Cryptocurrency Investing For Dummies book cover

Cryptocurrency Investing For Dummies

By: Kiana Danial Published: 03-06-2019

The ultimate guide to the world of cryptocurrencies!

While the cryptocurrency market is known for its volatility—and this volatility is often linked to the ever-changing regulatory environment of the industry—the entire cryptocurrency market is expected to reach a total value of $1 trillion this year. If you want to get in on the action, this book shows you how. 

Cryptocurrency Investing For Dummies offers trusted guidance on how to make money trading and investing in the top 200 digital currencies, no matter what the market sentiment. You'll find out how to navigate the new digital finance landscape and choose the right cryptocurrency for different situations with the help of real-world examples that show you how to maximize your cryptocurrency wallet.

  • Understand how the cryptocurrency market works
  • Find best practices for choosing the right cryptocurrency
  • Explore new financial opportunities
  • Choose the right platforms to make the best investments

This book explores the hot topics and market moving events affecting cryptocurrency prices and shows you how to develop the smartest investment strategies based on your unique risk tolerance. 

 

Articles From Cryptocurrency Investing For Dummies

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Cryptocurrency Investing For Dummies Cheat Sheet

Cheat Sheet / Updated 04-05-2022

So, you’ve heard about Bitcoin and other cryptocurrencies, and you’re ready to add these new kids on the block to your investment portfolio — that’s great! You’re now officially a part of the future economy. To make the best decisions for your portfolio, educate yourself on the basics of cryptocurrencies and what you need to get started. Also, be sure to do your homework on a crypto’s fundamentals before adding any new assets to your portfolio.

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What Is Cryptocurrency?

