Adventures in Bitcoin and Other Cryptocurrencies

Bitcoin Thrift Savings Plan Allocation GuideI am firmly on record as believing that Bitcoin and most of the other cryptocurrencies are poor investments and this is all a bubble which is going to end badly. I’m not a complete nay-sayer, I do believe that blockchain technology is real and will play a role in creating frictionless transfers of money for both people and institutions, but I am nowhere near the point where I can assess which systems are going to be the winners in that race. I most recently talked about the subject in the December update in the section titled Bitcoin.

But $50 billion a week is flowing into the cryptocurrency bubble. As long as that flow continues, the bubble will keep expanding. So over the holidays I sat down to try to figure out if there was a way for me to profit from this ridiculous speculation.

So far it’s going pretty well. I’ve doubled my money since funding my Coinbase account on 12/29. Not that I think that is the result of any skill or special insights, just lucky timing.

I hesitate to write this post, because I know that probably ten thousand people will read this and one or two of them are going to be inspired to start trading cryptocurrencies, get carried away, and make some mistakes they will later really regret. But I have received a huge number of questions on the subject and it is entering the mainstream, so I hope my words of warning and extremely cautious approach will help temper any tendencies to jump in with both feet.

A good time for the usual caveat – I’m not a financial advisor and you should not take anything I write as advice. I write these posts to share my experiences, sort things out in my own head, and start a conversation. This is entertainment and hopefully a little bit educational, but definitely not something you should rely on to make investing decisions.

THE CRYPTOCURRENCY BOOM

At the beginning of 2017, the value of all crypto currencies combined was about $17.7 billion. By the end of the year, more than 1,370 separate cryptocurrencies combined at $605 billion. That’s an increase of better than 3,300% for the sector. Bitcoin started the year at about $1,000 and finished around $15,800. Ethereum went from around $8 to $750 during the same time span. So you can see why I want to dabble.

Investing in crypto last year would have been pretty simple – buy just about anything and hold on to it. I don’t know that it will continue to be that easy (although I’m certainly hoping it will be), so I sat down and worked out what I consider to be a reasonable strategy.

HARD STOPS

First off, I set a very strict limit on the amount that I would be willing to lose in this experiment. It is the amount of money I would fine with losing at the tables if I went to Vegas for a weekend. Which makes sense – because this really is gambling, not investing. It is less than 0.001% of my net worth. And I don’t plan to ever put another dime into it.

If someone is going to get involved in crypto, the money they put into it should be coming from their entertainment money, not investing money. And it is entertaining, bordering on addictive. It’s a little like having video poker on your phone. And it never stops, Crypto exchanges run 24/7 – there are no market hours.

MY CRYPTO STRATEGY

My strategy at this point is fairly simple – no day trading, no trying to figure out which of the new coins coming onto the market every day are going to explode in value. The money in a speculative bubble flows most smoothly and consistently to investments which are (1) easy to make and (2) to the names being touted as either “the next big thing” or as the market leaders in popular niches.

If you are in the United States and want to invest in cryptocurrencies of any kind, the starting point is Coinbase. This is by far the most popular exchange, has a very easy to use interface, a good iPhone app (which is currently the most downloaded app in the app store), is insured and regulated, and is the only exchange I have found which lets you easily and instantly move money into the market from a US bank account. And if the only coins you want to speculate in are Bitcoin, Ethereum, Bitcoin Cash, and Litecoin, this is the only exchange you need.

100,000 new Coinbase accounts are being created each day. All of that new money coming in goes into these four currencies. So a fairly solid strategy is to buy one or more of those currencies and float up as more people pile into them.

Quick aside: If you register for Coinbase with this referral link, you will get $10 worth of Bitcoin free after buying $100 worth of any of the currencies offered (and I get $10 too). $10 isn’t much, but it will pay for the fee to ACH funds in from your bank to start your account. https://www.coinbase.com/join/5a473a1da4b69a013c2b3292

An even better strategy is to try to figure out which coins not currently traded on Coinbase are going to be added to Coinbase in the future. Lowering the barrier-to-entry for the masses increases demand dramatically. Looking back at the performance of Bitcoin Cash, Litecoin and Ethereum immediately upon being added to Coinbase shows just how significant that listing is. Coinbase (under it’s GDAX brand) put out a white paper on the factors it will consider when choosing additional cryptos to list – factors which I am using to help make decisions on what to buy.

