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With the recent surge in the price of the cryptocurrency Bitcoin to greater than $10,000, there has never been more interest in investing in cryptocurrencies.
Bitcoin has seen a meteoric rise in price this year starting the year at ~$900 and peaking out so far at $10,900 before falling again to sub-$10,000. The total rise in price is 1100% growth. If I had $10,000 in Bitcoin in January this year, I would have over $100,000 today. With this kind of movement, it is generating a lot of excitement around investing.
All of this raises the question of: should you should be investing in cryptocurrencies like Bitcoin and Ethereum?
Disclaimer: cryptocurrencies are considered highly speculative investments right now. It is pretty much recommended to not invest more than you are prepared to lose.
What Are Cryptocurrencies?
Cryptocurrencies are a whole new financial instrument and the markets along with the underlying people behind them don’t really know what to make of them. This is the first currency in a long time that is not government created and regulated. It allows you to buy and sell the services that the currency was designed for.
Cryptocurrencies are based on blockchain technology which networks computers together and allows them to work together as a giant network.
When analyzing whether to invest in a cryptocurrency vs a stock you have a whole new set of information to be looking at. Instead of looking at the balance sheet to see whether a company is profitable and makes sense you are now looking at the “white paper” or detail of what the cryptocurrency if for. You are looking to see if you believe the technology is going to catch on and go mainstream. If one does go mainstream, then you have the opportunity to make lots of money by getting in early.
However, as of 27 November 2017, there are over 1324 cryptocurrencies. This means that there are a few cryptocurrencies that are going to make it big time and lots of others that are going to go to zero.
Should You Invest In Cryptocurrencies?
I think it is a very interesting investment opportunity. Since I am very interested in technology and can understand some of how it works, I think investing in this technology is a good, albeit speculative investment. If you have come around here before, you will know that I generally espouse keeping it simple and investing in index funds. However, there are times when a little speculation is a good thing.
It is certainly possible to make a quick retirement getting lucky on cryptocurrencies. However, the chances are even better that you go bust on cryptocurrencies.
How To Pick The Cryptocurrencies to Invest In?
When you read through the “white paper” on a particular cryptocurrency, you are looking for a currency that is solving a problem. When a technology solves a legitimate problem and makes things easier, then it has a good chance of success.
Bitcoin is one that does not necessarily solve a problem or make things easier. It is a decentralized currency and that is it. It does not solve banking problems or technical problems. Bitcoin is simply a new currency that is peer-to-peer.
Ethereum, on the other hand, solves a problem. For one, it has created a platform for others to test blockchain technology more easily. Second, it has created smart-contracts, which allow 2 parties to enter into an enforced agreement without the services, and therefore fees, of notaries or lawyers. Since Ethereum solved a problem, it has a better chance of success in the future.
Basically, just look for problems that are getting solved by the new technologies and look to see if it is getting adopted. If it is, then you may have found a good one to invest in.
Mining or Buying Cryptocurrencies?
There are 2 ways to acquire cryptocurrencies, mining and buying/trading.
I have invested in an Ethereum miner and am making money by renting out my machine to the Ethereum blockchain. Mining is essentially renting out your hardware resources to the blockchain to help the network. In return for renting out your equipment to the network, you are paid in the network’s corresponding cryptocurrency.
Mining is not for the non-techies of the world. You need to be able to understand how to build a computer and troubleshoot problems as they arise. I have had my fair share of problems so far, but have finally reached a stable environment where my miner just makes consistent money. However, as more and more people jump on the mining bandwagon the “difficulty” rises and the amount you make for the capability of your hardware decreases.
Therefore, my experiment with an Ethereum miner is interesting because I like technology, but is not the easiest way to make money with cryptocurrencies.
Buying and trading cryptocurrencies, as opposed to mining, is more for the layman. You do not need to understand nearly as much about technology but should still have a grasp on technology because that is what you are investing in.
In order to invest in cryptocurrencies, you need a couple of different services.
First, you need to use a service where you can buy cryptocurrency with Fiat (regular governmental currency) currency. The options in the US are Coinbase and Gemini. Both allow you to buy Bitcoin and Ethereum with your US bank accounts. There are other exchanges outside the US, but as regulations move forward, Americans are being excluded because exchanges don’t want to deal with tax reporting in the US.
With all the options out there, you have to choose carefully. Do your research and find what works for you.
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Since cryptocurrencies are all internet and networking based they are a favorite target of hackers. There have been large hacks of exchanges where a hacker has been able to steal all the funds on the exchange. This is not to dissuade you from investing, but to let you know to be aware of the dangers.
Cryptocurrencies can be kept in offline or personal “wallets” outside of the exchanges. These personal wallets afford you the privacy and security needed to ensure no one touches your investments. Since transfers are near instantaneous, you can keep your funds in a personal wallet and only transfer them to the exchange when you are ready to trade. After that, you can return your investments to their respective offline wallets.
A cryptocurrency wallet consists of a public account number, a private hash key file, and a strong password. With a private account you have control of the hash key file and the password which gives you 2 levels of security. If you keep your key file on a USB, then it is impossible to hack into your account and steal your information. Just be sure not to lose it. If you do, it cannot be retrieved…
I am just getting into investing in cryptocurrencies but am excited at the possibility of expanding my portfolio to include them. They have the potential for large returns, but as with most investing, when you are in it for the long term, you will most likely succeed.
So readers, have you invested in cryptocurrencies? Do you think they are too speculative? Let me know in the comments.