Article / Updated 02-18-2022

Simply stated, a cryptocurrency is a new form of digital money. You can transfer your traditional, non-cryptocurrency money like the U.S. dollar digitally, but that’s not quite the same as how cryptocurrencies work. When cryptocurrencies become mainstream, you may be able to use them to pay for stuff electronically, just like you do with traditional currencies. However, what sets cryptocurrencies apart is the technology behind them. You may say, “Who cares about the technology behind my money? I only care about how much of it there is in my wallet!” The issue is that the world’s current money systems have a bunch of problems. Here are some examples: Payment systems such as credit cards and wire transfers are outdated. In most cases, a bunch of middlemen like banks and brokers take a cut in the process, making transactions expensive and slow. Financial inequality is growing around the globe. Around 3 billion unbanked or underbanked people can’t access financial services. That’s approximately half the population on the planet! Cryptocurrencies aim to solve some of these problems, if not more. The basics of cryptocurrencies You know how your everyday, government-based currency is reserved in banks? And that you need an ATM or a connection to a bank to get more of it or transfer it to other people? Well, with cryptocurrencies, you may be able to get rid of banks and other centralized middlemen altogether. That’s because cryptocurrencies rely on a technology called blockchain, which is decentralized (meaning no single entity is in charge of it). Instead, every computer in the network confirms the transactions. The definition of money Before getting into the nitty-gritty of cryptocurrencies, you need to understand the definition of money itself. The philosophy behind money is a bit like the whole “which came first: the chicken or the egg?” thing. In order for money to be valuable, it must have a number of characteristics, such as the following: Enough people must have it. Merchants must accept it as a form of payment. Society must trust that it’s valuable and that it will remain valuable in the future. Of course, in the old days, when you traded your chicken for shoes, the values of the exchanged materials were inherent to their nature. But when coins, cash, and credit cards came into play, the definition of money and, more importantly, the trust model of money changed. Another key change in money has been its ease of transaction. The hassle of carrying a ton of gold bars from one country to another was one of the main reasons cash was invented. Then, when people got even lazier, credit cards were invented. But credit cards carry the money that your government controls. As the world becomes more interconnected and more concerned about authorities who may or may not have people’s best interests in mind, cryptocurrencies may offer a valuable alternative. Here’s a fun fact: Your normal, government-backed currency, such as the U.S. dollar, must go by its fancy name, fiat currency, now that cryptocurrencies are around. Fiat is described as a legal tender like coins and banknotes that have value only because the government says so. Some cryptocurrency history The first ever cryptocurrency was (drumroll please) Bitcoin! You probably have heard of Bitcoin more than any other thing in the crypto industry. Bitcoin was the first product of the first blockchain developed by some anonymous entity who went by the name Satoshi Nakamoto. Satoshi released the idea of Bitcoin in 2008 and described it as a “purely peer-to-peer version” of electronic money. Bitcoin was the first established cryptocurrency, but many attempts at creating digital currencies occurred years before Bitcoin was formally introduced. Cryptocurrencies like Bitcoin are created through a process called mining. Very different than mining ore, mining cryptocurrencies involves powerful computers solving complicated problems. Bitcoin remained the only cryptocurrency until 2011. Then Bitcoin enthusiasts started noticing flaws in it, so they decided to create alternative coins, also known as altcoins, to improve Bitcoin’s design for things like speed, security, anonymity, and more. Among the first altcoins was Litecoin, which aimed to become the silver to Bitcoin’s gold. But as of the time of writing, more than 1,600 cryptocurrencies are available, and the number is expected to increase in the future. Key cryptocurrency benefits Still not convinced that cryptocurrencies (or any other sort of decentralized money) are a better solution than traditional government-based money? Here are a number of solutions that cryptocurrencies may be able to provide through their decentralized nature: Reducing corruption: With great power comes great responsibility. But when you give a ton of power to only one person or entity, the chances of their abusing that power increase. The 19th-century British politician Lord Acton said it best: “Power tends to corrupt, and absolute power corrupts absolutely.” Cryptocurrencies aim to resolve the issue of absolute power by distributing power among many people or, better yet, among all the members of the network. That’s the key idea behind blockchain technology anyway. Eliminating extreme money printing: Governments have central banks, and central banks have the ability to simply print money when they’re faced with a serious economic problem. This process is also called quantitative easing. By printing more money, a government may be able to bail out debt or devalue its currency. However, this approach is like putting a bandage on a broken leg. Not only does it rarely solve the problem, but the negative side effects also can sometimes surpass the original issue. For example, when a country like Iran or Venezuela prints too much money, the value of its currency drops so much that inflation skyrockets and people can’t even afford to buy everyday goods and services. Their cash becomes barely as valuable as rolls of toilet paper. Most cryptocurrencies have a limited, set amount of coins available. When all those coins are in circulation, a central entity or the company behind the blockchain has no easy way to simply create more coins or add on to its supply. Giving people charge of their own money: With traditional cash, you’re basically giving away all your control to central banks and the government. If you trust your government, that’s great, but keep in mind that at any point, your government is able to simply freeze your bank account and deny your access to your funds. For example, in the United States, if you don’t have a legal will and own a business, the government has the right to all your assets if you pass away. Some governments can even simply abolish bank notes the way India did in 2016. With cryptocurrencies, you and only you can access your funds. Cutting out the middleman: With traditional money, every time you make a transfer, a middleman like your bank or a digital payment service takes a cut. With cryptocurrencies, all the network members in the blockchain are that middleman; their compensation is formulated differently from that of fiat money middlemen’s and therefore is minimal in comparison. Serving the unbanked: A vast portion of the world’s citizens has no access or limited access to payment systems like banks. Cryptocurrencies aim to resolve this issue by spreading digital commerce around the globe so that anyone with a mobile phone can start making payments. And yes, more people have access to mobile phones than to banks. In fact, more people have mobile phones than have toilets, but at this point the blockchain technology may not be able to resolve the latter issue. Common crypto and blockchain myths During the 2017 Bitcoin hype, a lot of misconceptions about the whole industry started to circulate. These myths may have played a role in the cryptocurrency crash that followed the surge. The important thing to remember is that both the blockchain technology and its byproduct, the cryptocurrency market, are still in their infancy, and things are rapidly changing. Let me get some of the most common misunderstandings out of the way: Cryptocurrencies are good only for criminals. Some cryptocurrencies boast anonymity as one of their key features. That means your identity isn’t revealed when you’re making transactions. Other cryptocurrencies are based on a decentralized blockchain, meaning a central government isn’t the sole power behind them. These features do make such cryptocurrencies attractive for criminals; however, law-abiding citizens in corrupt countries can also benefit from them. For example, if you don’t trust your local bank or country because of corruption and political instability, the best way to store your money may be through the blockchain and cryptocurrency assets. You can make anonymous transactions using all cryptocurrencies. For some reason, many people equate Bitcoin with anonymity. But Bitcoin, along with many other cryptocurrencies, doesn’t incorporate anonymity at all. All transactions made using such cryptocurrencies are made on public blockchain. Some cryptocurrencies, such as Monero, do prioritize privacy, meaning no outsider can find the source, amount, or destination of transactions. However, most other cryptocurrencies, including Bitcoin, don’t operate that way. The only application of blockchain is Bitcoin. This idea couldn’t be further from the truth. Bitcoin and other cryptocurrencies are a tiny byproduct of the blockchain revolution. Many believe Satoshi created Bitcoin simply to provide an example of how the blockchain technology can work. All blockchain activity is private. Many people falsely believe that the blockchain technology isn’t open to the public and is accessible only to its network of common users. Although some companies create their own private blockchains to be used only among employees and business partners, the majority of the blockchains behind famous cryptocurrencies such as Bitcoin are accessible by the public. Literally anyone with a computer can access the transactions in real time. For example, you can view the real-time Bitcoin transactions. Risks of cryptocurrency Just like anything else in life, cryptocurrencies come with their own baggage of risk. Whether you trade cryptos, invest in them, or simply hold on to them for the future, you must assess and understand the risks beforehand. Some of the most talked-about cryptocurrency risks include their volatility and lack of regulation. Volatility got especially out of hand in 2017, when the price of most major cryptocurrencies, including Bitcoin, skyrocketed above 1,000 percent and then came crashing down. However, as the cryptocurrency hype has calmed down, the price fluctuations have become more predictable and followed similar patterns of stocks and other financial assets. Regulations are another major topic in the industry. The funny thing is that both lack of regulation and exposure to regulations can turn into risk events for cryptocurrency investors. Gear up to make transactions Cryptocurrencies are here to make transactions easier and faster. But before you take advantage of these benefits, you must gear up with crypto gadgets, discover where you can get your hands on different cryptocurrencies, and get to know the cryptocurrency community. Some of the essentials include cryptocurrency wallets and exchanges. Cryptocurrency wallets Some cryptocurrency wallets, which hold your purchased cryptos, are similar to digital payment services like Apple Pay and PayPal. But generally, they’re different from traditional wallets and come in different formats and levels of security. You can’t get involved in the cryptocurrency market without a crypto wallet. Get the most secure type of wallet, such as hardware or paper wallets, instead of using the convenient online ones. Cryptocurrency exchanges After you get yourself a crypto wallet, you’re ready to go crypto shopping, and one of the best destinations is a cryptocurrency exchange. These online web services are where you can transfer your traditional money to buy cryptocurrencies, exchange different types of cryptocurrencies, or even store your cryptocurrencies. Storing your cryptocurrencies on an exchange is considered high risk because many such exchanges have been exposed to hacking attacks and scams in the past. When you’re done with your transactions, your best bet is to move your new digital assets to your personal, secure wallet. Exchanges come in different shapes and forms. Some are like traditional stock exchanges and act as a middleman — something crypto enthusiasts believe is a slap in the face of the cryptocurrency market, which is trying to remove a centralized middleman. Others are decentralized and provide a service where buyers and sellers come together and transact in a peer-to-peer manner, but they come with their own sets of problems, like the risk of locking yourself out. A third type of crypto exchange is called hybrid, and it merges the benefits of the other two types to create a better, more secure experience for users. Cryptocurrency communities Getting to know the crypto community can be the next step as you’re finding your way in the market. The web has plenty of chat rooms and support groups to give you a sense of the market and what people are talking about. Here are some ways to get involved: Crypto-specific Telegram groups. Many cryptocurrencies have their very own channels on the Telegram app. To join them, you first need to download the Telegram messenger app on your smartphone or computer; it’s available for iOS and Android. Crypto chat rooms on Reddit or BitcoinTalk: BitcoinTalk and Reddit have some of the oldest crypto chat rooms around. You can view some topics without signing up, but if you want to get involved, you need to log in. (Of course, Reddit isn’t exclusive to cryptos, but you can search for a variety of cryptocurrency topics.) TradingView chat room: One of the best trading platforms out there, TradingView also has a social service where traders and investors of all sorts come together and share their thoughts, questions, and ideas. Invest Diva’s Premium Investing Group: If you’re looking for a less crowded and more investment/trading-focused place to get support, you can join our investment group (and chat directly with me as a perk too). On the flip side, many scammers also target these kinds of platforms to advertise and lure members into trouble. Keep your wits about you. Make a plan before you jump in You may just want to buy some cryptocurrencies and save them for their potential growth in the future. Or you may want to become more of an active investor and buy or sell cryptocurrencies more regularly to maximize profit and revenue. Regardless, you must have a plan and a strategy. Even if your transaction is a one-time thing and you don’t want to hear anything about your crypto assets for the next ten years, you still must gain the knowledge necessary to determine things like the following: What to buy When to buy How much to buy When to sell The following sections give you a quick overview of the steps you must take before buying your first cryptocurrency. If you’re not fully ready to buy cryptocurrencies, no worries: You can try some of the alternatives to cryptos like initial coin offerings, mining, stocks, and more. Select your cryptocurrencies More than 1,600 cryptocurrencies are out there at the time of writing, and the number is growing. Some of these cryptos may vanish in five years. Others may explode over 1,000 percent and may even replace traditional cash. You can select cryptocurrencies based on things like category, popularity, ideology, the management behind the blockchain, and its economic model. Because the crypto industry is pretty new, it’s still very hard to identify the best-performing cryptos for long-term investments. That’s why you may benefit from diversifying among various types and categories of cryptocurrencies in order to manage your risk. By diversifying across 15 or more cryptos, you can stack up the odds of having winners in your portfolio. On the flip side, overdiversification can become problematic as well, so you need to take calculated measures. Analyze, invest, and profit When you’ve narrowed down the cryptocurrencies you like, you must then identify the best time to buy them. For example, in 2017 many people started to believe in the idea of Bitcoin and wanted to get involved. Unfortunately, many of those people mismanaged the timing and bought when the price had peaked. Therefore, they not only were able to buy fewer bits of Bitcoin (pun intended), but they also had to sit on their losses and wait for the next price surge. However, by analyzing the price action and conducting proper risk management, you may be able to stack the odds in your favor and make a ton of profit in the future.

