Bitcoin: It’s About to Get Loud

Well it’s official, three years after the last one, Bitcoin has set an all time high and broken through the massive $20,000 resistance point . As I write now, it’s actually trading at around $21,500. However, somehow it feels different this time around. Something is missing. It’s very, very quiet… Nobody outside the world of finance or crypto itself seems to be paying much attention.

I remember the previous all time high very clearly. Late 2017, having risen from under $1,000 earlier in the year, Bitcoin surged past $10k and just kept on marching. New highs were marked every week. Here in Japan there were crypto exchange ads on TV constantly. (remember Tetsuro Degawa and the ill-fated Coincheck?) Mr. and Mrs. Watanabe were buying feverishly as the FOMO (Fear Of Missing Out) took hold. I remember watching a news report about Kabukicho hostesses trading crypto on their smartphones. The 2017 bull run was driven by individual investors caught up in a get-rich-quick buying frenzy. And when the bubble burst they all got burned…

Fast forward three years and the landscape looks quite different. Since the halving in May 2020, Bitcoin has gradually fought its way through heavy resistance at $10k, $12k, $13k, $14k and now $20k. Mainstream news, dominated by Covid-19, economic stimulus and a soaring stock market, makes little mention of it.

Meanwhile, big things are happening: You can now buy crypto through Paypal. MicroStrategy, a business intelligence software company, has invested $475 million of its cash reserve in Bitcoin and is in the process of issuing $650 million in convertible notes, the proceeds of which will be used to buy more BTC. Square, the payments company run by Twitter’s Jack Dorsey has invested $50 million in Bitcoin. One River Asset Management, a hedge fund specialising in volatility bets, has just emerged as another huge investor in Bitcoin, with some $600 million already allocated. And also this week, MassMutual has become the first insurance company to invest in Bitcoin, dipping its toe in with a $100 million investment.

Are you feeling bullish yet?

Guggenhiem Partners, who manage over $230 billion in assets, started investing in Bitcoin when it was around $10,000. Their CIO, Scott Minerd, just shocked Bloomberg TV hosts by telling them that his firm’s analysis shows it should be worth $400,000. (Video here – tellingly Bloomberg delayed coverage of a Federal Reserve press conference to get this comment!)

Following the massive success of Grayscale Investments, Bitwise have just launched the Bitwise 10 Crypto Index Fund, which invests in the 10 biggest cryptocurrencies. The fund is available to purchase the same way you would purchase a stock or an ETF on US brokerages, and is already seeing huge demand. (not to mention a dizzying jump in price)

What is interesting here is that the reason for this underlying demand from companies and financial institutions is due largely to a change in the perception of Bitcoin, from payment system to store of value.

The original Bitcoin white paper talked of a peer to peer electronic cash system: i.e. a means of exchange, something you would use to buy your coffee, but with no intermediary / bank in the middle of the process. While Bitcoin is certainly capable of such transactions it is still somewhat clunky and there are other cashless payment methods, and even other cryptocurrency solutions, that can get the job done more efficiently.

What the likes of Michael Saylor at MicroStrategy see, is that Bitcoin acts far better as a store of value, an alternative to the “melting ice cube” that is Fiat currency. This is the role that has typically been played by gold for generations. The unprecedented expansion of Central Bank balance sheets, pumped ever higher by Covid-19 stimulus, has institutions eyeing an asset which, despite being easy to transport and store, cannot be manipulated to increase supply. You can’t just print endless Bitcoin. Understanding this shift in reasoning is essential for individual investors wondering why they should care about digital assets. (Saylor has been the guest on a number of podcasts where he talks at length about his reasoning on Bitcoin – here’s one if you are interested in listening)

Institutions and Bitcoin “whales” are certainly trading the BTC price action to some degree, but their main goal is accumulation. And compared to individual investors they have the capacity to accumulate in bulk. When dips in price scare off smaller investors and day traders, these big guys are hoovering up supply and locking it away for the long term. This level of demand combined with Bitcoin’s built in scarcity could lead to some serious price moves in the next 12 months.

