teams, a decent proxy for reputation is trade volume. The projects that those in the know trust are generally going to get a lot more interest, which results in higher trade volume.
On most exchanges, you can sort the altcoins they offer for trading by trade volume.
This will quickly surface the altcoins that are gaining traction within the community, giving beginners an easy way to find legitimate altcoins. If a lot of people are buying into an altcoin, that’s a very bullish sign, and probably offers a chance to jump in and ride that wave up.
New coins are a little more risky, given their untested nature, but the price of a new altcoin generally trends up after being introduced. The price is often highly volatile for the first few days after being introduced too, offering speculative day traders the chance to make a quick buck.
Similar to stock markets, cryptocurrency markets tend to move based on media stories.
Positive or negative reports on crypto-focused news sites like deep.dot.web will push the markets one way or the other, but if a particular juicy story on deep.dot.web or the Ethereum sub-Reddit gets picked up by a mainstream media news outlet, you can expect much bigger swings in price.
News of an exchange hack can send prices spiraling down, while news of a big event like the introduction of Bitcoin Cash can send prices shooting up. By paying attention to the early chatter and first-wave reporting, it’s possible to get in front of these predictable swings in price.
As discussed, one of the big selling points of cryptocurrency is the ability to buy and sell anonymously. Traders may not care much about this feature, but those who use these currencies as cash to anonymously buy and sell over the web care very much, and they make up a big chunk of all usage. If a dark web marketplace decides to adopt a new altcoin that specializes in anonymity, the price of that altcoin is very likely to surge.
Conversely, whenever someone gets arrested and we find out the
“anonymous” altcoin they were using turns out to not be totally anonymous after all, the price and usage of that coin tends to plummet.
If you’ve been trading stocks or Forex for a while, you’ll recognize that many of the best practices for trading crypto are similar to or borrowed from these markets. Rules are meant to be broken, but here are a few rules to follow anyway.
world unto its own. When it comes to technical trading, however, we will simply borrow the tactics and strategies that are already working well in the wider world of finance. All of the information in this section is just as useful when day trading penny stocks on the NASDAQ as it is when flipping altcoins on the Poloniex crypto exchange.
An old adage in the world of trading is “bulls make money, bears make money, and pigs get slaughtered.” In other words, you can make money when stocks go up (buy low, sell high) and you can make money when stocks go down (short sell high, buy low), but if you try to time every low and every high and sell at the exact right moment, there’s a very very very good chance that you’ll miss that brief window, and all your gains will evaporate.
The nature of any tradable asset is that its value is constantly changing. While a stock or token may only go up or down 1% or 2% in a day from the start of trading to the close of trading, over the course of that day it has probably traveled 20% to 30%, were we to add up all the cumulative rises and falls. Every rise and every fall represents an opportunity for profit.
Thanks to price volatility, it is possible for a day trader to trade a stock like this in such a way that you could easily earn 10% or more on a stock that only increases in value by 1% during the same time-frame. The trick is to recognize the conditions that produce these ups and downs before (or as) they happen and and act quickly enough to get in and out with your gains intact.
So, how do we figure out if the price will go up or down? The reality is that we can’t ever know if price will go up or down, we can only make an educated guess. This requires paying close attention to indicators of volatility, and thinking like a statistician. When a statistician says there is a 70% chance something will happen, that means there is a 30% chance it will not happen. Statistics is not a democracy where the majority wins. The point is not to win every time, the point is to win 70% of the time (or more) so that your wins outweigh your losses.
When you find yourself losing a big bet, it’s easy to succumb to emotion or stress and abandon your disciplined approach. Do not do this. If you can’t stick to your plan and trust the math, day trading is not for you.
However, if you can handle being wrong less often than you are right and are willing to be disciplined in your approach to trading, proceed.
1) Using trend lines, determine what the trajectory and normal range look like.
