First published in September 2018.
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DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND IN THIS
BOOK. The author is not registered as an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with the U.K. Financial Conduct Authority (FCA). The author is neither licensed nor qualified to provide investment advice.
This book is not and should not be interpreted as investment advice, a recommendation regarding a course of action or as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. This book is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
Nothing in this book constitutes professional and/or financial advice, nor a comprehensive or complete statement of the matters discussed or the law relating thereto. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other content in this book before making any decisions based on such information or other content. In acting on any information contained in this book, you agree not to hold the author, Nick King, its affiliates or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other content made available to you through this book.
The information in this book has been obtained from or is based on sources believed to be accurate and complete. Although reasonable care has been taken, the author cannot guarantee the accuracy or completeness of any information in this book. Any opinions in this book may be wrong and may change at any time. You should always carry out your own independent verification of facts and data before making any investment decisions.
Cryptocurrencies are speculative and complex, and they involve significant risks —they are highly volatile and sensitive to secondary activity. Performance is unpredictable, and past performance is no guarantee of future performance. Loss of principal is possible.
Consider your own circumstances and obtain your own advice. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant regulators’ websites before making any decision.
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Contents
4 So what’s crypto?
9 A new type of investment
12 Good habits of a smart investor
20 Buying your first cryptocurrency
47 Storing your crypto
54 Setting up a Bitcoin wallet
66 Setting up an Ethereum wallet
80 Finding more coins to invest in
94 Research in action
113 Buying altcoins
135 Monitoring your investment
137 Selling your coins
144 Tax implications
1
So what’s crypto?
The concepts and technologies behind crypto are complex: this explanation isn’t.
You’ve heard of Bitcoin.
It’s that computery currency that people began talking about as its price seemed to explode overnight, turning a bunch of geeks into instant millionaires.
Depending on whom you ask, Bitcoin is either the beginning of a technological revolution, a Ponzi scheme, the key to financial freedom from banks or history’s greatest scam.
Amid the technobabble, the sensationalist headlines and the idealism of crypto fanatics, it might seem like Bitcoin defies reasonable description.
It doesn’t.
Bitcoin, along with most other cryptocurrencies, can be summarized in just one simple sentence:
A cryptocurrency is a digital asset stored on a decentralized and cryptographically secure blockchain.
Okay, I’ll admit it’s not that simple, and it’s stuffed with buzzwords you’ve never bothered to google.
So let’s break it down.
An asset is an item owned by a person. Like a spoon.
A cryptocurrency coin is an asset. But unlike a spoon, it isn’t physical— there are no real-world coins to jingle in your pocket. A cryptocurrency coin is formed of information stored on a computer —making it digital.
This digital information, which details the owner of every coin and the transactions they have made, is stored in a special kind of database called a blockchain.
Database | Structured data held on a computer. |
It’s similar to how your bank manages your bank account: when you deposit money, your bank updates a database to show a transfer to your account and updates your balance to reflect it.
A blockchain works the same way: when you buy a cryptocurrency coin, your account on the blockchain (commonly referred to as a wallet) will show a transfer into it, and will update your balance accordingly.
But there’s a key difference between your bank’s database and a blockchain. Your bank might go off-line because a freak storm cuts power to its data center, or a hacker shuts down its systems. A blockchain is stored on thousands of computers across the world, all connected by the internet, making it extremely resistant to failure. This is called decentralization.
But having a database spread across the world sounds pretty insecure, right? What if someone decides to hack it and give themselves a zillion coins?
That’s where cryptography comes into play.
Cryptography means disguising and revealing (encrypting and decrypting) information using complex mathematics.
Mind-boggling, I know, but all we need to understand is that cryptography makes it virtually impossible for the information entered on to a blockchain to be falsified. That decentralized database is hellishly secure.
So far, cryptocurrencies sound neat but why bother with them? Cash and bank accounts work fine, right?
To offer some perspective as to why cryptocurrencies were even conceived of and the problems they aim to solve, let’s take a dip into recent history.
In the 2000’s, bankers were so hungry for commission that they issued mortgages to people who couldn’t really afford to pay them back, and then resold packages of those mortgages as securities to investors and other banks.
This house of cards stood fine while the price of property was going up, but by 2008 the property bubble had popped and those mortgages and securities went bad, triggering a worldwide recession that forced millions of people into unemployment.
