It has been more than an year since I started investing in cryptocurrencies. Following Warren Buffet’s advice of “Never Invest In Something You Don’t Understand”, I started reading more and more about cryptocurrencies to go get a sense of things before jumping into the world of cryptocurrencies.
Even today I am far from understanding cryptocurrencies completely, as it is a vast field. But I have learned enough to find my feet. When I started my learning stint, though there were lots of blogs and videos online, they were either very superficial or too deep. They were either too specific or too general. The learning path was not clear. After having spent almost an year in learnings I am writing this post so that newcomers like me will find it helpful and know enough to start exploring on their own. I have made it as a series of questions and answers. They are structured in the learning path I took. Most of the new users also might end up taking the same learning path and hence I felt that this order made sense.
Before getting started with article, get a coffee or beer to keep your company. This is going to be a long article. I have addressed all the questions I faced. If there are a few things that you are familiar with, you can skip those questions and move to the next.
It took me more than two complete days to finish this article. So if you find anything useful, clap right away. Don’t wait to reach till the bottom of this article as this is going to be a very long one. If you reach the end of the article then you can clap 50 times because that is the max ;)
Let us get started now. See you at the bottom of this post.
A digital currency in which code based on cryptography controls the generation of units of currency and verification of transactions for transfer of funds. A cryptocurrency is not backed by a government or a central bank of any country/countries. The account keeping is done in a distributed manner. Think of it as a distributed ledger one in which you can’t alter the order of transactions.
In short you can call it people’s money. Money created by the masses, for the masses and controlled by the masses.
Such money has various advantages compared to FIAT currency. That is the whole reason many banks and governments are opposing the adoption of cryptocurrencies. Cryptocurrencies takes the power out of centralised power centers, whether they are governments or central banks.
Currencies that are backed by a government are called FIAT currencies. So most of the currencies we are accustomed to like USD(United States Dollar), GBP(Great Britain Pound or Sterling Pound), AUD(Australian Dollar), CNY(Chinese Yen), JPY(Japanese Yen), INR(Indian Rupee) etc are all examples of FIAT currency. I had never heard of the term FIAT before learning about cryptocurrencies.
FIAT currencies have many disadvantages. They are centralised. These centralised agencies can make the existing money invalid just by a stroke of pen. Recently India carried out a massive demonetisation drive. They can print currency at will, leading to inflation. Inflation is stealing from the poor and gullible without their knowledge. You need agencies like Visa and Master-card to perform exchanges in business outlets. To store your own money you need to pay fees to banks while they make money in interests by lending out your money. If you want to transfer money across borders you need permissions from governments and pay huge fees to companies like Western Union. You pay your fees in percentages whereas it should have been only fee per transaction. The amount shouldn’t really matter.
FIAT lacks the characteristics of sound money. Cryptocurrencies fill most of these gaps. In addition to all these advantages it it also distributed which is a great advantage in itself, as we don’t need to trust any third party. All thanks to blockchains we are able to use this form of money called cryptocurrencies.
Blockchain is the technology behind cryptocurrencies. To be fair cryptocurrencies are one of the use-cases of blockchain. Blockchain is an irreversible(chain of order), incorruptible and distributed ledger of transactions. Incorruptible ledgers forms the basis of many valuable transactions. They might be in the field finance, record keeping in governments, international diplomacy or any record keeping of importance for that matter.
If you want to know the details of how a blockchain works in layman terms checkout WTF is Blockchain? by Mohit Mamoria.
Bitcoin is the first peer to peer electronic cash. Bitcoin solved a major problem in electronic cash called “double spending”. While there are many resources you can read about bitcoin, you should definitely start by reading the bitcoin whitepaper. Bitcoin is the torch bearer for cryptocurrencies. Most of the other cryptocurrencies owe it to bitcoin which proved that it was possible to build a secure, decentralised mechanism for storing and transferring value using internet.
For now just know that double spending is the risk that a digital currency can be spent twice. If the same money can be spent twice the currency will loose its value as it is not secure. Bitcoin addressed this problem and opened hence opened the flood gates of a completely new world order.
Satoshi Nakamoto is the inventor Bitcoin. But who is Satoshi Nakamoto? This has been a long standing mystery and a very important one as well.
There are many people who believe that Satoshi Nakamoto should get a Nobel prize in Economics and Turing Award(can be considered as Nobel prize in the field of computers) for the same invention that is Bitcoin. This should highlight the potential of blockchains and cryptocurrencies for you.
All cryptocurrencies other than Bitcoin are called Altcoins. Bitcoin was the first cryptocurrency. There are many other cryptocurrencies like clones of Bitcoin(claiming better features), Smart contract systems based cryptocurrencies, cryptocurrencies targeting specific fields and various other silly ones as well. All these cryptocurrencies are called altcoins(Alternate coins).
A derogatory term used for a cryptocurrency that is deemed to be useless by an individual or a certain group of individuals. While many people reserve this term for useless projects/cryptocurrencies, Bitcoin Maximalists consider all altcoins as shitcoins.