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3 Short-Term Cryptocurrency Investing Time Frames

Article / Updated 08-26-2021

Though it may be scary, it's a time-proven truth in investing: To earn more return, you must take more risk. When aiming to make money in the short term, you must be prepared to lose your investment (and maybe even more!) in that time frame as well, especially in a volatile market like cryptocurrencies. Another term for short-term trading is aggressive trading. Why? Because you’re taking more risk in the hope of making more profit. Investment of any kind requires a constant balancing and trade-off between risk and return. Short-term trading can be divided into different categories within itself based on how quickly you realize the profits — hours, days, or weeks. Generally speaking, the shorter the trading time frame, the higher the risk involved with that trade. Cryptocurrency investing: profiting within hours If you’ve ever wondered what a day trader does, this is it! Day trading is one form of aggressive short-term trading. You aim to buy and sell cryptos within a day and take profit before you go to bed. In traditional markets like the stock market, a trading day often ends at 4:30 p.m. local time. But the cryptocurrency market runs 24/7, so you can define your day-trading hours to fit your schedule. Pretty neat, right? With this great power comes great responsibility, though. You don’t want to lose your shirt and get your spouse or partner angry at you. Here are a few questions to ask yourself to determine whether day trading is indeed the right crypto route for you: Do you have the time to dedicate to day trading? If you have a full-time job and can’t stick to your screen all day, day trading probably isn’t right for you. Make sure you don’t use your company time for trading! Not only you can get fired, but you also won’t be able to dedicate the required time and energy to trading either. Double the trouble. Do you have sufficient risk tolerance for day trading? Even if you can financially afford to potentially lose money day trading, are you willing to do so? Do you have the stomach to see your portfolio go up and down on a daily basis? If not, perhaps day trading isn’t right for you. If you’ve made up your mind that day trading is the right crypto route for you, the following sections share some tips to keep in mind before getting started. Define crypto trading sessions Because cryptocurrencies are traded internationally without borders, one way you can define a trading day is to go by the trading sessions in financial capitals of the world like New York, Tokyo, the eurozone (made up of the European countries whose official currency is the euro), and Australia. This method follows similar trading sessions as in the foreign exchange (forex) market. Some sessions may provide better trading opportunities if the cryptocurrency you’re planning to trade has higher volume or volatility in that time frame. For example, a cryptocurrency based in China, such as NEO, may see more trading volume during the Asian session. Know that day trading cryptos is different from day trading other assets When day trading traditional financial assets such as stocks or forex, you can follow already established fundamental market-movers such as a company’s upcoming earnings report or a country’s interest rate decision. The cryptocurrency market, for the most part, doesn’t have a developed risk-event calendar. That’s why conducting fundamental analysis to develop a day-trading strategy is way harder for cryptos. Set a time aside Depending on your personal schedule, you may want to consider scheduling a specific time of the day to focus on your trades. The idea of being able to trade around the clock is pretty cool in theory. You can just get on your trading app during a sleepless night and start trading. But this flexibility can backfire when you start losing sleep over it. Remaining alert during day trading, or night trading for that matter, is very important because you need to develop strategies, identify trading opportunities, and manage your risk multiple times throughout the trading session. For many people, having a concrete discipline pays off. Start small Day trading involves a lot of risk. So until you get the hang of it, start with a small amount and gradually increase your capital as you gain experience. Some brokers even let you start trading with a minimum of $50. If you start trading small, make sure you aren’t using margin or leverage to increase your trading power. Leverage is one of those incredibly risky tools that’s projected as an opportunity. It lets you manage a bigger account with a small initial investment by borrowing the rest from your broker. If you’re trying to test the waters by starting small, using leverage will defeat that purpose. Don’t take too much risk According to Investopedia, most successful day traders don’t stake much of their account — 2 percent of it, max — with each trade. If you have a $10,000 trading account and are willing to risk 1 percent of your capital on each trade, your maximum loss per trade is $100 (0.01 × $10,000). So, you must make sure you have that money set aside for potential losses, and that you aren’t taking more risk than you can afford. Secure your crypto wallet One major problem with day trading cryptocurrencies is securing your crypto wallet. The least secure cryptocurrency wallets are online wallets. Because you’re going to need your capital handy throughout the trading day, you may have no choice but to leave your assets on your exchange’s online wallet, which can expose you to risk of hacking. One way to enhance your security is to not actually buy and sell cryptocurrencies but rather to speculate the price action and crypto market movements by using brokers who facilitate such services. Stay away from scalping Scalping is the shortest-term trading strategy some individual traders choose. It basically means jumping in and out of trades frequently, sometimes in a matter of seconds. If you’re paying commission fees for every trade, not only are you exposing yourself to a ton of market risk when scalping, but you can also get burned out by the fees before you make any profit. Individual traders rarely make any profit scalping. Now, if you’re part of an enterprise that has access to discount commission fees and huge trading accounts, the story may be different. Cryptocurrency investing: profiting within days If you want to trade short term but don’t want to stick to your computer all the time, this time frame may be the right one for you. In traditional trading, traders who hold their positions overnight are categorized as swing traders. The most common trading strategy for swing traders is range trading, where instead of riding up a trend, you look for a crypto whose price has been bouncing up and down within two prices. The idea is to buy at the bottom of the range and sell at the top, as you can see. If you’re using a broker who facilitates short-selling services, you can also go the other direction. Of course, in real life the ranges aren’t as neat and pretty as what you see in the example. To identify a range, you must be proficient in technical analysis. A number of technical chart patterns and indicators can help you identify a range. If you choose swing trading rather than day trading, one downside is that you may not be able to get an optimized tax rate that’s created for day traders in some countries. In fact, swing trading is in the gray area for taxation because if you hold your positions for more than a year, you also get an optimized tax rate. If you’re trading the cryptocurrency market movements without actually buying them, make sure you aren’t paying a ton of commission fees for holding your positions overnight. Consult with your broker before developing your swing-trading strategy. Cryptocurrency investing: profiting within weeks This time frame falls into the category of position trading in traditional markets. Still shorter than a long-term investing strategy but longer than day trading, this type of short-term trading can be considered the least risky form of short-term trading. But "least risky" doesn't equal "no risk." For this type of trade, you can identify a market trend and ride it up or down until the price hits a resistance or a support. A resistance level is a psychological market barrier that prevents the price from going higher. A support level is the opposite: a price at which the market has difficulty “breaking below.” To hold your positions for weeks, you need to keep your crypto assets in your exchange’s online wallet, which may expose you to additional security risk. You may be better off utilizing a broker that provides price-speculation services for this type of trading strategy so you don’t have to own the cryptocurrencies. One popular position-trading strategy involves the following steps, as you can also see in the figure: Identify a trend (using technical analysis). Wait for a pullback. Buy at the pullback within the uptrend. Take profit (sell) at a resistance.