To buy other cryptos before they are selected for listing on Coinbase, of course, you have to go to other less accessible exchanges. And if you want to speculate in most other coins out there, Binance is probably the exchange you want to register on. At the time of this writing, they list 108 different coins (including all of the ones on Coinbase). Binance is Hong Kong based, so the only way to get actual US money into Binance is through an expensive wire transfer. But there is no need to do that when you can buy Ethereum on Coinbase and then transfer that instantly to Binance.

Another quick aside: If you register for Binance with this referral link, you won’t get anything at all, but the TSP Allocation Guide will receive a fraction of the fees you pay when you trade cryptos, so please use the link: https://www.binance.com/?ref=20583308

Kucoin (mentioned by Matthew in the comments below) is another, newer cryptocurrency exchange based out of Hong Kong. I have been reading about it because it is often the first exchange to list hot new coins (it had NEO before Binance did), but I haven’t traded on it yet so while I can vouch for it being very easy to register for, I can’t write much about ease of use or performance at this point.

The last aside, I promise: Kucoin has an interesting three-level referral program, so if Matthew refers me, and I refer you, and you refer Bob – when Bob makes a trade you get 20% of the commission, I get 12% of the commission, and Matthew gets 8% of the commission. So you should definitely join using this link: https://www.kucoin.com/#/?r=2cPK7 and then tell all of your friends to join as well so you, Matthew and I all get rich $0.02 at a time.

COINS CURRENTLY HELD

Ethereum (ETH): I have more ETH than all other coins combined. It is the #2 cryptocurrency in the world by market cap after Bitcoin. It fixes all the terrible problems which vex Bitcoin and I think it is the Facebook to Bitcoin’s MySpace. It has tremendous support from the community, academia, and the business world (the Ethereum Enterprise Alliance). It is fast to transfer and is supported on every exchange, so this is my default coin.

Bitcoin (BTC): I have a little bit of Bitcoin, even though that’s not really cool anymore. There was a huge rotation out of Bitcoin into Ethereum and a dozen other contenders late last year. I think that rotation may have been over done and that the pendulum will swing back. I also believe that because most “normal” people have only ever heard of Bitcoin in the cryptocurrency world and it is the #1 coin out there, a lot of new money will continue to flow in BTC.

Don’t get me wrong, I don’t like Bitcoin for the long run. Bitcoin transactions are so slow and expensive that it has become virtually unusable. So the cheerleaders have started to call it a “stored value asset”, meaning that it is a place where you can park your money safely. It is not that –  it is volatile (it once lost 30% of its value in a single day), it generates zero income, and it is not particularly secure.

But I still own a little, and it is up about 10% since I bought so I must be right.

Stellar Lumens (XLM): a very fast payments protocol, the civilian version of Ripple (XRP) described below. XLM is used as the currency in the Stellar payment network. It is a distributed, hybrid blockchain designed to facilitate payments.

Neo (NEO): a Chinese version of Ethereum, it is the first decentralized, open-source cryptocurrency and blockchain platform launched in China and enables the development of digital assets and smart contracts.

Eos (EOS): similar to Neo and Ethereum, but heralded as faster and easier to work with. Newer, so not as much support to this point. Headed by Dan Larimer, the founder of two previous successful coins (STEEM and Bitshares). Eos is designed to support commercial-scale decentralized applications by enabling businesses to build blockchain applications in a way similar to web-based applications.

Monero (XMR): one of the leaders in the privacy/anonymity area. Bitcoin is actually pretty easy track, Monero aims to prevent that by obscuring key data from the public ledger. Because one of Coinbase’s factors in selecting future coins to list is their ability to comply with anti-money laundering requirements, XMR is the least likely of this group to be listed. But it has a strong community and will continue to attract users who value privacy above all.

THE WATCHLIST

Coins I don’t own, but am watching closely:

Ripple (XRP): the #3 crypto in the world by market cap. Super fast,a real-time gross settlement system, currency exchange and remittance network. Different because it is being developed as part of a system for financial institutions to move money quickly and easily around the world. It ran out of its shoes at the end of last year and is currently about 30% below its highs. This is one that I will get into once I think the price has leveled out.

Dash (DASH): similar to Monero, DASH is a cryptocurrency with a focus on privacy and speed. It was rebranded from Darkcoin as an attempt to stop being associated with the “dark web.”

Iota (MIOTA): focused on becoming the backbone for secure machine-to-machine payments in the Internet of Things economy. Created without the use of a blockchain, instead it is based on a distributed ledger architecture called “The Tangle,” which allows it to achieve zero-cost transactions, offline transactions, and infinite scalability. Recently partnered with Microsoft, which gave it a huge boost.

