YOUR CRYPTO BUYING PRIMER

Transcription

1 CALLUM NEWMAN S SMALL CAP ALPHA Ahead of the news, in front of the market YOUR CRYPTO BUYING PRIMER

2 CALLUM NEWMAN S SMALL CAP ALPHA Ahead of the news, in front of the market Your Crypto Buying Primer A Simple Guide to Putting Your Money in Cryptocurrencies Dear Reader, Welcome to the world of cryptocurrencies. You re in for an exciting ride! In this guide, I m going to walk you through everything you need to know to start buying and selling cryptos. I m sure you ve heard of bitcoin. But there s now over 1,100 different cryptocurrencies and coins! There s massive potential for many more too, all of which could produce prodigious gains. We need to get you set up to take advantage of it all. Before we get into the nitty gritty of buying and selling, let me give you my general take on cryptocurrencies as of now. I m sure you know by now there s some savvy people and a few darn lucky ones who have made a lot of money speculating on cryptocurrencies. Bitcoin is one it s up at least 8,000% since Ethereum is another one that s been up as much as 5,000% in 2017 alone. Ripple was up 3,900% at one point this year too. Fortunes are being made and lost There s the guy who traded his 10,000 bitcoins for two pizzas back in They d be worth about US$40 million now! (The bitcoins, not the pizzas.) Then there s the story about the hackers who drained US$150,000 worth of crypto from one guy s mobile phone recently. Ouch.

3 But then again, there s also Mr Smith, profiled in Forbes in July. He s now travelling the world from the US$25 million he made in bitcoin. The total value of all cryptocurrencies today is around US$135 billion. That s more than the market cap of Goldman Sachs. Everybody, it seems, is talking about cryptos. The question is: Is it too late to get in? The answer is no, and I m going to show you why. The trend in cryptocurrencies is in its infancy and could run for decades The internet sets the precedent for what we re seeing right now in cryptocurrencies. Why did the internet change the world? It reduced the cost of data. How? Well, in lots of ways, but mostly it bypassed the middlemen. Think record labels, newspaper editors, plus magazines and television stations. It is a protocol in which anyone can publish data and anyone can consume data. We call this an open protocol. Cryptocurrencies do the same thing. Underpinning them is an open protocol for trust. How Cryptos Are Created Most coins or tokens that we see emerge into the crypto space have code that is normally (but not always) a re-working of the original bitcoin code. The code underlying a new crypto generally dictates the number of coins that will ultimately be made available, over what time span, and the frequency and format of distribution. Most often, cryptocurrencies are produced through a mining process. Mining comes in two forms that are both designed to protect the network and to prevent double-spending of the same coin. In the past, all transactions took place with an intermediary like a bank overseeing the process. The bank would verify the transaction, adding a certain level of trust. Cryptocurrencies completely revolutionise this old system. They can cut out the middleman entirely. Instead, digital transactions are made peer to peer. For example, a British mate of mine uses an app called CurrencyFair to buy pounds when he goes back to the UK. That s a peer-to-peer network. It basically means he swaps his Australian dollars with someone in the UK looking for Aussie dollars. Goodbye to paying the banks a huge fee to facilitate the transaction. However, bitcoin is run using a blockchain a decentralised database that records each transaction. Essentially, when a bitcoin transfer is made, it s then validated by a group of bitcoin miners. These are people with super powerful computers each competing to confirm and authenticate every transaction in the network. Here s a great graph to show you in a visual way. 3

4 Source: Bloomberg But the applications for blockchain aren t limited to money. Walmart, for example, is using a version of blockchain technology to track the millions of goods it receives and dispatches. Imagine you re a consumer concerned about environmental toxins in your produce. You decide to buy organic vegetables and fruit. But you have no real way of knowing where your retailer sources their produce. The potential of the blockchain ledger means any product can be tracked from farm to logistic centre to supermarket, and it s all on public record that s unalterable. The blockchain could be used in a thousand different ways and this is why cryptocurrencies are exploding in number as much as they are in price. 4

5 Cryptos: A new asset class Six of the world s biggest banks are now in on the game, creating a new form of digital cash to make payments and settle transactions faster than they can now. Central banks are also exploring issuing their own digital currencies. The International Monetary Fund (IMF) is urging them on. There s no doubt about it: The blockchain is here to stay. For this reason alone, cryptocurrencies are worth following. They have the potential to disrupt many existing processes and businesses. This could impact the value of stocks you own now. That aside, the percentage gains on some of the coins are so prodigious that you can t help but wonder if you should have some exposure to this action. It s also seeded talk that cryptos are in a bubble. While some individual coins are highly likely to be worthless this time next year, I don t believe the trend in cryptocurrencies is in a bubble. In a true bubble, people can only see blue sky ahead and an easy road to riches. As of now, there s a constant stream of people disparaging cryptos. US banker Jamie Dimon called bitcoin a fraud. One Wall Street Journal writer said it s probably worth zero. The other thing is that the crypto market is tiny. As above, the total market cap of all the coins is around US$134 billion. That s not even a quarter of the size of Apple, for example. The truth is that every crypto could go to zero, and the world financial system wouldn t even think about it for more than a day or two. Crypto Miners Explained Mining is the process that confirms all transactions made with a cryptocurrency (polices it, if you like). The secret to mining is that the checking system, the network, is totally decentralised and not inter-dependent. You cannot bring a totally decentralised network down. You could theoretically attack part of it but not all of it at once. Most cryptocurrencies work on something called proof of work (POW), which means independent sources exist that can and do confirm whether transactions genuinely took place. The work comes with a reward of new coins in exchange for the proofing process (for confirming genuine transactions). There s been a big rise in the price of bitcoin, and some of the other coins, no doubt about it. But bitcoin is a global asset, and therefore can generate global demand. Is such a price rise as we ve seen really so crazy? Let me show you how I think things will play out. We ll take a dip into history Welcome to the Wild West of Finance If you walked into a bank during the 19th century in the US, the cash in your hand was almost certainly different to the cash in the hand of the man standing next to you. That s because each bank issued its own notes. For most of the 19th century, the US had no central bank, and banks were not federally regulated. 5