Bitcoin fan-boys believe that Bitcoin is the one true coin and all other coins are useless. Bitcoin maximalists claim that there are no real world use-cases for other currencies. They believe that all the money, time and resources should be spent on improving Bitcoin as second layer solutions on Bitcoin network can be used for any kind of application. Hence rendering all other altcoins useless.
Currently there are more than 1900 altcoins available. Most of these coins are scams and rip offs. But you can find a lot of interesting projects in the top 300 altcoins. These gems have the potential to alter the path of humanity. At their current stage you can compare them to internet giants of pre 200 era. Their real potential is yet to be realised. We might know of their consequences and their value only a couple of decades ahead.
Following are the top 50 cryptocurrencies.
https://coinmarketcap.com/
If you want to know what problems these cryptocurrencies are solving check out the list I made on http://www.bitfolio.org/cryptocurrencies-short-summary. I am a part of the team of this website and the website is still a work in progress. We are working on a set of tools that will increase the awareness about the world of cryptocurrencies. Please ignore any issues.
You can check out all the listed cryptocurrencies on https://coinmarketcap.com/ I have used the word listed as this is not an exhaustive list of coins. These are just the coins that have passed clearance criteria to be listed on coinmarketcap. There are many other projects which is are not listed on exchanges and a few are in stealth mode. Hence these projects will not be listed here.
There are a couple of other alternatives as well. http://cryptocompare.com/coins/list/USD/1 where you can add coins to your favourites and track your favourite cryptocurrencies. http://coins.live is also a similar website and another alternative.
I am long on Bitcoin. In the long term I think Bitcoin has a lot of scope for growth. I think the Bitcoin bandwagon is just getting started and I will use every dip to buy a few more Satoshis.
Many people whom I respect are bullish on the prospects of Bitcoin. You can checkout bullish predictions by many popular crypto personalities on this blog post. Please note that many of these predictions are long term and doesn’t have anything to do with the short time dips or shoot ups.
While I am bullish on Bitcoin I would suggest caution while investing in altcoins. Most of the altcoins have lost more 80% from their all time highs around December last year. Many people feel that altcoins might loose further. So invest with caution and only in best projects that you trust for the long term. Don’t forget to set stop losses though. Know when to exit.
An exchange is a website where you can trade one cryptocurrency for another cryptocurrency. These are also generally called crypto-crypto exchanges to highlight that they don’t support on-ramping which is the ability to buy cryptocurrency directly using FIAT.
Earlier you could only buy Bitcoin with FIAT and then you had to move your bitcoins to a crypto-crypto exchange to buy other altcoins. But today there are many websites where you can buy many popular cryptocurrencies with FIAT directly.
If you are from US you can checkout Coinbase and Robinhood. Bittrex is also planning to start FIAT support in a phased manner. Listing of altcoins on coinbase is considered a big deal and there are instances of cryptocurrencies rising steeply in price just for the rumours that it is getting listed on Coinbase.
Worlds most popular place to buy and sell bitcoin
You can buy crypto using FIAT from CEX.IO. Using Xcoins.io you can buy bitcoin using credit cards, Paypal or bank accounts. CEX.IO is the most hassle free way of buying Bitcoin and ethereum. If not for their high fees I would have suggested CIX.IO to many people.
You can also buy crypto using credit card from Changelly.com Check out their blog for the details https://medium.com/@Changelly/how-to-buy-bitcoin-with-credit-card-on-changelly-2e406f6d2e5c
No cryptocurrencies are not banned in India. The Indian government has announced that it doesn’t recognise cryptocurrencies as legal tender. What this means is that you can’t force the shop owner to accept cryptocurrencies as a payment for a product you buy. Hence it doesn’t mean that cryptocurrencies are banned in India.
Investing in cryptocurrencies is not illegal. This should have been clear to you as the government gave the guidelines for filing your income taxes from cryptocurrency trades. Since the government has not made up its mind regarding how to handle and monitor cryptocurrencies they have asked the banks not to support any companies or exchanges that are dealing with cryptocurrencies.
Post the government circular, many Indian companies have come up with innovative peer to peer transaction with the concerned exchange acting as escrow service.
Bitxoxo — www.bitxoxo.com This was my favourite when I could buy only Bitcoin with FIAT in India.
Zebpay — http://link.zebpay.com Most popular exchange in India. They have added more currencies now. We cannot purchase Bitcoin with FIAT now.
Koinex — https://koinex.in Allows peer to peer exchanges now.
Unocoin — https://www.unocoin.com
CoinSecure — https://coinsecure.in
Bitcoin India — https://bitcoin-india.org
Wazrix — https://wazirx.com
Giottus — https://www.giottus.com
If you are only interested in buying bitcoin you can checkout the rates on http://www.bitcoinrates.in/
Binance and Kucoin are the two very popular crypto to crypto exchanges. Both these exchanges had tremendous growth in last one year. At the peak of the craze, these two exchanges had to close their new signups due to the heavy load which they could not handle.