FUTURE STRATEGIES

Now that I’ve sort of figured out the basics, a few other areas I plan to look at more closely:

  1. identifying new coin offerings which are likely to generate momentum based on the team behind them and their use case. Entertaining to try to find the next big thing when it is still selling for pennies and ride it up 1000x, but obviously difficult to identify the good ones in all the noise, particularly as there is an entire industry pumping new coins for profit.
  2. Cloud mining. This is where you “rent” computing power in the cloud and participate in the creation of cryptocurrency in that way. It is simple in theory – you know what the value of a particular coin is right now and you know how much of that coin you can generate with that rented computing power. The problem is that you don’t know what the value of the coin will be in a year, or how much how much you can generate as the algorithms change over time. The people I know who have done this have come out way ahead – so far. Hashflare, an Estonia based company, is the biggest and best known of the cloud miners.
  3. I still have an unhealthy fascination with mining cryptocurrencies (which is where you construct a purpose-built computer with powerful graphics cards and are rewarded with cryptocurrency for running software which solves algorithms as part of the verification of block-chain transactions). Free crypto, but does entail initial outlay for hardware, significant cost of electricity, and the knowledge that you are doing bad things to the environment. If any of you have relatively modern GPUs sitting around in a box, let me know.
  4. figuring out if there is a way to take advantage of the discrepancies between pricing on different exchanges. (This one would probably only work effectively if either I or a partner had a foreign bank account to which withdrawals could be made in local currency from high-flying foreign exchanges such as those in Korea). Listed last because I see this as the most difficult to figure out and implement.

STORING YOUR PRIVATE KEYS

Right now I have such a small amount invested that my coins are still “stored” on various exchanges. That, of course, is not smart as exchanges are targets and susceptible to being hacked. (Coinbase is insured for the value of all the coins on the exchange and that’s where I keep my ETH and BTC, so I’m fairly comfortable with that for now). One of my tasks this weekend is to figure out the software wallets I need to store my coins more securely and I will update this post when I have finished doing that. Eventually I will want a hardware wallet as well, but I may need to wait a generation for one which will allow me to store all of my coins on one device. If you have suggestions, please share in the comments below or in the message board thread.

TAXES

Taxes for people trading cryptocurrencies are going to be somewhat complicated, unfortunately. My understanding is you will have to report capital gains (or losses) on any exchange between coins that you make, not just when you eventually cash out. So if you deposit $100 to Coinbase and buy ETH, then transfer that ETH to Kucoin and trade your ETH for NEO, your gain or loss on the ETH during the time that you held it is reportable. And then when you trade your NEO for something else, that gain or loss will also be reportable. And so on, and so on, and so on. But don’t let that intimidate you, this is the same system used for taxing gains on individual stocks, mutual funds or any other asset you sell. It is slightly more complicated though, because the exchanges don’t issue 1099-B forms the way brokerages do for capital gains on stocks, so you will have to keep records for yourself.

If you hold a coin for less than a year, you will pay short-term capital gains at the same tax rate as your ordinary income. If you hold a coin for more than a year, gains are subject to your capital gains rate, which varies depending on your tax rate as follows: taxpayers in the 10% and 15% tax brackets pay no tax on long-term gains on most assets; taxpayers in the 25-, 28-, 33-, or 35- % income tax brackets pay a 15% rate, and taxpayers in the 39.6% bracket pay a 20% rate.

GOING FORWARD

This post is way outside the goals of this website (and probably directly counter to my mission of encouraging sensible, economy based investment decisions), so I don’t plan to send out new posts on the subject. Instead, I will occasionally update this post and participate in discussions on the message board thread I have created here. I have about a month and a half into really looking at the crypto world, so I hope that the many TSPAG readers who are much more experienced than I am will share their lessons learned and strategies in that thread.

31 thoughts on “Adventures in Bitcoin and Other Cryptocurrencies”

  1. I am fascinated with Cryptocurrencies and all that you mentioned. I injected $1k 2 weeks ago and have also doubled my investment. Looks like we’re both on similar tracks. I’m also interested in cloudmining and have been researching Genesis (plans sold out) and Hashflare (there are others but this seems like the best option right now). I’m considering investing $10k to make the most of it.

    Specific to hardware storage and software storage, the recommendations are Exodus (online) and Ledger Nano S for hardware.

    1. Cloud mining contracts are not wise. Build a rig and sell the equipment. You can barely profit off of sketchy cloud miners anyways.