6 Reputable banks made loans, and kept strong reserves of gold or state bonds on their books to back them. Not all bankers were honest men. Some issued paper notes far beyond their ability for depositors to redeem them. These banks, often operating in remote towns, became known as wildcat banks. They often went bust, leaving their issued currency worthless. Other banks gained a reputation for reliability and safety, and their bank notes traded at par in the marketplace. We have history rhyming right now. Cryptocurrencies look to me like the wildcats of the 21st century. There s no doubt that some cryptos will go down to zero, while others will develop a sturdy reputation and continue to flourish unless they re regulated or taxed out of existence. That s what happened to US state bank notes in The key today will be to find the most compelling coins, and avoid the duds. This is why I will be exploring this exciting sector in the weeks and months to come. And I don t see why you shouldn t have some exposure to cryptos as long as you keep the amount you re speculating with rational. And you could make serious money in a hot market. These things really move in big percentages. The secret to making money from cryptos is the same as every other market: You limit your downside, and take a position for the upside. For example, perhaps a promising new crypto coin is brought to your attention You decide to risk some money on it. You could put a 20% stop loss on the trade, if you re comfortable with that level of risk. If it goes down, you get your money out. If it goes up, you ride along. What is wrong with that? There s potentially enormous inflows that could still come into this market. Let s take advantage of it while it s still growing. It s time to get on with it! While cryptos are tradeable much like shares are, you can t (yet) use your stock broking account for these. Why? Because bitcoin and other cryptos don t trade on stock exchanges, like the ASX here in Australia. That means we have to go to dedicated crypto exchanges that have sprung up to cater to investors and traders like you and me. Remember, cryptos are a young market, and still developing. It would be great if you could add this ability to your CommSec account, like you can with options and CFDs (contracts for difference). Maybe you ll be able to soon, but for now, you can t. 6

7 That means you ll need to set up a couple of different accounts especially for your crypto trading. There s a bit of legwork with this, but nothing too onerous. There s basically three key steps that need to happen for you to be in a position to start buying and selling crypto. They are #1 You need to convert some of your Australian dollars into bitcoin. #2 To buy other cryptos, you ll need to do it via an exchange that allows you to do this. You ll need an account with one of these exchanges. #3 You then need to store these other cryptocurrencies as well, for as long as you decide to hold them. This is also true of any large bitcoin holdings you may decide to accumulate. Like anything new, it can take some time to get used to new platforms and processes. Let s begin Step #1: Buy bitcoin Now, you might be wondering why you have to buy bitcoin at all. After all, if there s 1,100 cryptocurrenices, can t you just trade your Aussie dollars for, say, Monero? No. You need bitcoin (or another crypto called ether) to buy the other cryptocurrencies that we ll be bringing your attention to. Think of bitcoin as the reserve standard of the crypto world. This is not such a bad thing. Bitcoin is the most established cryptocurrency. That means you can test the waters here. The good news with bitcoin is that it s divisible to eight decimal places. That means you can buy very small amounts and do a few practice runs as you get used to transferring and storing your crypto. There is by far more than one place to buy bitcoin. But I m going to point you to just a couple to get you started. Perhaps the most recognisable one globally is called Coinbase. You can use Coinbase on your PC or via the app on your smartphone. Coinbase has over 10,000,000 registered users. It s growing in big numbers every week. Agora Financial Australia has no affiliation with Coinbase. It s just a helpful suggestion. You can buy bitcoin on Coinbase with Aussie dollars, but as yet it doesn t support selling. So you can get into bitcoin via Coinbase, but not out of it. One platform that offers both buying and selling, and is based in Australia, is Independent Reserve. So there s a second, perhaps more compelling, option to consider. It s smaller in terms of the overall operation though. Note that with either of these, you ll need to link a bank account and show some ID to get your account going. It usually doesn t take long to get approved. A third option is called CoinSpot. 7

