Introduction:
I’m sure you have all heard stories of some average joe becoming rich because he bought bitcoins at any given point in 2010-2013. That same kind of thing is happening right this very moment in the rapidly growing Cryptocurrency market aka altcoins. There have been xxx% increase gainers such as ripple, and even what is arguably bitcoin’s strongest rival, ethereum. If you would have bought any Cryptocurrency in the top 100 just one month ago, you would have made substantial gains given that every coin was in the green. The current market cap of all of the cryptocurrencies combined is sitting at about 800 billion, up from 50 billion in just May of 2017. If you compare this to the stock market at 18 trillion and the dot com bubble burst at 3-4 trillion it seems that this ride is only getting started as long as you account for market volatility and use basic obvious strategies like avoiding buying in at an all time high (given the circumstances this could be void I.e, extreme market hype and FOMO), diversifying your portfolio, and holding on to projects you are confident in when the weak hands can’t. This isn’t some pyramid scheme where I’m trying to convince you to buy my energy drinks because if you tell 5 more people to buy them you can win a Ferrari lmao. There is a real opportunity to make money in this bull market and my intent is to show you how to start if you are new to this kind of thing, and provide insight on resources that myself and many others have used to get the better end of this deal. Let’s begin!
The Exchanges
There are a plethora of exchanges out there but from my experience some of them are painfully slow, look like scams, and some of them even are scams. There are 3 reputable exchanges that can be used and should all be used if you want access to a wider spectrum of cryptocurrency.
Binance – This platform does a great job of providing quality altcoins and is generally considered as the best platform to use today.
Coinbase – The primary exchange for trading USD for crypto, as well as cashing out.
Kucoin – One of the newer exchanges on the block but has quickly proved themselves, as well as obtained unicorn status – reserved for companies who reach a $1 billion valuation in their first year.
Binance Signup & Registration
Use the link below to save 50% on trading fees (a small amount, but it helps).
https://www.binance.com/?ref=12788192
Once you click register you should be redirected to the following screen:
Once you successfully register you should receive an email to confirm your account. Once you can login to Binance it is highly recommended that you setup a 2 Factor Authentication method like Google Authentication for extra security.
**IT IS ESSENTIAL THAT YOU SAFELY COPY AND STORE A BACKUP OF YOUR 2FA KEY. IF YOU LOSE YOUR PHONE OR IF IT GETS DAMAGED YOU MAY BE UNABLE TO ACCESS YOUR ACCOUNT WITHOUT IT.
Coinbase Signup & Registration
Use the link below to get us both $10 of free bitcoin if you spend $100 on coinbase.
https://www.coinbase.com/join/590e4c226d5c5fea0fca004d
Once you’ve reviewed all the terms fill in the personal details as so:
Click Create account and you’ll be redirected to a confirmation page.
Check your spam or trash folder if you don’t receive the email at a reasonable time.
**IT IS ESSENTIAL THAT YOU SAFELY COPY AND STORE A BACKUP OF YOUR 2FA KEY. IF YOU LOSE YOUR PHONE OR IF IT GETS DAMAGED YOU MAY BE UNABLE TO ACCESS YOUR ACCOUNT WITHOUT IT.
Kucoin Signup & Registration
Use the link below to get 50% discount on trading fee and gain access to your own referral code upon registration. (See bottom for more details)
https://www.kucoin.com/#/?r=218de
Registering to join Kucoin is as simple as you could expect it to be. Begin by entering your email and chosen password. From there, you will receive a verification email with further instructions.
Once you log into your Kucoin account, you can adjust the various settings, keep track of your assets, or manage your rewards, such as invitation bonuses and Kucoin bonuses. Traders agree that Kucoin is among the most straightforward exchanges to use, even for those who are new to the cryptocurrency world.
It is highly recommend you enable 2 factor authentication to add an extra layer of security to your account.
Making Your First Purchase:
Once you have verified your email address and once you log back into either Kucoin or Binance, Click Deposits for BTC / Litecoin / Ethereum (you can buy any of them from Coinbase) to gain access to your deposit address. I would suggest avoiding bitcoin until the developers figure out a way to make the fees more reasonable. Ethereum is the choice I would go with as it has the most trading pairs in the market as well as speed, and lower fees than its rival BTC – hence its wild growth recently.
Now we need to send some Litecoin (LTC) or Ethereum (ETH) to Kucoin or Binance. Again I recommend Coinbase to purchase these.
Again, from our Coinbase account that we have just created and bought our Ethereum with we will need to send them to the address that you generated on Kucoin. You do this by going to Accounts and then clicking the Send button under the wallet of the currency you purchased.
OPTIONAL but RECOMMENDED: by signing up for Coinbase you automatically create an account on gdax.com with the same exact login credentials (gdax is the actual exchange, coinbase is a platform to make purchasing easier).
Once you login to gdax.com using your Coinbase credentials, you can use the withdraw option to send funds from coinbase to gdax for free.
Once your ETH is on gdax you can withdraw it into your kucoin or binance deposit address and the exchange will eat the fee for you making the transaction free rather than sending from coinbase which has a somewhat high fee.
