To Bitcoin and beyond: ultimate crypto guide
They’re seen variously as the way of the future, a scam or something in between. While the world makes up its mind, owners of cryptocurrencies have had a wild ride. Here’s what you need to know if you’re thinking of jumping on board
If the sharemarket is a roller coaster, the world of cryptocurrencies is a tsunami with tremendous sudden peaks and violent snapbacks that wipe out the gains. The volatility of some of the currencies is massive. $US100 invested in Bitcoin at the beginning of 2017 reached $US1469 at the end of last year. Other cryptocurrencies did even better with $US100 in Ripple soaring to $US35,664, Ethereum to $US9495 and Litecoin to $US5360.
“The moves were unbelievable, to be honest,” says Chris Weston, analyst with IG markets, a CFD provider that offers leverage into cryptocurrencies. “People are getting very, very rich, very, very quickly.”
He says the media, particularly social media, play a large role in stirring up people who have a fear of missing out (FOMO).
The past six months has seen retail investors – including those with large mortgages and flat wages – buying into virtual currencies. Until then the coins were typically the realm of the tight-knit, enthusiastic crypto community, sophisticated investors with spare money to risk and hedge funds. Data suggests that around 95% of coin wealth is held by men and 95% of the wealth is held by 4% of the owners.
The tales of great gains have spread and everyone seems to have an intoxicating story of someone who has made incredible profits. It triggered a mania that saw kids putting their pocket money into coins, teenagers trading them, mothers’ groups swapping tips at coffee mornings, people joining online clubs and attending regular meet-ups and conferences. Financial planners received requests from their clients to add cryptocurrencies to self-managed superannuation fund (SMSF) portfolios.
Not surprisingly, financial groups and investment spruikers are launching products such as managed funds, seminars and DVDs that claim to have experts who can invest wisely in cryptos. Until now Money readers have shown little interest in cryptocurrencies but we believe that has changed. So we’re taking a look at cryptocurrencies: how to buy them, store them, avoid scams and prevent hacking.
Some people want to put part of their wealth into cryptocurrencies. But watch out. They have been plunging sharply on concerns about escalating regulatory threats from authorities around the world including India, South Korea, China and the US, hacking at the Japanese exchange Coincheck, fears of price manipulation, major credit cards banning the purchase of coins and Facebook’s ban on cryptocurrency ads.
At the time of writing, Bitcoin had sunk 58% from its December high, Ethereum was down 39% since its January peak, Ripple had plummeted by 78% and Litecoin had collapsed by 66%.
How are people responding to the falls? Weston says while some are rushing for the exits, the big falls also tend to trigger more buying. He scoffs when I use the term “investor” to describe people buying into currencies, particularly using debt to leverage in, saying they are speculators who live and die by the sword. “It magnifies the wild swings. They can make a lot of money very quickly or lose a lot of money.”
Certainly cryptocurrencies are changing people’s lives. Pharmacist Alex Saunders was given some listed Australian shares for his 21st birthday by his parents a few days before the GFC. He lost half of his investment, a disillusioning experience. Not surprisingly, he became interested in cryptocurrencies in 2012 and says he hasn’t looked back. He gave up his full-time job to trade currencies and spread awareness. He runs Nugget’s News with free educational digital currency seminars on YouTube and says he has 100,000 followers on social media.
Saunders says it is unfortunate that some of the clever, unique blockchain companies get lumped together with cryptocurrencies such as Bitcoin. Blockchain is a game-changing technology that is already reshaping a whole range of activities, in particular financial services, but can also be applied to solve world problems such as voting systems, sharing power resources and much more. It reduces trading frictions and makes transactions more secure and cost effective. For example, the ASX has adopted the distributed ledger technology from Blockchain, replacing the CHESS system, to record changes in shareholding.
Chris Brycki, CEO and founder of robo advice group Stockspot, is excited about blockchain’s potential to transform the asset management industry.
“In the future, online investment advisers like Stockspot are likely to use some form of blockchain technology to transact and administer holdings rather than the current system of holder identification numbers (HINs) on the CHESS subregister system. This could help us further drive down costs, which ultimately benefits clients.”
But Brycki is less enthusiastic about placing money in Bitcoin as an investment. “It can be easy to lose sight of what’s smart when you see people making tonnes of money in short periods of time.”
He says the same happened in other speculative manias like the tech bubble of 1999-2000 and the mining boom of 2003-07. In both periods plenty of shares rose by more than 1000% before falling or vanishing entirely.
