Captain’s Log 004 – Predictable Passive Power

The three P’s. Predictable, Passive Power! I made these up! I did not read them in a book anywhere but I did read several books on Finance. These days I have spent a lot of time in a car and I have listened to a number of audiobooks. What is an investor? My answer is someone that’s not trying to make a quick buck but rather sees potential in something and wants to be a part of it. Let me emphasize that last part. Being a part of your investment. What? All too often I see people wanting to drop a few dollars and get immediate and enormous returns! Investing is not about that. You have to own what you put your money in. There are strategies for doing this, and in this blog post I’m going to tell you about mine. I’m going to tell you about a predictable way to make money in markets, a passive way to do so, and paint a picture for you about the power of investing!

My interest in finance started when I realized how poorly my own retirement 401k was doing. I had not the slightest clue what I was doing. The average person gets zero help making decisions on funds to pick. You get countless links to useless online resource guides full of complicated terminology. Actually, if you don’t make decision, your company does so for you and sticks your retirement money in a Target Date Fund! This usually happens but not always. Yikes! High fees and mediocre performance. About a year back I read this book called “Money Master the Game” by Tony Robbins [1]. A good read if you’re interested in a new mindset or looking for new ideas. There’s a lot of repetitiveness in there but the book put me in the right mindset, and it led me to other books. The book I was led to is called “The Little Book of Common Sense Investing” by Jack Bogle and that gave me the knowledge to put together my own investment strategy [2].

Remember the crypto-realm is full of odd terms like Hot and Cold for wallets? Well there are also a host of acronyms? Some of them are really silly sounding like FOMO, or Fear of Missing Out. A lot of people fall victim to this one. Wanting to rush in after the wave of a particular investment opportunity is heading toward its peak. In a good book that I’m currently reading, “A Random Walk Down Wall Street” by Burton Malkiel I learned about the Greater Fool Theory[3][4]. There always has to be a greater fool willing to buy what you bought for more than what you paid for it, and that can only go so far. Not knowing when that will happen has caused me to lean back into the investment strategy that I use; passive indexing. I use a buy and hold strategy. Crypto followers called this HODL. No that is not hold spelled incorrectly. Rather an acronym to mean hold on for dear life because the cryptocurrency markets are volatile like roller coaster is.

If I went around and looked for a needle in a haystack I will have a hard time trying to find it. That is analogous to hunting for the next big winner. For instance, there are dozens of Altcoins that are priced very low and one could easily jump in on and win big. But, which one? Seeing as one cannot possibly know which one or where the needle in the haystack is, what is there to do? My approach. Buy the haystack. Yes. Do not try and guess where the needle is. Departing from that analogy, one can apply this with securities. Ever hear of the Standard and Poor’s 500 or S&P 500? Well that is a collection of 505 stocks issued by the 500 companies that it includes under its index [5]. The money in the index is spread out over all of those companies with a weight to each. This is wonderful because if any one of those companies fails, the entire index will continue on. The idea of an index is spreading risk out among many securities instead of a handful, and it works just as well with cryptocurrencies as it does with stocks.

Why is this better than trying to chase big winners and constantly buying and selling to beat the market? That is to gain more by actively trading than the market would on its own passively. I do not want to get hung up on numbers. You can go do the research yourself, but I do know from my own research that when funds managers try to beat the market, they fail over the long term. Yes, I’m talking about Mutual Funds. They’re expensive to hold with enormous fees and the fund manager tries to actively beat the market. Two things, one you can’t beat the market (better than the S&P 500 or similar) consistently over many year; 30 plus years. Very few mutual fund managers have pulled that off. I don’t have a reference for that, so I challenge you to go find some that do and wish you good luck. I digress a bit here but I have to make due diligence. The second, is fees. Fee’s will erode your returns for as long as they’re held. Since they’re unavoidable, I’d keep them as close to 1% or less. In the context of a mutual fund, one pays these fees to the fund manager. In the realm of crypto your fees consist of transaction cost to make trades.

A passive strategy over the years will produce a consistent result. Remember, one’s goal is not to chase the market risers which are rising and falling all the time. Eventually you’ll guess wrong and get dropped like a rock. Pick a collection of crypto assets and split your money across them. Believe it or not, there are even strategies for how to pick and split money across the collection of assets too. Pick cryptos you’re really into. That’s what I do. If I find a cryptocurrency that I really think has a good fundamental value to it. I try to get in on the ground floor, that is, early on. However, if a security is priced at a specific number and you feel that is a good price then go for it. Once I have picked a crypto asset, I’ll invest and hold on to the asset no matter what the market does. The market will do the rest passively. I am in the market for the long term. An investor!