      1. I bought a couple of mining contracts through genesis late 2015 and early 2016 when BTC was $400-$600. It only became profitable for me when BTC hit $5,000+. Easier and more profitable to buy the “currency” and hold. I spent approximately 1.5 BTC for the contracts in total back then and only made 0.45 BTC back so my profit is only from appreciation and not in BTC accumulation. The payouts from the contracts have slowed from daily to about every 10 days so far, and eventually will stop when the contract is no longer profitable. So no, don’t buy a mining contract and, buy the “currency” with the understanding its speculation and not investing.

    1. I began my crypto adventure in June 2017 and have multiplied my small initial investment many times over. As far as hardware wallets, I went with the nano ledger s, it holds more coins and is extremely secure. The trezor and ledger are the only way to go once you have more than a months pay in crypto. You can access all Ethereum based coins through My Ether Wallet which is the portal that allows you to access your coins. You can also download Bitcoin, Litecoin, Ripple and NEO wallets from the google store for free using google chrome. It is important to understand that your coins aren’t on a hardware or software wallet, they exist on the blockchain. It is all about possessing your private keys to access your coins. The ledger is your private key. There is no doubt that 90% of the coins will fail but if you invest in companies that are solving real world problems and have strong teams you minimize your risk. It takes a lot of time to do fundamental research but just because the dot com bubble burst didn’t prove that the internet was a fad. AOL and Netscape are gone but Google, Microsoft and Amazon took their place and more people are connected by smartphones than ever before. I see blockchain technology and the distributed ledger as internet 2.0. Im interested to see what happens when institution money begins entering this space. Im positioned well for this, but agree that it is very risky and you should only invest a small portion of your hard earned cash.

  2. Cryptocurrencies certainly can be investments – just because they are relatively high risk doesn’t make them not so.

    That being said, the crypto space has become full of would-be day-traders and gamblers looking to flip quick profits and possibly find “the next Bitcoin.” Much like the stock market, there are now cryptos we can regard as “blue chips,” (mainly Bitcoin, Ethereum and Litecoin), and them more risky mid or small cap cryptos, and finally, the penny cryptos which mostly appeal to the uneducated or day traders.

    My TSP and my IRA are 100% fully funded, and I made sure to only invest money I can afford to lose – although in my case I am likely risking more funds than you, because I really do believe that blockchain and distributed ledger technology is poised to change the world even more fundamentally than the era of the dot-com explosion in the 1990s.

    My investment strategy is to have 50% of my crypto portfolio in Ethereum, which I think has first-mover advantage in the “smart contracts” and “dAPP” space, which I think is poised to revolutionize computing. The other 50% I have invested in mid and small-cap cryptos like EOS, NEO, XLM, and XRP, which I feel are on solid ground to grow in the future, and are not at risk of disappearing anytime soon. I also have a small position in ADA (Cardano) which I feel has the greatest potential ROI, given the technology, talent, and resources being poured into the project.

    Anyways, that’s my story. Glad you’re addressing the topic.

    1. Thanks very much for the comment. ADA is another one I have been watching which I left off my watch list above. ETH has just been doing too well for me to sell to buy anymore speculative ones.

    2. How did you put your Thrift Savings Plan (TSP) into cryptocurrencies? I served in the military for six years and now that I’m out I was looking for a new way to invest my TSP because right now it’s doing very little.

      1. Geoffrey meant that he could afford to dabble in crypto because his TSP is maxed out, not that he was investing TSP money in crypto. And thank goodness for that after the day we had today… 🙂

  3. I am investing in Verge (XVG), which is a privacy/public currency coin, that the user choses anonymity, or not, and has android wallets using Tor and I2p for privacy. It is $0.13, at the time of this writing.
    My second investment is Tron (TRX) which is an ICO company that is looking to decentralize the web for entertainment using the block chain. There are big name developers from chinese businesses, such as Alibaba, that are behind the project. At the time of writing $0.09 per coin.
    I see big potential behind these coins, but I’m not an expert in trading or cryptocurrencies.

  4. I second Kevin’s recommendation on the Ledger Nano per all of the reviews I’ve read. I’ll be getting mine early this week if delivery is on time and can update you on ease of use.

    It sounds like I’m on a similar track to you as well, having doubled my initial “investment” from late December though got caught up experimenting in day trading, KuCoin offerings, trying to trade coins as soon as they hit exchanges and a feeble attempt at arbitrage (personal lack of time, transfer fees, different spreads, and slow transfer times make it difficult). Now I’m “only” up ~50% after the recent pullback. I’ve put most of my KuCoin collection into USDT until I can decide what I want to do from here (most likely focus of ETH).