Both these exchanges list many altcoins. If a cryptocurrency is in the top 100 list then there is a fair chance that it is listed in one of these two exchanges.
Here is the complete list of exchanges that I used to trade on. I have reduced trading these days and I just invest for the long term.
Binance — www.binance.com
Kucoin — www.kucoin.com
Bittrex — www.bittrex.org
Bitfinex — www.bitfinex.com
Huobi — www.hbg.com
GateIO — www.gate.io
Cobinhood-www.cobinhood.com
Yes. Cryptocurrencies are all about decentralisation but still most of the trading of cryptocurrencies happen on centralised exchanges. You can see the irony right? There is a better alternative.
The better alternative is a decentralised one. No prizes for guessing that. In decentralised exchanges cryptocurrencies are transferred from one user to other. It is a peer to peer exchange.
As per today’s prices one bitcoin is worth approximately 25 ethers. No let us say that I want to sell one bitcoin. Users A and B want to buy 10 ether each and user C wants to buy 5 ether. Assuming that all four of us agreed to buy/sell at this rate, the decentralised exchange will connect us all and transfers will happen from our wallet to wallet. Today this cross currency exchanges are not yet possible.
Today there are decentralised exchanges where you can exchange currencies that fall under same category. For example all ERC20 tokens are based on ethereum and hence they can be exchanged for each other using a decentralised exchange like KyberNetwork or IDEX. There are other exchanges like bitshares and waves as well.
I was thinking that 2019 will be year of decentralised exchanges but most of them have been plagued by low volumes and not having listed enough cryptocurrencies. So until they go mainstream I think it is better to stick to centralised exchanges for now.
There are many safety precautions to make sure that your accounts on exchanges doesn’t get hacked. But if the exchanges itself gets hacked, there is nothing much that you can do. Don’t be under the assumption that exchanges will not be hacked. There are many instances of exchanges being hacked and people loosing their funds.
The most popular and infamous hack is the Mt.Gox hack. There are myriad other exchange hacks. In India one of popular exchanges Coinsecure got hacked. In both these cases both the exchanges agreed to pay back the lost amount in USD equivalent as on the date of the hack. But there have been various scenarios where people lost all the money that they had invested and there were no refunds.
You can read my post How to keep your cryptocurrency funds save? to know more about precautions you can follow to keep your crypto funds safe.
The whole point of cryptocurrencies is decentralisation. But the funny thing is that most of the trading today happens on centralised exchanges. Until distributed exchanges get better, this is going to be the case. While there are interesting projects like Kyber network and Switcheo who are working on making distributed exchanges mainstream,I think Binance distributed exchange will be the real game changer.
So the strategy that most of my friends are following is that of using the centralised exchanges for trading and then moving the funds to personal wallets when not trading a particular cryptocurrency for some time and plan to hold it for a longer duration of time.
A cryptocurrency wallet stores the public and private keys which are used to send and receive cryptocurrency funds. You can think of this as similar to opening an account in a bank.
Cryptocurrencies use cryptography to secure & verify transactions and control the creation of new units. Cryptography forms the base of cryptocurrencies and hence the name “Cryptocurrencies”. When people say cryptocurrencies are trustless it means that you don’t need to trust a centralised third party like a central bank or government to keep your accounts safe and verify your transactions. The whole system is distributed. Each user can cryptographically verify each and every transaction.
You can just think of them as your username and password. Public key being your username and Private key being your password.
A wallet consists of pairs of public and private keys. Anybody who is aware of cryptography will be familiar with public and private keys. If you are a developer you would have used public keys and private keys to set up secure connection between two different for communication. What if you could extend this concept to send and receive money? That is what cryptocurrency does. Before exploring further let us take a detour.
Let us look at how Gmail account creation, username and passwords work.
Say you have never used Gmail before and want to use it now. You first need to create an account for yourself. Creating an account consists of creating a username and password. You can publicise your username to everybody so that they can send across the mail to you. Whereas your password gives you access to your account and special rights. Using your password you can initiate transactions form your account to other accounts(Commonly referred to as as sending mail) .
Comparing Gmail and cryptocurrencies to understand keys better
Now let us assume for a second that Gmail in above example is Bitcoin network. The first major difference is that Gmail is centralised whereas Bitcoin network is decentralised. If you want to create an account on gmail you head to https://accounts.google.com/signup/v2/webcreateaccount and create an account. Since gmail is centralised there is only interface and everybody knows about it. But blockchain is decentralised. So if you want to create an account bitcoin network you need to broadcast the account creation request to the Bitcoin network. If you are a developer and you know how to set up a machine and run scripts, you can create an account on Bitcoin blockchain on your own.
Since many people are not tech-savy enough, there are web interfaces for creating accounts on Bitcoin blockchain. You can use websites like https://www.bitaddress.org and https://walletgenerator.net/ to generate your public key and private keys. They use some sort of randomisation in generating the accounts to assure you that your public and private keys were pre-generated. Public key(wallet address) is like your username and Private key is like your password.
