Thought I’d write a post about a topic that is more booming now than ever, what to know about and how to trade CryptoCurrencies.
Disclaimer: I’ve written this article to the best of my knowledge, If i’m misinformed or talking nonsense, or you would like to have some information added please be so kind to inform me in a appropriate manner in the comment section.
This article is intended for people who are looking for information on where to start if they have any interest in CryptoCurrency.
Basically, CryptoCurrency as we know it in 2017 exists and is related to the following topics:
- Initial Coin Offerings (ICO’s)
- What are Smart Contracts
We will go deeper into these topics one by one after the introduction.
So I’ve become familiar with CryptoCurrency and mainly Bitcoin as the first blockchain cryptocurrency back in 2012. Bitcoin then already existed for two years and had build a reasonable reputation of something of value. But it is only since May 2017 that I have become really involved with CryptoCurrency as an investment for the future, and participating in one of the many communication methods used by CryptoCurrency owners and traders.
So if you are looking to start investing, buying, trading, but also working with or on a blockchain solution where would you start?
What is blockchain?
First you would need to understand (if it has your interest to understand it at least) what blockchain is, and what it does. The first initial idea of blockchain can be compared with a database. Traditional database like we know them in IT ifrastructures are central, blockchain however is different, it’s decentral. Nobody own’s it, yet everyone is equally important once involved. This means that everybody can become part of the chain. On this database transactions occur just like on a regular database. These transactions are not financial transactions they are just actions that tell the system what has happened. But as soon as a transaction is executed all peers in the network become aware of the transactions and it becomes irreversible. A CryptoCurrency makes use of this procedure to send tokens around, and these tokens posses some kind of value (which we will discuss later on).
Blockchain isn’t solely intended for sending tokens with value around the network. At this moment numerous big companies like Microsoft, IBM, Google, Amazon but also banks and other very large enterprise companies have shown interest in blockchain. One of the most relevant examples of how blockchain can be used, is sea-container company “Maersk” who is working closely with Microsoft and IBM to investigate the usage of blockchain into their company. By what I have heard and read it is used for the insurance process of sea-containers.
Currently this is a process which needs to be ran by 40 stakeholders before a sea container is permitted to ship. 40 Stakeholders which are even equally important, but are slowed down by a bureaucratic process. This is where blockchain comes in, to speed up the process but also make it more reliable and less fraudulent. Once a transaction occurs it is acknowledged by its peers and after a certain number of confirmations becomes irreversible, making it basically incorruptible.
Initial Coin Offerings
A massive hype in the blockchain ‘world’ nowadays are Initial Coin Offerings or ICO’s
These ICO’s are basically comparable with start-ups or campaigns to kickstart a venture, raising funds to proceed with the development of the company. Over a period of 4 months a large amount of new cryptocurrency have risen each claiming key features and functionality incomparable with other cryptocurrency. An ICO is funded by exchaging cryptocurrency for their own token. For example on the ethereum network ETH tokens are send to an address and in return the sender will receive a number of tokens in the newly developed cryptocurrency.
A general trend is that people invest heavily in these ICO’s to dump them as soon as possible they come available on a cryptocurrency exchange. Usually in the first hours after a release on these exchanges the coin increases in value but wouldn’t hold it’s position too long before people cash out.
Recent developments have lead to the banning of ICO’s in the China area. As Chinese people are claimed to be notorious gamblers, Chinese government has decided it is forbidden for Chinese people to participate in ICO’s.
Smart Contracts is something made possible on the blockchain. It is nothing more then an agreement between two parties, where the blockchain is used to control under which circumstances the transaction is executed. Let’s say I want to order a pizza at Domino’s. I can setup a smart contract and send it to the blockchain. In this contract I make the following demands:
- The pizza is delivered at my house
- The pizza needs to be fresh and warm
- The pizza needs to have tomatoes and cheese on it
In return I’ll send an amount of tokens with the specific amount of value I have agreed with Domino’s over the network. As soon as Domino’s meets my demands, the tokens are released.
This is a smart contract in it’s simplest form. For more info, please see: What are Smart Contract?
Since the rise and fall and rise again of Bitcoin each new All Time High (ATH) has generated attention for bitcoin itself as CryptoCurrency in it’s whole. As we can see by coinmarketcap.com historical snapshot, in 2013 there where 7 coins listed. Currently there are over 850+ cryptocurrencies available for trading.