After you click Send, a dialogue window will pop up and this will ask you to enter an address to send ethereum (ETH) to. This is the address that we got from Kucoin/Binance when you clicked deposit. Below is a visual example of the process: First we get our Kucoin deposit address, then we will tell coinbase to send to that address.
Once your coins are received in Kucoin or Binance, your balance will be reflected.
Use these to buy the various Altcoins.
Happy trading!
Read further for more details on Kucoin …
Markets & Trading View
Kucoin has a very clean and modern layout throughout the website and this extends to the markets overview screen where you can see the available trading pairs and are able to choose between BTC, ETH, KCS, NEO & USDT.
Selecting a trading pair will then take you to the trading screen where you can view the usual candles, order book and can then buy or sell the selected currencies. When you first enter this screen you will be prompted for your Google Authenticator code before being able to trade, this can be a little annoying but does add an extra layer of security to the site.
Kucoin Fees
Kucoin aims to always offer very low fees, both for trading and withdrawals, making it affordable to use this exchange. There is no fee to make a deposit, and the trading fees are only 0.1 percent, based on the asset that you purchase. The fees for a withdrawal depend on the cryptocurrency in question, but some are free from fees, including GAS and NEO. Others have incredibly low fees, such as BTC at just 0.0005, LTC at just 0.001, and ETH at just 0.01.
Withdrawals that are for less than the current fee times 100,000 will be processed in just seconds. If you withdraw less than 50 BTC (fee of 0.0005 x 100,000=50), for example, this speed will apply. Other withdrawals may require additional time for processing.
It is important to note that the vast majority of Kucoin’s fees, which are already minimal, go back to the users. Ninety percent of the total trading fees are returned to users in one way or another, with Kucoin retaining only 10 percent of trading service fees. The largest portion, 50 percent of the fees, goes to users with KCS in their accounts as their Kucoin Bonus. They then share the other 40 percent via the Invitation Bonus.
Key Features
Kucoin strives to separate itself from other similar cryptocurrency exchanges via its outstanding features. Between the powerful interface, the excellent customer service, and the experience of the team, there are many key features worth mentioning:
Efficient Customer Service: Kucoin has customer service available 24/7 via the hotline, email, and website for ease of use.
Numerous Popular Assets on the Blockchain: Kucoin uses an underlying technology that supports an infinite number of cryptocurrency trading pairs. The initial list includes ETH, BTC, and USDT markets, including trading pairs with various ERC20 tokens, NEO, KCS, and LTC. This will quickly expand; there will also be a unique feature that allows cryptocurrency managers or regular people to register their own cryptocurrency pairs and begin trading. New currencies are constantly added, with QLink, LAToken, and UTRUST all being listed on Dec. 29, 2017, and TFL being listed the day before. Kucoin has already developed a reputation for offering coin pairs earlier than other exchanges, helping it secure a market share.
Powerful API Interface
Top Professional Team: The team behind Kucoin has years of experience in the blockchain and cryptocurrency worlds, working in leadership roles in major companies. The team also has a strong emphasis on research and development, hinting at great things for Kucoin in the future.
Consultant Team with Financial Experts
Financial System Stability: Kucoin has levels of stability typically reserved for financing sectors. The underlying financial system’s design inspired the core exchanging system with its multi-cluster and multilayer architecture. Kucoin also takes precautions like those of banks, including three centers and two locations to be disaster proof.
Financial Safety: Wallets within the Kucoin platform have multiple security levels to fit the storage scale in question. The micro-withdrawal wallets are stored in a private network architecture built using Amazon Web Services Cloud, which allows the wallets to take advantage of that cloud’s multilayer firewall. The documentation for wallets itself has industry-level multilayer encryption. Macro-wallets are typically stored within the bank.
Bank-Level Security for Assets
Fast Processing: Withdrawals under a certain amount are processed in a matter of seconds, and larger withdrawals only take about 10 minutes at the most. Deposits are completed within just two minutes.
Million-Level Throughput for the Core Trading Engine: The memory matching technology is highly efficient and accelerated by hardware. The peak order-making value of this tech is 2 million+/second with a peak order-processing value of 1 million+/second. To put it in perspective, those figures are hundreds to thousands of times of the typical industry standard. The result is no lags or delays during your core order process, even during a market boom.
Operation Strategies: Kucoin’s operation strategies are also worth mentioning, as the operation team works on large-scale and long-term offline and online promotion and operations. Most of the commission from the exchange is rewarded to users who are active and exchange, promote, or invest in Kucoin. With these incentive policies in place, Kucoin hopes to sustain high levels of enthusiasm while improving business. The invitation bonus plan should also bring in new traders and subscribers.
Invitation Bonus: To encourage further growth of Kucoin, those who register receive a bonus for inviting new users. The user who sends the invitation will receive a portion of trading fees accrued by the invitee. This has a pyramid effect, so you can accumulate bonuses for the traders that someone you invited invites. Do not confuse this with a pyramid scheme despite its similar structure. Unlike in a pyramid scheme, Kucoin does not make money off of this. In fact, it loses money from every transaction with each referral a user makes, as the user who sent the referral then gets a portion of the fees.