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How Mining Cryptocurrency Works

Article / Updated 08-04-2021

When most people think about mining, they typically envision tunnels, headlamps, and axes. But in the world of Bitcoin and other cryptocurrencies, mining is a computerized method for verifying the legitimacy of cryptocurrency transactions and entering new cryptocurrencies into circulation. Bitcoin and other minable cryptocurrencies rely on miners to maintain their network. By solving math problems and providing consent on the validity of transactions, miners support the blockchain network, which will otherwise collapse. For their service to the network, miners are rewarded with newly created cryptocurrencies (such as Bitcoins) and transaction fees. To really understand mining, you first need to explore the world of blockchain technology. Here’s a quick overview: If you want to help update the ledger (transaction record) of a minable cryptocurrency like Bitcoin, all you need to do is guess a random number that solves a math equation. Of course, you don’t want to guess these numbers all by yourself. That’s what computers are for! The more powerful your computer is, the more quickly you can solve these math problems and beat the mining crowd. The more you win the guessing game, the more cryptos you receive as a reward. If all of the miners use a relatively similar type of computing power, the laws of probability dictate that the winner isn’t likely to be the same miner every time. But if half of the miners have regular commercial computers while the other half use supercomputers, then the participation gets unfair to the favor of the super powerful computers. Some argue that those with supercomputers will win most of the time, if not all the time. Cryptocurrency networks such as Bitcoin automatically change the difficulty of the math problems depending on how fast miners are solving them. This process is also known as adjusting the difficulty of the proof-of-work (PoW). In the early days of Bitcoin, when the miners were just a tiny group of computer junkies, the proof-of-work was very easy to achieve. In fact, when Satoshi Nakamoto released Bitcoin, he/she/it intended it to be mined on computer CPUs. (The true identity of Satoshi is unknown, and I’m adding “it” because there are even discussions that Satoshi can be a government entity.) Satoshi wanted this distributed network to be mined by people distributed around the world using their laptops and personal computers. Back in the day, you were able to solve rather easy guessing games with a simple processor on your computer. As the mining group got larger, so did the competition. After a bunch of hard-core computer gamers joined the network, they discovered the graphics cards for their gaming computers were much more suitable for mining. My husband was sure among those people. As a gaming geek, he had two high-end computers with Nvidia graphic cards sitting in his game room, collecting dust after we got married. (For obvious reasons, he had to trade his gaming time up for dating time.) When he saw my passion for cryptos, he had to jump in and turn on his computers to start mining. But because he joined the mining game rather late, mining Bitcoin wasn’t turning out to be that profitable. That’s why he turned to mining other minable cryptos. Mining isn’t a get-rich-quick scheme. To mine effectively, you need access to pretty sophisticated equipment. First you need to do the math to see whether the initial investment required to set up your mining assets is going to be worth the cryptos you get in return. And even if you choose to mine cryptocurrencies instead of buying them, you’re still betting on the fact that their value will increase in the future. As Bitcoin became more popular, mining it became more popular, and therefore more difficult. To add to the challenge, some companies who saw the potential in Bitcoin value started massive data centers, called mining farms, with ranges of high-end computers whose jobs are only to mine Bitcoins. The figure shows an example of a mining farm setup. So next time you think about becoming a Bitcoin miner, keep in mind who you’re going up against! But don’t get disappointed. You do have a way to go about mining: mining pools.

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Short-Term Analysis Methods for Cryptocurrency Investing

Article / Updated 07-06-2021

You can’t become a successful short-term trader just by reading the news. Short-term trading is an art that combines active risk management with a great understanding of crowd psychology and price actions. Also, the cryptocurrency market isn’t as established as other markets, so trading the lesser-known cryptos on a short-term basis can be even riskier. You can compare that to trading penny stocks or gambling, which are almost sure ways to lose money. Regardless, the following sections present some analysis methods that professional traders with large accounts and a high-risk tolerance can use. How to decipher chart patterns You can use the majority of the chart patterns for short-term trading as well as medium- and long-term trading strategies. All you need to do is to set your chart view to a shorter time frame. I normally check with three different time frames when developing a trading strategy. If I’m analyzing the markets for more rapid profit-taking, I look at three short time frames. For example, if you’re looking to profit within hours, you can analyze the price action on these three time frames: 30-minute chart (to get a sense of the market sentiment) Hourly chart Four-hour chart (to get an understanding of the bigger picture) If you see different forms of bullish reversal chart patterns across all three time frames, you may have a higher probability of a new uptrend starting, which can lead you to a successful bullish trading strategy. The following sections show an example of the Bitcoin/U.S. dollar (BTC/USD) crypto/fiat pair on September 5, 2018. A 30-minute chart You’re looking at the 30-minute chart, and at 9:30 a.m., you suddenly see a massive drop that brings Bitcoin’s price down from approximately $7,380 to $7,111, as you can see in the figure. This formation is called a bearish engulfing candlestick pattern among technical analysts. Is this the beginning of a new downtrend? An hourly chart By switching from the 30-minute chart (see the preceding section) to the hourly chart, you notice the same drop (shown here). But because now you can see the bigger picture, you discover that this drop was after a period of uptrend in the market, which may be a signal of a pullback during an uptrend. But how low can the pair go? A four-hour chart By switching from the hourly chart to the four-hour chart, you notice that the bearish engulfing pattern is formed in a much longer uptrend that has been moving up since the middle of August. By observing the four-hour chart, you can pinpoint the key support levels, shown at $6,890 and $6,720, that the price can pull back toward within this newly established bearish market sentiment. In this figure, I’ve used the Fibonacci retracement levels to identify the key price levels with higher accuracy. Following the technical analysis guidelines, you can expect a bit of a correction after this sudden drop, followed by more drops to key support levels on the four-hour chart. With this, a potential trading idea may be to sell at correction or at market price and then to take profit at one or two support levels. After sudden drops in the markets, sometimes the market corrects itself before dropping more. Often, it corrects itself to key pivot levels (a level that’s considered trend-changing if the price breaks below or above it), which in this case is the 23 percent Fibonacci retracement level at $7,090. The reward for waiting for a correction is that you may be able to take more profit short-selling at a higher price. The risk with it is that the market may not correct itself, and you may miss out. Personally, if I think the market is really going to shift into a bearish sentiment, I sell some at market price and set a sell limit order at the key pivot level just in case the market corrects itself before further drops. This way, you can distribute your risk. A sell limit order is a type of trading order you can set on your broker’s platform, which enables you to sell your assets at a specific price in the future. For a short-term profit-taking, I consider setting buy limit orders at both key support levels at 38 percent and 50 percent Fibonacci retracement levels. In this example, I aim to take partial profit at around $6,890, and then exit the trade completely at $6,720. Again, this approach may limit my gains if the market continues to drop, but it also limits my risk if the price doesn’t fall as low as the second key support, so it gives me a proportionate risk-reward ratio. This figure shows how the market actually performed. The BTC/USD price did correct a little bit, but it didn’t go as high as the 23 percent Fibonacci retracement level. So, if you had only waited for a correction to sell, you would’ve missed out on the trading opportunity. The market did drop to both key support levels at 38 percent and 50 percent Fibonacci retracement levels. So, if you had sold at market price, you would’ve taken profit at both key support levels. On the other hand, the price continued to drop beyond the 50 percent Fibonacci retracement level, so that may represent a missed opportunity to maximize your returns. However, in my opinion, it’s always better to be safe than sorry. That’s why I always recommend that my students avoid being greedy when it comes to strategic developments. How to use indicators in short-term cryptocurrency investing Another popular technical analysis method is to use indicators such as the relative strength index (RSI), Bollinger Bands (BOL), and Ichimoku Kinko Hyo (ICH). I call such indicators elements of a beauty kit. By adding them to your chart, you make it more beautiful and accent the important features just as you would by putting on makeup on your face! Indicators are mathematical tools, developed over the years by technical analysts, that can help you predict the future price actions in the market. You can use these indicators in addition to chart patterns to get a higher analysis accuracy. But in short-term trading, some traders use only one or two indicators without paying attention to chart patterns. In fact, you can create a whole trading strategy by using only one indicator in short-term trading. Avoid illegal pump-and-dump stuff As a cryptocurrency trader, you need to be aware of what can happen among illegal group activities that manipulate the markets, take profit, and leave others shirtless. A pump-and-dump scheme happens when a group of people or an influential individual manipulates the market prices in its own favor. For example, in an unlikely illegal act, a highly influential person named Joe goes on TV and says, “I think Bitcoin is going to reach $60,000 tomorrow,” while he already has an established buy and sell strategy to trade a ton of Bitcoin. The moment his speculation hits the news, everyone else who’s watching TV gets excited and starts buying Bitcoin based on this suggestion. The hype helps Bitcoin’s price go up and Joe’s strategy to go through. But before the rest of the market can catch up, Joe sells (dumps) his Bitcoins, taking a ton of profit but sending Bitcoin’s price crashing down. Pump-and-dump schemes can happen in any market. But at least with traditional markets like equities, the Securities and Exchange Commission (SEC) actively tries to go after the bad guys. In the cryptocurrency market, the regulations have yet to be fully established. According to a study published by the Wall Street Journal, dozens of trading groups manipulated cryptocurrency prices on some of the largest online exchanges, generating at least $825 million between February and August of 2018.