A word about advice. I am not a person that is qualified to give investment advice. I have not listed any assets that I’ve picked myself, but I may talk about some in a later post. I am merely a person telling you how I go about investing, and you are under obligation to yourself to do your own research. I really must emphasize research. I read about crypto every day and keep up to date with market developments as best I can. An investor is obliged to stay current, and so am I. Cryptocurrency markets are extremely volatile so be careful!

Reference:

  1. https://www.amazon.com/MONEY-Master-Game-Financial-Freedom/dp/1476757860
  2. https://www.amazon.com/Little-Book-Common-Sense-Investing/dp/0470102101
  3. https://www.amazon.com/Random-Walk-down-Wall-Street/dp/0393352242/ref=sr_1_1?ie=UTF8&qid=1513868853&sr=8-1&keywords=a+random+walk+down+wall+street
  4. https://www.investopedia.com/terms/g/greaterfooltheory.asp
  5. https://www.investopedia.com/terms/s/sp500.asp

Captain’s Log 003 – Wallets for days!

Wallet, wallets everywhere. What to choose, a hope and a prayer. That was how I felt looking for my first cryptocurrency wallet. Since the inception of Bitcoin countless developers have made wallets for it, and the numerous altcoins each have their own. All of them claiming to be the best thing around. I must have read a dozen articles about it and watched just as many YouTube videos. My first Bitcoin purchase of $100 was sitting on my Coinbase account and, at the time, that seemed like the most logical place to store my money. I had this feeling like I had lto get it into my hands. In this post you will learn what a wallet is, how it operates, the different types and where to get one. I’ll let you know what I use too. After reading this you should have an idea of what sort of wallet you might want to use.

Before diving in I need to say this about wallets. This is the mother of all rules when it comes to wallets and I cannot emphasize this enough. If you do not possess the private keys, then it is NOT your wallet! I mean that in the most explicit and seriousness of tones possible. Everyone that lost their money on the Mt Gox [1] exchange or the NiceHash hack [2] learned this the hard way. Trust me. I was one of them. I lost a month of mining earnings on NiceHash in that hack. Thankfully it was only a few bucks. You might be wondering what is a private key? Or, I thought we were talking about wallets? Well, I need to explain what that is exactly.

To understand what the term “Wallet” is in the realm of cryptocurrency I must explain to you how one functions. First, shed all notion of the traditional concept of a wallet because the name does not own up to what is actually happening. A wallet handles what I am about to explain to you and gives you a lot of pretty buttons to use while you’re doing so; enter another piece of software. All coins or tokens belonging to a cryptocurrency must live at a certain address that is yours, and that address is accounted for on the blockchain. Here is an example of a BTC wallet address I created at www.bitaddress.org:

E.g. My BTC Address in the sidebar of this blog: 1CAiRgo2KcXQehsC2PdiPEmjMHECJhvriK

Good luck remembering that thing by memory! This address is public and is what you give to others to receive a payment, and the private key is even longer. All transactions made are visible publicly on the blockchain or public ledger. That address did not just come from anywhere, however, it is generated by a random seed and comes with a private key pair.

The private key is how you sign transactions on the blockchain. A transaction consists of three items; A destination address, an amount to send, and a signature [3]. All of these make up a piece of information that is sent out to the network to become a part of a block to be mined and added to the blockchain. A wallet is your window to controlling your interests on the blockchain.

Here’s a good analogy. You can think of your wallet like a mailbox. This is your public facing address. Everyone can send you mail if they know where you live. Also, anyone can look into your mailbox and see what’s there, although I hope my neighbors aren’t snooping inside! Can’t somebody just steal your mail? Well, yes but let’s say ours is a P.O. box with a key! Now, usually, to send mail you put it in your mailbox for pickup or a drop box. We all know our mail isn’t going anywhere without a stamp, right? So, think of that stamp as your signature. Obviously, the contents of the mail is the digital currency you’re sending.

Not too hot and not too cold… Yes, there are types of wallets, and they’re not associated with temperature.. A hot wallet is on that either lives on a hosted website or on a device. If the hot wallet is hosted by another site, then you by default do not own the private keys and your money is not in your possession. All exchanges operate this way. Do not trust an exchange or website to keep your money safe! They can be hacked! I don’t even trust Coinbase to do this and they’re about as reputable as it gets in the USA for an exchange. The other type of hot wallet is a the kind that runs on your mobile device, like Coinomi [5], or your desktop, like exodus [6]. For the record, I do not endorse either of those software host wallets. They are merely meant as an example. The hot wallet types are versatile, convenient, and, usually, easy to use. However, this wallet type is only as safe as your device is. If your device, desktop or mobile, becomes compromised then your crypto is at risk.