Kucoin Customer Support
Customer support for Kucoin is very good, with multiple methods of contacting the support team. Support is available 24/7, and team members pride themselves on resolving any issues in a timely manner. It is possible to email support@kucoin.com or contact support via the website. In addition to troubleshooting and answering questions, the support team is ready to listen to suggestions, as Kucoin likes to take user preferences to heart.
Is Kucoin Safe?
Kucoin is indeed safe to use thanks to security efforts on both the system and operational level. On the system level, it helps that Kucoin was constructed using financing-level standards. This includes standard transfer encryption protocol for data transfer layers, meaning that all of the sensitive data and user data are stored on data encryption at a bank level. There is also multifactor dynamic authentication for additional security.
On the operational level, Kucoin has a dedicated internal risk control department, as well as one for operational processes. Each of these departments has its own strict standards for operating and using data involving multilevel review plus approval.
The only caveat concerning safety is that the Kucoin platform is still relatively new and has not yet proven itself to be secure. That being said, the vast experience of its team combined with the numerous security features in place should be enough to inspire confidence in the safety of the system.
KCS Kucoin Token
The Kucoin token, KCS or Kucoin Shares, has a total volume at issuance of 200 million. Following the planned buyback disposal, there will be a constant 100 million tokens. A minimum of 10 percent of each quarter’s net profit will be allocated to buying back KCS, and those that KCS bought back will be destroyed immediately. KCS works with all Ethereum wallets, as it is a decentralized cryptocurrency based on Ethereum.
The Initial Coin Offering occurred in three stages. The first phase accounted for 35 percent, about 70 million tokens, and involved issues for the founders. The second phase was for industry stars, consultants, and angel investors, accounting for 15 percent or 30 million KCS. The final, third phase, was for all users, and this public ICO accounted for the remaining 50 percent or 100 million KCS.
The KCS issued by founders within the first phase undergo a lockup period lasting four years and ending Sept. 2, 2021. Before Sept. 2, 2018, founders cannot sell or assign their KCS holdings. The angel investors and consultants have a two-year lockup period, ending on Sept. 2, 2019. The KCS purchased during the public offering do not have a lockup period, so they went on the exchange on Sept. 2, 2017.
KCS Token Benefits
The token comes with a Kucoin bonus, which is awarded to users who hold this token. This incentive bonus amounts to half of all trading fees that the platform charges, with the percentage open to adjustment in the future. To achieve the daily bonus, users must have their KCS deposited within the Kucoin Platform.
Those with a minimum number of KCS in their Kucoin account can also take advantage of reduced trading fees at the time that they place orders for online trades. Eventually, KCS will reach certain levels, at which point those users who hold this token will get access to customer service Fast-Pass, one-on-one investment consultation, and other exclusive services.
What is a cryptocurrency?
Let’s start at the beginning.
You may have heard many things about what a cryptocurrency is, but you may still be searching for an understandable definition. I hear ya, I was in the same boat for a long time.
Instead of getting too technical, here’s the easiest way to think about cryptocurrencies:
A cryptocurrency is basically money on software platforms.
It’s important to keep in mind that the teams/companies that are behind these cryptocurrencies are not only creating a new form of currency, but a new software platform. To demonstrate how this works, let’s take a look at other software platforms that you are probably already familiar with.
Examining how these platforms work will help you understand cryptocurrencies.
Here are a few software platforms that many people use:
Windows: A software platform for personal computers
Dropbox: A software platform for storing and sharing documents
Fedwire: A software platform that sends money between financial institutions
On each of these platforms, a type of money is used, in exchange for using the platform:
Windows: You pay US Dollars (or your local fiat currency) to buy a license for Windows to use on your computer. If you buy a computer that already has Windows on it, the license fee is included in the purchase price.
Dropbox: You pay US Dollars (or your local fiat currency) to buy a subscription to use the software for a month or a year, depending on which plan you buy.
Fedwire: You pay a transaction fee to use the system and you send fiat currency itself.
Each of these systems also have a database connected to it:
Windows: Database is stored on your local computer
Dropbox: Database is stored on the Dropbox servers
Fedwire: Database is stored on the Fedwire servers
Cryptocurrencies essentially replace the US Dollars (or your local fiat currency) that you use to purchase these software services. The “database” that cryptocurrencies give you access to is based on blockchain technology.
More on blockchain technology in the next section of this guide.
But wait, what are the software services that you are getting? Isn’t a cryptocurrency like Bitcoin just a currency, like US Dollars?
Not quite.
The goal of cryptocurrencies is usually to improve on some type of existing software system or network. When you send money via PayPal, Fedwire or Western Union, you are basically sending fiat money electronically, similar to Bitcoin.
However, that’s where the similarity ends.
Platforms like PayPal have severe limitations on what you can and cannot do. For example, you cannot send/receive money from certain countries (like Nigeria).
Cryptocurrencies like Bitcoin want to make financial transactions more open and accessible to everyone around the world.
Other cryptocurrencies solve other problems, which we will explore later in this guide.
Is Cryptocurrency Real Money?
Yes.