Anytime you’re calculating averages, more data is generally going to be better, and give a bigger picture view of the data you’re looking at. However, you’ll want to limit the data you’re averaging to just look at current market conditions. Start with a moving 20-day average. That tends to be the sweet spot between too much and too little data when capturing the current trend. However, trends change, and we’re only interested in the current trend. If the market sees a big correction or a huge price increase, you may want to omit that data, and only go as far back as the point where prices stabilized. If big news comes out that affects the trend going forward, that’s something to watch out for too. The chart below offers a simple visualization of a trend.
a) The center line is the trend line. This moving average is
“normal” and in the absence of big changes, the price should generally come back to this center point.
b) The outer lines are usually called Bollinger Bands, and they represent a range of two standard deviations above and below the average. When a price approaches or goes outside of a Bollinger Band, that is a strong signal that the short term trend is about to change and revert to the mean.
c) A technical trader would see three fairly obvious points on this chart, represented by the arrows, in which to consider executing a trade.
2) Using indicators of support and resistance, double check the stats.
Remember, statistics just tell us that there is a chance something will happen. Just because something happens 95% of the time doesn’t mean that this time isn’t the other 5%. The more indicators you can check, the better. These will get you started.
a) Use candlestick charts to help predict whether a trend is about to reverse.
i) Candlestick charts group all the Ask prices and all the Buy prices into time based chunks. The time-frame can be anything from 1 minute to 1 week. The Ask prices are
represented by the “wick” or the skinny line, while the Buy prices are represented by the “wax” or the fat line.
ii) When the wick extends far above the wax, that means that the asking price is higher than what buyers are willing to pay, which means that the price will probably come down.
iii) When the wick extends far below the wax, that means that buyers are willing to pay towards the top of the range of asking prices. This means that the price is probably about to go up.
iv) If the wick extends equally from both the top and bottom, that means that prices are probably staying pretty stable.
v) The longer the candle, the more volatility there is, and the greater the change in price.
b) Pay attention to volume. This is nearly always represented as a bar graph at the bottom of a candlestick chart. Notice that every big fluctuation in price is accompanied by an increase in trading volume. This is a good way to determine whether a
change in the price trend is “real” or not.
c) Pay attention to the news. Prices tend to move erratically whenever there is a press mention. By monitoring mentions of anything you’re day trading you can predict possible dips or spikes in real-time.
3) Decide whether to buy or sell short.
a) Buying low is intuitive. When the price drops below the normal range, then reverses and starts to come back up, statistics tells us that the chance of the price going lower is smaller than the chance of the price going higher. More often than not, the price will return towards the average trend line, and when it does, you can sell at a profit.
b) Selling short is much less intuitive, but put simply, it’s a way to bet that the price will go down. Short selling is more dangerous than buying, because your losses are potentially infinite. When you pay $10 for a stock, you can never lose more than the $10 you spent because the price will never drop below $0. However, if you short sell a stock for $10, and the price suddenly spikes to $100, you would lose $90. This can make short selling in volatile markets extremely risky. However, if done well, it’s a great way to make money in a bear market.
Breaking it down, short selling works like this:
i) I notice that stock A is either very overvalued, or has a strong downward trend line, and I’m willing to bet that the price will go down in the near future.
ii) I don’t own stock A, but I borrow 10 shares of stock A from my broker, who will connect me with someone who does own the stock and is willing to lend it.
(1) My broker will probably require that I have 50% of the value of the borrowed stock in a margin account to ensure I can cover any losses. If I borrow $1000 worth of stock, I will need $500 in cash in my margin account.
(2) The broker will charge a small fee.
(3) The stock owner will collect interest on the value of the stock borrowed, usually between 3-4%.
iii) I sell the stock I borrowed at the time I borrow it. No matter what, I have to return the same amount of stock I borrowed. If I borrow 10 shares, I have to return 10 shares. The longer I hold onto it, the more I pay in fees.
iv) Let’s say stock A is selling at $100 at the time I borrow it, but dips to $80 a few hours later. I decide to buy it back at $80. This means that I short sold my 10 borrowed shares for $1000, but bought them back for $800.
v) I return the 10 borrowed shares, keep the difference in price, which is $200, minus whatever fees and interest I pay.
vi) ON THE OTHER HAND… If the stock is selling at $100 when I borrow it, and the price suddenly spikes to $120, I have a hard decision to make. If I buy it back at $120, I now have to pay $200 out of the cash reserves in my margin account on top of the interest and fees. If I wait, hoping the price will go back down, I take a huge risk, because the price could easily keep going up!