When you want various people to transfer money to your account, you share your public key with them. Private key gives you access to your account and the funds within it. If you want to transfer you bitcoins to somebody else then you will need your private key. Remember that all the transactions on Bitcoin blockchain are public and anybody can check them out.
You loose access to your account when you loose your private keys. Since you loose access to your account it also means that you no more have access to your funds. Though the blockchain ledger maintains that your account has so many bitcoins, you can no longer use them as you have lost your password.
So while it is good to have your non exchange wallet accounts, make sure to consider the risks that are associated with them. Freedom comes with a responsibility. You cannot blame others for your fate.
In case of gmail whenever we forget our password, we have the handy “Forgot your password” link which will help you reset your password. This is possible since gmail is centralised meaning Google has full control of the database and they can override it any time. They can reset your password when they are confident that you really own the account and password reset request is a genuine one.
Since Bitcoin is decentralised there is no option to reset you r private key.
General examples of hot wallets are mobile and desktop wallets. Hot wallets are used for day to day crypto transactions. A hot wallet generally has ready access to internet. You keep only small amounts of cryptocurrencies in your hot wallets as you use them for day to day transactions and not for storage/safeguarding. A hot wallet is safer when compared to wallets on exchanges.
Examples of cold wallets are paper wallet and hard wallet. Cold wallets are used for storing large amounts of money for a longer duration. They are not connected to internet. Some of the cold wallets like hard wallets can be connected to internet when required.
A paper wallet is just a piece of paper on which public and private keys are printed. Though paper wallets are considered safe from hacks, they are subject to wear and tear. If you loose your paper or if the print on the paper wears off, you will have no access to your account or funds in that account.
A hardware wallet is a type of bitcoin wallet which stores the user’s private keys in a secure hardware device. Popular examples are Ledger Nano and https://trezor.io. After speaking to a couple of my friends who have been in cryptocurrencies for more than a couple of years, I decided buy a Ledger Nano.
A hardware wallet is considered to be the safest wallet.
You can use any of these wallets based on your use-case.
Following is the approach that I use.
Categorise your funds.
Break your funds into three categories.
Long term holding funds.
Mid term holding funds. (ICO participation funds and low frequency trading fund)
High frequency trading fund.
I store these categorised funds in the following fashion.
Use a hardware wallet for storing a major chunk of long term holding funds.
Use a paper wallet for storing a small chunk of long term holding funds. It might be a good idea to store this paper wallet in a locker.
Split short term holding funds and save a large portion of it on desktop wallet and a small portion on Mobile wallet.
I split my high frequency trading fund into various parts and distribute it across various exchanges where I trade. Based on my confidence on the exchanges I move a share of my stash proportionately. For example I trust Binance the most followed by Kucoin. So accordingly I store most of my high frequency trading funds in these exchanges.
I prefer to use a central dashboard for keeping track of my cryptocurrency investment. This is possible using a portfolio tracker which gathers all your trades from various exchanges using the API and wallets using the blockchain explorer. While some people are not comfortable sharing their APIs keys to these portfolio trackers, I am ok with it as I only share the read only API keys.
There are various free open portfolio trackers and the most popular one is Blockfolio. While most of the people are happy with Blockfolio I am hesitant to you use it. As a rule of thumb I prefer either “paid and closed” apps or “free and open source” apps. If an app is free and closed that is a red flag for me. I would prefer a paid opensource app but I couldn’t find any till now.
I recently renewed my Cointracking account. It has support for almost all of the popular exchanges. Once you set up all your API keys, the app can import all your trades from exchanges automatically. To see how to set up automatic import of trades check out my blog on how to import trades automatically. Cointracking also has a report called Exchange Balance which gives the current balance from all the exchanges that you have synced.
Yes. Cryptocurrencies are all about decentralisation but still most of the trading of cryptocurrencies happen on centralised exchanges. You can see the irony right? There is a better alternative.
The better alternative is a decentralised one. No prizes for guessing that. In decentralised exchanges cryptocurrencies are transferred from one user to other. It is a peer to peer exchange.
As per today’s prices one bitcoin is worth approximately 25 ethers. No let us say that I want to sell one bitcoin. Users A and B want to buy 10 ether each and user C wants to buy 5 ether. Assuming that all four of us agreed to buy/sell at this rate, the decentralised exchange will connect us all and transfers will happen from our wallet to wallet. Today this cross currency exchanges are not yet possible.
Today there are decentralised exchanges where you can exchange currencies that fall under same category. For example all ERC20 tokens are based on ethereum and hence they can be exchanged for each other using a decentralised exchange like KyberNetwork or IDEX. There are other exchanges like bitshares and waves as well.
I was thinking that 2019 will be year of decentralised exchanges but most of them have been plagued by low volumes and not having listed enough cryptocurrencies. So until they go mainstream I think it is better to stick to centralised exchanges for now.
There are many safety precautions to make sure that your accounts on exchanges doesn’t get hacked. But if the exchanges itself gets hacked, there is nothing much that you can do. Don’t be under the assumption that exchanges will not be hacked. There are many instances of exchanges being hacked and people loosing their funds.