Since this is a new concept to most people, it will take some time to become widely accepted. This is where Bitcoin has been instrumental in paving the way for this new technology.
Websites like Newegg take Bitcoin, along with the other traditional payment methods. Here’s what the checkout screen looked like after I added a drone to my cart.
Payment processor Stripe also allows online merchants to accept Bitcoin.
Notice that other coins like Ether or Litecoin are not accepted. However, the fact that Bitcoin is accepted, is a big step towards the adoption of other cryptocurrencies.
The Risks of Cryptocurrency
Now that you understand the basics, what are the risks of trading these cryptocurrencies? There are quite a few, but here are the top three.
- Some Technologies Will Fail
Remember that cryptocurrencies are basically software, created by people or companies. So just like Webvan or Pets.com in the dot-com bust, some of these technologies will fail.
…and they will fail spectacularly.
Right now, there is a lot of buzz around certain cryptocurrencies increasing several thousand percent, in a few months. This has a lot to do with ignorance and hype.
Just like when people found out that this new thing called the “internet” would change the world of business.
Did it change the world?
Of course.
But was there a lot of dumb money that overhyped the first wave of internet companies?
Totally.
So just remember, trading cryptocurrencies is kind of like trading a software stock. Some of the software will change the world.
Others will explode in a giant ball of fire.
There are also a lot of scam coins out there, so be careful. Like penny stocks that are just a company on paper, almost anyone can create a new cryptocurrency.
Learn how to separate the scams from the deeply underpriced currencies. Then use proper risk management and play the odds.
- It Requires Technical Savviness
Let’s face it, cryptocurrencies were created by super nerds. Like with Linux, there is still quite a bit of technical know-how that is required.
You don’t need to know how to code, but if you are “not good with computers” you may want to stay away from cryptocurrency trading, at least until they start building more user friendly interfaces.
Don’t get me wrong, I’m not calling anyone dumb. I’m just saying that if you don’t possess a certain skillset, then you shouldn’t get involved in that area. This could cause you to lose a lot of money, very quickly.
For example, I don’t know how to sew, so I don’t make my own clothes. If I did try to make my own clothes, everyone who meets me would think I’m a weirdo for wearing fucked up pants.
You get the picture.
So if you aren’t so tech savvy, but still want to get involved, find someone you trust to trade for you.
- There’s a Lot of Broker and Technology Risk
Since this is emerging technology, there are still a lot of unknowns with trading at scale and how brokers and the software will react to certain surprise events. If you think that Forex brokers are risky, then you should consider cryptocurrency brokers at least twice as risky. Not just because they could be shady, but there a still so many unknowns with the technology.
However, I would still trust the bigger cryptocurrency exchanges over a lot of offshore binary options brokers.
So the lesson is: Don’t keep too much of your coinage at the brokers. Move them off to your own wallet as soon as possible.
I’ll get to wallets later in this guide.
Which Cryptocurrencies Are Worth Buying?
Although cryptocurrencies are all based on blockchain technology, they are not all created equal. Here are some differences that you need to understand to make informed trading decisions:
Transaction processing speed
Total supply currently available
Will there ultimately be a limit on the total number of currency available?
Will there be an unlimited supply of currency?
Is there a real-world need for this software/currency?
Real world adoption of the technology
Any big investors in the project?
Does the use of the software make sense?
Do the founders have a reputable background?
What is the current market cap compared to coins in the top 10?
How much room for potential growth does it have based off that market cap?
These are just a few of the characteristics that you should look at. But once you start digging into these details, you will begin to see which projects could work for their intended purpose and which ones are probably scams.
This understanding will also allow you to assess the long-term viability of these different currencies and which ones will be more desirable in the future.
Potential Investment Strategies
The cryptocurrency market has returned over 900% since the beginning of 2017 (at the time of writing this). You cannot find these kinds of return on investments in the stock market or anywhere. If you had made an investment of $500 in January, you would have made $5000 in less than a year (!). This type of strategy is known as long-term investing, and this guide is aiming to show you how to implement this investment method – to construct a long-term cryptocurrency portfolio.
Long-term investing is simply as its name says – taking a long-term view of investments. Everyone defines ‘long-term’ differently. In the stock market, ‘long-term’ normally means anything that lasts years… However, given the fact that the cryptocurrency market moves extremely quickly, we can scale that number down to couple of months or a year. If we look at stock market investment, the legendary investor, Warren Buffet, is an advocate of long-term investment because of the many advantages it has to offer.
The Advantages of Long-term Crypto Investment:
Historical statistical data of a growing economy has proven that it works: Looking at the S&P 500 over a 5-year period, it has achieved a return of around 60%. The same can be said for the FTSE 100, which achieved a return of 25% over the same time period. Markets generally tend to trend upwards over a period of time, so with this in mind, long-term investing does have its merits. This can be said not only about the last 5 years, but for almost every 5 years throughout the history of the new economy.
Lower fees: If you take an active trading approach to investing, then it is expected that fees from exchanges will trim your profits. With a long-term investment strategy, all the investor has to do is select a few cryptocurrencies, and then wait. A long-term investor does not trade every day, therefore, they do not have to worry about trading fees.