So how should regular investors be adjusting to this new dynamic? If you don’t own any crypto but think you should, how do you get involved without getting burned? What follows is my two cents, for what it’s worth, in a market that changes fast. Please note that I am not a trader and do not use leverage. The purpose here is to share my thoughts on how to accumulate BTC. All the usual disclaimers apply: I don’t know your financial situation or risk profile, this is not investment advice, don’t invest money you can’t afford to lose etc etc:

  • Breaking $20k is a big deal. We could be off to the races, but new resistance levels will form and volatility is the norm in crypto.
  • Expect retraces down into the 17,000s and below, and be ready to buy these dips. It’s going to take courage as every financial news site will be screaming about the “crash” in the Bitcoin price.
  • Any kind of major macro shock, eg. a severe stock market correction, will send BTC tumbling down with it. This will be even scarier as the panic will lead investors to sell every asset they have to raise cash, as they did in March this year. Mainstream news will now be proclaiming a full-blown financial crisis. Bitcoin will be pronounced dead for failing to act as a hedge against other assets. Hold onto your hat and buy as much as you can.
  • Hold, hold, hold.
  • Assuming however, there is no such macro shock. Things are about to get interesting. Just as big dips are possible, so are big moves up.
  • Accumulation is best done little by little over time, and the same goes for selling a rising asset. If the trend is up, don’t fight it. Sell a little at a time unless you are already looking at life-changing values. (when kabukicho hostesses start trading again and Degawa pops up, it’s probably time to think about getting out!)
  • I’m not going to guess how high it’s going to go. If you are looking for price models, charts and research here are some people worth following: @100trillionusd / @woonomic / @PrestonPysh / @raoulGMI
  • When BTC takes off, altcoins generally follow. Personally I would stick to the top 10 in the Bitwise fund. I have no idea where Dogecoin will land in all this!

By the time you read this, prices could already have changed significantly. This is a fast-moving space. Whatever happens, I don’t think it will stay this quiet for much longer. Things are about to get loud!

With that I’ll sign off. Wishing you a safe and enjoyable holiday season and an exciting 2021!

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.

Why is Bitcoin Valuable?

BTC Scarcity

I’m writing this today with Bitcoin having once more passed the $10,000 mark. It’s quite remarkable to think that a digital asset that didn’t even exist until 2009 can be valued at such a level. Is it pure speculation? Or is there something particular about BTC that makes it valuable?

One person who has an answer for that question is known as PlanB, an anonymous Dutch institutional investor who created the Bitcoin Stock to Flow (S2F) model. According to his website, the name PlanB refers to “an alternative plan to quantitative easing (printing money by central banks), negative interest rates, and currency debasement in general.” His online handle, @100trillionusd, “is a reference to the Zimbabwe 100 trillion dollar note during the 2008 hyperinflation.”

If you really want to understand what the S2F model is, you should go straight to the following two articles from March 2019 and April 2020 respectively:

Modeling Bitcoin Value with Scarcity

Bitcoin Stock-to-flow Cross Asset Model

If this is a bit too much heavy reading I will attempt to summarise briefly:

The bottom line here is scarcity, Bitcoin is scarce in the same way that silver and gold are scarce, but it can be transmitted over the internet. The S2F model aims to put a value on this scarcity.

Stock refers to the existing stockpile or reserves of something. Flow is the annual production. Gold has a high Stock to Flow ratio – it would take 62 years of gold production to get the current gold stock. Around the year 2022 Bitcoin’s stock to flow ratio will overtake that of gold.

It is high stock to flow that makes something monetary goods. Low stock to flow goods can easily be over-produced, thereby crashing the price.

Supply of Bitcoin is fixed. As new Bitcoins are mined, the miner that found the block is rewarded. Over time those rewards are cut in half at regular intervals, know as halvings. The halvings and the fixed supply are the reason that Bitcoin’s stock to flow increases over time.

Working on the hypothesis that scarcity (SF) drives value, PlanB created a statistical model. What he found is that there is a statistically significant relationship between stock-to-flow and value. (the price of Bitcoin) Interestingly he also found that gold and silver are in line with the Bitcoin model values for SF. Of course other factors also affect price, but he found scarcity to be the dominant driving factor.

So what could it mean for the future price of Bitcoin? The initial modeling predicted a $1trillion valuation sometime after the May 2020 halving. This would mean a price of $55,000 per Bitcoin in the next year or two.