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What is a Blockchain, and How Does It Work?

Article / Updated 07-02-2021

Simply put, a blockchain is a special kind of database. According to cigionline.org, the term blockchain refers to the whole network of distributed ledger technologies. According to Oxford Dictionaries, a ledger is “a book or other collection of financial accounts of a particular type.” It can be a computer file that records transactions. A ledger is actually the foundation of accounting and is as old as writing and money. Now imagine a whole suite of incorruptible digital ledgers of economic transactions that can be programmed to record and track not only financial transactions but also virtually everything of value. The blockchain can track things like medical records, land titles, and even voting. It’s a shared, distributed, and immutable ledger that records the history of transactions starting with transaction number one. It establishes trust, accountability, and transparency. Blockchain stores information in batches called blocks. These blocks are linked together in a sequential way to form a continuous line. A chain of blocks. A blockchain. Each block is like a page of a ledger or a record book. As you can see in the figure, each block mainly has three elements: Data: The type of data depends on what the blockchain is being used for. In Bitcoin, for example, a block’s data contains the details about the transaction including sender, receiver, number of coins, and so on. Hash: No, I’m not talking about that kind of hash. A hash in blockchain is something like a fingerprint or signature. It identifies a block and all its content, and it’s always unique. Hash of previous block: This piece is precisely what makes a blockchain! Because each block carries the information of the previous block, the chain becomes very secure. Here’s an example of how a bunch of blocks come together in a blockchain. Say you have three blocks. Block 1 contains this stuff: Data: 10 Bitcoins from Fred to Jack Hash (simplified): 12A Previous hash (simplified): 000 Block 2 contains this stuff: Data: 5 Bitcoins from Jack to Mary Hash (simplified): 3B4 Previous hash: 12A Block 3 contains this stuff: Data: 4 Bitcoins from Mary to Sally Hash (simplified): C74 Previous hash: 3B4 As you can see in the following figure, each block has its own hash and a hash of the previous block. So, block 3 points to block 2, and block 2 points to block 1. (Note: The first block is a bit special because it can’t point to a previous block. This block is the genesis block.) The hashes and the data are unique to each block, but they can still be tampered with. The following section lays out some ways blockchains secure themselves. How does a blockchain secure itself? Interfering with a block on the blockchain is almost impossible to do. The first way a blockchain secures itself is by hashing. Tampering with a block within a blockchain causes the hash of the block to change. That change makes the following block, which originally pointed to the first block’s hash, invalid. In fact, changing a single block makes all the following blocks invalid. This setup gives the blockchain a level of security. Using hashing isn’t enough to prevent tampering. That’s because computers these days are super fast, and they can calculate hundreds of thousands of hashes per second. Technically, a hacker can change the hash of a specific block and then calculate and change all the hashes of the following blocks in order to hide the tampering. On top of the hashes, blockchains have additional security steps including things like proof-of-work and peer-to-peer distribution. A proof-of-work (PoW) is a mechanism that slows down the creation of the blocks. In Bitcoin’s case, for example, it takes about ten minutes to calculate the required PoW and add a new block to the chain. This timeline makes tampering with a block super difficult because if you interfere with one block, you need to interfere with all the following blocks. A blockchain like Bitcoin contains hundreds of thousands of blocks, so successfully manipulating it can take over ten years! A third way blockchains secure themselves is by being distributed. Blockchains don’t use a central entity to manage the chain. Instead, they use a peer-to-peer (P2P) network. In public blockchains like Bitcoin, everyone is allowed to join. Each member of the network is called a validator or a node. When someone joins the network, they get the full copy of the blockchain. This way, the node can verify that everything is still in order. Here’s what happens when someone creates a new block in the network: The new block is sent to everyone in the network. Each node then verifies the block and makes sure it hasn’t been tampered with. If everything checks out, each node adds this new block to their own blockchain. All the nodes in this process create a consensus. They agree about which blocks are valid and which ones aren’t. The other nodes in the network reject blocks that are tampered with. So, to successfully mess with a block on a blockchain, you’d need to tamper with all the blocks on the chain, redo the proof-of-work for each block, and take control of the peer-to-peer network! Blockchains are also constantly evolving. One of the most recent developments in the cryptocurrency ecosystem is the addition of something called a smart contract. A smart contract is a digital computer program stored inside a blockchain. It can directly control the transfer of cryptocurrencies or other digital assets based on certain conditions. Why is blockchain revolutionary? Here are three main reasons blockchain is different from other kinds of database and tracking systems already in use. Blockchain may eliminate data tampering because of the way it tracks and stores data If you make a change to the information recorded in one particular block of a blockchain, you don’t rewrite it. Instead the change is stored in a new block. Therefore, you can’t rewrite history — no one can — because that new block shows the change as well as the date and the time of the change. This approach is actually based on a century-old method of the general financial ledger. Suppose that Joe and his cousin Matt have a dispute over who owns the furniture shop they’ve been comanaging for years. Because the blockchain technology uses the ledger method, the ledger should have an entry showing that P.J. first owned the shop in 1947. When P.J. sold the shop to Mary in 1976, they made a new entry in the ledger, and so on. Every change of ownership of this shop is represented by a new entry in the ledger, right up until Matt bought it from his uncle in 2009. By going through the history in the ledger, Matt can show that he is in fact the current owner. Now, here’s how blockchain would approach this dispute differently than the age-old ledger method. The traditional ledger method uses a book, or a database file stored in a single (centralized) system. However, blockchain was designed to be decentralized and distributed across a large network of computers. This decentralizing of information reduces the ability for data tampering. Recent blockchain attacks such as the one on ZenCash show that data tampering can’t be completely eliminated on the blockchain database as is. If 51 percent of miners decide to rewrite the ledger, it would be possible, and as a result, they can do whatever they want with the transaction: they can delay it, double-spend the coins, postpone it, or simply remove it from the block. Several blockchain networks are currently working on a custom solution for this. Blockchain creates trust in the data The unique way blockchain works creates trust in the data. I get more into the specifics earlier in this chapter, but here’s a simplified version to show you why. Before a block can be added to the chain, a few things have to happen: A cryptographic puzzle must be solved to create the new block. The computer that solves the puzzle shares the solution with all the other computers in the network. Finally, all the computers involved in the network verify the proof-of-work. If 51 percent of the network testifies that the PoW was correct, the new block is added to the chain. The combination of these complex math puzzles and verification by many computers ensures that users can trust each and every block on the chain. Heck, one of the main reasons I’m a big supporter of cryptocurrencies is that I trust in the blockchain technology so much. Because the network does the trust-building for you, you now have the opportunity to interact with your data in real time. Centralized third parties aren’t necessary In my previous example of the dispute between Joe and Matt, each of the cousins may have hired a lawyer or a trusted centralized third party to go through the ledger and the documentation of the shop ownership. They trust the lawyers to keep the financial information and the documentation confidential. The third-party lawyers try to build trust between their clients and verify that Matt is indeed the rightful owner of the shop. The problem with centralized third parties and intermediaries such as lawyers and banks is that they add an extra step to resolving the dispute, resulting in spending more time and money. If Matt’s ownership information had been stored in a blockchain, he would’ve been able to cut out the centralized middleman, his lawyer. That’s because all blocks added to the chain would’ve been verified to be true and couldn’t be tampered with. In other words, the blockchain network and the miners are now the third party, which makes the process faster and more affordable. So, Matt could simply show Joe his ownership information secured on the blockchain. He would save a ton of money and time by cutting out the centralized middleman. This type of trusted, peer-to-peer interaction with data can revolutionize the way people access, verify, and transact with one another. And because blockchain is a type of technology and not a single network, it can be implemented in many different ways.

