Everything You Need to Know to Win With Digital Currencies
I’ll admit, when cryptocurrencies like bitcoin first came on the scene several years ago, I was skeptical.
In many ways, I still am.
But in many other ways, I find what’s happening to be flat-out incredible. It’s a revolution in the making. The “death of cash” will forever change the way we look at money.
Even better, it’s created a brand-new arena for investors. Cryptocurrencies have turned into one of the hottest asset classes on the planet.
The trend begs our attention.
But where to begin?
What do you need to know to start using cryptocurrencies like bitcoin and investing in this hot asset class?
As you likely know, everything we do at Manward revolves around our Triad – Liberty, Know-How and Connections.
When mastered, these are the three elements that are proven to lead us to happier, healthier and wealthier lives.
We could argue the realm of cryptocurrencies embodies all three ideas. But it’s the liberty that’s minted into each digital coin that has our attention.
These new forms of digital cash exemplify liberty.
They are completely free of regulations. They weren’t created by some heavy-handed government. And they know no borders.
But that freedom comes at a cost. In this early stage of the game, an investor must take on a lot of risk.
You could get rich. Or you could lose everything.
That’s why it’s vital you know everything you can about the realm of cryptocurrencies.
Let’s get into it. We’ll start by focusing solely on the most popular of the bunch, bitcoin.
Bitcoins are created by solving complicated equations. They’re basically electricity converted into long strings of code with monetary value.
Bitcoin was first invented by mystery man Satoshi Nakamoto. You essentially have a digital balance on the internet. But what’s entirely unique is that it uses a technology called a blockchain to permanently and securely track each transaction.
When you buy or sell something using bitcoin, nothing physically changes hands. Instead, a record of the move – based on a unique key that tracks that particular coin is added to the blockchain.
But again, it’s entirely decentralized.
There’s no central database of all these transactions. Instead, they’re spread across the world on a network of bitcoin users’ computers.
With no government in charge, cryptocurrencies like bitcoin derive their value from a “monetary policy” that puts a cap on the maximum supply of bitcoins at 21 million. Its value is dependent on the market and its demand.
If there is a higher demand for bitcoin, the price will increase. If demand goes down, the bitcoin price will drop. Simple.
Unlike so many other currencies throughout the globe whose values are poked and prodded by either outright manipulation or stiff monetary policy, bitcoin’s value is not established by a governing entity.
But anytime an asset is driven by the market’s natural forces, we must ponder the idea of liquidity. After all, you could stick a huge price tag on a beautiful home, but if nobody wants to move into your neighborhood, you’ll never get your asking price.
Early on, liquidity was an issue for bitcoin and its digital brethren.
Bitcoin used to be the income of choice for hackers and high-tech drug dealers. It was practically off-limits to the casual user.
But that’s changing quickly.
Now you can use bitcoins at e-commerce sites like Dell, Expedia and Overstock. They’ve even started to accept bitcoins at brick-and-mortar stores.
With bitcoins growing in popularity, illiquidity won’t be a concern for much longer.
And as bitcoins become more liquid, volatility is expected to decline as well.
How to Invest
Before we get into the mechanics of buying cryptocurrencies, we must issue a word of caution.
With an asset as volatile and untested as bitcoin, you must invest cautiously. Allocate only a small portion (certainly less than 4% of your total portfolio) to the asset class.
While it’s tempting to get greedy, a sizable stake could turn into pure disaster.
We recently heard from a company that wants to roll folks’ retirement accounts into bitcoins…
That idea is not just terrible – it’s terrifying. Bitcoins are extremely volatile. It’s one thing to invest in them when you’re 30 and have time to make back any losses. But if you bet the farm when you’re planning for retirement, you could find yourself in big trouble.
Again, there are no regulations with bitcoin. It’s the Wild West of currencies. In many ways, that’s a great notion. In others, it’s a bit troubling.
After all, it means you can’t complain to a customer service rep if somebody hacks your money. It’s gone, and you’re not getting it back.
But if you store your digital currency properly, you shouldn’t lose any sleep over this.
That’s why if you plan to invest, I advise you to store your bitcoins on an encrypted USB drive. Referred to as “cold storage,” this provides a strong defense against cyberattacks.
You can use a standard USB drive or purchase one of the many drives designed specifically for cryptocurrencies. The latter are significantly more secure but do cost as much as $50.
You can also keep your bitcoins in an online digital “wallet.” Using one is fairly simple. They’re essentially cloud-based databases that store the keys that are used to receive and spend digital currencies.
If you don’t want to store your wealth online (on some unknown server) or on a USB drive that’s easily lost or stolen, one more option is a desktop wallet like those offered by Armory, Electrum or Hive. These setups allow you to store your digital currency directly on your own computer.
It’s a good idea… until your hard drive crashes or your house burns down.
For that reason, back up your computer regularly if you use this method.