The most popular and infamous hack is the Mt.Gox hack. There are myriad other exchange hacks. In India one of popular exchanges Coinsecure got hacked. In both these cases both the exchanges agreed to pay back the lost amount in USD equivalent as on the date of the hack. But there have been various scenarios where people lost all the money that they had invested and there were no refunds.
You can read my post How to keep your cryptocurrency funds save? to know more about precautions you can follow to keep your crypto funds safe.
The whole point of cryptocurrencies is decentralisation. But the funny thing is that most of the trading today happens on centralised exchanges. Until distributed exchanges get better, this is going to be the case. While there are interesting projects like Kyber network and Switcheo who are working on making distributed exchanges mainstream,I think Binance distributed exchange will be the real game changer.
So the strategy that most of my friends are following is that of using the centralised exchanges for trading and then moving the funds to personal wallets when not trading a particular cryptocurrency for some time and plan to hold it for a longer duration of time.
A cryptocurrency wallet stores the public and private keys which are used to send and receive cryptocurrency funds. You can think of this as similar to opening an account in a bank.
Cryptocurrencies use cryptography to secure & verify transactions and control the creation of new units. Cryptography forms the base of cryptocurrencies and hence the name “Cryptocurrencies”. When people say cryptocurrencies are trustless it means that you don’t need to trust a centralised third party like a central bank or government to keep your accounts safe and verify your transactions. The whole system is distributed. Each user can cryptographically verify each and every transaction.
You can just think of them as your username and password. Public key being your username and Private key being your password.
A wallet consists of pairs of public and private keys. Anybody who is aware of cryptography will be familiar with public and private keys. If you are a developer you would have used public keys and private keys to set up secure connection between two different for communication. What if you could extend this concept to send and receive money? That is what cryptocurrency does. Before exploring further let us take a detour.
Let us look at how Gmail account creation, username and passwords work.
Say you have never used Gmail before and want to use it now. You first need to create an account for yourself. Creating an account consists of creating a username and password. You can publicise your username to everybody so that they can send across the mail to you. Whereas your password gives you access to your account and special rights. Using your password you can initiate transactions form your account to other accounts(Commonly referred to as as sending mail) .
Comparing Gmail and cryptocurrencies to understand keys better
Now let us assume for a second that Gmail in above example is Bitcoin network. The first major difference is that Gmail is centralised whereas Bitcoin network is decentralised. If you want to create an account on gmail you head to https://accounts.google.com/signup/v2/webcreateaccount and create an account. Since gmail is centralised there is only interface and everybody knows about it. But blockchain is decentralised. So if you want to create an account bitcoin network you need to broadcast the account creation request to the Bitcoin network. If you are a developer and you know how to set up a machine and run scripts, you can create an account on Bitcoin blockchain on your own.
Since many people are not tech-savy enough, there are web interfaces for creating accounts on Bitcoin blockchain. You can use websites like https://www.bitaddress.org and https://walletgenerator.net/ to generate your public key and private keys. They use some sort of randomisation in generating the accounts to assure you that your public and private keys were pre-generated. Public key(wallet address) is like your username and Private key is like your password.
When you want various people to transfer money to your account, you share your public key with them. Private key gives you access to your account and the funds within it. If you want to transfer you bitcoins to somebody else then you will need your private key. Remember that all the transactions on Bitcoin blockchain are public and anybody can check them out.
You loose access to your account when you loose your private keys. Since you loose access to your account it also means that you no more have access to your funds. Though the blockchain ledger maintains that your account has so many bitcoins, you can no longer use them as you have lost your password.
So while it is good to have your non exchange wallet accounts, make sure to consider the risks that are associated with them. Freedom comes with a responsibility. You cannot blame others for your fate.
In case of gmail whenever we forget our password, we have the handy “Forgot your password” link which will help you reset your password. This is possible since gmail is centralised meaning Google has full control of the database and they can override it any time. They can reset your password when they are confident that you really own the account and password reset request is a genuine one.
Since Bitcoin is decentralised there is no option to reset you r private key.
General examples of hot wallets are mobile and desktop wallets. Hot wallets are used for day to day crypto transactions. A hot wallet generally has ready access to internet. You keep only small amounts of cryptocurrencies in your hot wallets as you use them for day to day transactions and not for storage/safeguarding. A hot wallet is safer when compared to wallets on exchanges.
Examples of cold wallets are paper wallet and hard wallet. Cold wallets are used for storing large amounts of money for a longer duration. They are not connected to internet. Some of the cold wallets like hard wallets can be connected to internet when required.
A paper wallet is just a piece of paper on which public and private keys are printed. Though paper wallets are considered safe from hacks, they are subject to wear and tear. If you loose your paper or if the print on the paper wears off, you will have no access to your account or funds in that account.
A hardware wallet is a type of bitcoin wallet which stores the user’s private keys in a secure hardware device. Popular examples are Ledger Nano and https://trezor.io. After speaking to a couple of my friends who have been in cryptocurrencies for more than a couple of years, I decided buy a Ledger Nano.
