I became interested in Bitcoin and crypto assets in 2016 and after having spent a ton of my time learning how they work and what their investment case might be, I made up my mind that they were a good bet and purchased some cryptos.
I have maintained my position throughout the subsequent bull run of 2017 and the big fall of 2018. The following year, 2019, was a quiet one in terms of media mentions and public discussion of Bitcoin, although cryptos made a steady from the previous year’s fall. Indeed, if we look at Bitcoin’s performance compared to the S&P 500 and Gold in these early months of 2020, we can see that Bitcoin is outperforming the other assets.
However, I don’t really look at charts anyway, the basis for my investment is a philosophical one based on my belief that Bitcoin solves a need as a totally independent store of value that is not at the mercy of any government or company. I am happy to invest some of my net worth in cryptos for this reason, and I know that I’ll be happy about my decision in the future whether prices rise or fall, as it is based on that reasoning and not just speculation.
What is the place of crypto in an investor’s portfolio?
I do think though that Bitcoin can be thought of as a hedge asset, so let’s explore what we would be hedging against.
Cryptoassets offer a hedge primarily against two things:
- Large monetary disarrangements: currency debasement, rampant price inflation, central bank and fiscal policies gone awry, etc.
- Geopolitical risks that could lead to government actors seizing, freezing, or egregiously taxing citizens’ assets.
As this article from Barron’s argues, it is not a hedge against everything.
For instance, the late February 2020 pullback in the equity markets was driven by concerns that the coronavirus outbreak would disrupt supply chains and cause a severe shortfall in corporate profits. Bitcoin doesn’t have much to say about that. There’s nothing about Bitcoin that smooths the flow of goods around the world, or buoys corporate bottom lines in times of stress. Why would it rally in the face of those challenges?
See also: Is this the right time to buy Bitcoin?
While crypto is a hedge, it’s specific types of risks that motivate investors to turn to Bitcoin. Knowing that can help one make sense of its moves.
Crypto assets have so far shown to be uncorrelated with other assets, making them a perfect hedge and in my opinion, deserving a place in investors’ portfolios as a diversification tool.
How to buy cryptocurrencies
To buy cryptocurrencies you will need to first transfer fiat money into an exchange, and then purchase whichever crypto you want.
Some of my favorite exchanges are:
Here are a couple of cryptocurrencies you can look at as a long-term investment:
Take a look at other crypto assets I’ve written about here as well.
There are various strategies you can use to invest in cryptos, just choose the one that most suits your profile.
Out of all cryptocurrencies, I think Bitcoin remains the number one asset for long-term investing. It is possibly the only investment asset with a Sharpe ratio higher than one, so the returns are actually higher than its volatility.
How to Transfer Fiat Currency to a Crypto Exchange
In order to be able to buy cryptocurrencies on an exchange, you need to first transfer some Euro, USD, or other fiat currency. Many major commercial banks have unfortunately decided to make things difficult for people and businesses who want to buy cryptos from big exchanges such as Kraken and Binance.
Digital banks such as N26, Revolut, and TransferWise, which are otherwise great choices for your day to day needs, all impose restrictions on transfers to crypto exchanges, although Revolut lets you buy crypto assets directly from within the app. So that’s one option to keep in mind if you’re absolutely stuck not being able to transfer fiat to an exchange.
See also: Cryptocurrencies vs Fiat Currencies
The key thing to understand is that many of the local banks block transfers to a particular bank account. So if your favorite exchange has several bank accounts you can transfer into, try them all and see if the bank accepts any of them. You can also try a different exchange altogether. Just look at the exchanges I mentioned earlier, at least one of them will work for you. Banks typically only block transfers to the most famous and biggest exchanges.
The best exchange to try if you’re having problems with sending fiat, is without a doubt Binance. They’re the exchange that has the most options for transferring fiat currencies, and I can almost guarantee that you will manage to transfer money to them in order to buy a cryptocurrency.
I hope that helps all those of you who are stuck dealing with their banks. I don’t think it’s an insurmountable issue as cryptocurrencies are becoming more mainstream and exchanges are more regulated nowadays, so the financial sector is less concerned about these things.
How to Store your Bitcoin and other Crypto-assets
Many people make the mistake of stopping there and keeping all their newly bought cryptos on the exchange itself. This is a classic newbie mistake and you might pay for it dearly if you don’t follow the advice in this post.