Recession | A period of economic decline. Central bank | A national bank that issues a country’s currency. |
Banks started going bankrupt and the world’s entire financial system was on the verge of collapse.
Unfortunately, instead of addressing and dealing with the fraud and
corruption in the world’s financial institutions that brought about this disaster, central banks instead chose to expand their balance sheets, otherwise known as ‘money printing’, to bail the banks out of their debt problems.
There wasn’t any actual physical money printed —it was simply numbers added to and shuffled between databases. The banks were loaned this new money and used it to ride out the crisis, while ordinary people suffered from the economic fallout.
With this inequality in mind, a man (or group of people, since it’s still a mystery) named Satoshi Nakamoto conceived of an experiment —to create a currency free from central-bank meddling. A currency free from self-enriching manipulation.
The first and most famous of cryptocurrencies, Bitcoin, was born.
Peer-to-peer | A network of computers that allow shared access to files without the need for a central server. Open-source | Software for which the source code is made freely available to everyone. Code | The instructions that power a computer program. Altcoin | Alternative cryptocurrencies launched after the success of Bitcoin. |
Bitcoin needs no central authority or bank to operate, instead relying on peer-to-peer technology to manage transactions and issue coins. What this means in action is that no one has control over your coins but yourself . There’s no need to trust a third party (e.g. a bank that can go bust) with your money.
Nobody owns or controls Bitcoin, and the open-source code that powers it is available for anyone to view and audit.
But don’t start to think Bitcoin is a perfect or finished product . It has technical challenges to overcome so that it can scale for its growing user
base and have speedy transactions. To that end, the Bitcoin code is being actively worked on by hundreds of developers, dedicated to improving its features, security and speed.
The growing popularity of Bitcoin has given rise to the creation of more cryptocurrencies, referred to as ‘altcoins’. Most altcoins embrace the following principles:
Each and every transaction of a cryptocurrency gets stored
on thousands of servers around the world, creating a robust, decentralized system.
Open-source code provides trust in the system. People can be corrupted, but code obeys cold, hard logic.
Security and transparency combine to make it effectively impossible for someone to hack the transaction history of a cryptocurrency.
All that’s required to send and receive cryptocurrencies, anywhere in the world, is a device capable of accessing the internet.
Bank transfers can take days. Cryptocurrency transfers can be instantaneous or take minutes, depending on the currency used.
If you’ve ever sent money to someone in another country, you know that you have to pay a fee to convert it from one currency to another.
Sending cryptocurrencies to another country requires no conversion fee . It’s all done across the internet, and the internet doesn’t care about countries and borders.
2
A new type of investment.
What cryptocurrencies are, and what they’re not.
Cryptocurrencies are unlike any other asset class that’s come before, and their unique characteristics have led to confusion and misconceptions about just what these digital assets represent.
Buying a stock or share is like buying a tiny part of a company and usually entitles you to a dividend and voting rights over a company’s plans.
Dividend | A sum of money paid regularly by a company to its shareholders. |
Buying a cryptocurrency doesn’t entitle you to either of these things.
For instance, owning a Bitcoin won’t earn you any future Bitcoin dividends, and it doesn’t give you any say over how the development of the coin proceeds.
The popularity of cryptocurrencies may be exploding, but they are not yet ready for mainstream adoption.
Solutions to technical challenges, such as how to scale the technology to keep it stable as its use grows, are still being researched and developed.
The technology holds great promise, but it’s still a risky, speculative investment.
Imagine a gold coin. It just sits there, a small, shiny circle of inert metal. You can’t eat it, you can’t drink it, you can’t do much at all with it. So why would anyone assign value to it? Why is it worth anything?
Because of our collective belief that it is worth something.
So if we all believe a gold coin is worth something, how much is it worth?
As much as someone is willing to pay for it.
It’s the same with cryptocurrency. A Bitcoin is worth something only because of the market’s collective belief that it has value. And it’s worth exactly what someone at that moment is willing to pay for it. The price goes up when more people want to buy, and down when more people want to sell.
This means the price of cryptocurrencies can be volatile, changing from moment to moment for seemingly no reason. In the course of the same day, it can go to the moon and to the floor.
It’s vital to be aware and respectful of this unpredictability.
One of the misconceptions that dog Bitcoin is the belief that it allows for anonymous transactions.
This just isn’t true.