Less risky: Dipping in and out of the market could mean that you miss days in which significant gains are made. You don’t have to worry about this with a long-term investment strategy. Keeping in mind that fact, in order to reduce volatility, we recommend getting into the market using the DCA method.
Now that the benefits of a long term-investment strategy have been made clear, it is also important to consider which cryptocurrencies you want in your long-term portfolio, or how to build your portfolio. Before that, let’s identify some indicators that we can use to measure the potential of the crypto project in the long term. These are just a few indicators that we have identified; feel free to include yours in the comments section below.
Indicators of Long-term Value
Market share: this can be defined as the proportion of market capitalization that a cryptocurrency has. A large market share typically indicates dominance. For example, Bitcoin’s market share is currently 33% (at the time of writing) of total market capitalization of the cryptocurrency space. We can use this as an indicator to determine the long-term viability of cryptocurrencies, including Bitcoin, in our portfolio.
Utility value: when determining if a cryptocurrency will be here in a few years from now, we have to ask ourselves, is the cryptocurrency useful? Does it have a users’ market? This question is important because it is the most useful cryptocurrencies that are likely to be widely adopted. Take Ethereum for example, its utility value derives from its function of allowing developers to build Decentralized Applications (DApps) on top of its blockchain. We can conclude that, as long as Ethereum is the go-to-place for DApp development, it is likely to maintain, and possibly increase, its utility value. Therefore, Ethereum would be a viable cryptocurrency to include in our portfolio.
Transaction volume: in order to determine whether a cryptocurrency is actually being used, you can take a look at its transaction volume. In the case of Ethereum, its transaction volume per day is about 500,000 ETH. Historically, this is a number that is increasing and as long as this upward trend continues this reaffirms the long-term viability of holding Ethereum in our portfolio.
Technology development: this is a key aspect in cryptocurrency. If the technology behind a cryptocurrency is not fit for purpose, then it is likely that in the long-term, the cryptocurrency will fail. An example of a positive technological development is Ethereum’s recent Byzantium hard fork. This hard fork allowed for more transactions to be processed on the Ethereum blockchain. This positive technological development increases the likelihood of Ethereum being widely adopted, and so once again makes it a viable candidate for our portfolio.
Market news: it can emerge that a cryptocurrency is having a problem, and depending on what that problem is, it can significantly affect its long-term viability. Market news will affect the price of your cryptocurrency, and the value of your portfolio, so it is imperative that you are ready to react. As well as market news, other factors can also affect the price of cryptocurrency, which can be found here. Overall, it is important to stay up-to-date with market news involving cryptocurrencies in your portfolio, so that you can make informed investment decisions.
These are just some indicators that you can use to determine the long-term viability of a cryptocurrency. With this in mind, we can now turn to portfolio construction, more specifically, what percentage of each cryptocurrency we should hold in our portfolio.
Risk Appetite
Exposure to a particular cryptocurrency is primarily dependent on your risk appetite. This can be defined simply as, your tolerance towards taking risk. Using traditional investment markets as an example, if your tolerance towards risk is neutral, then a typical investment portfolio would be 50% equities and 50% bonds. Equities are known to be riskier than bonds, but also offer higher returns as a result. Conversely, bonds tend to be a safer asset than stocks, but offer a lower return over time as a result. Combined together, a balanced portfolio is produced, not too much risk, but also not too safe.
If we apply this to cryptocurrency, we can draw some parallels between the traditional markets and the cryptocurrency market. One would typically regard Bitcoin as being less risky than an unknown altcoin. From this, we can then tailor our level of exposure to suit our risk appetite. For example, a very risky portfolio might be 80% in small-cap cryptocurrency and 20% in Bitcoin. Using the information we have gathered so far, we can now construct our own long-term portfolio.
How to Structure Your Portfolio:
Our portfolio will be different to yours because factors such as our risk appetite will undoubtedly differ. Our portfolio has been closely modelled using the scheme below. You can use it too when constructing your own long-term cryptocurrency portfolio.
I personally have a higher risk appetite so my portfolio is 25% ETH, 20% LTC, 15% NEO, 15% XRP, 10% XLM, 10% REQ, 5% across small bets like POE, FUN, COSS.
It is essential that you do your own research to be confident in your choices.
Where to store your coins:
Hardware (cold) Wallet:
Hardware or cold wallets are indubitably the most secure way to store your cryptocurrencies, however they are quite expensive and I would only recommend using them if you are dealing with any amount over $5,000-10,000 depending on your trust levels in the other wallet choices.
Some examples of common hardware wallets are: TREZOR, Ledger NANO S (supports most altcoins), and KeepKey.
These are actual small physical devices similar to usb drives if you will, though the technology is far more advanced.
Desktop Wallet:
If you prefer using a desktop PC as your means of storage, the true and tested platform of choice is Electrum. The general consensus is that desktop wallets are a decent choice as far as security goes, but it has flaws for obvious reasons – what if your computer breaks and you lose your private keys? You would need to create a back-up plan if you go with the desktop wallet, and that goes for all of the wallets each with their own levels of risk and circumstances.