A hardware wallet is considered to be the safest wallet.
You can use any of these wallets based on your use-case.
Following is the approach that I use.
Categorise your funds.
Break your funds into three categories.
Long term holding funds.
Mid term holding funds. (ICO participation funds and low frequency trading fund)
High frequency trading fund.
I store these categorised funds in the following fashion.
Use a hardware wallet for storing a major chunk of long term holding funds.
Use a paper wallet for storing a small chunk of long term holding funds. It might be a good idea to store this paper wallet in a locker.
Split short term holding funds and save a large portion of it on desktop wallet and a small portion on Mobile wallet.
I split my high frequency trading fund into various parts and distribute it across various exchanges where I trade. Based on my confidence on the exchanges I move a share of my stash proportionately. For example I trust Binance the most followed by Kucoin. So accordingly I store most of my high frequency trading funds in these exchanges.
I prefer to use a central dashboard for keeping track of my cryptocurrency investment. This is possible using a portfolio tracker which gathers all your trades from various exchanges using the API and wallets using the blockchain explorer. While some people are not comfortable sharing their APIs keys to these portfolio trackers, I am ok with it as I only share the read only API keys.
There are various free open portfolio trackers and the most popular one is Blockfolio. While most of the people are happy with Blockfolio I am hesitant to you use it. As a rule of thumb I prefer either “paid and closed” apps or “free and open source” apps. If an app is free and closed that is a red flag for me. I would prefer a paid opensource app but I couldn’t find any till now.
I recently renewed my Cointracking account. It has support for almost all of the popular exchanges. Once you set up all your API keys, the app can import all your trades from exchanges automatically. To see how to set up automatic import of trades check out my blog on how to import trades automatically. Cointracking also has a report called Exchange Balance which gives the current balance from all the exchanges that you have synced.
Yes. Cryptocurrencies are all about decentralisation but still most of the trading of cryptocurrencies happen on centralised exchanges. You can see the irony right? There is a better alternative.
The better alternative is a decentralised one. No prizes for guessing that. In decentralised exchanges cryptocurrencies are transferred from one user to other. It is a peer to peer exchange.
As per today’s prices one bitcoin is worth approximately 25 ethers. No let us say that I want to sell one bitcoin. Users A and B want to buy 10 ether each and user C wants to buy 5 ether. Assuming that all four of us agreed to buy/sell at this rate, the decentralised exchange will connect us all and transfers will happen from our wallet to wallet. Today this cross currency exchanges are not yet possible.
Today there are decentralised exchanges where you can exchange currencies that fall under same category. For example all ERC20 tokens are based on ethereum and hence they can be exchanged for each other using a decentralised exchange like KyberNetwork or IDEX. There are other exchanges like bitshares and waves as well.
I was thinking that 2019 will be year of decentralised exchanges but most of them have been plagued by low volumes and not having listed enough cryptocurrencies. So until they go mainstream I think it is better to stick to centralised exchanges for now.
There are many safety precautions to make sure that your accounts on exchanges doesn’t get hacked. But if the exchanges itself gets hacked, there is nothing much that you can do. Don’t be under the assumption that exchanges will not be hacked. There are many instances of exchanges being hacked and people loosing their funds.
The most popular and infamous hack is the Mt.Gox hack. There are myriad other exchange hacks. In India one of popular exchanges Coinsecure got hacked. In both these cases both the exchanges agreed to pay back the lost amount in USD equivalent as on the date of the hack. But there have been various scenarios where people lost all the money that they had invested and there were no refunds.
You can read my post How to keep your cryptocurrency funds save? to know more about precautions you can follow to keep your crypto funds safe.
The whole point of cryptocurrencies is decentralisation. But the funny thing is that most of the trading today happens on centralised exchanges. Until distributed exchanges get better, this is going to be the case. While there are interesting projects like Kyber network and Switcheo who are working on making distributed exchanges mainstream,I think Binance distributed exchange will be the real game changer.
So the strategy that most of my friends are following is that of using the centralised exchanges for trading and then moving the funds to personal wallets when not trading a particular cryptocurrency for some time and plan to hold it for a longer duration of time.
A cryptocurrency wallet stores the public and private keys which are used to send and receive cryptocurrency funds. You can think of this as similar to opening an account in a bank.
Cryptocurrencies use cryptography to secure & verify transactions and control the creation of new units. Cryptography forms the base of cryptocurrencies and hence the name “Cryptocurrencies”. When people say cryptocurrencies are trustless it means that you don’t need to trust a centralised third party like a central bank or government to keep your accounts safe and verify your transactions. The whole system is distributed. Each user can cryptographically verify each and every transaction.
You can just think of them as your username and password. Public key being your username and Private key being your password.
A wallet consists of pairs of public and private keys. Anybody who is aware of cryptography will be familiar with public and private keys. If you are a developer you would have used public keys and private keys to set up secure connection between two different for communication. What if you could extend this concept to send and receive money? That is what cryptocurrency does. Before exploring further let us take a detour.
Let us look at how Gmail account creation, username and passwords work.