The basics of trading cryptocurrency is as following:
Money (which we will call FIAT) needs to be deposited either at an exchange through wired SEPA transfer, or via paypall or via other websites which enable you to buy bitcoin or other cryptocurrencies and send it directly into a wallet.
So FIAT > Exchange > Wallet
Your wallet exist out of an address which is hexadecimal and is generated once you open up a wallet, or deposit currency on a exchange. This address is public and for everyone to see. If I have the address I can list how much currency it currently possesses and which transactions have been executed towards or away from the address. So basically my bank account is out in the open and visible, but since there is no direct relation between the address and me, nobody know’s which address belongs to me or someone.
Now you say, they know my bank account, can’t anyone hack into this? No, not unless you give your private keys to this person. Each wallet generates a private key. This private key again is a very long string which holds all the information to your wallet. With this key I can access the wallet and control it. This means receiving or sending currency which is available on this wallet.
If you want to trade in your cryptocurrency back to FIAT or another cryptocurrency this can be done at an exchange. This means you need to send out an amount from your wallet to an exchange. If your currency is already on a exchange, you can skip this step and exchange it right away to another currency.
There are a number of large exchanges around at this time (Sept. 2017)
- Bitfinex $505,867,176
- Bittrex $445,875,834
- Poloniex $249,425,157
- Kraken $214,885,074
- Bitstamp $140,261,655
As you can see the exchanges Bitfinex and Bittrex are the biggest exchanges, Bitfinex trades around 35 cryptocurrencies and Bittrex around 257! different cryptocurrencies.
Personally I have experience with the following exchanges: Bittrex, Poloniex, Kraken. I’ll list my personal pro’s and con’s about these exchanges here:
- Margin trading, also available for a certain amount of alternative coins like NEO
- Fast interface with instant trades
- Long and decent track record. The exchange has been hacked before but responded accordingly
- Mobile Application
- Not many altcoins, more attention for the big coins
- Margin leverage to a maximum of 3.3
- High number of cryptocurrency
- USDT available
- Basic Account withdraw 3 BTC per day
- No withdrawal to FIAT possible
- Withdrawal to FIAT possible
- Stop-loss and Take-Profit orders or combination of both
- Support is fast on average with tier verification
- Website will become slow and unusable during critical times (in case of fast increase or decrease of cryptocurrency value)
- BTC lending
- Margin trading
- Stop-limit and combined orders
- Support is slow and doesn’t respond very quickly
- Withdraw is limited to 1000 USD a day
Each exchange has common functionality such as buying or selling currencies but some exchanges stand out with special features such as lending, margin trading, going long or short
Each exchange works with pairs between cryptocurrencies, this means Bitcoin and another currency or Ethereum and another currency. This means to swap between currencies you need to first go back to Bitcoin or Ethereum before you can engage in another currency.
Example, I’ve purchased Bitcoin somewhere and want to invest in Litecoin, I need to go to an exchange and exchange the desired amount of Bitcoin to Litecoin. Later on I decide to invest in Ethereum. I then first need to exchange Litecoin back to Bitcoin before I can buy Ethereum.
Most of these exchanges if not all possess and API which enables you to control what happens with your currency remotely, with some self written code or perhaps you have purchased a bot.
Cryptocurrency can be held in wallets, these wallets are a hexadecimal address that represent an address on the blockchain. As soon as a wallet address is generated it becomes part of the blockchain basically to never disappear ever again. Once a address is generated it can be traced indefinitely. It is publicly available and will tell how much currency is held onto the address. So are your coins on this wallet? No, your wallet is secured with a private key and depending on the software has options to secure access through a passphrase, a 12 word sentence or just a password you make up of your own. This information is needed to access your tokens, but the tokens itself aren’t physically present on your wallet which you may have installed on your phone, computer or airgapped device. It’s just some piece of information you own, so you can prove you are the holder of the amount of tokens that is residing on that specific address.
Each wallet possesses a private key, this is also a very long string of characters which is basically all the information that is needed to access the address on the blockchain and enables you to deposit, withdraw and transfer currency on the blockchain. Usually a wallet is secured with a password, or 12 or 24 word passphrase.
People often speak about a paper wallet which you can safely store in your house, or at a bank locker/safe. This is nothing more and nothing less than these 12 or 24 words written down on a piece of paper.
Full chain sync vs. light wallets and multi wallets
Back in the days when there were only a few cryptocurrency values that each had their own blockchain, in order to participate you needed to download the entire blockchain onto our computer. Nowadays the blockchain size for Bitcoin is 133 GB (as of september 2017).
