Cryptocurrencies

Distributed cryptographic currencies




Home



Introduction

Platforms

Resources

Investment strategy

Investment algorithm

Trading

Tips from others



Money



Introduction

A cryptocurrency is a peer-to-peer distributed, digital currency.

For some cryptocurrencies the entire amount of available units is issued before the cryptocurrency is made public, but for some cryptocurrencies the units are created / mined in time (although some can be mined before the cryptocurrency is made public). In both cases, the software which manages the cryptocurrency can be modified by its issuer to issue more cryptocurrency later.

The most important feature of a cryptocurrency is that there is no central authority to control it, and no central authority to keep track and validate the transactions. The cryptocurrency's underlying peer-to-peer network keeps track and validates the transactions in a distributed manner.

Cryptocurrencies, unlike traditional assets, are not owned by companies or governments, so while their creators can disappear, the software and the peer-to-peer network can continue to run, and can be maintained by others. Currently, there is some centralization in most cryptocurrencies; some of them have just a few miners, some have most of their validating nodes owned by their creators, but things will decentralize more in time.

Some states want to, and will, create their own cryptocurrencies. A state controlled cryptocurrency is not a cryptocurrency in the practical sense because it's controlled by one entity, the state, so it's in fact digital fiat money owned by the state, not by the people.

Ignore any cryptocurrency whose creators don't make public the source code which manages the cryptocurrency.

Most cryptocurrencies have a finite supply (= amount of available units), or have a very small inflation of the supply. Such cryptocurrencies can act as a store of value, like gold, meaning that they can preserve or increase their purchasing power over time; this means that in the future you will need to pay an equal or smaller number of units in order to buy the same thing; this is called "deflation of prices".

In contrast, a currency whose circulating supply increases in time, like fiat money, has a decreasing purchasing power over time; this means that in the future you will need to pay a larger number of units in order to buy the same thing; this is called "inflation of prices".

Since the cryptocurrencies with the largest market capitalization have a fixed circulating supply, it means that their prices (relative to fiat money) will increase in time, in the absence of bad news. This means that: future price = current price * future market capitalization / current market capitalization. This means that the value of the cryptocurrencies that you hold today will increase in time. Obviously, there is no guarantee that a specific cryptocurrency will survive for years or decades.

Since you can usually own and use fractions of a cryptocurrency's units, with many decimals, a high price per unit is not a problem.

In the first half of 2010, Bitcoin was worth less than 1 cent / unit. 7 years later it was worth over 1'000 USD / unit. This means an increase in price of over 100'000 times, so someone who has invested 10 USD in 2010 and kept it until 2017 became a millionaire. This kind of growth will never be achieved again, not even by far. This has happened because Bitcoin was the start of a financial revolution. As the market capitalization of a cryptocurrency raises, its potential percentual growth decreases because the total possible market capitalization is limited (it's not infinite).

The World Economic Forum predicts that the market capitalization of the entire cryptocurrency industry could reach 8 trillions USD until 2027. The problem is that you don't know which cryptocurrencies will still have value then, nor which of them will grow faster than most of the others.



Platforms

These cryptocurrency platforms have potential to be used as store of value, and as general purpose currencies.

Listing is by market capitalization, descending.



Main

These have the highest market capitalization, by far.

Bitcoin is the cryptocurrency which has started the entire industry of cryptocurrencies. Its proof of work consensus algorithm has performance issues.

Ethereum. Has some performance issues, but intends to switch to the more performant proof of stake consensus algorithm.

Bitcoin is used as a settlement currency, that is, it's the currency in which most trades are being denominated and provides the highest transactional liquidity. Its price drops the least when the entire ecosystem has a price correction.



Secondary

Neo. A cryptocurrency which can handle a huge number of transactions per second, due the its byzantine fault tolerance consensus algorithm. Neo's Chinese heritage was supposed to make it better suited to succeed in the local market, but due to the uncertain intentions of the Chinese government regarding the industry, it can only grow internationally.



Resources

CoinMarketCap = Statistics for cryptocurrencies.

IcoStats = Statistics for cryptocurrency ICOs.

Bitcoin Magazine = News.

Coindesk = News.

Binance = Exchange.

Bittrex = Exchange.

Coinbase = Exchange. Accepts fiat.

Kraken = Exchange. Accepts fiat.