Say you have never used Gmail before and want to use it now. You first need to create an account for yourself. Creating an account consists of creating a username and password. You can publicise your username to everybody so that they can send across the mail to you. Whereas your password gives you access to your account and special rights. Using your password you can initiate transactions form your account to other accounts(Commonly referred to as as sending mail) .
Comparing Gmail and cryptocurrencies to understand keys better
Now let us assume for a second that Gmail in above example is Bitcoin network. The first major difference is that Gmail is centralised whereas Bitcoin network is decentralised. If you want to create an account on gmail you head to https://accounts.google.com/signup/v2/webcreateaccount and create an account. Since gmail is centralised there is only interface and everybody knows about it. But blockchain is decentralised. So if you want to create an account bitcoin network you need to broadcast the account creation request to the Bitcoin network. If you are a developer and you know how to set up a machine and run scripts, you can create an account on Bitcoin blockchain on your own.
Since many people are not tech-savy enough, there are web interfaces for creating accounts on Bitcoin blockchain. You can use websites like https://www.bitaddress.org and https://walletgenerator.net/ to generate your public key and private keys. They use some sort of randomisation in generating the accounts to assure you that your public and private keys were pre-generated. Public key(wallet address) is like your username and Private key is like your password.
When you want various people to transfer money to your account, you share your public key with them. Private key gives you access to your account and the funds within it. If you want to transfer you bitcoins to somebody else then you will need your private key. Remember that all the transactions on Bitcoin blockchain are public and anybody can check them out.
You loose access to your account when you loose your private keys. Since you loose access to your account it also means that you no more have access to your funds. Though the blockchain ledger maintains that your account has so many bitcoins, you can no longer use them as you have lost your password.
So while it is good to have your non exchange wallet accounts, make sure to consider the risks that are associated with them. Freedom comes with a responsibility. You cannot blame others for your fate.
In case of gmail whenever we forget our password, we have the handy “Forgot your password” link which will help you reset your password. This is possible since gmail is centralised meaning Google has full control of the database and they can override it any time. They can reset your password when they are confident that you really own the account and password reset request is a genuine one.
Since Bitcoin is decentralised there is no option to reset you r private key.
General examples of hot wallets are mobile and desktop wallets. Hot wallets are used for day to day crypto transactions. A hot wallet generally has ready access to internet. You keep only small amounts of cryptocurrencies in your hot wallets as you use them for day to day transactions and not for storage/safeguarding. A hot wallet is safer when compared to wallets on exchanges.
Examples of cold wallets are paper wallet and hard wallet. Cold wallets are used for storing large amounts of money for a longer duration. They are not connected to internet. Some of the cold wallets like hard wallets can be connected to internet when required.
A paper wallet is just a piece of paper on which public and private keys are printed. Though paper wallets are considered safe from hacks, they are subject to wear and tear. If you loose your paper or if the print on the paper wears off, you will have no access to your account or funds in that account.
A hardware wallet is a type of bitcoin wallet which stores the user’s private keys in a secure hardware device. Popular examples are Ledger Nano and https://trezor.io. After speaking to a couple of my friends who have been in cryptocurrencies for more than a couple of years, I decided buy a Ledger Nano.
A hardware wallet is considered to be the safest wallet.
So which wallet should I use?
You can use any of these wallets based on your use-case.
Following is the approach that I use.
Categorise your funds.
Break your funds into three categories.
Long term holding funds.
Mid term holding funds. (ICO participation funds and low frequency trading fund)
High frequency trading fund.
I store these categorised funds in the following fashion.
Use a hardware wallet for storing a major chunk of long term holding funds.
Use a paper wallet for storing a small chunk of long term holding funds. It might be a good idea to store this paper wallet in a locker.
Split short term holding funds and save a large portion of it on desktop wallet and a small portion on Mobile wallet.
I split my high frequency trading fund into various parts and distribute it across various exchanges where I trade. Based on my confidence on the exchanges I move a share of my stash proportionately. For example I trust Binance the most followed by Kucoin. So accordingly I store most of my high frequency trading funds in these exchanges.
With so many exchanges and wallets, how do you keep track of your funds?
I prefer to use a central dashboard for keeping track of my cryptocurrency investment. This is possible using a portfolio tracker which gathers all your trades from various exchanges using the API and wallets using the blockchain explorer. While some people are not comfortable sharing their APIs keys to these portfolio trackers, I am ok with it as I only share the read only API keys.
There are various free open portfolio trackers and the most popular one is Blockfolio. While most of the people are happy with Blockfolio I am hesitant to you use it. As a rule of thumb I prefer either “paid and closed” apps or “free and open source” apps. If an app is free and closed that is a red flag for me. I would prefer a paid opensource app but I couldn’t find any till now.
What is the best portfolio tracker for tracking Bitcoin and cryptocurrencies?
I recently renewed my Cointracking account. It has support for almost all of the popular exchanges. Once you set up all your API keys, the app can import all your trades from exchanges automatically. To see how to set up automatic import of trades check out my blog on how to import trades automatically. Cointracking also has a report called Exchange Balance which gives the current balance from all the exchanges that you have synced.
