Thursday, July 13, 2017

Things you REALLY need to know before buying Cryptocurrencies

This post is inspired by the IG-sponsored post on D&S.

1. You own the underlying asset when you trade

When you buy cryptocurrencies, once the coins are in a wallet which you have the private key to, you are the owner of the coins.

2. There is no counterparty

Unless you are leaving your coins within a centralized exchange to make trades, all the coins that you can access with your private key are yours and you don't have any counterparty. You directly interact with the blockchain to send your coins, or receive more coins directly to your ownership

3. There will be volatility

In a market with plenty of speculators, the volatility is high. Even for the "large cap" coins, it isn't strange to see swings of 20% within a day.

4. Don't use leverage

Related to #3, with the huge amount of volatility in the cryptomarkets, you don't need to use leverage. With a leverage ratio of 5:1, a 20% move is all it would take to wipe out your account.

5. Know your fees

There are a bevy of fees everywhere in crypto. There is the exchange rate "fee" for pricing the coins in a specific currency, there are exchange fees for using the exchange. There are payment processing fees for different types of payments. There are withdrawal / transfer fees for moving the coins out of exchanges. There are also transfer fees when moving coins to different wallets. There are deposit fees when sending coins to be traded on exchanges. There are exchange fees on those coin exchanges as well.

The good news is that there are plenty of people offering a wide range of fees. It is possible to buy coins and have them in your private wallet for less than 1%, after taking into consideration all the fees involved. It varies widely, so be careful.

6. Ownership has possible benefits (and downsides)

Some coins generate interest for owners. Most coins just sit around and do nothing. A rare minority of coins have a holding cost. Understand the benefits of having ownership of coins and what you would have to do to make them work for you.

7. After the fiat conversion portion, there are almost no regulations

From the point that you have coins transferred out of an exchange, you are on your own. There are no regulations. The decentralized nature of most blockchains make them extremely hard to be regulated.

8. You are trading a currency that is immune to central bank's policy

No country or central bank control's cryptocurrencies (unless they make one themselves), so they cannot influence how it works. This gives transparency and consistency to cryptos.

9. Risk management is key

With such crazy volatility and new technology, there are bound to be failures. Don't risk more than you can afford.

My 2 cents:

If you are buying because of the hype, the fear of missing out and stupid ads and articles saying "If you had bought $5 of Bitcoin 5 years ago you would have $5 million", you should definitely NOT be buying any cryptocurrencies.

However, if you:
1) Understand the technology and how it works
2) Understand why a particular crypto can be successful
3) Have money that you are prepared to lose

then, by all means, welcome to the wild wild west.

2 comments:

  1. Have put in 0.01% of networth for fun. More fun than Toto or 4D.

    For longer term investing, I'd rather put into the nuts & bolts / infrastructure that allows blockchains to exist & function in the 1st place.

    After the coming massive implosion, I'll then slowly look to see any potential surviving or emerging exploiters & monetizers of blockchain i.e. the future Googles, Facebooks, Amazons, Apples, Microsoft, Netflix.

    ReplyDelete
  2. Hey GMGH,

    appreciate the post. Do you mind sharing with us which platform do you trade crypto?

    Thanks man, keep it up!

    ReplyDelete

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