Mobile Wallet:
Mobile Wallets are definitely the most widely used among cryptocurrency buyers because not everyone is a whale who can afford a $2000 hardware wallet, but everyone who has access to cryptos conveniently has access to a mobile phone presumably. Because the market for these mobile wallet apps is so big, it’s a given that there will be a wide variety of wallet apps to choose from, here is what I suggest based off my experience:
Bitcoin: Bread Wallet
Ripple: Toast Wallet
Litecoin: Loaf Wallet
Exchanges (hot):
Leaving your coins on an exchange is technically the least safe way to store your coins. Any coins you leave on an exchange are not actually owned by you as you do not actually have access to the private keys. Once you send money from an exchange to a wallet you become the “true” owner. There was a big hack on the #1 exchange a few years ago that caused a ton of people to lose money because they kept their coins vulnerable, see Mt.Gox. In my opinion, as long as you keep your exchange accounts secured with 2 Factor Authentication, as well as your personal email, you should have enough security if some kind of hack were to take place. I like to leave a big chunk of my portfolio on exchanges so I can take advantage of market shifts as they come.
Cashing out to USD:
I realize that not everyone that “cashes out” of crypto does so by selling it for USD. In fact, I understand that some in the crypto community view the necessity of cashing out itself as a type of myth. In this section, I discuss what happens if you trade your crypto for basically anything that isn’t cash.
The IRS views trading crypto for something of value as a type of bartering that must be included in income. From the IRS’s perspective, it doesn’t matter if you sold crypto for cash and bought a car with that cash or if you just traded crypto directly for the car – in both cases, the IRS views you as having sold your crypto. This approach isn’t unique to crypto – it works the same way if you trade stock for something.
This means that if you do trade your crypto for “stuff”, you have to report every exchange as a sale of your crypto and calculate the gain/loss on that sale, just as if you had sold the crypto for cash.
Finally, there is one important exception to this rule. If you give your crypto away to charity (one recognized by the IRS; like a 501(c)(3) organization), the IRS doesn’t make you report/pay any capital gains on the transaction. Additionally, you still get to deduct the value of your donation on the date it was made. Now, from a “selfish” point of view, you will always end up with more money if you sell the crypto, pay the tax, and keep the rest. But, if you are going to make a donation anyway, especially a large one, giving crypto where you have a big unrealized/untaxed gain is a very efficient way of doing so.
Taxes:
The Basics
This section is best for people that don’t understand much about taxes. It covers some very basic tax principles. It also assumes that all you did during the year was buy/sell a single cryptocurrency.
Fundamentally, the IRS treats crypto not as money, but as an asset (investment). While there are a few specific “twists” when it comes to crypto, when in doubt replace the word “crypto” with the word “stock” and you will get a pretty good idea how you should report and pay tax on crypto.
The first thing you should know is that the majority of this discussion applies to the taxes you are currently working on (2017 taxes). The tax bill that just passed applies to 2018 taxes (with a few very tiny exceptions), which most people will file in early 2019.
In general, you don’t have to report or pay taxes on cryptocurrency holdings until you “cash out” all or part of your holdings. For now, I’m going to assume that you cash out by selling them for USD; however, other forms of cashing out will be covered later.
When you sell crypto, you report the difference between your basis (purchase price) and proceeds (sale price) on Schedule D. Your purchase price is commonly referred to as your basis; while the two terms don’t mean exactly the same thing, they are pretty close to one another (in particular, there are three ways to calculate your basis – your average cost, a first-in, first-out method, and a “specific identification” method. See more about these here and here). If you sell at a gain, this gain increases your tax liability; if you sell at a loss, this loss decreases your tax liability (in most cases). If you sell multiple times during the year, you report each transaction separately (bad news if you trade often) but get to lump all your gains/losses together when determining how the trades impact your income.
One important thing to remember is that there are two different types of gains/losses from investments – short term gains (if you held an asset for one year or less) and long term gains (over one year; i.e. one year and one day). Short term gains are taxed at your marginal income rate (basically, just like if you had earned that money at a job) while long term gains are taxed at lower rates.
For most people, long term capital gains are taxed at 15%. However, if you are in the 10% or 15% tax bracket, congrats – your gains (up to the maximum amount of “unused space” in your bracket) are tax free! If you are in the 25%, 28%, 33%, or 35% bracket, long term gains are taxed at 15%. If you are in the 39.6% bracket, long term gains are taxed at 20%. Additionally, there is an “extra” 3.8% tax that applies to gains for those above $200,000/$250,000 (single/married). The exact computation of this tax is a little complicated, but if you are close to the $200,000 level, just know that it exists.
Finally, you should know that I’m assuming that you should treat your crypto gains/losses as investment gains/losses. I’m sure some people will try and argue that they are really “day traders” of crypto and trade as a full time job. While this is possible, the vast majority of people don’t qualify for this status and you should really think several times before deciding you want to try that approach on the IRS.
Dealing with “Forks”
Perhaps another unpleasant surprise for crypto holders is that “forks” to create a new crypto also very likely generate a taxable event. The IRS has long (since at least the 1960s) held that “found” money is a taxable event. This approach has been litigated in court and courts have consistently upheld this position; it even has its own cool nerdy tax name – the “treasure trove” doctrine.