4) Use automatic stop losses and trailing profit exits.
Also known as a bracket trade, this means that you enter a conditional order to sell as soon as you buy. A profit exit will be triggered once the price reaches a set increase (let’s say 5%) and automatically sell.
A trailing profit exit will do the same thing, except it will follow the price up until it goes down, so if it gets triggered at 5% but the price rises to 10% before slipping, your trade should execute at 9%. Stop losses work the same way, only going the other direction. You can set a stop loss at -1%, meaning that if the price drops 1% below the price you bought it at, it will automatically sell.
This is a good way to protect yourself from bad bets. If your upside is 5% and your downside is 1%, you could be wrong 80% of the time and still make money. However, it’s easy to accidentally trigger that – 1% stop loss if you mis-time the buy, which leads to the next point.
5) Don’t buy at the peak or sell at the bottom. The point of day trading should not be to predict every possible increase and decrease, the point is just to beat a buy and hold strategy. You can’t pick up every 10% swing, but if you pick up two 3% swings, and make 6% profit in a day, compared to 1% profit you might have made buying and holding, you’ve won. Ideally, you want to pick up lots of middles by buying after a trend has reversed, and selling it before it reverses again. Stay away from the peaks and valleys.
- Trading on Autopilot
Bitcoin trading bots offer one solution for the hands-off trader. The idea is relatively simple: when the bot predicts that prices will go up, it buys, and when the bot predicts that prices will go down, it sells. In theory, this means that you get the best of both worlds, active trading and a hands-off buy and hold strategy.
- Lending Bitcoin for Interest
Whenever you borrow to buy on margin, that asset is coming from somewhere. In the case of cryptocurrency, some exchanges offer the option of putting your stored coins into that borrowing pool. If your goal is to buy and hold, even for just a week, why not earn a little interest? This can either be an extra payday on top of increases in the valuation of the currency, or at worst, a hedge against any decreases.
Lending is relatively uncomplicated, but some good guidelines to follow are:
– Even if lending, continue to spread your currency around. It’s never wise to park all of your coins in one place. Even the biggest exchanges can get hacked or go out of business overnight.
– Choose a competitive lending rate, or you may not be able to get anyone to borrow your funds. Better to earn a little less than nothing at all.
– Set time-frames you can live with. If there’s a huge uptick and you want to sell, you may not be able to if you offered a 30 day lending period.
– If lending altcoins, keep in mind that the longer you hold these coins, the more risk you take on.
- Trading For Non-Owners
Some brokers offer what’s called a CFD or Contract for Difference. It is what it sounds like, which is an agreement to pay or be paid the difference in price of a set amount of currency over a set amount of time. If the price goes up, you make money without ever touching a single Satoshi of Bitcoin. On the other hand, if it goes down, you now owe the difference. CFD sellers are usually much more regulated and better established companies, so they’re less risky than dealing with crypto exchanges, but they also tend to charge much higher fees.
Another way to avoid crypto exchanges entirely is to buy Bitcoin Investment Trust (GBTC), a kind of Bitcoin index fund, through your regular stock broker. GBTC is tied to the price of Bitcoin, and for someone with a self-directed IRA that wants to diversify, it makes sense to invest a little in that just as you might invest in an index fund tied to the price of gold. A Bitcoin hedge makes a lot of sense for safeguarding wealth in uncertain times.
Section 8: Mining for Digital Gold
– Mining Bitcoin means that your computer is running hash algorithms to decrypt transactions for other people and add them to the blockchain.