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What You Need for Mining Cryptocurrency

Article / Updated 07-01-2021

Before getting started with mining cryptocurrency, you should set yourself up with a few mining toys. When you’ve got everything up and running, mining becomes rather easy because everything happens automatically. The only thing left to do is pay your electric bills at the end of each month. First things first — here’s a brief to-do list to get you started: Get a crypto wallet. Make sure you have a strong internet connection. Set up your high-end computer in a cool location. By cool, I literally mean “low temperature” and not “stylish.” Select the hardware to use based on the cryptocurrency you want to mine. If you want to mine solo (not recommended), download the whole cryptocurrency’s blockchain. Be prepared; for mature cryptos, downloading the whole blockchain may take days. Get a mining software package. Join a mining pool. Make sure your expenses aren’t exceeding your rewards. The mining profitability of different cryptocurrencies Some tech junkies mine just for the heck of it, but at the end of the day, most people mine cryptos with profit in mind. But even if you fall in the former group, you may as well get a reward out of your efforts, eh? Mining profitability can change drastically based on cryptocurrency value, mining difficulty, electricity rates, and hardware prices at the time you’re setting up your mining system. You can go to websites like CoinWarz to see which cryptos are best to mine at a given time. As of September 2018, for example, that site indicates the most profitable cryptocurrency to mine is Verge (XVG), while Bitcoin is ranked number seven, as you can see here. Even if mining isn’t profitable at the moment, your cryptos can be worth a lot in the future if the coin value surges. By mining cryptos that have low profitability at the moment, you’re taking an investment risk. Cryptocurrency mining hardware Different types of cryptocurrencies may require different types of hardware for best mining results. For example, hardware (such as ASICs, which stands for application-specific integrated circuits) has been customized to optimize cryptocurrencies like Bitcoin and Bitcoin Cash. But for cryptocurrencies without dedicated hardware, such as Ethereum, Zcash and BitcoinGold, graphics processing units (GPUs) are good enough to process the transactions. Of course, GPUs are still slow at mining compared to mining farms. If you decide to mine Bitcoin with a GPU, for example, you may wait years before you can mine one Bitcoin! You can find GPUs at any store that sells computer hardware equipment. As mining became more difficult, crafty coders started exploiting graphics cards because those provided more hashing power, which is the rate at which you mine. They wrote mining software (in other words, developed mining algorithms) optimized for the processing power of GPUs to mine way more quickly than central processing units (CPUs). These graphics cards are faster, but they still use more electricity and generate a lot of heat. That’s when miners decided to switch to something called an application-specific integrated circuit, or ASIC. The ASIC technology has made Bitcoin mining much faster while using less power. (You can search “where to buy ASIC miner” on your favorite search engine.) During crypto hype, mining equipment such as ASICs becomes incredibly expensive. At the beginning of 2018, for example, they were priced at over $9,000 due to high demand. That’s why you must consider your return on investment before getting yourself involved in mining; sometimes simply buying cryptocurrencies makes more sense than mining them does. Cryptocurrency mining may make more sense to do in winter because it generates so much heat in the hardware. You may be able to reduce the cost of your electricity bill by using nature as your computer’s natural cooling system. Or using your computer as your home’s heating system! Of course, the cost of the electricity used by mining computers far exceeds the cost of heating or cooling the house. Cryptocurrency mining software Mining software handles the actual mining process. If you’re a solo miner, the software connects your machine to the blockchain to become a mining node or a miner. If you mine with a pool (see the next section), the software connects you to the mining pool. The main job of the software is to deliver the mining hardware’s work to the rest of the network and to receive completed work from the other miners on the network. It also shows statistics such as the speed of your miner and fan, your hash rate, and the temperature. Again, you must search for the best software at the time you’re ready to start. Here are some popular ones at the time of writing: CGminer: CGminer is one of the oldest and most popular examples of Bitcoin mining software. You can use it for pools like Cryptominers to mine different altcoins. It supports ASICs and GPUs. Ethminer: Ethminer is the most popular software to mine Ethereum. It supports GPU hardware such as Nvidia and AMD. XMR Stak: XMR Stak can mine cryptocurrencies like Monero and Aeon. It supports CPU and GPU hardware. These options are just examples and not recommendations. You can go about selecting the best software by reading online reviews about their features, reputations, and ease of use. This market is evolving, and navigating your way to find the best options may take time. Personally, I rely heavily on my search engine to find a number of resources, and then I compare the results to choose the one I feel most comfortable with. Cryptocurrency mining pools Mining pools definitely bring miners together, but luckily you don’t have to get into your beach body shape to join one. Simply put, a mining pool is a place where regular miners who don’t have access to gigantic mining farms come together and share their resources. When you join a mining pool, you’re able to find solutions for the math problems faster than going about it solo. You’re rewarded in proportion to the amount of work you provide. Mining pools are cool because they smooth out rewards and make them more predictable. Without a mining pool, you receive a mining payout only if you find a block on your own. That’s why I don’t recommend solo mining; your hardware’s hash rate is very unlikely to be anywhere near enough to find a block on its own. To find a mining pool that’s suitable for you, I recommend doing an online search at the time you’re ready to jump in. That’s because this market changes rapidly, and so do the infrastructure and the participants. Here are some features to compare when selecting the best mining pool for you: Minable cryptocurrency: Make sure the pool is mining the cryptocurrency you’ve selected. Location: Some pools don’t have servers in all countries. Make sure the one you choose is available in your country. Reputation: This factor is an important one. Don’t get in the pool with nasty people. Fees: Some pools have higher fees than others. Make sure you don’t prioritize fee over reputation, though. Profit sharing: Different pools have different rules for profit sharing. One thing to consider is how much of the coin you need to mine before the pool pays you out. Ease of use: If you’re not tech-savvy, this feature can be important to keep in mind. A cryptocurrency mining setup example The figure shows what my husband’s mining setup looked like at the beginning of 2018 to mine Ethereum. Keep in mind that he already had these systems sitting in his game room, so he didn’t really make much investment with mining in mind. He did invest in the hardware wallet, though. Two custom-made, high-end gaming computers from boutique PC builders (one from Maingear and the other from Falcon Northwest) Two Nvidia GTX 1070 Tis in his first PC; two Nvidia Titan X Pascals in the second PC Two Ledger Nano S hardware wallets Org pool to mine Ethereum Make sure cryptocurrency mining is worth your time After you have all your tools together, you then need to set up and start mining. It can certainly be challenging to do so, and the dynamic of the mining community changes regularly, so you must make sure that you are up-to-date with recent changes and have acquired the latest tools for your mining adventure. If you’re looking to mine Bitcoin, keep in mind that your profitability depends on many factors (such as your computing power, electricity costs, pool fees, and the Bitcoin’s value at the time of mining), and chances are very high that you won’t be profitable at all. You can check whether Bitcoin mining is going to profitable for you by using a Bitcoin mining calculator. Mining calculators take into account all the relevant costs you may be paying to mine and show you if mining a certain cryptocurrency is profitable for your situation. Simple mining calculators ask you questions about your hash rate, the pool fees, and your power usage, among others. The figure shows you a sample mining calculator powered by CryptoRival. Once you hit the “Calculate” button, it shows you your gross earning per year, month, and day. By doing the mining calculation ahead of time, you may realize that mining other cryptocurrencies may make more sense.

