Guide To Investing in Cryptocurrency
Cryptocurrency is a new and exciting market with potential to disrupt many of the current global financial institutions – from putting a down payment on a home to simply buying a cup of coffee digital currencies are becoming more accepted. However, they are still in the “wild west” stage of their creation, so there are some added risks to investing. When investing it is important to adhere to a few basic principles:
Never invest more than you can afford to lose. It is incredibly unlikely that the market will lose all value for many (large interests, real value etc.), but it is important to “play” only with capital you do not need anytime soon. Some overly-eager investors have refinanced their homes and taken out credit cards to purchase cryptocurrency. Their rational is that if the market outperforms the interest rate on their debt they can safely invest. DO NOT follow in their footsteps, this is a bad decision for many reasons and a dangerous secondary effect on the global economy.
When the market “dips” do not sell in a panic! In investment communities this is called “panic selling.” It is normal for a cryptocurrency to occasionally lose 25% or 50% of value overnight. As strange as it sounds this is NORMAL, not cause for concern. Often after a major crash the market rebounds to a new all time high (ATH). Furthermore, if you adhere to the first principle and only invest what you can afford to lose there is no incentive to sell at a loss. This is because, since you do not need to immediately rely on the money you have invested, you can afford to wait for the investment to again increase in value. This brings us to the final principle I will list here:
Be patient! Despite high volatility, trading on the margin, or “day trading” is not a sustainable way to make money in the market. Avoid checking the price of cryptocurrencies in your portfolio too frequently, it can easily distract you from the sbigger picture. I wish I had learned this principle sooner – early on I thought I could day trade to get greater profits than other investors. Instead I ended up breaking even on many investments and getting cold feet which caused me to cash out. Instead, if I had put my money in and waited for 4 months I would have easily made an 8x return on my initial investment.
One good way to manage your portfolio is to set either a price-based goal or a time-based goal. “I will monitor my portfolio value until X date and evaluate if I am ready to take my money out” or “I will wait for my money to increase by X amount (say, 1.5x) and I will pull my money out.” Or, you could sit on it in perpetuity and decide when to withdraw on the fly by using a combination of the two strategies.
Now that I’ve explained some basic principles I’ll include a short guide for how and where you should invest. This will be a list of websites and cryptocurrencies that I personally recommend. For legal reasons I’m going to say here that I’m not liable, financially or otherwise (including IRS interactions), for your participation in the market. This document represents my opinions, not licensed financial advice. So, while you can’t sue me if anything goes wrong, I also can’t claim any of your profits. Win-win!
How To Register Accounts
First, you will want to register an account with Coinbase (https://www.coinbase.com/). DON’T DEPOSIT MONEY DIRECTLY INTO COINBASE. They charge large fees for withdrawals and purchases.
After you register an account with Coinbase you should go to Gdax (https://www.gdax.com) and click the option that says, “Register with Coinbase” and follow the steps listed.
You will also want to get verified under “Advance Verification.” The website will ask for a picture of you, a picture of your passport, and a picture of you holding your passport. SAVE THESE PICTURES, basically all exchanges will ask for this level of verification. They do this to prevent mass market manipulation through their exchanges, and to ensure the security of your account.
You want to get verified with Gdax so the limits of what you can invest or withdraw within a week are increased from $500 a week to $10,000. Whether or not you plan to do that kind of investing per week it is an important option to have. If your portfolio grows to above $500 over time and, when you want to eventually withdraw, you can get all your money out at once instead of staggering withdrawals week by week.
Chances are verification will take a week or so, but don’t fret, this is normal.
Now that you’ve submitted your materials to Gdax.com you will want to go to https://www.binance.com to register with Binance, and possibly bittrex.com to register with Bittrex (I have an account with both but prefer Binance).
After you register with Binance, and possibly Bittrex, you will need/want to go through with advanced verification as well. Again, this ensures a higher level of account security and increases your weekly investment and withdrawal limits.
How To Buy Coins
I recommend your first purchase is Ethereum, I will explain later in the “Exchanging Coins” section.
An important note – you can buy fractions of coins. You do not need to purchase a whole Ethereum, Bitcoin, or Litecoin. Instead, focus on the dollar amount you want to invest and let the website take care of the rest.
You will want to do all your purchases through Gdax because of their very low transaction fees. To do this you will need to link a bank account to Gdax.
You can also purchase coins with a credit or debit card through Coinbase, but they will charge a substantial fee which is why I recommend linking your bank account instead. Follow the steps on the website and link your account, they explain in great detail so I don’t find it necessary to include steps here.
So, now that you’ve linked your bank account to Gdax (this may also take a few days), you will want to navigate to the top left of the browser
Here, click the drop-down menu and select “ETH/USD” which mine already says, as shown above. Then, below, select “Deposit” underneath
A pop-up window will open, where you will select “bank account” and indicate the amount. Alternatively, if you purchased coins through Coinbase using a credit or debit card, you can click “Coinbase Account” and transfer them from your Coinbase account.
