Goal Setting – Financial Protection

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We’ll spend the next few posts looking at various milestones in the financial planning process, and start to understand exactly what you need to have in place for each stage. I am going to borrow heavily from Tony Robbins “Wealth Mastery” here as he has done an incredible job of helping people get clarity on their financial goals.

Today we’ll start with Financial Protection. This is the basic minimum goal for everyone. The idea here is to be absolutely certain that you and your family are protected, no matter what life may throw at you. You want to financially bulletproof yourself and your family against sickness, unemployment, an economic downturn or whatever else may lie in wait.

You have adequate financial protection when:

  1. You have accumulated an emergency cash reserve large enough to cover your basic living expenses for a minimum of 3 months and up to 24 months, depending on your needs. If you lose your job tomorrow, you need to be able to cover these basic expenses for as long as it takes to find new employment. If you have a very secure job or highly marketable skills, you may be comfortable with less. If you are self employed, or have a fluctuating income, you may need a bit more cash to feel comfortable. Write down the actual amount of money you need for your emergency cash reserve.
  2. You have obtained income protection insurance to protect yourself and your family against long-term sickness or disability. The amount of insurance you need is directly related to the amount you already have saved. Income protection insurance is designed to pay you a portion of your current income if you are sick and unable to work for the long term. It will often cover you up to age 65 for a relatively small monthly cost. Write down how much income you would require per year if you you were disabled and unable to work ever again from tomorrow.
  3. You have at least obtained basic life insurance to provide for your family if you were to pass away. Even if the amount of cover is small, try to at least meet your family’s basic income needs. If your family needs a minimum of $25,000 per year to pay the bills, then look at $500,000 in cover. The $500,000 invested at a 5% return = $25,000 per year. Go for a simple term life policy and set the term so it expires when your youngest child will become financially independent. Write down the amount of life insurance required to cover the basics for your family if you were no longer around.

Loss of income due to job challenges or long term illness are the main causes of economic trouble for families. If your choice is to make the first contribution to a retirement plan, or pay the first premium on an income protection plan, the latter is going to be far more valuable if you have an accident or illness.

Cryptocurrency Trading Basics

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Having written a couple of posts on Bitcoin and how to protect yourself when trading / investing in cryptocurrency, I thought I would share some basic information on the trading side. Please don’t expect any high level technicals, trading charts or buy / sell recommendations; I’m still learning this myself. I bought Bitcoin around May last year and have been holding it ever since. I have no intention to sell it in the near future.

However, the volatility in crypto makes trading hard to resist. I started trading in January this year on Quoinex, a Japanese exchange. Quoinex ticks all the boxes for security that I mentioned in my previous post. It also has its own cryptocurrency named QASH, along with other well-known tokens such as BTC, BCH, ETH and XRP.

So, here are some basics to get you started, based on my experience so far:

Select an exchange – are you going to trade in Japan or overseas? See my previous post on how to protect yourself when selecting an exchange.

Account opening – The initial application involves filling in your basic information online. For Japanese exchanges this may require some Japanese language ability. You will need to upload a proof of identity and in some cases a proof of your residential address. In Japan, the exchange verifies your address by sending a postcard by registered mail that you have to sign for. You should also set up two-factor authentication to protect your account. This involves downloading an authentication application such as Google Authenticator to your phone and pairing it with your account.

Deposit – If you are depositing FIAT currency you will first need to register your bank account details. Once these have been approved, you can then create a funding request. Then you follow the instructions to wire money to the exchange. If you are depositing Bitcoin or Ethereum you will create a funding a request and then follow the instructions to transfer BTC / ETH to your exchange account. If you are planning to send a large amount it is a good idea to do a smaller test transaction first and make sure it arrives safely.

Buying and selling – Once your account is open, verified and funds have been deposited, you are ready to trade. If you are new to this I would suggest starting small while you get used to the trading interface. The basic orders you will use to begin with are market orders and limit orders. A market order allows you to buy / sell at whatever price is available at the time. A limit order allows you to specify the price you want to buy / sell at and matches you with bids / offers at that price.

The first thing you should learn how to read is the Order Book. This shows you a real time list of bids / offers on the exchange for the particular token you are looking at. This gives you a picture of how much is being traded at the moment and at what price. You will see two prices here: the bid price is the price that traders are willing to buy at right now, and the offer price is the price traders are willing to sell at.

Be very careful using market orders. Cryptocurrency is extremely volatile and the price can move considerably in a matter of minutes. Just because “X Coin” is now trading at 100, it does not mean your order will get filled at that price, particularly if it’s a large order. You may get partially filled at 100, and then the rest of your order gets filled at all kinds of different prices. Some new traders have had nasty shocks, finding that they have just bought at a much higher price than they expected.

Limit orders are much safer. With a limit order you can specify that you want to buy at 100, and your order will get filled whenever other traders offer to sell at that price. Unlike stock accounts, where typically limit orders are “good for the day” unless you specify otherwise, crypto limit orders are good for as long as you want to keep them. This is particularly useful if you don’t have all day to watch the markets. You can select the price you want to buy or sell at and come back later to check if your order has been filled or not.

Margin trading – most exchanges offer the option of using leverage. Essentially you are borrowing money from the exchange to increase the size of your order, and taking on significantly more risk in the process. Given the volatility of crypto markets I would advise extreme caution with leverage. Personally I don’t use it at all.

Withdrawal – once you are done trading you are free to withdraw your money from the exchange. Depending on the exchange, it can be sent back to your bank account in FIAT currency, or you can transfer BTC / ETH back to your own wallet. Remember that coins left sitting on an exchange are at risk of hacking and theft. Also note, particularly for traders in Japan, that a withdrawal creates a taxable event. Make sure you are aware of this before you move money or tokens.

Tax – I will talk about Japan in particular here. As noted above, making a withdrawal (which includes transferring tokens to another wallet outside Japan) creates a taxable event. Crypto gains in Japan are treated as miscellaneous income and you will need to declare them and pay tax at your marginal rate. For high earners this can mean up to 50% tax on gains. Calculating the profit itself is no easy business. This post provides a useful guide in English. I am already aware of one company in Japan that will assist (for a fee) in calculating cryptocurrency gains. I’m sure we’ll see more companies like that spring up in the near future, along with applications linked to exchanges to make the calculation easier.

I hope this helps people with an interest in crypto trading to get started. As always, I would stress that cryptocurrency trading carries a high degree of risk and you should only trade amounts commensurate with your knowledge. Start small and be prepared to make mistakes you can afford.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.