1. What is Cryptocurrency and Blockchain Tech?
by G. Bradley II via Young Wealth Builders
Welcome to our 3-part Cryptocurrency articles series where we break down 1) what cryptocurrency (we’ll call it crypto for short) is like you’re 10 years old, 2) how to analyze crypto, and, more importantly, 3) what you need to think about come tax time if you invest in crypto. This is part 1 of the series, giving you all the information you need to know about crypto and blockchain tech. Get ready to read-up on the new investment wave!
What is Cryptocurrency?
Want to know about Cryptocurrency? I’ll give you a scenario. Let’s say you’re hanging out with your cousin and she asks you for five dollars to buy something at the corner store. You give her five dollars and walk on your merry way to the store.
Whether you know it or not, a transaction just took place. Your cousin now has five dollars and you have zero dollars. You physically reached into your pocket, grasped the five dollars in-hand, extended your hand and saw your cousin take the money. No third person (or party) was there to transfer the money from your hands to hers, or verified that you handed five dollars to her and she accepted it. See, easy right? Let’s take it a step further.
Let’s say you gave your cousin five digital dollars. You pull out your phone, login to the digital money transfer app and send the money to your cousin. Ping! She’s received the money and accepts. But did she actually receive it? I mean you heard the ‘ping’, but what happens if she didn’t actually receive the money? What do you do? Do you send another five? Now you’ve sent $10 instead of five because you don’t know if the first amount went through. Or maybe someone hacked the exchange to “show” you sent the money, but in all actuality it didn’t work. In a nutshell, a digital exchange has a different feel than a physical one. Which could present unique problems compared to physical exchanges.
Here’s the solution…..
One of the tried and true ways that has always been used to counteract this problem is a ledger. A good ole’ accounting tool used to track transactions over a period of time. But, you don’t want to carry a ledger around all day so you decide to create a digital ledger and teach your friends how to make one. Yay! Problem solved! Here’s a dilemma. What happens if one of your friends was able to “game” the digital ledger and increased the amount of digital dollars they have in the exchange?
Or what happens if several of your friends decide to give each other money all at once? Now you would have to bring someone in to verify all of the transactions. You and your cousin was one exchange, but several parties?! Is there a way to give money digitally and feel the same way you did when you gave money to your cousin? We’ll come back to this question later and take your handy dandy digital ledger to the next level.
If the digital ledger was made available to everyone instead of you and your friends, the ledger would be on everyone’s computer. You see where I’m going with this? Your one friend that was able to game the system can no longer “cheat the system” since it’s controlled by everyone. The code and rules of the digital ledger would be an open source system. Since the system is open source, anyone can contribute, maintain, and update the system. You could even make some digital currency as a reward for contributing. This is what’s called mining. It’s the only way to create more digital currency.
“Great! Now we just need to create this system!”
No you don’t. The good thing is a system like this already exists and it’s called Blockchain, a public ledger that is constantly updated. Every transaction has it’s own unique code which makes it un-hackable! That’s what makes blockchain technology so revolutionary! If you want to learn more about blockchain technology check out it here. Now let’s do a quick summary of what we just went through.
Cryptocurrency is run on a blockchain, or a digital ledger, which is open sourced and constantly maintained and updated by millions of individuals throughout around the world.
From our example, when you made that five dollar exchange you now know the digital amount left your hand (or in this case, account) and is now your cousins. The exchange will be updated and verified within the blockchain (digital ledger).
Since the digital ledger is public, you didn’t need a third party to make sure you actually gave your cousin the $5, and not a fake one.
From our example, this is how cyptocurrency behaves giving you assurance that 1) your exchange went through, 2) it’s safely secured, and 3) hack proof. Now what do you do with all this new knowledge? Get in the game! Here’s the value of Bitcoin, right now. It’s going to continue to rise and there are several other alternative coins you can look at as well, but before you decide to turn your hard earned cash into digital coins check out the 2nd part of our article series on how to analyze cryptocurrency. You’re going to love it!
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2. How Do I Analyze Cryptocurrency?
Welcome to our 3-part Cryptocurrency articles series where we break down 1) what cryptocurrency (we’ll call it crypto for short) is like you’re 10 years old, 2) how to analyze crypto, and, more importantly, 3) what you need to think about come tax time if you invest in crypto. This is part 2 of the series where our featured guest, Rayven J. Moore, takes you through how to analyze crypto in knowing when to buy or sell. If you have no idea what cryptocurrency is check out Part 1 of our series above. With that being said, get ready to read-up on the new investment wave!
How do I make money with Cryptocurrency?
If you are thinking to yourself, “How do I make money from it?” then I am here to help teach you the basics of analyzing cryptocurrencies. People invest for different reasons and there are different ways to do it. So you’re going to want to come up with a plan for you and stick to that plan. Consistency is key. This will be the largest transfer of wealth in human history, get your piece.