So what’s the problem with keeping your cryptocurrencies on the exchange? Well, you’re basically keeping your money in someone else’s wallet. So if a hacker gains access to that wallet (and all main exchanges are primary hacker targets) that hacker will gain access to your assets. This is not something hypothetical, it’s something that happened time and again. The most famous such case was the case of Mt Gox where thousands of people lost their investments when the site got hacked (allegedly).
Never keep your purchased cryptocurrency on the exchange. If the exchange is hacked, you might lose all your crypto. This has happened in the past and will most probably happen again in the future as no system is hack-proof.
Here are a number of ways people have lost bitcoin:
- User’s computer is hacked and web wallet password is stolen
- Web wallet server gets hacked and bitcoins are stolen
- Web wallet company goes bankrupt
- FBI or other enforcement agency confiscates coins
- Web wallet provider points to ToS violation and takes coins
- Owners of web wallet company run away with coins
- Bug in web wallet software leads to loss of coins
- Your computer or cell phone is stolen while you are logged in and thieves then steal your coins
Exchanges are designed for the trading of Bitcoin. They expect people to be depositing very large amounts of money, and want to ensure that gets handled properly. Withdrawing money from exchanges is not very convenient, because they assume people won’t be doing it very often and they want it to be safe and secure. Trying to make an online purchase using Bitcoin from your Kraken account won’t be as easy as using an actual wallet, and using it to make an in-person purchase at a store would be even worse!
The solution is to take your cryptocurrencies off the exchange and store them offline for maximum security. Note the keyword offline, which means that your private key must be stored in a format or container that is not connected to the Internet and thus can’t be electronically hacked.
The most convenient offline hardware wallets are those manufactured by a company called Ledger. They have two main products:
The Ledger Nano X is the newest product and has some cooler features when compared to the Nano S. Considering the difference in price, I would recommend the Ledger Nano S to most people. If you see anything in Ledger Nano X’s feature list that you absolutely can’t do without and the Ledger Nano S doesn’t have it, consider going for the Ledger Nano X.
Also, if you have big cryptocurrency investments, then perhaps the price of the Ledger Nano X is dwarfed in comparison to the investment and the added convenience of this device. The bottom line is you can’t go wrong whichever you choose. I have the Ledger Nano S and am happy with it.
Now, having a hardware wallet like the Ledger Nano S is all well and good, but you might be wondering what happens if you lose this tiny device. Would all your crypto be gone?
Nope, you can rest safely as long as you are in possession of the seed phrase. When you first set up your wallet on the Ledger devices, the device will ask you to write down a 24-word seed phrase that you should keep safe. In the packaging, you will find a card that is made specifically for you to write down the seed phrase on it. You then take this card and store it somewhere super safe. For example, you can store it in a bank security box. I would recommend making two copies of the seed phrase really, it’s too risky to rely on just one copy.
An alternative to the Ledger is the Trezor.
With your 24-word seed phrase can recover your wallet from any wallet supporting 24-word passphrases, compatible with:
- BIP39 wordlist,
- BIP32 (Hierarchical Deterministic wallets specifying a generic key derivation method)
- and BIP44 (specifying how the keys are derived) standards.
For maximum safety, I would recommend that you buy another Ledger Nano or Trezor offline hardware wallet compatible with the 24-word seed phrase and restore to that device.
It is important to store the 24-word seed phrase securely, not running around on a piece of paper and definitely not stored on your computer. One good way to do it is using the Billfodl.
What about paper wallets?
Paper wallets were the standard method of cold storage before hardware wallets were built. Paper wallets are private keys printed out on a piece of paper. If generated and printed with a secure, offline computer, paper wallets are secure cold storage.
The main problem with paper wallets is it can be inconvenient to create and print a new wallet each time you send funds to cold storage. However, it’s possible to bulk print paper wallets to save time and eliminate address reuse. Our cold storage guide explains step-by-step how to create a secure paper wallet.
What are hot wallets?
Hot wallets refer to Bitcoin wallets used on internet-connected devices like phones, computers, or tablets. Because hot wallets run on internet-connected devices there is always a risk of theft. Think of hot wallets like your wallet today. You shouldn’t store any significant amount of bitcoins in a hot wallet, just as you would not walk around with your savings account as cash.
If only used with small amounts, hot wallets should be used for your everyday Bitcoin needs. One may, for example, want to keep $200 worth of bitcoins in a hot wallet for spending, with $10,000 locked away in cold storage.
If it were me, I’d at least use a hot wallet I controlled like Mycelium for Android or Breadwallet for iOS. You could always look into hardware wallets like Trezor if you are trading large amounts.
Take a look at my post about the best crypto mobile wallets.
