Dabbling in Cryptocurrencies

I started dabbling in crytocurrencies in early March. I’ve just scratched the surface of a vast, previously unknown-to-me universe. What follows is a short summary of what I have learned and my experiences so far. This is not to be construed to be a recommendation to put your money in them.

Wikipedia defines cryptocurrency as “a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency”. The best known example by far is bitcoin (BTC). Bitcoin pioneered the use of blockchain, a database of continuously updated transaction records of all coins, whose maintenance and verification by a peer-to-peer network is the basis of this decentralized trust system. Bitcoin was invented and released in 2008/9 by Satoshi Nakamoto, a pseudonym of an individual or a group of individuals whose exact identity is still shrouded in mystery.

One of the more intriguing aspects of digital currency to me is being prompted to reflect on the nature of currencies in general. Due to my interest in gold, I have always understood the value of a medium of exchange which is a great simplification of what would be an impossibly unwieldy barter system in its absence; and the trust necessary in this medium. Gold achieves this trust by its long history of continued acceptance and the impossibility to conjure up matter (not at reasonable cost, i.e. fusion). Government fiat achieves it by the force of law and pain of imprisonment on counterfeiters. On the other hand, bitcoin relies on the impossibility of mustering the computing power to establishing an alternate blockchain. In other words, the solutions are nature, force and math. For those who see gold as a hedge to government monetary policies, bitcoin should have some attraction as a decentralized alternative largely outside of the current global financial system. In practice though, there is an age divide, with bitcoin acceptance far higher in the more tech-savvy young generation than among the grizzled old man whose image the term “gold bug” conjures up.

The title of the post said “cryptocurrencies” pleural. Indeed bitcoin is only the largest and most well-known. The website
CoinMarketcap.com lists hundreds of alternative cryptocurrencies, aka “altcoins”:

At this moment, the total marketcap of all crytocurrencies are about $48 billion, with bitcoin at $26 billion or a “bitcoin dominance” — ratio of bitcoin market cap to the total of 54.1%. Despite bitcoin trading near $1600 close to a new high, bitcoin dominance is near a new low. In other words, even as bitcoin makes stratospheric gains the altcoins are rising even faster. Just take a look at some of the 24-hr moves in the screen shot! Some of that is due to intrinsic limitations of bitcoin itself such as its transaction speed, some is due some intrinsic advantage of the altcoins, and some due to “pump-and-dump” actions. Such intricacies cannot be covered in a blog post such as this. For example, just in the last two months, I was able to watch the debate on “segregation witness (SegWit)” unfold on Litecoin (LTC), mining pool signaling, UASF, etc. There were many developments like these in the other altcoins — this must be what the wild wild west was like!

Now let’s talk about where I put my money. In early March, I decided to put about 1% of my active accounts into cryptocurrency speculation. I funded an account at Coinbase, a US-based, regulated digital currency wallet where digital currencies are fully insured. I did most of the trading at the Coinbase affiliated exchange, GDAX since Coinbase itself has much higher fees (1.5%). In fact GDAX has the lowest fees (0.25% liquidity taker only, no fee for maker) even among the exchanges. I ended up establishing positions in all three cryptocurrencies that trade on GDAX: bitcoin (BTC), ethereum (ETH), and litecoin (LTC). I traded LTC a little during the aforementioned mayhem. There was non-stop (24/365) action. I could have easily gotten my trading fix there!

My actual numbers are unimportant since I was mostly lucky with my overall timing and the gains can be ephemeral. Suffice it to say that I plan to pull out a big chunk of my initial funds and let the rest ride. My advice to anyone dipping their toes into this market: control the position size and don’t be greedy! I see the likely longterm outcome as binary which justifies some speculative capital. For the individual coins though I think only a handful will survive. Forewarned is forearmed!