I am hearing a lot about Delta these days. I read that using the delta pro account you can keep track of 10 different portfolios which I think is a killer feature. You can use one for HODLing, one for trading and so on. That would be cool.
If you have read a couple of articles about cryptocurrencies, I am sure you have come across this term. No it is not a spelling mistake for HOLD. HODL stand for Hold On For Dear Life. People who believe in the long term bullish trend of Bitcoin suggest and promote HODL. They claim that it gives better returns than trading over long durations. While there are opposing views about this, it is a good strategy if you do not have lots of time for trading and tracking the market, provided you have invested in good projects.
Remember to DYOR.
I am sure you would have found this acronym at the beginning or end of crypto related articles. DYOR stands for Do Your Own Research. What started off a good practice to ask readers to do their own research, has now become a disclaimer for shrugging off responsibility. Don’t worry I will also add my DYOR towards the end of this article ;)
Like DYOR you will keep hearing this term again and again. I would consider this the first rule of investing in cryptocurrencies. Many people ignored this rule. During the November and December 2017 bull run many made a lot of profits. Having seen their friends make such profits, many more invested what they couldn’t afford to loose. They bought in at All time highs on loans from banks and acquaintances. Post January markets have been tumbling and many coins have lost more than 90% of their investment. So please take this advice seriously before jumping into investing in cryptocurrencies. That was a typical case of FOMO.
FOMO stands for Fear of Missing Out. Many people start investing in cryptocurrencies because they got FOMOed. There will be many opportunities to spot good projects and invest in them. Investing for the Fear of Missing Out and investing without Doing Your Own Research are two bad choices. Don’t commit them. Take time. Understand. The best investment is the time you put in understanding markets. It also saves you from becoming a prey to FUD.
FUD is an acronym for for Fear, Uncertainty and Doubt. Unverified new, rumours have done more damage to cryptocurrency than any governments or central agencies could have done. There have been instances where articles which were year only caused FUD and let to falling of prices. To be a pro trader you need to free yourself both from FOMO and FUD.
You can trade cryptocurrencies similar to how you trade securities. Like in any trading the goal is to BUY LOW and SELL HIGH while taking only the risk that you can afford. While this sounds easy its not. Trust me.
You can trade both in bitcoin and altcoins. The first step in trading is converting your fiat to cryptocurrencies. This process can vary based on the country you are from. For example you follow these steps if you are from US and you follow these steps if you are from India. Second step is creating accounts on popular exchanges and transferring your cryptocurrency funds to these accounts. Once you have done these two you are all set. Just BUY LOW and SELL HIGH or SELL HIGH and BUY LOW.
But before you start trading make sure to understand all the risks of trading cryptocurrencies.
I am just listing down a couple of risks but make sure to DYOR to know all the associated risks.
Cryptocurrencies can be declared illegal in the country you are residing and it can become very difficult to convert your cryptocurrencies back to FIAT. China is restricting the crypto trading. India recently asked the banks to withdraw support from all the businesses dealing with crypto.
Your banks may block your accounts for trading in cryptocurrencies. Recently my CITI bank account was blocked for trading in cryptocurrencies. I have been a regular Citibank user for more than a decade now and looks like it had no bearing on them.
The cryptocurrency you are trading might loose most of its value in a single day. Bitconnect lost more than 90% of its market value in a single day. The fact that Bitconnect was a top 10 cryptocurrency makes the feeling only much worse, as the cryptocurrency community couldn’t do anything to stop this scam.
Exchanges can get hacked and you might loose your money.
If you do not follow the best practices your account can get hacked and you will loose all your funds.
You may not be able to sell your cryptocurrencies as there are no buyers. It is also called no liquidity.
And a myriad of other risks :P
I am not saying all these to scare you off. But it is very important to know all the associated risks before you jump in.
There are two types of analysis that people generally do. Technical Analysis(TA) and Fundamental Analysis(FA). Most of the day-traders I know are good at TA and most of the HODLers I know are good at FA. Best investors I know do a mix of both. Whether you follow TA or FA or both is your choice but make sure to give it sufficient time.
Fundamental analysis is the study of fundamentals of a project that you are investing in. It involves researching about the project, the company, the team behind the company, their previous laurels, the domain the project is working in, the problem it is trying to solve, their roadmap, have they stuck to their road map till now etc etc.
You can read How to judge a cryptocurrency’s intrinsic value by using fundamental analysis to know more about Fundamental analysis.
Technical Analysis is the art of reading charts. It is founded on the principle that price action tends to repeat itself due to the collective, patterned behaviour of investors. In simple terms it means market cycles keep repeating.
While I am not sure if we can use technical analysis to predict the prices, I am sure it helps you make informed decisions. For long term investments Fundamental Analysis is a must. Similarly for short term trading TA is a must. If you are doing day trading or short term trades without TA, it pretty much means that you are doing the trades based on your gut feeling. That is bad. So learn Technical Analysis even if you don’t believe in it completely.