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Cryptocurrencies in Long-Term Diversification

Article / Updated 06-24-2019

When it comes to adding cryptocurrencies to your portfolio, keep the following two types of long-term diversification in mind: Diversifying with non-cryptocurrencies Diversifying among cryptocurrencies For more information on many of these topics, check out these Invest Diva resources: The Forex Coffee Break education course Other service listings Diversifying with non-cryptocurrencies You have so many financial instruments to choose from when you consider diversifying your portfolio across the board. Stocks, forex, precious metals, and bonds are just a few examples. Each of these assets has its unique traits. Some assets’ inherited risks can offset the risks of the other ones through long-term market ups and downs. The following sections provide guidance on how to use cryptos and non-cryptos together in the long term. No single golden diversification rule works for all investors. Diversification percentages and the overall mix greatly depend on the individual investor and his or her unique risk tolerance, as I talk about on my website. The more risk you’re willing to take, the higher the chances of a bigger return on investment, and vice versa. If you’re just starting out and have a lower risk tolerance, you may consider allocating a bigger portion of your portfolio to bonds and then systematically adding stocks, precious metals, and cryptocurrencies. Background on trading fiat currencies Fiat currencies are the traditional money that different countries’ authorities declare legal. For example, the U.S. dollar is the official currency of the United States. The euro is the official currency of the European Union and its territories. The Japanese yen is backed by Japan. You get the idea. The foreign exchange market, or forex, is a huge market where traders trade these fiat currencies against one another. Having a bit of a background in forex can help you better understand the cryptocurrency market and how you can trade the different types of currencies against one another. I compare this market to a big international party where all the couples are made up of partners from different regions. So if one is the Japanese yen (JPY), her partner may be the euro (EUR). I call them Ms. Japan and Mr. Euro. If one is the U.S. dollar (Ms. USA), her partner can be British, Portuguese, or Japanese. In the forex market, these international pairs get together and start “dancing.” But oftentimes, the paired-up partners aren’t compatible, and their moves aren’t correlated. For example, every time Ms. USA makes a good move, her partner screws up. Every time her partner picks up the rhythm, she’s stuck in her previous move. These incompatibilities gain some attention, and a bunch of people who are watching the dancers start betting on which of the partners is going to screw up next. Those folks are the forex traders. You can watch this forex metaphor in action in my video. The point is that when trading currencies — fiat or crypto — you can only trade them in pairs. For example, you can trade the U.S. dollar (USD) versus the Japanese yen (JPY); this is the USD/JPY pair. You can trade the Australian dollar (AUD) versus the Canadian dollar (CAD); that’s the AUD/CAD pair. Quote currency versus base currency When trading currency pairs, the base currency is listed first, and the quote currency is listed second. Which currency in a given pair is the base currency and which is the quote currency is normally fixed across the trading markets. For example, when talking about trading the U.S. dollar versus the Japanese yen, the currency of the United States always comes first, followed by the currency of Japan (USD/JPY). In the EUR/USD pair, the euro always comes first, followed by the U.S. dollar. These set patterns have nothing to do with whether a certain currency’s country is more important or whether one currency in a pair is more popular than the other. It’s just how the trading crowd set things up. The system doesn’t change, which means everyone is on the same page and navigating through the pairs is easier. As the base and quote come together, the currency pair shows how much of the quote currency is needed to purchase one unit of the base currency. For example, when USD/JPY is trading at 100, that means 1 U.S. dollar is valued at 100 Japanese yen. In other words, you need 100 Japanese yen (the quote currency) to buy 1 U.S. dollar (the base currency). The same concept applies to cryptocurrency pairs. Many cryptocurrency exchanges offer a select number of quote currencies, mainly popular ones such as a fiat like the USD and cryptos such as Bitcoin, Ethereum, and their own exchange cryptos. Then they offer trading opportunities versus all the hundreds of other cryptocurrencies they may carry versus these quote currencies. Trading cryptos versus fiat currencies Similar to the forex market, you can trade cryptocurrencies versus other currencies. The most common approach at the time of writing is trading them versus a fiat currency, typically the one backed by the country you live in. For example, in the United States, most people trade Bitcoin versus the USD. They don’t really think of it of trading these currencies in pairs because it feels a lot like buying a stock. But the fact is that when you buy Bitcoin using the U.S. dollar in hopes of capital gain, you’re essentially betting that the value of Bitcoin will move higher against the U.S. dollar in the future. That’s why if the U.S. dollar decreases in value (not only against Bitcoin but also against other currencies) at the same time that Bitcoin increases in value, you’re likely to make more return on your investment. This is where diversification can help you reduce your trading risk. As I explain in the later section “Diversifying among cryptocurrencies,” most cryptos are correlated to Bitcoin in shorter time frames. That’s why you can diversify your portfolio with the fiat currencies you trade them against. For example, if you think that at the time you’re trading, the U.S. dollar and the Japanese yen aren’t correlated, you can open up two Bitcoin trades: one versus the U.S. dollar and one versus the Japanese yen. Of course, in order to do so, you should make sure your exchange or broker carries these different fiat currencies and offers such trading opportunities. Speculating the markets and short-term trading carry a lot of risk. It may not be suitable for all investors, and you may end up losing all your investment. Before deciding to trade such assets, you should carefully consider your investment objectives, level of experience, risk tolerance, and risk appetite. Also, you should not invest money that you can’t afford to lose. Diversifying among cryptocurrencies The majority of cryptocurrency exchanges offer a wider selection of cross-crypto pairs than they do fiat/crypto pairs. In fact, some exchanges don’t even accept any type of fiat currencies altogether. That’s why many traders have no choice but to trade one cryptocurrency against another. Bitcoin (BTC) versus Ethereum (ETH) gives you the BTC/ETH pair, for example. As you can imagine, the thousands of different cryptocurrencies available to trade mean the mixes and matches can be endless. Many cryptocurrency exchanges have categorized these mixes by creating different “rooms” where you can trade the majority of the cryptos they carry versus a number of more popular cryptos. For example, as you can see in this figure, the Binance exchange has created four rooms or categories for the main cross-cryptos: Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), and Tether (USDT). By clicking on each of these categories, you can trade other cryptos versus the selected quote currency. When trading currency pairs, fiat or crypto, the best bet is always to pair a strong base currency versus a weak quote currency and vice versa. This way, you maximize the chances of that pair moving strongly in the direction you’re aiming for. The reason you diversify your portfolio is to reduce its exposure to risk by including assets that aren’t fully correlated. The big problem about diversifying within your cryptocurrency portfolio is that, at least at the time of writing, most cryptocurrencies are heavily correlated to Bitcoin. Most of the days where Bitcoin was having a bad day in 2017 and 2018, the majority of other cryptocurrencies were, too. The following figure, for example, shows a snapshot of the top 12 cryptocurrencies on August 18, 2018. All are in red. In fact, 94 out of the top 100 cryptocurrencies by market cap were plummeting that day. (Market cap shows the value of all units of a crypto that are for sale right now.) In the crypto market, this type of short-term market correlation has become the norm. August 19, the very next day, Bitcoin turned green, and so did the majority of the cryptos in the top 100, as you can see in the figure. In this snapshot of the top 17 cryptocurrencies, all tokens besides Tether (USDT) surged about the same amount Bitcoin did, around 1.72 percent. On the other hand, if you look at the bigger picture, say the seven-day price change, you notice that the market correlation to Bitcoin is more mixed, as shown . For example, while Bitcoin gained 1.25 percent in the seven days before August 18, Ripple’s XRP gained 8.51 percent, and Dash lost 9.79 percent. This correlation is one key reason short-term trading cryptocurrencies is riskier than many other financial instruments. Considering long-term investments when adding cryptocurrencies to your portfolio may be best. That way, you can reduce your investment risk by diversifying within different crypto categories. On the bright side, as the cryptocurrency market continues to develop, the diversification methods can also improve, and the whole market may become less correlated to Bitcoin.