    It would be great to continue to hear your thoughts (and that of others) away from the halls of /r/cryptocurrency.

    1. To follow up, for those that do want to look at what KuCoin offers, I also have a referral code (if you’re ok with me posting it, Paul). 1gh6w

      KuCoin.com/#/?r=1gh6w

  5. I would get a keep key. They have built in shapeshift and will support erc20 tokens in less than 60 days. Also, they are owned by Shapeshift and they also have a nice portfolio builder on Prism (currently in beta).

    Regarding the Warren Buffet comment, stay in your lane. Stay in your circle of competence. Great rule for investing. Or expand your circle. To fully understand the upcoming crypto revolution and how we are at the very beginning of a huge exit from traditional fiat currencies and monetary policies, I suggest watching/listening to these the next time you have some down time or at the gym etc. I think you will realize soon that the real bubble is our propped up economy and currency – the true house of cards.

    https://www.youtube.com/watch?v=n4F-h4xuXMk&feature=share

  6. Just went to register with Coinbase and see where they want you to upload a copy of a photo ID. That is kind of odd. Somewhat skeptical of that….

    1. That is part of AML/KYC anti-money laundering and know your customer laws…

      The only thing that is odd is the erosion of our civil liberties to transact among ourselves without submitting to finical surveillance.

    2. I thought that too initially, and then I realized that this is no different than opening a bank account in today’s world, I just hadn’t opened a new bank account in 15 years. It is common practice at any bank and any exchange in today’s world. I wouldn’t worry about it.

  7. I began investing in November. I’ve tripled my investment. I’m spread between BTC, ETH and LTC. I am also cloud mining on Hashflare. I took half of my bitcoin (at that time I had doubled my BTC value) and bought a one year 5 TH contract on hashflare. I will reach ROI 70 days from the day I started. I still don’t fully trust Hashflare so I am waiting to see ROI before investing more. Hashflare has a reinvest feature allowing you to purchase more mining contracts from your earnings which I will probably use after my ROI. My strategy from here is to mostly risk the value my investments have gained. Hashflare and Coinbase are quite user friendly.

  8. Surprised no one has mentioned GBTC; shocked, actually. If you are in this arena, suggest you at least check it out. (Public company)

  9. Okay guys, I have a silly question. Is there a way to cash out once you have made some significant returns on your investment, e.g., cashing out at certain points and reinvest into other blue chips or funding a back door Roth…

    1. You can covert your cryptocurrency to US dollars on any exchange which allows it and then withdraw. Foreign exchanges will only allow withdrawal by wire transfer (slow, sometimes expensive), whereas at least some US exchanges will allow transfer by ACH . If I were doing it today, I would trade my coins for ETH on whichever exchange had the best exchange rate, move the ETH to Coinbase, exchange for US dollars, and then initiate an ACH withdrawal. (And of course since my ETH and BTC are already on Coinbase, I wouldn’t need to do additional exchanges and moves prior to withdrawing those funds).

        1. You will need to report a capital gains tax on what ever increased value you cash out. Also, if you cash out before holding a coin for one year, you’ll pay a higher capital gains tax (I think 20%). So it’s better to play the long game or move it into a different crypto. The IRS is trying to crack down on people not reporting gains in Crypto so be careful.

          1. The new tax laws on cryptos are pretty crazy. If you transfer one crypto to another thats a taxable event, and one would need to keep track of all that, as the exchanges do not. For this reason, one would probably just want to hold or use a company that can track all those exchange rates between the fiat currency at the time of trade and profits or losses, etc. For this reason Im holding on to my coins in a hard/ paper wallet, for over a year. No trading for me.

  10. Is the price of bitcoin based on a minimum size of bitcoin partials traded?

    Since bitcoin can be subdivided down to 8 decimal places (or smaller in the future), can the market price be manipulated by making thousands of trades in increasing amounts (say 10%) by someone between 2 different accounts that they own?

    Seems to me that very small changes to these very small bits can have a huge influence on the published price.

  11. Regarding your EOS position.. if you plan to hold it long term you will have to register it, as the current EOS token is built on Ethereum blockchain (ERC20 standard) which will be of no value when EOS platform launches.

    1. I am firmly on the record that my investments in crypto has been widely successful. My investment in ETH has went up +300%. OMG +150% EOS +200%. I’m looking forward to seeing what my LTC investment will achieve. I’m sorry you missed the boat, but 2018 is still early. If you would DYOR you would see sound projects with large communities that create markets and are disruptive to archaic FINTEC models.

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