Table of Contents:
How to Trade Cryptocurrency – Choosing an Exchange
After reading the news that IBM was partnering with 12 banks to develop their own payment system using Stellar Lumens (Another crypto currency on a different blockchain), I decided I wanted to get some Lumens (XLM). After a bit of Googling, I found out that Lumens were being sold on the Bittrex exchange. As a new investor, I needed to know I could trust this exchange. When I’m doubtful about a new product or service, I will often check if there’s a subreddit on the topic. You can read the Bittrex subreddit here. Another good place to start is /r/CyptoCurrency. You’ll see lots of people complaining that the system isn’t perfect, but every exchange has issues of one kind or another.
I opened an account on bittrex.com and got myself verified before doing any trading. The last thing I wanted was to have my account frozen. You’ll notice there are lots of people complaining about this – however many of them seem to wish to remain anonymous. Anonymity does not play well with financial regulations. If you want to use coinbase or Bittrex, or any reputable exchange for that matter, you’ll have to submit ID for verification. It makes sense, this is real money!
How to Fund Your Bittrex or Binance Account
The first step is to get some amount of easily transferable cryptocurrency. Bitcoin won’t do because the transfer fees will kill your profit. If you want to trade bitcoin on an exchange, buy Ether or Litecoin on Coinbase, then transfer it for cheap to your trading account. Then, trade it for BTC on the exchange. The same thing works for cashing out back to fiat. Calculate the transfer fees for BTC, then compare that to the conversion rate to ETH or LTC. Transferring ETH or LTC is way cheaper, and this will probably save you money on transfer fees. I see a lot of people who want to get in on bitcoin who buy it directly on Coinbase – that’s fine, but if you want to move your BTC after it’s going to cost you a lot in transfer fees.
At first I sent only a tiny amount of Ether to the bittrex wallet address. To send Ether to your Bittrex account, go to the wallets tab and locate the ETH wallet. Press the + sign next to it:
For me, the Bittrex account wasn’t updating my balance. I looked on etherscan.io and I could see my Ether had indeed made it to the right account, but the balance was still 0. After a bit of research I found that Bittrex won’t show the balance unless the amount is more than 0.1 ETH.
So, I sent more Ether to the bittrex wallet, totaling 0.1 – This cost me a transaction fee, but it was only a few cents. Once the balance was above 0.1, the balance appeared in my account and I was able to buy some Lumens at market price! You’ll have to wait for 36 confirmations before you see your Ether in the account:
My Top Cryptocurrency Picks for 2018
With so many people trying to get rich overnight, is it possible to invest wisely? I believe so. Let’s look at my favorite picks for 2018:
IOTA is a promising technology for day to day payments in the future. In crypto currency it’s often asked whether the technology can be used to buy a cup of coffee or not. In the case of IOTA, this would be simple and automatic in the future. There are no fees to use IOTA, and there never will be. IOTA works right now on cell phones and computers. IOTA needs a small amount of proof of work. In order to function in new IOT devices in the future, this will be accomplished using a new ASIC chip integrated into the hardware. It will be a very small ASIC chip, not like the bitcoin mining rigs you might have seen. ASIC just means it’s a dedicated chip that does only one thing. You can hear more about it in this interview with IOTA founder David Sønstebø. The recent MIT controversy about IOTA’s code has not helped the company’s image. Most people don’t understand the technology behind it. If you’re willing to dig deep enough, you’ll find that the IOTA team purposely allowed a cryptographic flaw into their software. The reason for this is actually quite simple. When you have open source code, people are going to copy it. Anyone could take IOTA’s code and fork it to create “IOTA Cash”, for example. To protect the public from shady clones and scam coins based on the IOTA code, the IOTA team allowed practical collisions in one of their hashing functions. This was by design. Since IOTA is in it’s infancy, it uses a centralized “Coordinator”. While the coordinator is still in use, the cryptographic attack described my MIT would simply not work. The “flaw” would have been removed once the IOTA network reached sufficient capacity. Calling it a flaw may be inappropriate, since the designers introduced it as a sort of digital booby trap to thwart scammers. Further, the attack described by MIT was impractical in the first place, requiring the victim to run an executable file. If an attacker can get you to run an executable file, it would be trivial to steal your IOTA seed instead. This would be much easier than attempting cryptographic attacks on the key. Regardless, the IOTA team has removed the “insecure” hashing function and replaced it with a well-known algorithm.
Dapps, Smart Contracts and ICO platforms
Nicknamed the Ethereum of China, NEO is a fully working platform. It’s not a promise for the future, it works right now. The second most important thing about NEO is that it generates interest. On the surface, NEO is a lot like Ethereum. This in-depth article highlights the differences between Ethereum and NEO. With most ICOs launching on the Ethereum blockchain, NEO is possibly the top competitor for new ICOs. NEO is also working to be fully compliant with governments.