Currently, there are over a thousand different cryptocurrencies listed on Coin Market Cap. Coin Market Cap is basically the dictionary of crypto. It’s the best place to get started on your journey. There are four criteria for deciding whether or not to purchase a coin.
Your Crypto Investing Criteria
Determining what price to buy at – If you are looking at a coin and it is currently at its all time high price then, likely you should not purchase the coin. What is the probability of a coin going up from its all time high? Not likely (but still possible in crypto, the market is young). Look at the graph. Look at trends, volumes, and the price graph from different candlestick time intervals. Just remember the fundamental trading rule – buy low and sell high. Decide your entry price. Buy low. Be patient.
Look at external factors – Crypto trading takes a lot of time and research. Research is absolutely necessary. Go to the coin’s website. Look up the news of the coin you are interested in. Make sure it is something you are comfortable putting your money into. There are tons of shitcoins out there. Don’t buy shitcoins. Watch YouTube videos, read the Reddit page, go to forums. Make an educated decision. Where do you see the future of this coin going? Does the team behind the coin have plans for updates and future innovations? There is a lot to consider.
What is the community around the coin like? – Analyzing the size and level of engagement within a coin’s community is a good way to learn more about a potential investment. If you are choosing a coin to hold for long term (6 months to 3 years) then you should join a community for the coin. Subscribe to the subreddit page for the particular coin, join the Telegram group, and find other people that are involved with the investment so you can stay up to date on news and the overall vibe within the community. A community can make the difference between a great coin and a not so great coin.
How replicable is the coin? – What are the unique features that set this coin apart from the others? Can others easily copy the idea?
Caveat – Try to stay in coins with over $50 million market cap, so that whales can't manipulate the coin as much.
The Best Time to Buy
The best time to go shopping for coins is after a huge crash. If the prices look really low and people are losing money, then it should be a good time to buy. Dips in price are an opportunity to buy more! If you are buying at all time highs then it is likely that you will be the person feeling the hurt after a market crash.
Another key would be to learn how to read price charts. Technical analysis can make you a lot of money. Or another strategy is just find good coins, buy, and hold. Patience is key. It’s your money. Be confident and comfortable in your positions. Research. Don’t gamble. And remember you don’t lose money unless you sell for less than you bought if for.
Please be aware that trading cryptocurrency is similar to trading foreign exchange currency pairs. When you buy a new coin you will likely use Bitcoin or Ethereum to do so. If you are buying something with Bitcoin be sure that you decide based on the Bitcoin price, and not the USD price (likewise sell based on the Ethereum price when doing a trade using Ethereum). Some new traders assume they are making money because the USD price increased but they are selling for less Bitcoin than they paid. The winning strategy is to buy low and sell high. Many traders do the complete opposite.
How to react when the market crashes…
Do not panic. Be resilient. Don’t panic sell. Make a strategy for yourself and stick to it. Make a checklist of things to do before making a trade and stick to your rules. Start small and use more capital as you are more comfortable trading. There are a lot of mistakes that new traders make. It happens to everyone. Make sure if you make a mistake you learn from it. Learn the overall market environment. It’s so important to be connected to market news and updates.
The crypto market is in the early adopter stage. You will need to be mindful of updates, new releases, ICO dates, wallets, exchanges, passwords, usernames, public keys, private keys. Things will get simpler as developers build ecosystems around their products. Be sure to keep a notebook and pen for secure passwords to your exchange accounts and digital wallets. I recommend the free Last Pass software for storing and securing login info & passwords.
Other things you should consider…
There is a lot of greed and FUD (fear, uncertainty, and doubt) in crypto. Don’t get hacked. Stay safe out there. Equifax and Deloitte both got hacked. Also, look out for whales, shitcoins, scams, and pump & dumps. Be aware of FOMO (fear of missing out). There are so many coins, companies, products, and use cases – it’s all very exciting. Today there was over $5 billion dollars of global crypto trade volume in the past 24 hours. The markets never close. Some people might get addicted to checking their coins or account balance. It’s fun. And you make money over time. Be patient.
Just don’t sell for less than you bought. This is all very new technology. And the technology works. The world is gonna have to adapt. Once you understand that then you will forever be converted to crytpo. And hopefully, you will get rich. The simplest strategy is sometimes the best strategy. Buy Bitcoin & hold is a simple and effective strategy.
After you’ve bought your first Bitcoin, or several hundred, the first thing you should do before you even think about selling is research and understand the tax implications of buying and selling Bitcoin. We already wrote a piece to arm you with the tax knowledge so you don’t have to go anywhere.
Rayven J. Moore is a cryptocurrency investor, serial entrepreneur, and accountant. He has created a website to share personal finance, cryptocurrency, music recommendations, and life tips with you. He’s a financial analyst in Houston, Texas. Rayven graduated from the University of Notre Dame in 2014 with a Bachelor’s degree in Accountancy. He is a licensed CPA in the state of Texas. Feel free to follow and engage with him on social media.
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Disclaimer notice: The advice provided on this website is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.
I've removed this section of the website. -Rayven