– Mining Ethereum means that your computer is actually running the Ethereum P2P decentralized smart contract computer, or EVM.
– Mining a dApp coin like Storj, which runs decentralized file storage via the Ethereum decentralized computer, means that your computer is actually storing bits and pieces of other people’s files. You’re contributing gigs of harddrive space for file storage as well as computer processing power.
So, why call it “mining”? Why not just “earning”? The reason why the word “mining” is used to describe the act of earning Bitcoin is because
Bitcoin was intended to be scarce. There are a finite amount of Bitcoin that will be released (21 million to be exact) and the number of Bitcoin released as a reward for processing a block into the blockchain decreases by half every 210,000 blocks. In this way, Bitcoin distribution was modeled after gold, which is naturally scarce, and becomes harder to obtain over time.
Other coins are a little more straightforward. You simply earn coins for doing work. Regardless of what you’re earning, the question of whether to mine or not pretty much always comes down to one thing: is it profitable?
Mining is a bit like driving for Uber. You are lending Uber your car, and getting paid by the mile. It costs money to operate your car.
You have to pay for gas, and upkeep like new tires, oil, and brakes. Let’s say the average Uber driver earns $1 per mile.
- A dumb Uber driver would sign up to give rides in their gas-guzzling Hummer that costs $1.10 per mile to drive. This person would effectively be losing 10 cents on every mile they drive for Uber.
- A normal Uber driver would give rides in a small efficient car like a Prius hybrid. If this person spends 50 cents per mile to operate their car, that means they’re earning 50 cents per mile in profit.
- A very smart Uber driver would get an electric bus, and drive for Uber Pool. This person might spend 60 cents per mile driven, but earn $3 per mile by taking multiple riders, which would mean they make $2.40 per mile in profit.
When mining, you have to factor in the cost of your hardware, plus any costs of running the hardware, such as electricity, plus the costs of connectivity (e.g. a fiber broadband connection). Similar to the Uber metaphor, there are dumb ways to do this and smart ways to do it. There are also a lot of factors you need to consider before making a final decision on whether to go ahead with mining or not.
– Hardware speed: computer processors come in a few flavors, each an order of magnitude faster than the next. CPUs (central processing unit), GPUs (graphics processing unit), and ASICs (Application Specific Integrated Circuit) can all be used to mine, but only ASICs or GPUs will be competitive. The average laptop relies heavily on the CPU to do sequential tasks, and farms out a few tasks that take lots of processing power to the GPU, like rendering graphics in a video game. This makes sense for normal computer use, but hash decryption is not a normal task that your computer is designed for.
– You can run mining software on your home computer, and you may eventually earn some coins, but like the Uber driver with a Porsche, the inefficiency of your hardware will make it very difficult to compete against miners running highly efficient strings of GPU rigs. Better hardware will simply out-compute your hardware, making it difficult to earn coins. At this point in time, owning a bunch of ASICs is pretty much the only way to successfully compete as an individual miner.
– Cheap vs. Expensive electricity: The more expensive your electricity is (measured in kilowatt hours), the harder it will be to earn money.
Think of it like the price of gas in the Uber example. If you’re burning lots of energy to produce coins, you have to factor in the cost of that energy, and figure out what the net profit is. If you’re spending $1.10 on electricity for every $1 worth of Bitcoin you earn, you’re losing money. For this reason, serious miners tend to use renewable energy sources like solar, wind, and hydroelectric. Most of the Bitcoin mined in the world is mined in China, and the reason for this is that China has some of the cheapest electricity in the world. A Chinese miner with a rig using dozens of ASICs running on solar power will be many orders of magnitude more profitable than someone trying to mine with a laptop CPU using expensive electricity coming from a coal- fired power plant.
– Mining alone vs. group mining: Every time a transaction is released to the network, a giant race happens. Every miner is trying to be the first to solve the cryptographic puzzle so they can add the transaction to the block. As a result, miners have banded together to compete as a networked group rather than as individuals. Everyone in the group contributes, which increases the overall odds of earning coins, and then everyone shares the wealth. There are two main ways of group mining.