I censored my bank account details here, but where the blue scribbles are you will see the details for the bank account you wish to withdraw funds from. Note, where it says processing time it says 3-5 days, this is normal for most transactions with banks so be ready to wait for the money to show up in your Gdax.
Next, after the money has arrived in your account, you will want to enter the dollar amount you wish to purchase in the bar located under “Amount.” Alternatively, if you want to spend all the money you transferred into your Gdax, you can just click the number displayed next to “USD” under “Balance”
Exchanging Coins, Some Details
Now that you are the proud owner of Ethereum you can start to exchange! Below is a list of coins and their corresponding shorthand, or “ticker,” I recommend investing in (in no determined order), details of how to invest follow. An asterisk indicates a stronger recommendation, but all are recommended. Again I am going to emphasize that I am not responsible, financially or otherwise, for your participation in the market. It is up to you to do proper research and determine if you agree with my opinions listed here.
Classic alternative to Bitcoin – significantly faster transaction times than Bitcoin and far more decentralized
Biggest Chinese crypto, strong relationship with Chinese gov’t which is incredibly important in China
Sometimes called the “Ethereum killer,” this is a strong competitor to Ethereum and has a much more attractive (lower) price point
Stellar Lumens (XLM)
Grew rapidly in the last few months, many still consider it “undervalued”
Soon to be integrated with 80% of Japanese banks, has publicly stated they are willing to comply with regulators if/when that becomes relevant
Speculated to grow substantially in the coming months
Must have a Bittrex account to purchase, also speculated to grow in the coming months
Pegged to the US dollar, so it will always be worth $1 USD. So, it is useful for storing your money in an exchange or as a transfer of value, not an investment.
Why buy Ethereum first?
The cryptocurrency exchange market revolves around a few of the biggest players. Exchange markets will generally list USDT (Tether), ETH (Ethereum), LTC (Litecoin), and BTC (Bitcoin) markets. This means that every “alt-coin” you buy (a coin that isn’t one of the ones I just listed) will be purchased in units of the coin you are exchanging in.
So, let’s say you do an ETH/NEO transaction. This means that you are purchasing NEO with Ethereum. I recommend buying Ethereum first because it is generally a stable cryptocurrency to transact in and has a large amount of alt-coins listed on its markets. USDT is directly tied to the US dollar (through exchange rate manipulation) which makes it the most stable, but it does not have many alt-coins you can purchase on its markets. Bitcoin likely has the most coins you can purchase with it (slightly more than Ethereum), but it is by far the most volatile and it has much longer transaction times when compared to the other main coins. Ethereum strikes a healthy balance of access to alt-coins, stability, and transaction time.
So how do I get other Crypto-Currencies with my Ethereum?
You will want to open Binance and Gdax in two tabs, I will explain what to do on each website separately and bring the explanations together in the end.
On Gdax next to the “Deposit” button there is a “Withdraw” button. Click “Withdraw.” A pop-up window will appear, click on the tab that says, “ETH Address,” now go to your tab with Binance open.
On Binance under the “Funds” drop down menu click “Balances,” then search for Ethereum. Click “Deposit” on the Ethereum listing. A pop-up window will appear with a QR code, and text that reads “ETH Address” next to a string of 64 numbers and letters. This code is VERY important, it is your unique Binance Ethereum address. Everyone gets a different address that does not change. Copy this 64-digit address and paste it into Gdax, then enter the amount of Ethereum you would like to send to Binance (likely all of your Ethereum) and finish the withdrawal.
DO NOT ENTER YOUR ADDRESS INCORRECTLY WHEN WITHDRAWING OR DEPOSITING FUNDS. If you get the address wrong by even ONE CHARACTER your money will be sent to someone else, and there is no easy way, maybe no way at all, to get that money back. Fortunately copy and paste exist, so it’s very unlikely you will send any cryptocurrencies to the wrong address.
It will take between 10 and 20 minutes (if the market is busy you can expect up to an hour) for the Ethereum to appear in Binance, don’t panic, it’s on its way.
Now that your Ethereum is in Binance go to the home page. Under “Ethereum Markets” search for the coin you want to buy. I will use NEO as an example, but this process is the same for all cryptocurrencies.
You would search “NEO” in “Ethereum Markets,” then click on the NEO listing. You will be directed to a page with buy and sell options. You can manually enter a buy or sell price and your order will automatically be carried out when someone is willing to buy or sell at the price you entered. A good rule of thumb: To lessen headache of manually entering weird fractions of Ethereum yourself, you should generally Buy at the “Bid” price and Sell at the “Ask” price to take advantage of the current market price spread. To do this you can simply click the drop-down menu by “Price” and select either the Bid or Ask price.