I don’t know about you, but I am not a huge risk taker. I’m not risk averse, but I do prefer to mitigate risk whenever possible. You’ll see this when I get around to talking about indexing my crypto assets in a later post. Why would you prefer a cold wallet over the convenience of a hot wallet? I’ll tell you the answer is peace of mind. A cold wallet is one that is not connected to the internet or any device such that the private keys can be transmitted electronically. There are cold wallets that take the form of paper. You literally cannot hack a piece of paper! Unless we’re using a pair of scissors, your private key can be safely stored away in your filing cabinet if you so chose. I don’t like typing in long characters off of a piece of paper, so I’d rather have something manage that for me. Yes QR codes do exist, but who wants to have to pull a piece of paper out of a safe every time you want to scan it? The use case for paper wallets is limited to people wanting that sort of security, or to ATM devices that dispense your money is such a manner.

Enter the hardware wallet. I personally use a Ledger Nano S to safely store my crypto assets [7]. If you want to help me out, you can use the link in my references to obtain one and the referral should help me out. To give you other options, there are the Trezor[8] and Keepkey[9] wallets. I have never used either of those alternatives, but I read they are comparable to a Ledger Nano S. The device I use plugs into your machine via USB. You must enter a 4-8 digit PIN number to access it, and to make a transaction you must physically push a button on the device. If someone obtains your device, it will erase itself after 3 or 4 unsuccessful attempts. If someone takes it apart, it is tamper proof and will erase itself. Even if my desktop gets hacked, the ledger does not transmit the private keys to the compromised device. And, the best part! If a car runs over it or it gets incinerated, you can regenerate your wallet on another one! That’s worth the Approx $60 I spent to get one to me. I’m probably going to pick up a couple more to keep as back ups later. You must decide whether to go hot or cold.

A word on keeping your private keys safe. Regardless of the wallet choice you are still responsible for safeguarding the private key, or the seed that generated it. Seed? Wallets don’t have seeds in them? Some wallets generate the private key directly and then you store it somewhere safe. Other wallets generate the private key based off of a seed phrase you give it. For instance, the Ledger Nano S generates its public and private key pair off of a 24 word passphrase that is unique to each device issued. Forget the phrase and you will never regenerate the keys. That’s worth safeguarding! If you find yourself with a seed. Do yourself a favor. Write it down and put it in a safe. Seed or long giant private key; regardless of wallet type. With the power of being on your own bank, you are responsible for getting this right!

I added a progress gauge to the sidebar of this blog. The gauge is live and updates on its own! I’m still sitting at a whopping 0.018 BTC! Yay me! I am actually making progress just not in terms of BTC. I’m mining Ethereum and Making headway in my crypto asset portfolio. I just haven’t converted anything over to Bitcoin. Honestly, I’m wondering if I should? Once I work my way up to 1 ETH, I’ll use what’s left over and convert it. I sort of like to have at least one of each for investment purposes.

Until next time! I hope you now have a thorough understanding of wallets. If you have a topic you want covered or a question. Feel free to contact me on my Facebook page or Twitter!

References

  1. https://www.wired.com/2014/03/bitcoin-exchange/
  2. https://www.coindesk.com/62-million-gone-cryptocurrency-mining-market-nicehash-hacked/
  3. https://en.bitcoin.it/wiki/Transaction
  4. https://www.bitaddress.org/
  5. https://coinomi.com/
  6. https://www.exodus.io
  7. https://www.ledgerwallet.com/r/159b
  8. https://trezor.io/
  9. https://www.keepkey.com/

Captain’s Log 002 – Making a Market Master

The first time I got on an exchange other than Coinbase[1] and bought an Altcoin was an anxious and tedious experience. There were so many buttons with terminology I did not understand, such as limit, bid/ask, fees etc… From my perspective, I had just learned about Ripple XRP and I wanted to get some! I thought it would be as simple as handing over my dollars and receiving my new currency. Wrong! I had to learn my way around an exchange that did not make a fancy abstract graphical user interface tied to my credit card. I wasn’t even trading dollars actually, I was going to trade Bitcoin for the XRP.

I’ll tell you why I went this route. Some of you are thinking, why didn’t this person just use Changelly[2] or use Bitstamp[3]. The first reason is, I simply didn’t know of their existence at the time I did my first market purchase. The second reason is I had Bitcoin I had earned and wanted to trade it for something else. My first rule of investing is as such. Do NOT invest money you do NOT have. Period! The way I treat investment is considering it as if it were a total loss at the time of vesting. I have to be willing to lose that money entirely. Therefore, the Bitcoin I had earned through a mining marketplace company called Nicehash was currency I had earned, and I didn’t have to add more to the pot from my bank account.