“People ask me where all the money needed for $1trn bitcoin market value would come from? My answer: silver, gold, countries with negative interest rate (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs.” (Modeling Bitcoin Value With Scarcity)

The Bitcoin stock-to-flow cross asset model in the second article then revised this to a market value of $5.5trillion in 2020 – 2024. Which translates as $288,000 per Bitcoin. Yes, that’s the kind of number that can get your attention! Whether it turns out to be accurate or not will be something that’s very interesting to watch over the next few years. (particularly if you have some skin in the game)

Clearly my explanation above has been highly simplified. If you find this interesting and / or need a lot more persuading, please do read the two articles posted above and follow PlanB for more: @100trillionUSD

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.

 

Where to invest ¥100,000 today

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It’s been a while! I hope everyone is doing ok in these difficult times. The state of emergency in Japan has been lifted and people are cautiously getting back to something like normal life. Looking at news from around the world it seems we are lucky to be living in a country that has weathered the Covid-19 storm so well, and I’m certainly looking forward to getting out and about a bit more in the coming weeks.

I note that Japan residents are starting to receive the paperwork  for the ¥100,000 government cash assistance scheme. If you are not sure how to make your claim, here is a useful thread telling you how to complete the paperwork.

For some people, this money is clearly needed to replace income lost during the corona virus crisis and ensuing state of emergency shutdown.

However, if you are lucky enough not to need this money to cover expenses, and are thinking of putting it to work, below are a few ideas as to how you could invest it today. Please note I am trying to make these interesting “satellite” type ideas. It is of course perfectly acceptable to simply add this money to your core asset allocation – it’s just not as fun!

Cash is king – ok I know I said “invest”, but now is not such of a bad time to be holding cash. After a steep drop in March, stock markets have rebounded remarkably well, but this does not disguise the fact that the economic damage from Covid-19 is significant. The US unemployment numbers really don’t fit with where the S&P 500 is right now, and with America and Europe trying to reopen even before they have got through the first wave, there’s a chance of further extended lockdowns and more market panic to come. Keeping cash for now and investing when fear takes over is not a bad strategy.

Precious metals – Gold is well known as a safe haven in times of market turmoil, but there is a growing buzz about the gold to silver ratio, which suggests that silver is a compelling buy at the moment. In short, the amount of silver it takes to buy an ounce of gold is near an all-time high, which suggests it should revert to the mean over time. This article does a good job of explaining why silver could make a good investment right now. As for how to buy it, if you are not looking to take delivery of the physical metal you can simply buy a silver ETF via your brokerage account. iShares SLV is perhaps the best known silver ETF.

gold-to-silver-ratio-2020-05-28-macrotrends
Source: https://www.macrotrends.net/1441/gold-to-silver-ratio

Cryptocurrency – Following the halving on May 11th BTC has traded between $8,500 and $10,000, despite a negative Goldman Sachs client briefing on the digital currency. The Grayscale Bitcoin Trust is said to have purchased a third of all newly mined Bitcoin in the last 3 months at a total of $29.9 million, and this retail investor demand is combined with heavyweight trader Paul Tudor Jones declaring himself a holder of BTC. This would be a high risk place to put your ¥100,000, but you are at least guaranteed an exciting ride.

Biotech – I mentioned this in a recent post on satellite holdings. With the race for a Covid-19 vaccine hotting up, Biotech / Pharma / Healthcare are obvious areas of interest. Also with more and more countries heading toward the Japan aging population model, it makes a lot of sense as a long term buy and hold. Picking winners is not easy in this space so it’s probably best to look at ETFs.

I hope these ideas help. I would love to hear if you are investing your stimulus money elsewhere. Of course this money is being given out to stimulate the economy, so you are doing a good thing if you simply go out and spend it in your local community. Covid-19 is likely far from over so please stay safe as you get back to work!

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.

 

Spice up your Investments with Satellites

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Is the Covid-19 market plunge getting you down? Tired of being told not to panic and stay diversified? (by people like me!) Are you thirsting for something interesting and exciting to invest in rather than the usual steady and boring stuff?

Then this post is for you! Let’s look at something fun! However, before we jump in, please read here to make sure you understand what I mean by Core / Satellite holdings. In short, core is the sensible diversified allocation linked to your base currency and risk profile that you put 80-90% of your money in. Satellite is the other 10-20% where you swing for the fences!

Some areas that are typically classed as satellite holdings would be: hedge funds, direct stock picking, commodities, structured notes, private equity, biotech, property and cryptocurrency. This is by no means a definitive list and there are many other investments that would be considered non-core, depending on your risk profile.