In “Amount” you can either do a little math and figure out how much NEO you want to buy at the current market price (good if you plan to buy more than one crypto so you can save Ethereum for the other transactions), or you can click the number next to “ETH Available” to purchase the maximum amount of NEO you can. When you have filled out the window to your liking click “Place Order,” Binance will connect you with a seller willing to exchange NEO for the amount of Ethereum you indicated.
Withdrawing Your Money
So, you’ve invested in some coins and are satisfied with the gains your portfolio has made in the market and are ready to cash out.
To do this, you simply do the steps listed in the previous section but in reverse. I will briefly summarize the steps here to refresh your memory, and I will use cashing out of NEO as my example, but the steps are the same with every crypto-currency.
Go to the “Ethereum Markets” section of Binance, search for NEO and click on the listing.
Under “Sell NEO” enter the amount you wish to sell, or click on the number after “Amount Available” to automatically fill the order with all NEO you own.
Select “Ask” under price or manually enter a price you are willing to sell at.
Wait for your orders to fill, then once they have filled go to “Funds” drop down menu and click “Balances.”
Search for Ethereum, click “Withdraw”
Open Gdax in a new tab and click “Deposit”
You will get a unique 64-digit address for your Gdax Ethereum address, copy this address from Gdax and paste it in the Binance “Ethereum Address” in the “Withdraw” window.
Complete the withdrawal on Binance, and wait for your Ethereum to appear on Gdax.
When the Ethereum appears on Gdax, sell it using the site.
Then, click withdraw to send your newly earned money to your bank account.
It will take a few days to get your money in your bank account, so plan accordingly if you have a time sensitive reason for withdrawing your money.
This section will be short, but it is VERY important. The accounts you have on these exchanges are verifiably tied to who you are. The IRS can and will track down cryptocurrency investors, especially if you withdraw to your bank (they can access your bank records very easily). You only pay taxes if you make money but depending on when you withdraw you will pay different tax rates. I will attempt to briefly summarize the details here but researching tax guidelines is your responsibility, and it is up to you to determine whether my information here is accurate:
If you withdraw money within less than a year of investing it, your earnings are subject to income tax (not the whole amount, only the earnings)
If you wait a year or more to withdraw your money, your earnings are subject to capital gains (again, not the whole amount, just the earnings)
EXAMPLE: Let’s say you invest $1,000 and make 50% returns, so you withdraw $1,500. You will only pay taxes on the $500
Depending on your income tax rate you may want to alter your investment strategy. If your income tax is lower than capital gains, then it will be worth it for you to wait a year or more before withdrawing, but if capital gains is lower than your income tax you will want to withdraw in less than a year from the time you invested (I believe you can immediately reinvest it, the money just has to hit your bank account and be taxed before it goes back in).
Abide by all state and federal tax laws – it is your responsibility to accurately manage your taxes.
Bonus: How do I evaluate new Crypto-Currencies I’m hearing about?
There are a lot of crypto-currencies out there, so I feel it is important to share some general tools for evaluating whether a crypto is worth your investment rather than me just telling you where to put your money.
I will reiterate, these are general pieces of advice and every crypto is different. Investing in a new cryptocurrency takes research, and just like the stock market, it is a gamble to a degree. My advice is as follows:
Who is on the development team? Do they have the credentials to perform in the market?
Furthermore, are any of the founders active market participants, or established actors in the business community? For instance, a project by Da Hongfei (NEO founder) is likely a good investment because of his proven track record.
Is there an underlying technology/physical asset the team is using to add value/collect data for their network?
Many crypto-currencies derive their monetary value from real world computing networks (blockchain). Ethereum and NEO both derive value from this – there are many applications, the most notable is “smart contracts” which were initially conceived of in 1994 shortly after the invention of the internet.
Example of a physical asset: WaltonChain (WTC) used their crypto-currency to fund the development of a quality control device for monitoring the temperature, pressure, and humidity that pharmaceuticals are exposed to during transit.
Do you believe the underlying asset is valuable? Do you have faith that the team will develop and roll out the product? If you think it’s just talk, don’t bother investing.
Does the crypto seem overvalued or undervalued?
This information is largely speculative and takes social-media research (I recommend Reddit and Twitter)
Undervalued: Invest now and wait for value to increase
Overvalued: Wait for the incipient market correction (“crash”) and invest immediately after the price drops, then wait for the price to rise again and sell.
A Note on ICOs:
If you invest in Initial Coin Offerings (ICOs) be EXTREMELY WARY. In the year of 2017 47% of the ICO projects “completely failed” and 113 more “partially failed.” This means the investment was only valuable from those who invested and sold shortly after investing but before the market correction. Investing in ICOs is basically a 50-50 chance of success or failure, instead I would recommend already established coins/tokens.
Conclusion and Contact Information:
Hopefully this guide has been informative and opened the door for your crypto-currency market success. Thank you for taking the time to read this, and good luck in your future of investing in this exciting market.
If you have questions, or would like to otherwise get in touch with us.