1. Cloud mining: this is a great option for individuals that want to mine but don’t want to invest in hardware. It works kind of like a web hosting company, where you rent space on their server. Instead, you rent out part of their mining rig. This allows US residents to be part of these massive GPU farms in China running on renewable energy. You need to be cautious that the cloud mining company is legit, and not a ponzi scheme, but assuming your money really is going towards mining hardware, this is a good option.
2. Pool mining: If you have your own hardware setup, you can improve your chances by joining a mining pool. Pool members all contribute the hash power of their hardware, and get a percentage of any coins earned based on how much hash power they contributed. So, if your hardware generates, 0.001% of the total group hash power, you will earn 0.001% of any coins earned. It’s fairly simple to try out different pools and see which one produces the best results. The chart below shows the approximate size of the different mining pools out there based on the number of blocks in the blockchain they are responsible for adding.
– Currency value: Coin values are constantly changing. If the value of Bitcoin doubles, then the whole equation changes, as does the level of competition. The same goes for mining altcoins. If you do decide to mine altcoins, it’s a good idea to pick one that’s rapidly increasing in value.
When Satoshi Nakamoto set up Bitcoin, he wanted normal users to run the codebase on their home computers. The idea was to build a true P2P network that was so decentralized, no one could control it. For better or worse, we’re seeing a sort of arms race when it comes to mining hardware. People keep putting together bigger and faster machines to outcompete other miners.
To be clear, we do not recommend trying to mine Bitcoin as an individual, unless you’re simply a hobbyist that wants to try it out. Group mining is basically the only way to mine Bitcoin efficiently at this point.
You would be far better off buying into a cloud miner than going
through all this hassle. However, if you’re the kind of person that likes to do things the hard way, be my guest.
If you want to spend a little cash for a proper mining setup, you’ll need to buy some ASICs and join a mining pool. If you go on Amazon you will get a list of the fastest gear currently on the market. AntPool is the largest mining pool, and if you do a search, you’ll notice that Antminer ASICs designed specifically for mining with the AntPool come up at the top of the search. Searching myself, I found the Antminer S9 for $2,999. This device runs a whopping 13.5 terahashes per second, or 13,500,000,000,000 hashes every second. For comparison, your computer’s CPU can run about 5 megahashes per second, or 5,000,000 hashes per second.
Once you get your faster hardware in place, the basics remain the same: you want to hook up your wallet so your mined currency can be deposited somewhere, you want to install the mining software, then fire the thing up and let it run. Most mining software systems will automatically optimize the miner for minimal energy use.
Altcoins, on the other hand, are worth much less, so competition is much lighter. If the reward for mining a block of some brand new coin is worth the USD equivalent of $5, it doesn’t make a whole lot of sense to spend energy and devote the time of an expensive ASIC mining rig into mining coins that pay out less than the cost of mining. This means, however, that miners with more modest GPU mining rigs actually have a decent chance of collecting coins.
Still, why would anyone bother with this, given that after the cost of electricity is factored in, an altcoin miner might be earning the equivalent of a few cents an hour? The answer, like many answers to questions about cryptocurrency, is gambling. It doesn’t matter how much a coin is worth at the time you mine it, what matters is how much it’s worth at the time you sell it. Newer types of coins might be worth pennies at the time they’re mined, but over time can grow in value.
Someone mining Bitcoin in 2013 was only earning $89 per Bitcoin. A block of 25 would have been worth $2,225. This is decent money, but consider that those same 25 BTC are worth about $110,000 at today’s prices. Not only does the price go up, but the trickle of coins released generally goes down. Bitcoin is not the only cryptocurrency that decreases the rewards given to miners over time. There is a lot of advantage to getting in early and mining altcoins while they are still cheap and plentiful.
What the decision to mine really comes down to is simple: if you have some spare computer power laying around (maybe an old gaming PC with a decent GPU?) and not enough cash to simply buy a bunch of altcoins on an exchange, why not put your old computer or rack server to work mining something that might potentially be worth many multiples more in a few years?