Investment strategy

The most fundamental principle of investment, "buy low and sell high" / "buy the dips", passes through people's minds like a ghost through the real world: with no effect.

The overwhelming majority of people start buying when they see the price raising, and start selling when they see the price lowering, the opposite of what they should logically and mathematically do, that is, they "buy high and sell low". The greater the raise, the more fiat money they invest. Then, they complain that they are not making or are even losing money, and start searching for that magical recipe (like charts) that's going to quickly make them a lot of money, just like any other betting addict who believes that he's going to beat the market with his "system".

When a cryptocurrency's price raises dramatically in a short period of time, nobody (charts included) knows whether that trend will continue or the price will drop back to the initial level, so you have to budget your investment.

Sadly, most people will continue to ask questions like "Is this a good time to buy?" Why is it sad? Because it's the wrong question to ask. If the answer were "yes", most people would use it as an excuse to invest a lot of money and then blame the person who has answered, for any drop of the price, even though the answer is correct in the context of a long-term investment.

It's also sad because if people ask someone with trading experience whether it's a good time to buy or not, and they are told that nobody can say what the price will do next, they will insist by asking "I understand that nobody can say what the price will do, but what is your opinion?" So, they ask for advice but ignore the actual advice and, since they only accept a "buy" or "don't buy" answer, they are trying to shift the blame for the aftereffect on someone else.

The purpose of a very long term investment strategy is to maintain, and possibly grow, the value of the investment over years or even decades.

It's important to follow an investment strategy which increases the potential profits and decreases the potential losses, balancing them, while still betting / trusting on a rise of the price in the long term.

The investment value may be maintained even if, after years, the price of the bought cryptocurrency is below the price that it had when you started investing. This is because even though you have originally bought at a higher price, you have probably also later bought at much lower prices, prices which were probably lower than the price that the cryptocurrency had when you had to sell (meaning that you have both profits and losses).

Some people say that you should invest a lot of money when the price is low. The problem is that you can never know if a price will raise or drop after you start investing. Even for an emergent market, while you can bet that it will keep on growing, you can't know for sure, it's just a bet.

This is why investing all the money that you have on a single transaction is a sure way to lose money, and why you have to follow an investment strategy.

When the price drops dramatically, like half in a few days, when everybody panics and starts selling, in the absence of bad news, treat this as a buying opportunity because the buyers are inclined to accept the higher prices easier in the future, since they were recently in that area.

State regulation is not bad news. Many traders perceive state regulation to be bad, but in fact state regulation brings stability and predictability for big traders and for businesses. It's important to note that state regulation and banning are different things; regulation means the acceptance and the ordering of the business environment, banning means not accepting and forbidding business. When a rumor about impending state regulation causes a dramatic drop of the price, as it usually does, treat that as a good opportunity to buy, but keep in mind that you don't know when the drop will stop.

Invest in emergent markets, if the business model seems sound, because the growth potential (in percents) is greater than in mature markets, and once an emergent market becomes mature, the investment value will have grown much more than it could have grown in a mature market.

For example a cryptocurrency with a market capitalization of 1 billion (at investment time) requires 99 more billions in order to grow your investment 100 times, however, a cryptocurrency with a market capitalization of 10 billions requires 990 more billions in order to grow your investment 100 times, and obviously, it's far easier for a cryptocurrency to grow with 99 billions than 990 billions. Of course, a small cryptocurrency is also riskier for investments since it could disappear easier than a large cryptocurrency, so you should invest only a small amount of money in one.

Some people say that cryptocurrencies are in a bubble, meaning that they are valued too high and the bubble will pop. Say this is true and the prices of all the cryptocurrencies drop to 10% of what they are now. What does that mean? It means that it's a buying opportunity because the buyers are inclined to accept the higher prices easier in the future, since they were recently in that area. Even if the price were to go to virtually 0, so long as it goes back up the value of your investment is preserved, except if you do margin / leveraged trading or you are manually setting stop-losses. Why would the price recover? Because cryptocurrencies (unlike traditional assets) are not owned by companies, so while their creators can disappear, the software can continue to run and can be modified by others. In the absence of a fundamental cause that can bring cryptocurrencies to a 0 valuation, the prices should recover.

The profits and losses, expressed in fiat money, of a cryptocurrency are realized only when the cryptocurrency is sold in exchange for money. Until then, its value is like Schrödinger's cat, in multiple states at the same time. While the cryptocurrency is kept, its price could change dramatically during the next few days, weeks, months or years. This means that you should not despair when your investment's value is lower than originally, nor should you gloat when it's higher than originally.