“Rapid gains can be exciting, and quickly lead to FOMO if others are making easy money and you’re missing out but as a general rule ‘easy money’ is just a mirage.”
Brycki says that when it comes to recommending an investment strategy, “my job is to provide clients with carefully tested investment strategies based on evidence. We don’t provide opinion on whether a new innovation will succeed or how much it could be worth. That’s the difference between speculation and investment.”
More than a year ago, many of the other cryptocurrencies, even the next biggest ones behind Bitcoin such as Ethereum, Ripple and Litecoin, weren’t worth much but people started to rotate into them, often causing price movements that surpassed Bitcoin.
The volatility, illiquidity and lack of transparency are certainly worrying regulators around the world. The US Securities and Exchange Commission has stopped around a dozen proposed coin exchange traded funds (ETFs) and some cryptocurrency mutual funds, which was a blow for crypto investors who were banking on it. The SEC asked a series of questions on topics including the risks of manipulation, whether funds could accurately value the volatile products, and how they would meet demands to redeem virtual currency.
In March, the SEC rejected a proposal to list an ETF backed by the Winklevoss twins, Tyler and Cameron, who are founders of the digital asset exchange Gemini. At the time, the regulator raised concerns that exchanges wouldn’t be able to conduct adequate surveillance of the underlying market.
How to choose
The popular way to acquire coins is through an online exchange, such as CoinBase in the US and Australian Crypto locally, where you create an account and deposit your funds. Then comes the tricky part: deciding what to buy and how much to spend.
Kyle Kucharski, 32, a data modeller who buys cryptos, suggests first reading the whitepapers at the website whitepaperdatabase.com and always studying the credentials of the team developing the coin.
He recommends you ask someone you know to help you. “Don’t rely on companies to do this for you,” he says.
Also he advises buying coins that are developing something tangible and real-world applications, such as Power Ledger, or a security coin such as Habibi, which is backed by real estate. “This is the difference between what are called ‘shitcoins’ that are backed by nothing and rely on hype to drive up prices versus coins that are using innovation to provide solutions to problems,” he says.
Sam Calabrese, a cryptocurrency enthusiast, makes
his decision on a number of factors including his personal belief and understanding of the technology that is being developed and the strength of the team behind the project. “A little good luck and positive PR certainly helps.”
People who put cryptocurrencies in their SMSF need to understand how it is invested under the terms of the trust deed, warns Peter Hogan, head of education and technical at the SMSF Association. “You need to treat it as an investment, like any other investment. It is subject to the rules of the fund’s investment strategy.”
Avoid the scams
Every day people get scammed, says Saunders. Or they may get hacked. In January, the Japanese exchange Coincheck lost $660 million worth of the NEM currency to hackers. The theft highlights questions about the security practices of virtual currency exchanges. Other exchanges, such as Bitfinex and Tether, have also been hacked.
Before you open an account Saunders recommends downloading the Google Authenticator app on your phone. “It will generate a unique pin number each time you log into these exchanges, so if you lose your username or password or if you get hacked, your funds are still secure and they can’t log in.”
It is important to use a reputable exchange and wallet, says Calabrese. Most crypto exchanges require photo identification such as a driver’s licence or passport. He likes services such as Coinbase that often charge higher fees than competitors but offer “a very user-friendly experience”. Coinbase claims to have served 10 million customers but it offers just three cryptocurrencies (Bitcoin, Ethereum and Litecoin) and it doesn’t allow you to sell currencies, making it more of a storage facility for people who hold onto their currencies rather than trade them.
Saunders also recommends some other exchanges such as CoinSpot, which handles dozens of currencies; CoinJar, which is for Bitcoin only and comes with a swipe card linked back to your account; Bittrex, which only allows you to use Bitcoin and Ethereum to buy other currencies; and ACX.
“Identification is not required to set up wallet software on your computer or phone, which allows you to receive funds,” explains Calabrese.
You should store your cryptocurrency in hardware that can’t be hacked – for example, a USB stick kept in a safe place, says Saunders.
Calabrese says that for security and peace of mind, his cryptocurrency is stored offline. “However, the cryptocurrency I trade with are held by a variety of exchanges including Australian-owned BTC Markets.”
Kucharski says he stores his cryptocurrencies in Trezor, which he describes as “a highly encrypted device you plug into a USB port”.
He also uses CoinTree for his Australian dollar to Bitcoin purchases, which does require ID. “When using a trading exchange such as Bittrex, they may place small restrictions on your account until you provide ID but unless dealing with large amounts they do not impede your ability to trade.”