Cardano (ADA) is another so-called “Ethereum killer”, which aims to increase the speed and functionality of dapps. Cardano’s currency is called “ADA”, after mathemetician Ada Lovelave. The wallet for ADA is called Daedalus, who, in Greek mythology was Icarus’ father. Cardano has a live mainnet, but no smart contract functionality yet.
Stellar Lumens are becoming more popular as real world use cases continue to develop. XLM has solid potential to rival Ripple. Both protocols are similar in function and were developed in the same place. To quote this article from Observer.com: “They share a city (San Francisco), a founder (Jed McCaleb) and a lot of bad blood.” Lumens are more interesting to me than Ripple, mainly because anyone can create tokens on the Stellar platform. Unlike Ripple, Stellar is a public blockchain.
ERC20 Tokens (Ethereum tokens)
This is by far my favorite token! I already wrote a section about trading bots, so just skip to that part if you want to know why I think it’s worth investing in ENG.
This is another company using artificial intelligence to assist in making trading decisions. Cindicator gathers data by asking questions to a network of users through their app. Users are rewarded with points for correct predictions and lose points for being incorrect. This data is used in conjunction with AI and analytics to produce data that traders and investors might find extremely valuable.
EOS is another “Ethereum killer”. It’s quite ironic that the EOS token is an ERC20 token hosted on the Ethereum blockchain. The big deal about EOS is that developers will be able to code in c++ which is a popular programming language. This is important because Ethereum requires developers to learn a new programming language called Solidity. C++ is already well known, so future development and adoption could very explode once the mainnet launches.
This is a promising technology that is being developed along with core founders of Ethereum such as Vitalik Buterin and Dr. Gavin Wood. OMG will work as a payment system helping to bridge the gap between fiat currency and cryptocurrency. If you like Ethereum, you will certainly love OMG!
Decentralized Exchanges and Atomic Swaps: What Are They?
The way to trade in the future is without a middle man. Atomic swaps and decentralized exchanges let you trade cryptocurrencies directly with other people. The upsides are obvious: lower fees and less risk of being hacked. However, there’s also a downside. Since these systems are run by computers (smart contracts), there’s no one to complain to if things don’t work out. Right now, things aren’t much different on centralized exchanges in terms of customer support. Centralized exchanges keep expanding rapidly and their customer support is not able to keep up. There isn’t much customer service in the world of crypto currency trading. It seems if you’re going to be your own bank, you’re also going to be the customer service.
Ether Delta is the most well known decentralized exchange. It runs on the Ethereum network and you can see the supported currencies on Etherdelta here. Due to it’s decentalized nature, there are going to be lots of scam tokens and coins. There will also be lots of small cap coins and tokens that aren’t available elsewhere. To use Etherdelta you’ll need metamask which is an extension for Chrome and Firefox.
Instant Cryptocurrency Exchanges
There are several of these, but the most well known are Changelly and Shapeshift. Let’s say you want to change bitcoin into Ether. You’ll enter a receiving address where you’ll receive your changed Ether. Then, you’ll send bitcoin to the address that will be given to you. Once your bitcoin is received by the system, it will automatically send your Ether to your address. This makes it quick and easy to change from one Cryptocurrency to another! The downside is that the fees are higher.
Cryptocurrency exchanges have had a bad history of getting hacked. So how do you know your money is safe?
Rule #1: Your money is NOT safe sitting on an exchange, no matter how reputable. Whenever you use an online account to store cryptocurrency, someone else has a copy of your private keys. This is sort of like giving your PIN code to a teller who works at a bank. Yes, she works at the bank but why should you trust anyone with your PIN?
Ok, so now that we’ve established that your money is totally not safe, what are you going to do about it?
TOO MANY WALLETS.
One of the problems you might face is that every Cryptocurrency has it’s own wallet software. One reason you might want to have the wallet software is for staking coins. You run the wallet software on your computer and while you store your coins there, they generate interest. This is known as “staking” or proof of stake. So if you want to stake your coins and earn interest, you need the wallet software for each particular coin. One exception is the NEO coin, which uses something called Byzantine Fault Tolerance alternative (dBFT). NEO generates GAS even if you don’t run the wallet all the time.
More Downsides to Storing Crypto on an Exchange
Some exchanges let you buy NEO, but they don’t give you the GAS earned – they keep it for themselves. This is yet another reason why you shouldn’t keep your coins on any exchange. Ok, so you can probably tell already I’m a big fan of NEO. It’s been called the Chinese Ethereum killer. NEO is very fast and I hope to see even more from their development team. Owning NEO will generate interest in the form of GAS, but not all exchanges give you the GAS at the time of this writing. (Some will). It’s better to store your NEO in a wallet you control. When you load up the NEON wallet you will see a button that says “claim gas”. Press this and the GAS will be delivered to your account.