While a drop of the price of a cryptocurrency A (that you own) decreases your investment's value, if you believe that the price of a cryptocurrency B will raise before the price of the cryptocurrency A raises, you can move your investment there without a loss. Even if you do sell, if you later buy back at the sell price then it's as if you haven't sold. In metaphorical terms, if an elevator gets you down a few floors, you can take back up any other elevator, not necessarily the same. Still, you don't know in which direction any elevator goes, so randomly jumping from one to another might in fact bring you all the way down to the ground floor.

Never do margin / leveraged trading; this is reserved for trading in traditional markets, not for investments, not for trading cryptocurrencies (because the volatility is already high).

Invest in several cryptocurrencies because nobody knows which of the current cryptocurrencies will still be around in a few years, or how much will each grow. Diversification lowers the potential losses and lets you profit from the growth of several cryptocurrencies.

How do you decide which cryptocurrency to buy? A cryptocurrency with a small market capitalization can grow percentually much more than one with a large market capitalization, but it can also disappear much easier. A high volume per market capitalization ratio indicates a cryptocurrency which is of more interest than one with a small ratio. Never take a buy decision based the price, on the number of units that you can buy, or on the total circulating supply; they are irrelevant as indicators for potential growth.

Look at the cryptocurrency's team, at its (real world) connections, at what problems it's trying to solve, at its potential technical performance, at the geopolitical context. Is the cryptocurrency an internationalized effort? Is the emerging cryptocurrency designed for a market which is difficult to enter by an established cryptocurrency?

Sell only when it's necessary, like when you want to move to another cryptocurrency, or you want to buy a home.

Selling a cryptocurrency increases the potential losses because the price could keep on raising, and if you were to later buy at a higher price, you would lose the difference between the sell and the buy, compared to what would have happened had you not sold.

Don't waste your time and energy trying to predict, intuit or guess future prices. Money is made with smart investments not with guessing.



Technical analysis

Technical analysis can be like astrology. The majority of technical analysis fits the discourse to the data, that is, it works for the past because the analyst searches for time frames during which the analysis works. If technical analysis tells you that in the future the market will go up... unless it goes down, it's useless. To be useful, it has to tell you only one of 3 things: wait, buy, or sell.

There are lots of recognizable patterns on charts. The mass behavior of people creates patterns. The problem is that all these patterns are transformed continuously, that is, they are scaled, sheared and rotated in unpredictable ways.

Before technical analysis can be used, the trader must buy low and sell high using a variety of tools which help determine the prices for the buys and sells in a way which will increase the probability to win. These tools are: an investment strategy, money and risk management, statistical simulations, gathering and interpreting the rumors and news, and understanding the mass behavior of traders.

For example, in technical analysis there is a pattern called "pole and pennant" which is supposed to predict that a significant change in price will follow. This pattern looks like a triangle with the base on the left side and a vertex on the right side. This triangle is the result of mass behavior, that is, it's the effect of a cause. A significant change in price does follow, but not because of a geometric shape on a chart.

The reason why this triangle appears on the chart is that, firstly, the price moves in cycles, meaning that significant changes (up or down) are followed by small changes (called "consolidation"), then followed by significant changes, and so on. Secondly, in a period of consolidation a lot of currency is bought at increasingly higher prices and sold at decreasingly smaller prices, with the buys and sells centered around the middle of the base of the triangle. Once the price flatlines and the triangle gets its right vertex, meaning that profit can no longer be made with small price changes, a significant price change follows (possibly only after a while). The direction of this change is determined by fundamental causes, not by geometric shapes, and this direction is the only thing that matters when trying to make a profit.



Investment algorithm

This article does NOT constitute investment advice!

Investing money is risky: you might lose all the invested money!

Never invest more money than what you can afford to lose!

This algorithm is specifically designed for cryptocurrency markets, which have a very high volatility, not for traditional markets (which require margin / leveraged trading because their volatility is too small).

This algorithm considers that the cryptocurrency prices are expressed in fiat money, prices which in the long term should be raising.

This algorithm is just an example that you can build on. All the values specified here have to be adjusted for each cryptocurrency, to the real context, possibly often since the cryptocurrency markets are very dynamic.

