How to Trade Cryptocurrencies
One of Fintech’s most disruptive breakthroughs is the blockchain. Rather than keeping all your data on a single server, this decentralised ledger system stores data in many places. This makes it virtually impossible to hack into and steal or falsify data. It also creates a way to trade currency independent of any government or entity. Currently, hundreds of businesses are looking for ways to incorporate blockchain technology into their systems so they can increase security, speed up transactions, cut costs, and interact more easily with other businesses.
The short history shows how diverse blockchain technology can be and how many companies are jumping on it. It also shows the extreme volatility of the companies in this niche as it moves forward to weed out the winners and losers.
14.1 History of the Blockchain
The possibility of cryptocurrencies began with debit cards and electronic cash. But people concerned with privacy wanted an undetectable way to transfer money. Others wanted a secure system not controlled by any government. In 1983 David Chaum developed an RSA algorithm that modified a string of numbers.
A person sending a bank deposit sent it with one string of numbers. The bank received it with another set of numbers, based on, but distinct from the first, so the bank could not trace the origin of the deposit. This algorithm is the foundation for blockchain today51. He created DigiCash, but governments were not receptive to this private currency. Due to regulations and other issues, it did not succeed.
PayPal stepped in to provide a way to transact services on the web with ‘cash’ and prove there was a market need for web-based currency. Another online currency company, e-gold52 allowed clients to sell their gold or hold gold in e-based accounts. They could trade these monies across borders fairly anonymously. The anonymity let scammers flourish and in 2005 the US government stepped in to close it down.
In the United States, the 9/11 attacks of 2001 changed the tolerance for alternative monies. Now the US government seemed to view every private money source as a money laundering method for terrorists, drug dealers, and crime. While Europe realised these alternative methods did not necessarily foster crime, they were still not receptive to start-up companies.
However, the lack of privacy and the reduced trust in governments and banking institutions led to a desire for another currency source, and Bitcoin (BTC) emerged.
Even the origins of Bitcoin are shrouded in privacy and mystery. The bitcoin.org site was anonymously registered in August 2008. And in October 2008 a software developer with the pseudonym of Satoshi Nakamoto posted the Bitcoin paper that explained the peer-to-peer electronic cash system supported by the blockchain. It’s possible this founder of Bitcoin is a group of people. His goal was to create a currency outside the control of any government. One that was private and not based on trust but on verifiable transactions.
2009: In 2009 the first Bitcoin block was mined, proving the concept worked. And a simple version of Bitcoin was released on the internet to a small group of insiders. The first Bitcoin to dollar equivalency was based on the electric costs to create the Bitcoin: $1 =1,309.03 BTC.53 10,000 bitcoins bought a Papa John’s pizza for the first crypto-currency transaction.
2010: In early 2010, the first Bitcoin exchange was formed, the value of Bitcoin increased, and Jed McCaleb opened the Mt.Gox trading exchange.
This year the software became open sourced and freely available. Anyone could look and check on the authenticity of the transactions. They could see how many Bitcoins are in any numbered wallet. They just wouldn’t know who owns the wallet. Those who set up the ledgers and facilitate the transactions are called miners. Because of open sourcing, anyone can become a miner.
The growth was not without problems. In late 2010 miners exploited a system glitch and created 184 billion Bitcoins. And a government task force warned about the use of cryptocurrencies to finance terrorism. Still, by the end of 2010, BTC was trading at $.50 and the market cap of Bitcoin exceeded $1million.
Namecoin was one of the first additional blockchain technologies. It’s a decentralised name registration database. It allows the registration of a common name while giving it a unique blockchain key.54 One use could be to match domain names to IP addresses.
2011: By mid-year, BTC traded at $10 and was moving higher. The Silk Road, a drug dealing site opened using Bitcoin as currency and later in the year fraud interrupted PayPal/Bitcoin transactions. The bubble burst and in four days BTC lost over 67% of its value. Mid 2011 also saw 25,000 BTC stolen from a wallet and major breaches of the Mt.Gox exchange. Hackers stole passwords and drained accounts of millions in Bitcoin.