Bitcoin desktop wallets:
- Bitcoin Core
- MultiBit HD
- If you are dealing with large amounts of bitcoins you will need a secure wallet. Hardware wallets and secure offline wallets like Armory are good options.
- Use combinations. Use a mobile wallet as your checking account, and a hardware or secure offline wallet as your savings account. Mix and match to find a combination that provides both security and accessibility.
My favorite hardware wallet is the Ledger Nano X.
Another option is to use Ballet crypto wallet. You can use the coupon code 5PERCENT to get 5% off the sale price of the Ballet wallet.
Keeping your crypto safe can be a long and complex topic, and it’s an area where we will be seeing a lot of improvements in the coming years. There are custody solutions which I listed in my cryptocurrency resources article, but there are also some other guides that I would recommend reading right away:
Best Crypto Debit Cards
Crypto debit cards are one of the most important elements needed for the crypto space to continue growing. With such cards, you don’t need to worry about holding fiat currencies, you can just hold cryptos and whenever you’re at a shop you can just swipe your crypto debit card and the corresponding part of your crypto will be converted to the fiat currency that the merchant uses in order to make your payment and get your goods or services.
Here are the best crypto debit cards we can use at the moment:
Binance have also announced that they will soon launch their own debit card, which should be a huge push to the sector.
What is Bitcoin’s value proposition?
If you don’t understand why it is important for your stored value to be unconfiscatable, please read about what happened to people who had deposits in Cypriot banks. Governments and financial institutions are no longer able to decide who gets to make money transfers and who can’t, or to whom donations and payments can flow (read about the wikileaks part in Bitcoin’s history). Bitcoin is also uninflatable, as there is a fixed money supply of 21 million bitcoin that can never be increased, unlike the government habits of printing money, with all its negative consequences.
Bitcoin Maximalism (also known as moderate common sense: "Bitcoin could succeed, maybe") is in the middle of the spectrum, actually. The 2 extremes are nocoiner extremism ("Bitcoin cannot exist") & multicoiner extremism ("Bitcoin is infinitely replicable & my clone is tje best").
— GiacomoZucco.identify().hodl() (@giacomozucco) October 18, 2018
Charts for Looking into Bitcoin
I really like this site for analysing Bitcoin stats, and of course Cryptowatch is excellent if you are trading or know how to use charting techniques.
I’ve got plenty of other charts you can check out in my list of Crypto Resources.
Best Custody Solutions for Bitcoin
If you own a significant amount of crypto, the biggest problem you need to solve is how to solve it securely. Having your own cold storage devices is fine for some, but others want third party solutions that are even more bulletproof, although there is also the trusted third party risk to consider.
Here are a few solutions that you should check out:
Are Cryptocurrencies a fraud and a scam?
Many have pronounced Bitcoin dead over the years, while others have said that it’s a scam or a fraud. Jamie Dimon, CEO of JPMorgan, famously also took aim at bitcoin, calling the cryptocurrency “a fraud” and “worse than tulip bulbs.”
Understandably, this came as a bit of a shock to the lay people who don’t really understand the fundamentals of Bitcoin and cryptocurrencies. As I said, this is by no means the first time that someone has pronounced Bitcoin dead or denounced cryptocurrencies, but unfortunately, statements from such prominent people always make the news.
Let’s be clear, Dimon’s firm is one of the chief architects of the global financial crisis that led to the interest in a somewhat arcane cryptocurrency in the first place. There would be no bitcoin without Jamie Dimon — and in some ways he’s right to fear its rise.
As a Vanity Fair piece revealed, JPMorgan Chase paid out $13 billion (with a “b”) to the U.S. government because of its role in the financial crisis and the mortgage security fiasco that almost destroyed the U.S. economy.
This goes to show that you need to be very careful where you’re getting your news and information from. There’s a lot of purely ridiculous stuff out there, especially in new spaces such as cryptocurrencies.
It is normal and actually recommended to approach Bitcoin and other cryptocurrencies with a criticial mind. They are obviously highly speculative investments and have no intrinsic value. However, they are also a whole new type of asset. To try and compare them to tulip bulbs is just naive, as I discussed in a previous post. There is really no direct comparison to Bitcoin and cryptos throughout history, and that is what makes it so exciting.
Unlike fiat currency, Bitcoin is fully transparent and controlled. We know exactly how many Bitcoins will exist in 5, 10 or 50 years. If you take a look at history and the ways that fiat currency has been manipulated and how many people’s lives were instantly ruined during periods of hyperinflation, amongst other government triggered actions, you would be hard-pressed to name Bitcoin as a fraud and not fiat currencies.