No matter how safe your investment strategy is supposed to be, you have to be prepared for recession periods when there is a huge price drop followed by months or years of prices which are much lower than those at which you have invested. If external circumstances force you to sell cryptocurrency during a recession, before the price recovers, you will have to be able to support the incurred losses. This is why you should never invest more money than what you can afford to lose.

The most important tools that you can use to balance the potential profits and losses are budgeting (= splitting your budget among your buys) and buying during price dips.

The algorithm described below minimizes the possibility of using your entire investment budget to buy cryptocurrency at what might be the highest price, while at the same time allowing you to profit if the price keeps on raising.

As the market capitalization of a cryptocurrency raises, its volatility decreases, so this algorithm might not work anymore when the changes of the market capitalization become small.

Put all the money that you want to invest in something called "investment budget", IB. Every time you receive your regular income, put 5% of it in the IB.

Plan in advance to split your IB in several parts that you can later use to set up buy orders at different moments, for different cryptocurrencies that you want to invest in, proportional with how much you think each cryptocurrency's price will raise in the long term.

Let P be the current price of the cryptocurrency that you want to invest in.

The general idea is to set up buy orders starting from price P and going down to 0, for each order using a part of the IB which is reserved for the cryptocurrency.

You should set up a buy order at price P because you don't know whether the price will move up or down from that moment on, but the important orders are the ones which are set up below P.

You should set up buy orders at prices lower than P because the price might decrease (you don't know how much), trigger the buy orders as it reaches them, and then might increase (you don't know how much, but hopefully above P). This could happen even years later, during recessions. In a way, this rewinds the time back into the past when the price was much smaller than its recent high.

Setting up in advance the buy orders below price P ensures that you don't miss the buying opportunity (like during sleep).

The more parts you split the IB in, the lower the potential losses (and profits) are. With all these parts of the IB you would have to set up an equal number of buy orders either at smaller differences from one another, or at lower prices.

The money with which you set up an order is locked and is unusable for other orders until you close the locking order.

A fixed amount of money, like the 5% of your monthly income, can buy a decreasing number of units of cryptocurrency as its price increases, and an increasing number of units of cryptocurrency as its price decreases.

Many people will not buy when the price decreases because they fear that it will continue to do so. But you have to ask yourself why would the price continue to decrease and not recover in the long term? Bad news are a reason, your fears are not.

Some people compare buying when the price decreases with catching a falling knife. This comparison is fundamentally flawed because the knife is drawn by the ever present gravitational force, but the price of a cryptocurrency bounces around (unless there are some bad news).

If the price experiences a very large increase in a very short time frame, increase which is called "parabolic raise", this will be followed by a correction which can easily put the price back at the level from which the parabolic raise has started, so don't get greedy in such moments, don't put all your IB in the cryptocurrency.



Set up buy orders

When there is money in the IB, pick a cryptocurrency that you want to invest in.

Let P be the cryptocurrency's current price.

Let H be the highest price from the past 2 months. When trying to determine H, exclude any spikes which appear to be anomalies, that is, which shoot out of the normal trading range.

It may be best to pick a cryptocurrency in which to invest only if it's currently in a significant dip, like when P <= 0.7 * H. This technique is called "buying the dip".

Calculate a set of potential buy prices, using the following equations: 0.7 * H, 0.4 * H, 0.2 * H, 0.1 * H.

Split the IB reserved for the picked cryptocurrency in 3 equal parts and, using a part for each order, set up buy orders at price P and at the first 2 calculated prices which are below P.

Every time H increases visibly (like 5%), close all the buy orders and use the unlocked money to set up new buy orders at the calculated prices (not at price P). This technique is called "trailing the top". Using this technique is what will trigger at some point, with a high probability, the buy orders which were set up at the calculated prices, at least the one with the highest buy price.



Calculation sample

Here is a simple example of why it's important to budget, to buy as low as possible, and to still bet that the price will recover, at least in part, after a significant drop.

Let's say that you invest the amount of fiat money F1 = F to buy the amount of cryptocurrency C1 = C at price P1 = P. This means that C1 = F1 / P1 = F / P = C, which means that F = P * C.

Later, the price decreases to P2 = P / 4, so you invest the same amount of fiat money F2 = F to buy the amount of cryptocurrency C2 = 4 * C. This means that C2 = F2 / P2 = F / (P / 4) = F / P * 4 = 4 * C.