2012: This year brought an FBI report on virtual currencies and how they could enable illegal drug and arms deals. While cryptocurrencies and Bitcoin gained recognition with conferences, magazines, physical coins, and more, it still struggled with hacks, Ponzi schemes, and increasing government suspicion.
Governments expressed concern that cryptocurrencies could cause a loss of trust in government currencies. They worried that anonymity and no regulation would promote crime, tax evasion, and money laundering. But Bitcoin also moved toward legitimacy. In 2012 Bitcoin Central registered as a European bank complying with bank regulations and in 2013 more tech and retail stores begin to accept Bitcoin as payment.
Other groups worked to build on and improve Bitcoin’s blockchain currency. Yoni Assia, eToro founder, and Vitalik Buterin worked together to create a new Bitcoin protocol called Coloredcoins, which allows users to assign attributes to a transaction. Coloredcoins was designed to allow users to do more than just transfer value and the first implementation was to allow people to create their own cryptocurrencies.55
2013: It took until early 2013 for Bitcoin to surpass the all-time high of 2011. But volatility continued. In March 2013, a soft fork, or blockchain glitch, forced a trading shutdown. BTC suddenly dropped 23% to a low of $37 and then regained most of the loss by that evening. By mid-April Bitcoin hit $26656 and reached a market cap above $1 billion. A hack crashed the price down below $125 in a matter of hours.
Also in 2013, the US Financial Crimes Enforcement Network (FINCEN) created the first Bitcoin regulations. The US government then charged Mt.Gox exchange, with ‘failure to register as a money transmitting business’57 and subpoenaed 22 other Bitcoin companies for possible violations. It shut down the Silk Road, seized $3.6 million in Bitcoin and charged the Vice Chair of the Bitcoin Foundation with money laundering. In the same year, the US and Germany declared Bitcoin to be money. China’s Baidu began to accept Bitcoin but in late 2013 China’s central bank banned any Bitcoin transactions and Baidu stopped accepting BTC.
Bloomberg started showing Bitcoin as XBT a currency and Ben Bernanke, the US Federal Reserve Chairman, gave praise for Bitcoin at the senate’s digital currency hearings.58 This is the year the Winklevoss twins made their first attempt to establish an ETF based on Bitcoin. By November, Bitcoin soared above $1000, only to spend the next few years retrenching.
Vitalik Buterin decided blockchain technology needed more changes than Bitcoin could allow and began building Ethereum. This coin allows contracts to be written within the blockchain.
2014: 2014 brought a new level of respectability. UK government gave Bitcoin VAT-free status as HM Revenue and Customs classified it as private money. The European Banking Authority recommended virtual currencies be held to the same regulatory standards as banks when it comes to money laundering and anti-terrorism. This added legitimacy to the currency, as did the establishment of a regulated Bitcoin investment fund (GABI) and the first Bitcoin derivative trading on an equity platform. Microsoft began accepting Bitcoin as payment for products and services.
2015: By 2015, Bitcoin transactions exceeded 100,000 per day.59 Bitcoin started the year at $238 but gained traction and topped $400 by the end of the year. The HM Treasury Report issued concerns about consumer protection and technical standardisation for Bitcoin and reports by the European Central Bank looked for ways to control volatility. The Winklevoss brothers once again tried to establish a Bitcoin ETF. Companies begin to create crypto-tokens and other alternative cryptocurrencies.