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Cryptocurrency Forks or Investment Splits

Article / Updated 06-24-2019

What you get from a cryptocurrency fork won’t fill your tummy, but it may fill your crypto wallet with some money! Many popular new cryptocurrencies were born as a result of a split (fork) in another cryptocurrency like Bitcoin. The following discussion explains the basics of these cryptocurrency splits and how you may be able to profit from them. What is a cryptocurrency fork, and why do forks happen? Sometimes when a group of developers disagrees with the direction a specific cryptocurrency is going, the members decide to go their own way and initiate a fork. Imagine an actual physical fork. It has one long handle, and then it divides into a bunch of branches. That’s exactly what happens in a cryptocurrency fork. Some cryptocurrencies are implemented within open source software. Each of these cryptocurrencies has its own protocol that everyone in the network should follow. Examples of such rule topics include the following: Block size Rewards that miners, harvesters, or other network participants get How fees are calculated But because cryptocurrencies are essentially software projects, their development will never be fully finished. There’s always room for improvement. Crypto developers regularly push out updates to fix issues or to increase performance. Some of these improvements are small, but others fundamentally change the way the original cryptocurrency (which the developers fell in love with) works. Just as in any type of relationship, you either grow together or grow apart. When the disagreements among a group of developers or network participants intensify, they can choose to break up, create their own version of the protocol, and cause a potential heartbreak that requires years of therapy to get over. Okay, the last part doesn’t really happen. Hard forks and soft forks Two types of forks can happen in a cryptocurrency: a hard fork and a soft fork. Most cryptocurrencies consist of two big pieces: the protocol (set of rules) and the blockchain (which stores all the transactions that have ever happened). If a segment of the crypto community decides to create its own new rules, it starts by copying the original protocol code and then goes about making changes to it (assuming the cryptocurrency is completely open source). After the developers have implemented their desired changes, they define a point at which their fork will become active. More specifically, they choose a block number to start the forking. For example, as you can see in the figure, the community can say that the new protocol will go live when block 999 is published to the cryptocurrency blockchain. When the currency reaches that block number, the community splits in two. Some people decide to support the original set of rules, while others support the new fork. Each group then starts adding new blocks to the fork it supports. At this point, both blockchains are incompatible with each other, and a hard fork has occurred. In a hard fork, the nodes essentially go through a contentious divorce and don’t ever interact with each other again. They don’t even acknowledge the nodes or transactions on the old blockchain. On the other hand, a soft fork is the type of breakup where you remain friends with your ex. If the developers decide to fork the cryptocurrency and make the changes compatible with the old one, then the situation is called a soft fork. You can see the subtle difference in the example shown here. Say the soft fork is set to happen at block 700. The majority of the community may support the stronger chain of blocks following both the new and old rules. If the two sides reach a consensus after a while, the new rules are upgraded across the network. Any non-upgraded nodes (that is, stubborn geeks) who are still mining are essentially wasting their time. The community comes back together softly, and everyone lives happily ever after — until the next major argument, of course. Free money on cryptocurrency forks Because a new fork is based on the original blockchain, all transactions that previously happened on the blockchain also happen on the fork. The developers of the new chain take a “snapshot” of the ledger at a specific block number the fork happened (like 999 in the figure) and therefore create a duplicate copy of the chain. That means if you had a certain amount of cryptocurrencies before the fork, you also get the same amount of the new coin. To get free coins from a fork, you need to have the cryptocurrency on a platform that supports the fork before the block number at which the fork occurs. You can call this free money. But how valuable the coins are all depends how well the new fork performs and how popular it gets within the community.

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