8 There are plenty more. Here are some further links you can study. Just remember, none of these are endorsements in any way. See how they differ and what works best for you. More options for Australians are. Bit Trade Australia Buyabitcoin.com.au CoinTree CoinLoft Bitcoin.com.au CoinJar Not only can you buy bitcoin here, these providers can offer you (or at least suggest) what s known as a wallet. This is what you need to receive (and store) your bitcoin. Here s a good rundown on wallets. You can also see further wallet options here. But for now, consider setting up an account with Coinbase or Independent Reserve (or one of the other providers) to convert some of your Aussie dollars into bitcoin. That s your first step complete! Step #2: Buy and sell cryptos Now, to buy and sell other cryptocurrencies, you ll need to register with an exchange. That s because, as of now, Coinbase and Independent Reserve, for example, can only offer two to three cryptocurrencies (bitcoin, ether, and Litecoin) between them. To access the other 1,100, we need to have an account with a big exchange. I m going to suggest you set up an account with Bittrex. It s a major exchange. You can buy and sell over 190 cryptocurrencies here. Again, this is just one exchange of many, and Agora Financial Australia has no commercial link to them. Another place you could consider is called Poloniex. However, like a stock exchange, the bigger the better. That s because the more people buying and selling in one place, the more likely you ll be able to buy and sell your crypto close to the market price. This is known as liquidity, and it s important. Bittrex offers higher liquidity than Poloniex. Be aware that the price of bitcoin, and other cryptos, will vary across exchanges. So do your homework before buying. Once you ve set up an account with Bittrex (or a similar type of exchange), you ll need to send your bitcoin from your Coinbase/Independent Reserve (or separate wallet) account to your Bittrex account. Remember, you need bitcoin to buy the other cryptocurrencies on the market. At Bittrex, you ll see a long list of ticker symbols. These represent all the different cryptocurrencies available. 8

9 Once you have both of these accounts up and running, you re ready to buy and sell cryptocurrencies. Do be aware there are often limits to how much you can purchase at any one time. Now, steps one and two of our list are complete. Step #3: Keep your crypto holdings secure There s a danger with cryptos that s also part of their appeal. They are a largely unregulated market. This is important to understand. And it s also why you should only play with money you can afford to lose. If you lose or have your bitcoin/crypto holdings stolen, you ll almost certainly never see that money again. Hackers are actively targeting this market. And some are making a fortune. That means you must take steps to protect yourself before you invest money into this space, and be aware of the pros and cons of each option. Do some research on this. Google can point you to many articles. Here s one to begin with. The good news is that you have several different options when it comes to storing your crypto. Here s a table that sums it up nicely. Take a look Source: The Palm Beach Letter The amount you re prepared to invest in crypto will play a part here. If you re just dabbling, then I d suggest you re OK to use whatever is the most convenient. The higher you go in terms of money, though, the more you need to be conscious of the risk you re running. You wouldn t keep $10,000 on your desk at work, would you? But that s what some people basically do when they store their crypto on their desktop. For a significant amount of money, cold storage (via a hardware wallet) is the most secure option. 9

10 These are small devices you can plug into your computer via the USB drive. Two brands you might like to research are Ledger Wallet and Trezor. Again, there s no commercial relationship here. Note that not all cryptocurrencies are supported on each device. So check before you buy. You can do that for Trezor here. This is the basic rundown of what you need to begin buying and trading in the crypto market. I ll keep building the resources you need to know as part of Small Cap Alpha service. We ll also put together a list of FAQs at some point, once we collect the most common questions. In the meantime, here are some further useful links you can check out as well Further resources These are links I find useful in navigating and tracking the crypto market. Real-time crypto market statistics: You can adjust these figures from US dollars to Aussie dollar values, too. CoinDesk is a leading source of crypto news. It offers a free daily . Bitcoin Calculator allows you to convert the bitcoin price into any world currency. Bitcoin.org can answer any questions you have about the reserve standard of the crypto world. And again welcome to the crypto market! All the best, Callum Newman, Editor, Small Cap Alpha All content is 2017 Agora Financial Australia Pty Ltd (ACN: ABN: ). All Rights Reserved. The Reader acknowledges that the contents of this newsletter and all associated intellectual property rights of Agora Financial Australia Pty Ltd. No person is permitted to copy, forward or reproduce the newsletter and/or its contents without express consent of Agora Financial Australia. Agora Financial Australia Pty Ltd is an authorised representative (number ) of Port Phillip Publishing Pty Ltd (Australian Financial Services Licence ). All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment. Calculating Your Future Returns: The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you ve invested. While useful for detecting patterns, the past is not a guide to future performance. Some figures contained in this report are forecasts and may not be a reliable indicator of future results. Any potential gains in this letter do not include taxes, brokerage commissions, or associated fees. Please seek independent financial advice regarding your particular situation. Investments in foreign companies involve risk and may not be suitable for all investors. Specifically, changes in the rates of exchange between currencies may cause a divergence between your nominal gain and your currency-converted gain, making it possible to lose money once your total return is adjusted for currency. If you would like to contact us about your subscription please call us on or customerservice@agorafinancial.com.au Agora Financial Australia Attn: Small Cap Alpha, PO Box 713, South Melbourne, Victoria,