Here are a few unique satellite holdings that I have come across recently:

ARKK – Ark Innovation ETF: Run by Cathie Wood, the Best Investor You’ve Never Heard of, Ark is a stock picking fund, focussed on innovation in DNA Technologies, Energy, Automation, Manufacturing, Next Generation Internet and Fintech. Ark are currently looking rather smart for their heavy backing of Tesla. Their holdings contain a heady mix of 3D Printing, Gene Therapy, Biotech and Blockchain Technology. This level of active management in highly specialised areas would usually come with a hedge fund 2 and 20 price tag, but the expense ratio is just 0.75%. ARKK is listed on the NYSE so you will need a brokerage account that can access that exchange to access. More here.

GBTC – Grayscale Bitcoin Trust: According to this article, a recent study by brokerage giant Charles Schwab showed that GBTC is in the top 5 holdings for Millennial investors, (currently aged between 25 and 39) ahead of Netflix and Walt Disney. GBTC offers investors access to Bitcoin returns via their brokerage account. The Trust trades like a stock or ETF and, for a 2% annual fee, it takes care of the issue of custody of crypto, so you don’t have to worry about losing your private keys. Bitcoin purists would probably rather hold the real thing, but GBTC is proving popular as an alternative way to get exposure to Bitcoin returns. This could be interesting with the upcoming Bitcoin Halving on the horizon. I would note that not all brokerages allow trading in GBTC. From what I can tell it is available in the US on Schwab, Etrade, TD Ameritrade and Interactive Brokers. More here.

CHNA / CNCR – Loncar China Biopharma ETF / Loncar Cancer Immunotherapy ETF: Given the origin of the novel corona virus Covid-19, China Biopharma is kind of a hot topic right now. Despite the current panic, this article argues that now could be a good time to buy. Companies in the Cancer Immunotherapy space are harnessing the power of the body’s own immune system to offer an innovative alternative to current treatments, which makes for an exciting and potentially rewarding investment opportunity. Loncar’s ETFs are NASDAQ listed. More here.

If you are living in Japan or elsewhere in Asia and looking for a US brokerage account then your best bet for getting an account open is probably Interactive Brokers. See this post for more details on brokerage accounts.

Hopefully that’s helped take your mind off the doom and gloom. Please note that these are not recommendations, and all of the investments mentioned should be considered as belonging in the High Risk category. That’s why they are satellite holdings. We are talking about around 5% of your total investments in any one of these strategies. Please feel free to share any interesting satellite holdings you like. I would love to hear from you.

Note: I have no affiliation with any of the investment companies mentioned above.

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.

What is the Bitcoin Halving?

 

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If you follow cryptocurrency, you may well have heard about the upcoming Bitcoin halving, or halvening. So, what on earth is a halvening and what could it mean for the price of BTC?

What is it? – The halving refers to the reward paid to miners being reduced in half. Miners add “blocks” to the blockchain by performing transactions. Currently they earn 12.5 Bitcoins for each block added, but that will reduce to 6.25 Bitcoins.

When will it happen? – One block is added to the Bitcoin blockchain roughly every 10 minutes. Halvings typically occur every four years or so and this will be the third halving to date. If nothing major changes it is due to take place in May 2020.

What effect will the halving have on the price of Bitcoin? – Well, nobody knows, but previous halvings have seen an increase in the price of Bitcoin. The simple theory goes that as supply is cut short, miners will charge a higher price for their Bitcoins. The number of Bitcoins to be mined is fixed at 21 million, so each cut in new supply makes Bitcoin more scarce, and therefore more valuable. However, past performance is no indicator of future results. Some commentators believe the halving is already priced in, while others are predicting a severe drop in price before the halving even takes place.

Here’s an interesting price chart showing the previous halving dates.

My view is that Bitcoin is worth accumulating whenever the price dips, as it will pay off in the long run. However, price volatility can be severe and cautious investors should, of course, be careful of overcommitting. Crypto investing is not for the faint hearted, but it will be interesting to watch what happens after May next year.

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.

 

 

Bitcoin – Are you Accumulating?