As if that weren’t enough, there is a quirk with NEO – it is a non divisible asset. Unlike bitcoin and Ethereum, which can be divided, NEO can only be transferred in whole numbers. You can send 0.001 ETH or BTC, but you can only send 1 whole NEO. When you buy your NEO on an exchange and try to send it to yourself, the exchange will charge you a withdrawal fee and cut off a piece of your NEO. If you bought exactly 1 NEO and you try to withdraw it, you won’t be able to because after the fees, you’ll have less than 1. Make sure you buy enough NEO to cover the withdrawal cost. On Bittrex where I bought my NEO, I had to buy 1.025 NEO in order to withdraw 1 NEO to my NEON wallet. You could be left with “fractions of NEO” left on the exchange if you don’t calculate it exactly, so do your math! There are no fractions of NEO on the NEO network, the exchange is doing this virtually. Exchanges can break up the NEO into pieces (on paper), but the NEO network doesn’t work that way.
If were totally paranoid, I would setup a computer just for Cryptocurrencies. On this computer I would install a VirtualBox machine for each wallet, that way I could keep them all completely apart. That way, if one of the wallet designers puts out some code that might steal my other cryptocurrencies, it will be isolated and the damage will be limited. I’m not that paranoid yet, but I suppose I could get there in time!
Every single password has to be unique. It must contain at least 15 characters and not contain dictionary words. Something like UG&54(gfF@!!j . This is very hard to remember but if you don’t do this, there’s a good chance you’ll get hacked! Use KeePass and you won’t have to remember all these passwords. For every exchange and every wallet, make a unique password and use it ONLY FOR ONE THING.
Ideally, my passwords don’t have to be typed in. Keyloggers (spyware that records keys pressed) could potentially steal my password. There are keyloggers that can be launched from a web browser. It’s going to be a challenge to keep everything secure but there are some steps you can take. Install No Script for Firefox or Script Safe for Chrome. Only allow scripts you know and trust.
Ideally, my passwords will never be displayed on the screen. This is to prevent spyware from taking screenshots and stealing my password that way. Use a password manager like KeePass. I copy the password by pressing Ctrl-C, but I don’t see it on the screen – I only see stars. I press Ctrl-V to paste the password into the wallet or exchange website.
Ideally, I won’t keep my KeePass database somewhere hackers could get to it. This is the central point of failure. The KeePass system has a master password that you’ll have to memorize or write down. At some point you’ll have to type it in! This is a recursive problem and I don’t have a solution, but I believe you can still minimize the risks of getting hacked.
If you want to store your Cyrptocurrency safely, you’ll have to use a hardware wallet or offline cold storage. That is the best for long term storage, but the coins become inaccessible for trading. Finding a balance between a hot wallet (coins on an exchange or wallets connected to the internet) and cold storage is the best way I know to mitigate your risks of losing your cryptocurrency to hackers and thieves.
The Ledger Nano S seems to be a good choice for storing the most popular cryptocurrencies offline. Be sure to also read my section about storing Ethereum securely.
Capital Gains and Taxes
2018 is going to be a hell of a year for accountants! Fortunately there is a tool to calculate what you owe for income tax. This tool is for US citizens but I believe it can be used to generate the appropriate information for accountants in other countries as well. Keeping track of your transactions is important for good record keeping!
Cashing Out Back to Fiat
If you’re a US citizen and you’re already on Coinbase, you can most likely cash out very easily. For citizens of other countries however, it’s going to be different because each country has different rules regarding transferring money. Canadian citizens can use QuadrigaCX (Referral link). I have not cashed out using QuadrigaCX yet but I have an account there and it has been the recommended exchange on many forums for Canadians. I will update this page once I successfully cash any crypto back into fiat.
YES there are bots out there doing algorithmic trading. What are you going to do about it? If you can’t beat ’em, join ’em? A company called Enigma is launching a data marketplace where trading algorithms will be bought and sold. They have developed a unique trading engine based on Quantopian’s finance trading technology. Quantopian developed a platform that uses finance industry standards, and Enigma has taken the technology and applied it to digital currency trading. The product is called Enigma Catalyst and I got to try the open Alpha software. It was quite impressive. I was able to backtest a few different strategies but I haven’t gotten the live trading to work yet. I am an amateur Python programmer and it takes me a while to get things going sometimes. I expect quite a few developers to get on board this platform once they understand the potential. You can backtest strategies on various exchanges, as well as trade in real time using algorithms of your choosing. It’s not for beginners unless you already are familiar with the python programming language. Although there are other bots out there being sold, I wouldn’t recommend them as most are closed source and you won’t know what they are doing in the background. Further, Enigma is based on the Quantopian library which ensures you are using wall street standards in your trading. Enigma is trading on Bittrex as ENG. Disclaimer: I own some ENG.
Stay Informed, Don’t Miss Out!