Then, let's say that external circumstances force you to sell all the cryptocurrency, although the price is only P3 = P / 2. This means that you get an amount of fiat money F3 = P3 * (C1 + C2).

How much fiat money did you gain or lost, compared to your investment?

That is R = F3 - F1 - F2 = P3 * (C1 + C2) - F1 - F2 = (P / 2) * (C + 4 * C) - (F) - (F) = (P / 2) * C * 5 - 2 * P * C = P * C * 5 / 2 - 2 * P * C = F * (5 / 2 - 2) = F / 2. This is a profit of 25% from the total investment (both times), a pretty good outcome.

If P3 = P * K3 then R = F * (5 * K3 - 2).

You would break even (that is, R = 0) if when you had to sell you had K3 = 2 / 5, so the price would P3 = P * 0.4. Had you only bought at price P both times, at sell time you would have R = - 1.2 * F, a rather bad outcome. This is a loss of 60% from the total investment (both times), a rather bad outcome.



Trading

Trading can increase the potential profits, but at the same time increases the potential risks.

Trading requires the trader to "buy low and sell high". Beginners ask themselves what this means in practice, they ask how you can possibly know when the price stops dropping and starts increasing. The answer is simple: you don't know, nobody knows. This is the wrong question to ask. The correct question is: how do you make a profit? To make a profit you don't need to know when the exact movements of the price, you only need the price to raise a chosen value for most of your trades. This makes profit a matter of statistics, not knowledge, of probability, not certainty. The winning trades must be significantly more than the losing trades so that they can cover the stop-losses and the broker's fees.

As an example, to buy low means that you have to wait for the price to decrease a chosen value in a chosen time frame, and then buy. Once this happens, you have to sell high, meaning that you have to wait until the price increases a chosen value, and then sell. Once the sell order is executed, the amount of money you have is multiplied (compared to the original) with the sell price divided by the buy price. If you repeat the process with all the money, the profit is compounded in time.

Making a profit depends on the price going both down and up with the chosen values. It is however irrelevant when this happens, it's irrelevant if the price is trending up or down, it only matters if you find opportunities when you can buy low and sell high, no matter what the price is.

Here is an example. Let's say that you have an amount of money M1. You wait for the price to drop to half from the maximum price from the past 2 months. Then you buy. Then you wait for the price to double. At this point you have amount of money M2 = 2 * M1. After 3 such trades you have M4 = 2 * M1 * M1 * M1.

It might take months for such a trade to be completed. In this time frame, it's possible that you could have made the same amount of money by simply holding your original investment in the cryptocurrency, but without going through the added effort and stress.

How do you chose the values? You make a simulation on the past prices for the chosen cryptocurrency. The more detailed the simulation is, the higher the profit can be, and the smaller the risk can be.

You must simulate your strategy on past data. There is absolutely no way around this. Slight variations can mean the difference between ruin and richness. A simulation can only give you the optimal values for the past; the simulation's result is no indication of what those value will do in the future.

Price movements are trend-based, not random. You might think that this is a good thing, that you need trends to make a profit, but random movements actually create more trading opportunities, and therefore increase the potential profits compared to the case of trend-based movements.

Stop-losses are extremely expensive and can quickly decrease your budget to a fraction of the original one. For example, 3 stop-losses of 20% will bring your budget down to 50% from the original one. It's presumed that margin / leverage trading isn't used.

To minimize the probability of losing your entire budget in stop-losses, you have to split your budget in several parts and only risk a single part in a trade, at any given time. For example, keep a third of your budget invested in the cryptocurrency at all times. Split the rest of your budget in 3 parts. If you have a 20% stop-loss (because the volatility is high) and you use no margin / leverage, after 12 consecutive stop-losses (equally distributed among the budget parts) your budget becomes 40% of the original. The more careful you choose when to trade, the smaller is the probability for a stop-loss to occur.

To compensate for possible changes in the market behavior over the long term, you can use two very different sets of chosen values which yield a profit in simulations.

A trader must be very determined to succeed. You might think that you are too, but you are competing against the world's best traders. How good are your chances? Some informal research says that, in the traditional markets, only 1 in 30 (male) professional traders can make a profit that will keep them in the business for many years.



Tips from others

Duomo Initiative - Financial education

Chris Dunn - Cryptocurrency lessons for new traders and investors

Chris Dunn - Altcoin trading strategies

Chris Dunn - Prepare for the coming cryptocurrency bear market







License | Contact