Finally, perhaps the most convenient and simplest storage solution is a mobile wallet. These allow you to spend your coins directly through your phone by scanning a code or using the latest near-field communications technology. But again, you’re relying on unknown servers and their vulnerabilities.
There are many options and alternatives. Look for a wallet that accepts your coins and has strong reviews from users.
No matter how you store your digital currency, always have a backup.
When it comes to actually turning your dollars into cryptocurrency, there are several platforms available.
By far, the most popular is Coinbase (coinbase.com). It boasts more than 20 million customers and more than $150 billion in currency traded. Plus, it offers a mobile wallet and insurance for storing currency on its servers.
Your first step is to set up an account. It’s free and just as easy as setting up an online account anywhere else.
From there, you simply need to add dollars to your account. As with a traditional brokerage, you can fund the account using your bank account, a credit or debit card, or even PayPal.
Once funded, it’s as simple as a few mouse clicks.
Pick the digital currency you’d like to own, enter the amount you’d like to buy (you can buy a fraction of a coin), and click a button.
It’s yours… and it’s waiting for you in your digital wallet.
It’s important to note that Coinbase offers access to just three of the hundreds of cryptocurrencies available today: bitcoin, Ethereum and Litecoin.
To explain the difference between them, I’ll lean on my good friend Adam Sharp. He’s an expert on all things cryptocurrency and is the co-founder and Digital Asset Strategist of a crypto-focused site called EarlyInvesting.com.
Here’s how he describes each cryptocurrency…
Bitcoin, for example, is emerging as “digital gold” – a way to store and grow money. Bitcoin can be changed into cash or other assets all over the world. It’s the “reserve currency” of the crypto world.
Litecoin is “digital silver,” and has the advantage of lower fees and faster transactions. It was created by MIT grad Charlie Lee in 2011.
Charlie is a heavyweight in the crypto world. After creating Litecoin, he went on to work in an executive role at Coinbase.com.
In early 2017, Charlie left Coinbase to focus on Litecoin full time.
Litecoin is a lot like bitcoin… but faster.
It’s also cheaper to send. So merchants who transact in crypto (there are a lot of them) love using Litecoin. It has good liquidity on exchanges, so it serves as an excellent currency.
Litecoin is based on bitcoin’s open source code. But Litecoin implemented some major improvements, and as a result, it scales better than the original. Litecoin can handle far more transactions per second than bitcoin can.
Ethereum is a platform for building decentralized applications and executing smart contracts on a public ledger. We are still in the very early stages with Ethereum, but these companies (and millions of people) believe the potential is significant.
Ether (the currency that runs on the Ethereum platform) is also becoming a widely accepted currency and value store. This is natural with any asset that is valuable, rare, securable and easily transferrable.
It is widely used within the industry as currency. Developers are paid in Ether, so they have a vested interest in making the system as strong as possible.
When it comes to which cryptocurrencies are worth buying, Ethereum and Litecoin are on the list…
But bitcoin is not…
If the “crypto-craze” continues the way it has, bitcoin will remain the average buyer’s first choice. That makes it much more volatile and more speculative.
It’s smarter to focus on less popular choices.
Instead, a third digital coin worth your attention is Dash. It gets a lot less attention but has quickly become the world’s twelfth-biggest digital currency in terms of market cap.
It’s just one of a handful of bitcoin competitors to get accepted on Apple’s uber-popular App Store. Dash’s inclusion on the store ensures many more folks will be using the currency in the months and years ahead.
That means it will not remain in the twelfth spot for long… making it a speculative play worth your attention. It’s a rising star.
As we said earlier, there are many cryptocurrencies available. At last count, we found more than 1,600.
Not all are worthy of your attention.
We beg readers to stay away from the smaller, sketchier offerings. There are numerous reasons for caution, including future government intervention.
When – not if – the government steps in to try to regulate this wild frontier, the less legitimate currencies will be hit the hardest.
There are even several coins focused entirely on the pornography industry – like Sexcoin and Titcoin.
Though it’s an interesting concept – as they offer a private way to pay for sites many folks don’t want to get caught using – we urge caution.
They have a lot of very legitimate competition.
Finally, what’s the fun in making money off of cryptocurrencies if you can’t spend the money?
Of course, the traditional way of cashing out is to convert the currency back to dollars. You can use the same broker from whom you bought the digital cash.
Another option – one that allows you to use your cryptocurrency just about anywhere – is to fund a debit card directly from your digital wallet.
One popular option comes from ANX. It’s easy and safe. It’s virtually no different than using your standard debit card. You can use your ANX card at thousands of ATMs. You can use it online… or even at the gas station.
The world of digital currencies is utterly fascinating. A huge revolution is unfolding in front of us.
We argue cash will always be king. But we get very few chances to invest in a transformation like this one. It’s worth a portion of your portfolio.
For much more information about bitcoin and the lucrative world of cryptocurrencies, we urge readers to go to the ultimate authority on the subject, our friends at EarlyInvesting.com.