Sure, you can set up an anonymous Bitcoin wallet and receive a coin from a stranger, and to an outside observer it would appear to be untraceable.
But that transaction will be recorded on the blockchain —and anyone can see it. Specialist companies can follow the trail of Bitcoin transactions using analysis software and other online, public clues, which can enable them to link transactions to real identities.
There are privacy cryptocurrencies, such as Monera and Zcash, that use special technology to anonymize a user’s transactions. But they’re still vulnerable to someone matching transaction timestamps to real-world events , such as buying something online or selling coins for cash , which in turn can reveal a user’s identity.
Loose and sometimes non-existent regulation of cryptocurrency markets has led some people to refer to them as the ‘Wild West’ of investments.
Different countries have different laws and different attitudes towards crypto. Japan and South Korea have embraced cryptocurrency trading by drafting laws to regulate the market. Countries such as China and India have swung in the opposite direction, all but banning their citizens from (legally) investing in cryptocurrencies.
Only one thing’s for sure : more regulation is coming.
The sheer rise in value of the crypto markets will force governments to create new laws to regulate it —in part to protect investors, in part to make sure they get their slice of the pie.
3
Good habits of a smart investor.
Invest smart, invest safe.
This might be your first time investing in anything that isn’t a savings account, or you might already be a savvy buyer of bonds and stocks.
Either way, now is a good time for some basic pointers on how to be sure your crypto investing is done in a smart and secure way.
The smart investor’s golden rule is:
Never invest what you can’t afford to lose.
As tempting as it is to dream of the future riches a large investment in your favorite coin could net you, also consider the worst-case scenario: the price of your coin crashes to nothing.
How will your life be affected? Will you laugh and write it off as a lesson learned? Will you find it mentally difficult to cope with losing that sum of money? Will you struggle to pay your rent?
Write it on a piece of paper and stick it to your fridge. Chant it to yourself in the bathroom mirror. Whatever it takes, just make sure to follow the golden rule:
Never invest what you can’t afford to lose.
It’s a terrible idea to borrow money to invest in anything, even if you’re convinced the price is about to shoot up.
Because what’s worse than making a bad investment?
Making a bad investment and being in debt because of it.
The cryptocurrency markets are rampant with people desperate to convince you to buy a certain coin —because if they get enough people to buy, the price of the coin will rise, and so will the value of their own investment.
They’ll try to manipulate you with fake news stories, fabricated
announcements, and dreamed up
Moon | To experience an explosive increase in value. Shilling | Person engaged in covert advertising. Spreading buzz with the pretense of sincerity. |
‘analysis’ to show that the coin is about to ‘moon’. They’ll use Facebook, Instagram, Twitter, Reddit, message boards and blogs to spread their ‘shilling’. As a result, when you read or hear anything related to cryptocurrency investments, you need to question it.
Is this statement true? Is it being reported by numerous sources? Why would this person be telling me this? How could he profit?
This is where your own research comes in. Search for news. Root it out. Test it for truth. Ask questions. Listen, and form your own opinions. And only then should you feel comfortable to invest.
Because no one is going to be looking out for you and your money except yourself.
Just as in traditional investments, it’s not a good idea to go ‘all-in’ on one single thing.
Over the years coins have soared in price, and coins have tanked. If you’re unlucky enough to invest in a project that fails and you were all-in the impact on your investment could be devastating.
Instead, consider keeping a portfolio of at least several coins so that the failure of any one won’t mean losing all of your investment.
You might fall in love with the idea of a coin; maybe the team is attempting to solve a problem that you’re passionate about, maybe its marketing makes you laugh, or maybe you’re just really keen on the name.
Then again, you might be experiencing ‘FOMO’ because the price of a coin just started shooting up —and you’re afraid to miss the opportunity for profit.
FOMO | Fear of missing out. Pump and dump | Encouraging others to buy a coin in order to inflate the price artificially, and then selling one’s own coins while the price is high, causing the price to drop. |
These kinds of emotional investments are a terrible idea.
That price explosion might have been caused by a fake rumor flying around Twitter, or a ‘pump and dump’ group trying to lure you in. Without taking a step back and doing your research, you just won’t know, not until it’s too late.
So try to practice emotional detachment when you’re deciding on which coins to invest in . Rely on research (covered in chapter 9) and cold, hard logic.
We all know that computers and phones are vulnerable machines. Email accounts get hacked, credit card numbers are stolen, celebrities find th