2019 Masters

After day two of the recent US Masters Golf, a friend of mine asked me who I thought he should bet on. My answer was somewhere along the lines of “My heart says Tiger, but my head says Molinari”. Shows where rational thinking can get you sometimes…

Luckily, when it comes to calls on a speculative asset like cryptocurrency, you don’t need my opinion to help decide if it’s worth a flutter. Tuur Demeester’s head and heart have been in Bitcoin for many years and he has been writing informative reports on the leading cryptocurrency since 2012. His latest report is here and I highly recommend you read it.

Although a little technical at times, the main points are quite clear:

  • Big investors (whales) are accumulating Bitcoin
  • We’ve seen this kind of bear market scenario before
  • Smart investors don’t try to buy the exact bottom, they accumulate when they know they are around it
  • Lower prices and shocks are still possible
  • Bitcoin expected to trade in a range of $3,000 – $6,500 before the next bull market breakout

Obviously I’m not saying you should be putting all of your savings into crypto, but given the potential for returns it’s worth considering a small allocation of money you can afford to take risk on.

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.

Diversifying Through Crypto – How Digital Assets Could Change Your Retirement Plan

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Sticking with the theme of cryptocurrency this week, I came across this fascinating research paper  on the role that digital assets can play in asset allocation. While I recommend you read the report yourself, I appreciate that not everyone is enraptured by talk of efficient frontiers and Sharpe ratios, so I will attempt to summarise the main points of the paper into something more easily digestible.

First of all, here’s a post I wrote previously about asset allocation, which may be a good refresher. As noted there, modern portfolio theory is about diversification, specifically, blending various asset classes to produce good returns with the lowest possible risk. Over the long term it is possible to estimate the future behaviour of various asset classes and blend them to together to create an efficient frontier portfolio, whereby the return is optimized to the level of risk.

Efficient frontier
https://grayscale.co/a-new-frontier-research-paper/

What makes the development of a new digital asset class so interesting is the opportunity to add it into the mix and create an allocation that is more diversified than traditional portfolios. A well diversified portfolio contains a blend of assets which are not strongly correlated to each other. So the key to success is not necessarily finding better performing assets, but properly combining uncorrelated assets. In short, to widen the net and capture a better return without greatly increasing the risk.

The graphic below shows a simple simulation of how this could work. It takes a typical portfolio that is 60% global stocks and 40% global bonds, (Global 60/40) and shows how the performance and risk characteristics change by simply adding an allocation to bitcoin:

Figure 5
https://grayscale.co/a-new-frontier-research-paper/

As you can see, a 1% allocation to Bitcoin increases the return over the time period without greatly affecting the level of risk. A 5% allocation to bitcoin moves the risk needle a little more, but the cumulative return is almost double that of the Global 60/40.

This can then be taken a step further by adding a blend of digital assets rather than just bitcoin:

grayscale_fig8
https://grayscale.co/a-new-frontier-research-paper/

It seems that the extra diversification achieved through a range of digital assets has a significant positive impact on the risk/return profile of this portfolio. This can be attributed to the fact that although digital assets appear to go up and down together, they are not perfectly correlated.

I’m not going to get into Sharpe ratios in this post but you can get a definition here. From a financial planning perspective I do think it is worth a look at Figure 12 and Figure 13 in the paper, which give an interesting simulation of how someone saving for retirement could benefit from an allocation to digital assets over time:

grayscale_fig12
https://grayscale.co/a-new-frontier-research-paper/

Assuming $100,000 in starting capital and an annual contribution of $18,500, this gives us an idea of how adding a 5% allocation to a blend of digital assets to the Global 60/40 can affect risk/return results over time. Although the increase in annualised return is only 0.3% for a similar level of risk, the effect of compound interest over the years turns this into a meaningful dollar figure at the end:

grayscale_fig13
https://grayscale.co/a-new-frontier-research-paper/

Now this is, of course, a simulation and there is no guarantee of achieving these returns over time, but it certainly makes for a compelling argument for allocating a small portion of long term investments to digital assets. Having said that, we are still some way from being able to click a button and add a 5% allocation to crypto to a retirement plan, which means investors currently have to figure out how to buy and store these assets safely themselves. However, there is already talk of bitcoin ETFs, and crypto funds that are accessible to retail investors are starting to appear. It looks like making an allocation to digital assets as part of your long term investment strategy is about to get easier.

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.