Practically, what this means is that if you owned BTC and it “forked” to create BCH, then the fair market value of the BCH you received is considered a “treasure trove” that must be reported as income (ordinary income – no capital gain rates). This is true whether or not you sold your BCH; if you got BCH from a fork, that is a taxable event (note – I’ll continue using BTC forking to BCH in this section as an example, but the logic applies to all forks).
While everything I’ve discussed up to this point is pretty clearly established tax law, forks are really where things get messy with taxes. Thus, the remainder of this section contains more speculation than elsewhere in this post – the truth is that while the idea is simple (fork = free money = taxable), the details are messy and other kinds of tax treatment might apply to forks.
One basic practical problem with forks is that the new currency doesn’t necessarily start trading immediately. Thus, you may have received BCH before there was a clear price or market for it. Basically, you owe tax on the value of BCH when you received it, but it isn’t completely clear what that value was. There are several ways you can handle this; I’ll list them in order from most accurate to least accurate (but note that this is just my personal view and there is ongoing disagreement on this issue with little/no authoritative guidance).
Use a futures market to determine the value of the BCH – if reliable sources published realistic estimates of what BCH will trade for in the future once trading begins, use this estimate as the value of your BCH. Pros/cons – futures markets are, in theory, pretty accurate. However, if they are volatile/subject to manipulation, they may provide an incorrect estimate of the true value of BCH. It would suck to use the first futures value published only to have that value plummet shortly thereafter, leaving you to pay ordinary income tax but only have an unrealized capital loss.
Wait until an exchange starts trading BCH; use the actual (“spot” price) as the value. Pros/cons – spot prices certainly reflect what you could have sold BCH for; however, it is possible that the true value of the coin was higher/lower when you received it as compared to when it started trading on the exchange. Thus this method seems less accurate to me than a futures based approach, but it is still certainly fairly reasonable.
Assume that the value is $0. This is my least preferred option, but there is still a case to be made for it. If you receive something that you didn’t want, can’t access, can’t sell, and might fail, does it have any value? I believe the answer is yes (maybe not value it perfectly, but value it somewhat accurately), but if you honestly think the answer is no, then the correct tax answer would be to report $0 in income from the fork. The IRS would be most likely to disagree with this approach, especially since it results in the least amount of income reported for the current year (and the most favorable rates going forward). Accordingly, if you go this route, make extra sure you understand what it entails.
Note, once you’ve decided what to report as taxable income, this amount also becomes your cost basis in the new crypto (BCH). Thus, when you ultimately sell your BCH (or trade it for something else as described above), you calculate your gain/loss based on what you included in taxable income from the fork.
Finally, there is one more approach to dealing with forks worth mentioning. A fork “feels” a lot like a dividend – because you held BTC, you get BCH. In a stock world, if I get a cash dividend because I own the stock, that money is not treated as a “treasure trove” and subject to ordinary income rates – in most cases, it is a qualified dividend and subject to capital gain rates; in some cases, some types of stock dividends are completely non taxable. This article discusses this idea in slightly more detail and generally concludes that forks should not be treated as a dividend. Still, I would note that I’m unaware of any court cases directly testing this theory.
Ultimately, this post is supposed to be practical, so let me make sure to leave you with two key thoughts about the taxation of forks. First, I believe that the majority of evidence suggests that forks should be treated as a “treasure trove” and reported as ordinary income based on their value at creation and that this is certainly the “safest” option. Second, out of everything discussed in this post, I also believe that the correct taxation of forks is the murkiest and most “up for debate” area. If you are interested in a more detailed discussion of forks, see this thread for a previous version of this post discussing it at even more length and the comments for a discussion of this with the r/tax community.
Mining Crypto
Successfully mining crypto coins is a taxable event. Depending on the amount of effort you put into mining, it is either considered a hobby or a self-employment (business) activity. The IRS provides the following list of questions to help decide the correct classification:
The manner in which the taxpayer carries on the activity.
The expertise of the taxpayer or his advisors.
The time and effort expended by the taxpayer in carrying on the activity.
Expectation that assets used in activity may appreciate in value.
The success of the taxpayer in carrying on other similar or dissimilar activities.
The taxpayer’s history of income or losses with respect to the activity.
The amount of occasional profits, if any, which are earned.
If this still sounds complicated, that’s because the distinction is subject to some amount of interpretation. As a rule of thumb, randomly mining crypto on an old computer is probably a hobby; mining full time on a custom rig is probably a business.
In either event, you must include in income the fair market value of any coins you successfully mine. These are ordinary income and your basis in these coins is their fair market value on the date they were mined. If your mining is a hobby, they go on line 21 (other income) and any expenses directly associated with mining go on schedule A (miscellaneous subject to 2% of AGI limitation). If your mining is a business, income and expenses go on schedule C.
Both approaches have pros and cons – hobby income isn’t subject to the 15.3% self-employment tax, only normal income tax, but you get fewer deductions against your income and the deductions you get are less valuable. Business income has more deductions available, but you have to pay payroll (self-employment) tax of about 15.3% in addition to normal income tax.