The Biggest Hurdles that Bitcoin Faces
While I firmly believe that Bitcoin is here to stay and that we will see a massive increase in price over the coming years, there are still some big and important hurdles for this new technology to overcome before it can really go mainstream.
These are the big problems that need to be tackled by Bitcoin and other cryptocurrencies for hyperbitcoinization to have a real chance at happening.
Safe and Easy Storage Solutions
Cryptos can easily be lost or stolen by inexperienced users; this is one of the biggest problems I see as most people simply find it too technical or daunting to buy and store cryptocurrencies.
For those investors who are technical enough and have the resources to invest heavily, on the other hand, there is the significant headache of storing hundreds of thousands of dollars worth (or even millions) of crypto. Thankfully, we are seeing new crypto custody solutions popping up, but it’s still early days.
Peer-to-Peer Payments are Still Hard to Do
Most banks have implemented systems that allow P2P payments between friends in a really easy fashion. Although Bitcoin was invented to enabled such peer to peer transactions of value of any size, there is still some way to go until we can say that the average person knows how to do that via his smartphone. Transaction prices are still high for lower transfer values (but the lightning network promises to change that).
Bitcoin Payment Acceptance is Low
There was a time where many online sellers and even brick-and-mortar stores were adopting Bitcoin as a method of payment, but I see less of them these days.
The tax implications of paying for small items with Bitcoin can be big, as in many countries every sale of Bitcoin is a taxable event. So you need to keep track of every item you purchase with Bitcoin during the year (including coffees and other low-value purchases) and calculate the capital gains tax at the end of the year. Few people want to bother with that yet.
Even if we ignore the tax consequences, paying with Bitcoin is still not easy from an app point of view.
In many countries, Bitcoin is not legal tender and cannot be used to purchase big items like a house, car or even pay your taxes. Some states in the US and some countries allow it, but we’re still a long way off.
2017 ICO and Crypto Bubble
Many people still have the 2017 ICO and crypto bubble in their recent memory, where cryptos rose very quickly in value only to come crashing down again a few months later. A lot of people jumped on the bandwagon when the price was rising without knowing what they were getting into, and then logically got burned when the prices declined sharply.
These people are more likely to have written off Bitcoin as they try to stave off the painful memories of losing money. Those who invested in ICOs fared even worse as many ICOs were outright scams.
It’s Not Easy to Get Hold of Crypto
While in some of the more developed countries it is easy to get hold of crypto by purchasing them from an exchange like Kraken or Binance or in a peer to peer transaction, in a lot of countries it’s very hard to get an onramp and offramp to start working with Bitcoin and other cryptocurrencies.
Many banks are still blocking transactions to and from Bitcoin exchanges, and without a way to get their fiat currencies onto an exchange people are thus blocked from getting hold of Bitcoin. The alternative would be to exchange services for Bitcoin, but I personally don’t know anyone who would be ready to pay for services in Bitcoin, so it’s hard to get hold of Bitcoin in this way.
Many countries still have not clearly stated their position with regard to cryptocurrencies, while others have outright banned cryptos. It is important for people to know the following from their governments:
- Whether the buying and selling of cryptos implies a VAT-able transaction.
- Whether there are any capital gains taxes when selling at a profit.
- Whether the holding and usage of crypto is legal or not.
The answers to those questions mostly lies in what financial instrument it considers cryptocurrencies to be. Some treat them as currencies while others treat them as intangible assets; those are the two major categories we’ve seen so far. ICOs, for example, fell into a grey area as what a lot of the companies were selling were actually securities, and they needed to be classified as such.
Some governments also opt not to tax long term capital gains, while others due, implying a huge difference in the ultimate tax bill for investors.
China has banned crypto exchanges from operating in the country while India has announced a ban on the purchase and sale of crypto currencies.
To conclude, while it’s anyone’s guess where the value of Bitcoin will be in a few years time, or whether it will still be the leading cryptocurrency, there’s little doubt that blockchain technology is here to stay, and even institutions like banks and governments are investing huge amounts of money and resources into this technology.
If you’re interested in entering the space of cryptocurrency, make sure you educate yourself and follow news from reputable resources. I’ve already compiled a list of great cryptocurrency resources that you can use to start off.
You can also listen to my interview with Mitchell Callahan (Bitcoin expert), and you can find that Mastermind.fm podcast episode here.
Important note: I am not a financial advisor and cryptocurrencies are considered to be very high-risk investments. Only risk money you can afford to lose.