Bitcoin Price Prediction

Top 11 Bitcoin Prediction

I recently read here that bitcoin bull Tom Lee has reduced his target for the price of bitcoin at the end of 2018 from $25,000 to $15,000. It’s actually amazing that people are willing to make put their reputation on the line about something as volatile as cryptocurrency, but as the above graphic shows, Mr. Lee is not alone in making bold predictions.

It’s interesting to note that two American economists are right down at the bottom with predictions of $100. They are far from the only “experts” who have a negative view with Bill Gates and investor Peter Schiff both expecting bitcoin to go to zero.

So should we all be buying bitcoin and betting on it going to a million dollars, or is that just reckless speculation?

First of all, no-one knows where this is really going, and there’s certainly a lot of speculation involved. Before making a decision, I would suggest reading up on the reasons people think bitcoin will reach a certain value. Yes, you should study up on the views of Tom Lee and Jim Cramer, as well as those of Joseph Stiglitz and Kenneth Rogoff. In fact, Peter Schiff is a good person to follow if you’re looking for the ultimate bitcoin bear.

Here’s another way to look at it. The bitcoin price as I write today is around $5,500:

How would you feel if you bought one bitcoin today and the price went to zero and you lost $5,500?

How would you feel if you didn’t buy bitcoin and the price went to $250,000? How about $1,000,000?

These two questions alone should tell you a lot about the way you view risk. There’s no correct answer, just what works for you.

FYI I bought originally at $2,500 and just bought a little more at $5,500 – that’s not advice, just disclosure. And no, I don’t have a price prediction for end of 2018, 2022 or ever!

If you simply enjoy reading the predictions there are a few more here, although this was from October before Tom Lee adjusted his outlook.

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.

 

 

 

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.

 

Cryptocurrency Hacks – How to Protect Yourself When Trading And Investing

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If you follow crypto markets, you are probably aware of this weekend’s massive theft of digital currency from a Japan-based exchange. In the early hours of Friday January 26th Coincheck Inc. was hacked and nearly $500 million in NEM digital tokens were stolen. Mercifully, Coincheck seem to have the means to reimburse their customers, albeit after a slight haircut, but once again security is a hot topic when it comes to crypto trading and investing.

So how can you protect yourself and still participate in the cryptocurrency phenomenon? Here are a few things to consider:

Are you trading or investing? – first off be clear on what your strategy is. Are you actively trading, or buying and holding?

Traders – If you are trading crypto then you will be using an exchange and, as we have seen, exchanges can be vulnerable to hacks. That is a risk you will have to take, but at least exercise caution. If you are in Japan, for example, make sure you are using an exchange that is registered with the Financial Services Agency. The site is in Japanese but you can find a list here. (I couldn’t find the same page on their English site) Note though that Coincheck had applied to register and was allowed to continue trading, and advertising on TV, during the approval process. FSA registration does not guarantee that your funds are safe, but I would not bother with exchanges that don’t make this list. If you are trading outside Japan Buy Bitcoin Worldwide is a useful resource for finding exchanges in your country, along with a list of pros and cons for each exchange.

You should be looking for exchanges that implement at least the following measures:

  • Cold wallet – the recent hack was from Coincheck’s hot wallet, which is connected to external networks
  • Whitelisting of all withdrawal addresses for crypto
  • Private server
  • Two-factor authentication
  • No API withdrawals

If you are done with trading, or taking a break for a while, you should be moving your coins off the exchange to a private wallet or storage device.

Investors – perhaps you just want to buy some Bitcoin or Ethereum and hold it for the long term? In this case you will likely buy the coins on an exchange, but you then need to move them into a private wallet. If you leave crypto sitting on the exchange you are at risk.

Online wallets are convenient for shopping with Bitcoin but they are also not a safe place to store your coins.

I stored Bitcoin with Xapo, whose vault service is currently free of charge. They store their private keys in multi-signature form in vaults in Asia, the United States and South America.

Hardcore crypto enthusiasts will tell you to keep your private keys completely offline. Probably the most popular hardware wallet is the Trezor device. With this device a pin code gives you access to your coins, and if you lose it you can regenerate your wallet using the 24 word recovery code.

If you don’t trust any storage solution that can be plugged into a computer, or are looking for a near indestructible back up for your hardware wallet then take a look at Cryptosteel.

Lastly, don’t get carried away with the promise of high returns. Only invest / trade amounts commensurate with your level of knowledge. If a large portion of your assets are in cryptocurrency you better be an expert!

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.