Investing in cryptocurrencies is as simple as creating an online account and linking it to a source of cash. Making money with cryptocurrency is a lot harder. If you want someone to tell you how to make money doing this, you have come to the wrong place. If you simply want to learn what steps you need to take to have some skin in the cryptocurrency game, how to move funds from one source to another, and what sources of information might lead to good decisions, you are in the right place. There are a lot of tools out there for those that want to take the plunge into new forms of currency. Before we get into those tools, let’s look at the big picture.
What game are you playing?
The first thing you should know before you begin investing is if you are more interested in short term gains or long term gains. The rules of engagement for each of these outcomes are different. The short term game requires extensive research and knowledge of who is about to be hot right now. Buying low and selling high is the name of the game. It’s also the rules. Day traders are specialists at recognizing patterns of undervaluation so that they may buy cheap, wait for the price to rise, and then sell. The current market for cryptocurrencies makes day trading a 24-hour emotional roller coaster. On Sunday July 19th, 2017, one bitcoin was worth $2,257. The very next day it was worth $2,849. That’s more than a 25% increase overnight. Wonderful, right? Well, two days earlier it fell 16%. Day traders pay attention to these dips, raises, and curves to decide when to push money in and pull money out. Putting $1000 in on the 19th and pulling it out at the peak the next day would have given you $1250. That might sound interesting, but double digit moves do not happen every day. The trick here is to learn to anticipate the rises and falls. Changes in monetary policy, laws, and endorsements all have effects on the price of cryptocurrencies. All of these things show that there is either more trust or less trust in the currency and the price reacts accordingly. Because of this, day traders are constantly listening to trusted sources of information regarding the factors they know will have an effect on the price. This might mean following a few thought leaders on through twitter, blogs, podcasts, or however they get information out. At the very least, you should know who founded that cryptocurrency and what they are worried about. When it’s decision time on some of the issues they bring up repeatedly, expect the price to move.
The long game is a different beast altogether. To play this game, you only need commitment. You need to find cryptocurrencies that you believe in at their core: this means you trust the team that came up with the underlying technology, there is at least one unique benefit, and there is an active community who is mining and exchanging currency. If you can find a currency (or more than one) that can meet these requirements, you should make a long-term inve
stment. It does require a decent amount of homework in the beginning. You may have to read a white paper, a document that explains the purpose and theory behind the currency. Every cryptocurrency that makes a unique contribution has a white paper attached to its name. Here, the organization spells out why it is unique, what limitations it might have, and why they believe it is likely to overcome those limitations and continue to grow. A thorough white paper is great, but it is even more important that there is an active community behind the currency. Is there a popular forum, website, or subreddit that the community uses to organize and share ideas? If so, you might have a good currency to invest in for the long run. The rules for investment in the long run are simple. Buy in incrementally. It’s not as sexy as day trading, but it will ensure you are averaging your gains/losses over time to match the growth of the currency as a whole. Also, if you believe in the technology, now is always a good time to buy more. It’s all going to go up anyways when everyone else learns about it, right? Right? Once you have a system to buy in slowly over time, forget about it. Put it away in a place that you cannot access immediately and stop looking at charts and graphs. This will only give you temptation to sell. You don’t need it. What you need is time. If you are the kind of person that needs something to obsess over, find another currency that you can day trade while your long term investment works while you sleep.
How to Play the Game
Once you decide whether you want to play the short game or the long game, you can figure out what tools you want to use to play. The first thing you will need is an account on an exchange. There are many cryptocurrency exchanges out there and they all do the same thing: they take your currency of choice and give you back cryptocurrency. The most popular service providers are GDAX, Coinbase, and Kraken. All of these sites will charge you a small, and in their opinion, decent fee to transfer bitcoins from them to you. These websites can all create and help you fill your first online wallet.
Your wallet is a vitally important part of cryptocurrency. It’s not a conventional place to store money; it’s a unique string of characters, just like an account number. This unique string of characters that represents the value of your currency is known as a private key. It is extremely important you take every precaution you can to make sure your private key as private as possible. There has been a history of multi-million dollar cryptocurrency hacks. What was actually stolen and manipulated were the private keys of users and prominent accounts. Once someone who is not you has your private key, they are free to transfer anything in and out of that account. You can keep yourself safe on a currency exchange by enabling two-factor authentication, only using trusted devices, and using strong passwords.
Once you have an account, you can begin to make purchases and make transfers between wallets. Each exchange places its own limits on how much you can purchase. Because there is little regulation in the cryptocurrency exchange business, you only need to provide enough documentation to make that exchange comfortable with you and your money. On some exchanges, you can trade thousands (USD) before having to show ID. On some exchanges, you will need photo-ID, bank account verification, and other documents before you can trade more than a set amount each week. Your limits on these sites are removed as you provide more identification and your account gets older. This is done to combat fraud and keep your private keys safe. Banks have their money insured by the FDIC, so even if the money is stolen, users have a reliable backup in the government. There is no FDIC-analog in the world of cryptocurrencies, yet.
Playing the short game on exchanges is as easy as it looks. Look at the graph, buy low, sell high. As long as the growth in price is greater than what you paid + transaction fees, you have profit. Each transaction incurs a transaction fee that varies from website to website and by volume of the transaction. Larger transfers have larger fees that make up a small percentage of the funds. Smaller transfers have smaller fees that take up a larger portion of the funds. Unless you own a currency exchange, it is always in your best interest to make the least moves necessary to profit from your funds. Online cryptocurrency exchanges have everything you need to play the short game. They will sell you currency, allow you to track it over time, let you send and receive currency from other sources, and cash out once you have had your fill. Most of these movements will incur fees on any exchange.
The long game is a lot simpler than the short one. You can exchange a large amount of currency all at once to ensure the lowest fee or some sites let you set up a regular deposit that will automatically exchange a set amount every day, week or month. Once you have a sizable amount invested, you want to regularly move your stash to a more secure location. Essentially, you want to have a wallet that your currency exchange website does not know about. This means having a paper wallet, mobile or desktop wallet, or hardware wallets. Keeping your money in a hardware wallet is recommended for those who are serious in investing in cryptocurrencies. Whichever route you go, you want to have a place to put your money that is off of the exchange you used to buy your currency. Until you create your own wallet with its own digital signature, you are beholden to the exchange. When values begin to change quickly in response to a large event, exchanges can become overwhelmed and often shut down. You should never be denied access to your money; relieve yourself of dealing with an exchange as soon as you can.
Sit Back, Relax
If you are hoping on instant results, you are playing the wrong game and you need to give your credit cards to an adult. Patience is key. Nothing worth happening is going to happen overnight. Bitcoin first reached a value of $1000 in late 2013. Then it fell and fell and fell and it did not return to $1000 until late 2016. The second wind that it caught is part of the reason so much more people are talking about cryptocurrency today. In August of 2017, 1BTC is worth 2700USD. This upward trajectory took six months, or three years and six months, to bring a 170% return. The best thing you can do is invest in, and use what you invest. Not only do you want to have your money in it, but you want to use it like you use money. The more transactions taking place on the network, the more trust people place in it. This is a much better use of your time than refreshing charts and graphs, reading too deep into fluctuations, and getting into gossip. Nothing beats getting into the technology by learning about it, using it, and investing in it. After you have done that, take your mind off of it. We are in the early days of cryptocurrencies and that means their values will be fluctuating a lot before they stabilize. Do not subject yourself to a series of small heart attacks daily by checking the price on the hour. Instead, support the network, learn the technology, and use the currency.