In my last post I had mentioned that privacy is subjective to the user. One must decide if handing over their personal information is unsettling or not. I was okay with this when I made my Coinbase account. However, I felt that doing this once was enough and I felt more comfortable using a USA based exchange doing it. Finding an exchange that dealt with altcoins while simultaneously having a low barrier to entry was important to me. Name and address was okay with me, but I didn’t want to have to fork over my drivers license and birth certificate to make a single trade. I must have googled “altcoin exchange” about a dozen times before I found Bittrex[4]. This exchange was going to let me do what I wanted without needing to know everything about me. Later I learned about Binance[5]. In my opinion both are equally private and useful.

In this first experience, I went headlong in without doing enough research to understand fully how to proceed. In my mind the money I was risking was for education and I’d learn as I went. My first lesson came in the form of confirmations. Bittrex requires at least 2 confirmations of your Bitcoin transaction before crediting the funds to your account. Cue waiting time! An hour later I returned and found my Bitcoin available for trade. Afterward I navigated over to the trading page for the BTC/XRP exchange pair.

XRP-Bittrex

I don’t know about you but my brain works in USD not BTC, so looking at the marked information for the last trade in an alternative currency was a bit of a switch. I found myself constant keeping track of the conversion between BTC and USD. Fortunately, the conversion is there for you but it’s interesting to note how much my brain clung to the notion of dealing in dollars. Looking at the information I deduced that “LAST” meant the last trade that settled, but I wasn’t sure what “VOL”, “BID” and “ASK” meant initially. Google is your friend. Volume or “VOL” simply meant how much had been traded in the past 24 hours. There’s more to it than just that because one can learn a lot about a coin by its volume. Long story short, you want to work with a currency that is traded. If there’s a low volume then that means nobody is trading it so you would have a hard time buying and/or selling that item. Next “BID” simply meant the most anyone in the market was willing to buy for, and “ASK” was the least current sell price. That’s why it’s a market right? You have to meet in the middle somewhere, only who is going to do that is anyone’s guess.

Trading-Bittrex

A little market terminology on orders. An order is a person’s intent to buy or sell at a given price. However, there are different types of orders and I’m going to tell you about the two simplest and why you might want to use them. First, you have the market order. Imagine you’re doing the shopping for a fresh fish and you’re pressed for time or money isn’t an object for you. What do you do? You go to the grocery store and buy the fish at whatever the fish is selling for. No haggling or questions asked. Settlement is pretty easy in this situation. The advantage is you get your fish pretty quickly but you might not get the best price in town. The second order type is the limit order, and these get a little more tricky. The limit order may come with a time limit on it or may be good until you change your mind. Using the fish analogy, imagine you’re sure that the fish may be purchased elsewhere at a better price and therefore you decide to hold out. Once can do that on an exchange with a limit order. Your order might not go through immediately because there may be others willing to pay more than you are for the same thing to the same sellers. What you are doing is betting that eventually that pool of people willing to pay more will dry up, or those selling will decide to sell lower all of a sudden. Either way, you put a limit on your price.

Oders-Bids-Bittrex

Playing around with limit orders is fun! I really enjoyed seeing how little I could get away with paying for my XRP. I must have waited an hour but eventually the number of folks willing to pay more than I did waned and sellers gave in a little. The fun part is you get to watch this play out on the order book. Your order usually gets a star next to it or something to make it stand out to you. The user interface on exchanges are going to vary but the concepts are the same. For example, on Bittrex, I would place a bit at the last price for a market order. There is no “market buy” button.

A word of caution about dealing with exchanges. Two big ones fees and wallets. Do your homework and read the fees pages thoroughly. I wish I had done this my first time. Every exchange, will charge two types of fees. The first being a trading commision. This fee will vary exchange to exchange. For example, Bittrex charges 0.25% on each trade you perform regardless of the amount. The second one is more important, withdrawal fees! I had no idea that the exchange was going to charge me 5 XRP just to withdraw my money!

Regarding wallets and exchanges…. Never leave your money on an exchange and be careful about which wallet you chose. I cannot stress this enough. If you do not possess the private keys to your wallet IT IS NOT YOURS. I will not trust an exchange to store my money. They are not bank accounts.

My bitcoin meter hasn’t moved because my latest round of Bitcoin earnings was lost when NiceHash was hacked last week on 12/6/17[7]. I suppose that’s yet another post; mining!