As long as you’re at least breaking even on the cost of electricity and depreciation of your hardware, having a mining machine running 24/7 out in your garage or basement would not take a whole lot of effort, and could potentially be very lucrative.
The best altcoins to mine are going to change. If you can figure out what your actual cost is for electricity, you can plug it into the calculator and get a rank- order list back of the best coins to mine by projected profitability using the hardware you have at home. Altcoin cloud mining pools are also common, and offer a way to simply rent mining resources on a virtual computer without having to own or deal with hardware or installing your own software. As with anything where you’re handing over cash today for the promise of future returns, be sure you’re dealing with a reputable company and not scammers. You might also consider just buying altcoins on an exchange rather than paying for cloud mining. At least that way you know exactly what you’re getting.
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- Proof-of-Work vs. Proof-of-Stake
The debate between proof-of-work and proof-of-stake gets pretty wonky, but if you’re serious about mining altcoins, it’s important to understand the difference between the two, and what that difference means for mining competition and hardware needed to mine.
Bitcoin, Ethereum, and nearly all the cryptocurrencies that emulate
them, use what’s called a proof-of-work to create a cost for mining. When a mining computer does the difficult task of decryption, that difficulty is the
“work” in proof-of-work. This work isn’t really needed to make the cryptocurrency function, but it was included because it makes it very difficult to game the system by successfully adding fraudulent blocks, or commit a denial-of-service attack. Because there is a real-world cost of electricity, gaming the system would be incredibly expensive.
It is absolutely possible to commit fraud and add a fake block to the blockchain, but to do that you would need enough computing power to overpower the rest of the network. This is known as a 51% attack. However, to commit a 51% attack would take an enormous amount of computing power and electricity. The cost of doing 51% of all the computing work on the Bitcoin network is greater than the funds available to steal.
A criticism of Bitcoin is that it’s not very “green”. All of this electricity is being spent decrypting meaningless puzzles. The innovation behind Ethereum, which also uses proof-of-work, is to harness that electricity and put it to use running the Ethereum Virtual Machine. The work of mining Ethereum actually runs the EVM.
Proof-of-stake mining works a little differently, but is designed to thwart fraud and DDOS attacks just like proof-of-work mining. In a proof- of-stake mining operation, anyone who wants to mine the coin can sign up, but they have to contribute a deposit (usually Ethereum).
If that miner tries to commit fraud or acts badly, they would lose their deposit. Again, it’s possible to game the system by creating enough fake miners to commit a 51% attack, but if all those fake miners require a deposit that is then lost, the cost is so high that it makes no sense to ever do that. The only reason anyone would ever commit a 51% fraud attack on a proof-of-stake system is if they are able to steal more money than they would lose by forfeiting the sum total of all deposits.
As a miner, the distinction between these two systems is a very important one. Any proof-of-work system is going to require a lot of heavy duty hardware to compete. The more a currency is worth, the greater the competition will be. Worse, this leads to consolidation of power among fewer and fewer miners. The more mining is consolidated, the greater the chance is that one of those powerful miners could successfully pull off a 51% attack.
Proof-of-stake systems are attractive because a miner has just as much of a chance to mine on a CPU as on a GPU or ASIC. Miners are chosen at random by the system.
This is great for average crypto users that want to get in on mining without spending a pile of money on hardware and electricity, and is considerably more environmentally friendly. All a proof-of-stake miner needs to spend money on is their stake (the deposit at sign-up).
A lot of people are predicting that currencies will switch from proof-of- work to proof-of-stake in the near future. As long as PoS proves to be as hard to game as PoW, this will be a good thing for the world of cryptocurrency.
Just to sweeten the deal, many PoS stakes earn interest or dividends, meaning you’ll get some income just for putting your stake in. It’s worth taking the time to shop around and check out staking PoS coins rather than opting for traditional PoW mining. It may be a much easier way to earn money.