What if I didn’t keep good records? Do I really have to report every transaction?
One nice thing about the IRS treating crypto as an asset is that we can look at how the IRS treats people that “day trade” stock and often don’t keep great records/have lots of transactions. While you need to be as accurate as possible, it is ok to estimate a little bit if you don’t have exact records (especially concerning your cost basis). You need to put in some effort (research historical prices, etc…) and be reasonable, but the IRS would much rather you do a little bit of reasonable estimation as opposed to just not reporting anything. Sure, they might decide to audit you/disagree with some specifics, but you earn yourself a lot of credit if you can show that you honestly did the best you reasonably could and are making efforts to improve going forward.
However, concerning reporting every transaction – yes, sorry, it is clear that you have to do this, even if you made hundreds or thousands of them. Stock traders have had to go through this for many decades, and there is absolutely no reason to believe that the IRS would accept anything less from the crypto community. If you have the records or have any reasonable way of obtaining records/estimating them, you must report every transaction.
What if I don’t trust you?
Well, first let me say that I can’t believe you made it all the way down here to this section. Thanks for giving me an honest hearing. I would strongly encourage you to go read other well-written, honest guides. I’ll link to some I like (both more technical IRS type guides and more crypto community driven guides). While a certain portion of the crypto community seems to view one of the benefits of crypto as avoiding all government regulation (including taxes), I’ve been pleasantly surprised to find that many crypto forums contain well reasoned, accurate tax guides. While I may not agree with 100% of their conclusions, that likely reflects true uncertainty around tax law that is fundamentally complex rather than an attempt on either end to help individuals unlawfully avoid taxes.
IRS guides
IRS Notice 2014-21 on cryptocurrency
IRS Publication 550 – Investments
IRS Topic 409 – capital gains/losses
IRS Topic 420 – bartering income
IRS guide to taxable income
Non-IRS treasure trove discussion 1 and 2
Non-IRS guides
Coinbase statement
CoinDesk’s Tax Guides
Forbes Discussion
Cryptocurrency facts
Turbo Tax Discussion
Investopedia Discussion
*The previous section regarding taxes and cashing out was extracted via copy/paste from this thread.
Following The Hype:
A big part of my success in cryptocurrency can be credited to the small communities on reddit that always seem to have an edge on distinguishing shit coins from hit coins. The primary subs that I follow are:
Reddit.com/r/cryptocurrency
Reddit.com/r/cryptocurrencies
Reddit.com/r/altcoins
From there I gather a list of all the coins that are shilled (highly glorified) and I research them based off the criteria found in the “Indicators of Long-term Value section” previously seen in the guide. Generally if a coin is consistent with the desired traits and qualities that we seek, I will venture to that coin’s respective subreddit, study charts and graphs to determine if its in a dip or if it seems primed for takeoff based off the amount of FOMO and shilling surrounding it. Right now a big part of the market is being swayed by the concept of FOMO and its ugly step brother, FUD.
FOMO: Fear of Missing Out
Defined as an anxiety that an exciting or interesting event may currently be happening elsewhere, often aroused by posts seen on a social media website. In the context of the crypto world, this all began when some guy heard a story of his neighbor finding his old bitcoin addresses and becoming rich (exaggerated but true in many cases). Let’s say this person knew about bitcoin in 2012 and had many opportunities to buy, his friends were buying, but he didn’t believe in the concept so he “missed out”. Now that he has rediscovered the cryptocurrency world he is also seeing many more coins jumping in price so he finally decides to buy in, and holy cow, he made 5x returns on his initial investment by buying into the hyped up coin Ripple (XRP) or Raiblocks (XRB). Now this guy is actively searching for coins all around coinmarketcap and reddit, and other various boards trying to find the next big hitter. Because of this concept of FOMO, people are buying into coins without even doing research, often times only buying a coin because it is CHEAP. We have seen tons of sub-penny coins jumping into the .01-.25 cent range which doesn’t seem like a lot but have actually yielded 10-100x gains. It is my belief that this concept will only grow more wild every day, and i believe my theory is supported by our rapidly growing market cap where billions of new dollars and “dumb” money are being poured into the market causing everything to grow.
FUD: Fear, Uncertainty, Doubt
Alongside all the shilling and glorifying of coins is the naysayers and people who spread rumors about coins that cause downward shifts in the market because of just that: fear, uncertainty, and doubt entering the minds of newer buyers. FUD is important for making sound decisions and keeping an edge on the market so it is not necessarily completely bad if you will. If you see a news post that is meant to spread FUD and it seems legitimate you might be able to predict a dip if you were willing to risk it which means you can either sell a coin off or buy more during the dip (recommended option unless you have thousands to spend, you’ll probably lose to whales).
The best thing you can do is try to stay as unbiased as possible and although it sounds cliche, don’t let your emotions get the best of you. The market has seen crazy dips and crazy booms and there has been tons of FUD essentially saying that this particular dip is gonna be the big CRASH we have all been waiting for. That crash does have the potential to happen if whales get greedy, but I’d bet my bottom dollar we won’t see it happen for at least a couple of years.