Until next time! Feel free to comment with questions, or drop me a tweet on twitter! I use my blog and twitter the most with the occasional YouTube video.

References:

  1. Coinbase – https://www.coinbase.com/join/59a82f0fbb717800af37aaca
  2. Changelly – https://changelly.com/
  3. Bitstamp – https://www.bitstamp.net/
  4. Bittrex – https://bittrex.com/
  5. Binance – https://www.binance.com/?ref=11161850
  6. Ledger Nano S – https://www.ledgerwallet.com/r/159b
  7. NiceHash Hack – https://www.reddit.com/r/NiceHashHack/

Captain’s Log 001 – Where I started & My Bitcoin Progress Gauge.

Where to start in crypto and my progress gauge

There is a plethora of information to get people started obtaining bitcoin and most other altcoins.  Almost too much information.  This world is so busy everyone wants a piece of the proverbial “pie”.  After I made the decision to buy my first fraction of a bitcoin I started looking for a place to do this.  Cue up the dozens of “Where to buy bitcoin” Google searches.  What I found was a cacophony of choices and routes one can get bitcoin.  In this post I am going to break down all of the various choices of cryptocurrency exchanges and then walk you through how to store it safely.  

Enter the exchange and lots of choices.  I would later find out that the exchange was just a fancy way to say a market with a pretty user interface. Exchanges are where you swap your hard earned “fiat” currency for a crypto-asset.  I had no idea what the word “fiat” meant either and as a result started looking at exchanges of all types not knowing some accepted it and others did not.  For the uninitiated, “fiat” generally refers to a currency backed by a government.  

Simply put, there are categories of exchanges out there.  In the first category there are the exchanges that are controlled by an entity or organization and those fitting such a group convert currency differently.  The first kind is an exchange that deals in fiat currency and trades it for crypto.  For example, a very well known exchange that does this is Coinbase. Not promoting them but that’s an example.  The second sort of exchange does not bridge fiat. Instead it assumes you already have crypto and want to swap it out for another cryptocurrency, specifically one of the many alternative coins; altcoins. You have to transfer Bitcoin or Ethereum to it and then trade it for other currencies or tokens.  An example of an exchange like this is Binance or Bittrex.  In the case of Bittrex, you can go through a more rigorous vetting process to exchange in fiat there, however, I have not done this yet.  Outside of exchanges controlled by an organization are the peer-to-peer exchanges.  Some of them are run by a controlling authority and others are open source, for example Cointal and Bisq, respectively. Both have their pros and cons a there are dozens of choices for each! Where do you go?

What to consider.  For me it boils down to two bigs ones.  Do you want your transactions to hold your name to it or not? Me personally, I have nothing to hide so I don’t mind. A company like Coinbase is going to vet you and give you a buying limit based on whom your are.  Meanwhile, peer-to-peer trading platforms use a trusted third party ebay-like system or have a built in method for handling it. Think trust-less.  Among all exchanges, unless you’re totally doing this in your backyard with your neighbor, you’re going to pay a fee and that brings me to the second.  Do you want to pay big bucks to swap your currencies or not? For me, I’m not opposed to dealing with a company like Coinbase because they have a simple user interface.  To me that’s worth the 4% fee they charge when you use a credit card to buy.  

If you’re clueless and want a simple place to start, just check out coinbase.  There’s a whole extra side to all of this, which is the question of “How the heck do I place a market order?” if you don’t use a simplistic exchange to tackle too.  I’ll talk about that in another blog post.  

For me, I am using Coinbase and GDAX.  If I want instant buys, that is something I hadn’t planned for. More specifically, a hypothetical dip on Ethereum, I’ll use Coinbase. Long term if you plan to buy a certain amount each month then I use a bank transfer, wait a ridiculously long period of time, and finally trade on GDAX because it’s cheaper to do the market orders yourself than to go through the simplified user system that Coinbase offers.  

I’d like to write another blog post about storing your cryptocurrencies, but suffice it to say I don’t trust an exchange to keep my crypto safe and neither should you. I’m a computer geek but I’m paranoid about losing a hard drive, so I opted for a hardware wallet.  

To tell everyone where I’m at, I have amassed a whopping ~0.018 BTC! That’s after a few months of mining and learning where and how to obtain crypto and store it safely.  Most of that I’ve earned through mining.  I even made a pretty gauge to show my progress.  Side note: I love graphs because I’m an engineer. I have a long way to go, but that’s okay! 

btc-gauge12717

 

My resources:

I’ll be honest, some of these are referrals, but the way I see things using it is a win win for both of us.