Today there are many solutions in participating in the blockchain, there are so called full, fast and null wallets. So full wallet wil actually sync the entire blockchain to your computer opposed to fast or light wallets which will do a partial sync. And then there are null wallets which don’t have to sync
Research and/or Participate: Twitter, Slack, Reddit, BitcoinTalk
Let’s say you want to invest or participate in a cryptocurrency, what would be the best places for you to start?
Big sources for information are Bitcointalk, Reddit and the Slack channel of a currency team. Also the currency’s website, roadmap and whitepaper are a must read to predict what is coming. Do research of how the course rate responded after news became public, but don’t forget all alternative cryptocurrency is related to the big one: Bitcoin. There aren’t much coins which price isn’t influenced by the course rate of bitcoin.
Do’s and Don’ts
- Buy low / Sell high
- Hold a coin you belief in
- Define a strategy
- Sell low(er than you have bought for) (duh!)
- Be greedy (be satisfied with 5, 10, 20%)
- Buy during or after a pump (likely it will fall back right after)
- Organize or participate in pump & dumps (I will explain this one more extensively right after)
- Trade with emotion (again I’ll dedicate some words to this)
- Enter your private keys anywhere, ever!!!!
Upon entering the cryptocurrency market it is good to set a predefined target on when you will get out of it. For example, decide to get out of a coin or the market entirely on a profit percentage of 20%. This helps you control your emotion (see Dont’s) and lets you make a rational decision and still feel good about it. Entering the cryptocurrency market as a ‘newbee’ is almost like entering a casino to play a game of roulette. Based on your emotions you want to increase your stakes and profit, and want to make up for your losses when things went sideways. By setting a goal or defining your strategy you’ll be able to cope with your emotions.
Pump & Dumps
I thought I devote an entire section to pump and dumps and why you should be carefull with it. Since the cryptocurrency market is an unregulated market which has no control or authority to control it or have say over what is ok and what not, there is an entire world beneath the surface of people trying to take advantage over other people. Just like the real world!
Pump and dumps are a coördinated scheme to increase and decrease the value of a cryptocurrency over a short period of time. Usually these p&d’s are coördinated in telegram, whats-app and or private slack channels. Usually there is one person or a team who dictates the pump or dump and others follow. As the value begins to increase or decrease it draws the attention of other people that are already invested in or want to invest. Thus creating basically a ponzi scheme to facilitate financial gains over these people. The person or team that initiates the pump or dump gains the most, as others follow. Then there are the people who are unaware of what is happening, and usually they pay the price (the money needs to come from somewhere, where their is gain there is loss)
I’m not a moralist, but be aware that participating in these schemes comes at a price and has it’s risks. And currently since there is no regulation possible, these people are untouchable, but as soon a relationship can be created between an individual as in knowing who this person is, and your wallet addresses I’m not so sure these people are untouchable any longer.
Trade with(out) Emotion!
A big share which comes with FOMO (fear of missing out) is emotion! The one that always bites you in the ass when it comes to making rational decisions. Can you trade without emotion? Without fear? Since there are no guarantees which way cryptocurrency goes. It can go up or down, and what do you do when you are heavily invested in a coin?
- HOD’L originated from this thread on bitcointalk and has gone ‘viral’ amongst cryptocurrency traders meaning, they will hold their currency for a longer period
- FOMO which means: Fear of Missing Out, this usually occurs when currency is at an exceptional low price and you wish you had some funds available to buy them, or when a currency is ‘mooning’ and you don’t possess any of it
- FUD which means: Fear Uncertainty and Doubt, FUD is widespread, nowadays with fake news it is very easy to manipulate cryptocurrency value by spreading rumors to create fear, which will lead to uncertainty and doubt for cryptocurrency holders to stay in the currency for the upcoming period. So FUD is spread to create a movement. Unexperienced traders are lured into selling their investments while more experienced traders will go along for the ride
- ATH, means: All Time High, the highest value a cryptocurrency has ever had
- 24 High and Low can be seen on some exchanges to see what a currency did over a time span of 24 hours.
- Moon or mooning, when a currency rises exceptionally to new hights
- Pump and Dump, when a coin is massively bought or sold this affects the course rate and value of a currency. Pump and Dumps are often organized in private slack channels or telegram and whats-app groups.
- Alts (as in alternative coins, as in altcoins, as in any coin other than Bitcoin)
I hope you’ve found this article very useful on your way towards cryptocurrency trading. I would appreciate it if you would be so kind to leave a comment if this has helped you in any way.