2016: Many international, national, and local companies began to accept Bitcoin as payment. The Chinese became the largest Bitcoin traders as people tried to evade government capital controls. 80% of Bitcoin transactions were processed in China.60 Bitcoin more than doubled in price to a peak of $997. Competitive currencies and crypto-tokens began to multiply. The UN’s World Food Programme started using Ethereum blockchain in their programmes to feed the hungry. 61
2017: The Winklevoss brothers again tried and failed to get a Bitcoin ETF. Speculation on the ETF caused Bitcoin prices to spike over $1300 and drop to $975 on word of the failure. However, they rapidly climbed back to $1200 in just a few days later and have continued climbing. Canada opened the first peer-to-peer Bitcoin exchange. Fortune 500 companies joined together to find ways to take advantage of blockchain technology to add security and lower costs. Companies found private blockchain systems could increase security, ensure accurate authentication, and offer real-time hack checking. IBM promoted its own cloud blockchain with regulation compliant solutions for healthcare, finance, and government use.
Japan officially recognised Bitcoin as a legal method of payment. Japan’s point-of-sale giant AirREGI, used at more than 260,000 retail locations, began accepting Bitcoin as payment. Since AirREGI is compatible with China’s Alibaba’s Alipay, visiting Chinese tourists can pay with Bitcoin.62 This new acceptance may be part of the reason Bitcoin has nearly tripled in the first half of the year alone. It has not occurred without extreme volatility, even dropping 36% only to rebound.
14.2 Cryptocurrency Terminology
Don’t be thrown off by the language surrounding cryptocurrencies. It’s easy to learn and soon you will feel like an expert.
Bitcoin (BTC) is the original blockchain cryptocurrency. An alternative, decentralised currency. Also known as ‘digital gold’.
Blockchain collects transactions and data and puts them into blocks in a public ledger. The records are securely linked together with hash codes to prevent hacking.
Cryptocurrencies are a new digital money outside government systems based on a blockchain.
Crypto-tokens are tradeable coins that hold part ownership in a company instead or as well as being a source of currency.
DAO or Distributed Autonomous Organisation, is a company built around the blockchain technology.
Decentralised means many computers and people have access to the data. It is the opposite of a single government controlling the source.
Fork or Hard Fork is a change in blockchain protocol that changes block history. Users either continue the old way or split off and update to the newest protocol to continue building the blockchain.
Hash or Hashtag closes off a block in the blockchain with a secure number. It is created by a
complex mathematical formula that draws on past blocks to make it unhackable.
ICO or Initial Coin Offering is when a blockchain company offers cryptocoins as ownership in the company instead of stock at a public sale.
Miners are people with sets of high energy computer processors who build the ledger or blockchain to store cryptocurrencies.
Nodes are any unique network addresses that hold the complete and updated copy of the cryptocurrency blockchain. Your private wallet would be a node.
Nonce is a slight variation in the hash computation that lets miners adjust the calculations while seeking a hash that starts with enough zeros to qualify as a hash.
Proof of Stake is a blockchain system where those who own the most coins help create the cryptocurrency hash and earn coins.
Proof of Work is the difficult hashtag producing system that verifies the blocks and pays the miners.
Pump-and-Dump is when unscrupulous cryptocurrency investors manipulate the price by buying gradually and selling all at once. They hype it up so the price increases, then let it fall.
Wallet is a secure online place where your cryptocurrency is stored. This is separate from a trading platform.
14.3 What is a Blockchain?
Blockchains, such as Bitcoin, use cryptographic protocols. These are complex code systems built on advanced mathematics and engineering principles. They encrypt data so it can be transferred securely while making them nearly impossible to duplicate or counterfeit. This prevents scams or cheating by spending the same money twice. You can transfer coins with a chain of numbers and letters. There are public and private keys. Your personal key is not seen in the the public transaction and ensures privacy.
Since the transaction is based on cryptographic proof, it eliminates the need to use a third-party financial institution like a bank or trading platform to verify the trade and ensure each party will fulfil their part of the agreement.63
The blockchain ledger, a foundation of any crypto-currency, is decentralised. It is not held in one place, such as the national reserve. Instead, the ledger is copied to many places. Let’s take Bitcoin for example.
Bitcoin collects each time period of transactions into a ‘block’. These blocks are kept in a general ledger which is a long list of blocks or a ‘blockchain’. This provides a way to go back and check any transaction. Each new block is added to the old.
To prevent it from being tampered with, miners take the string of numbers that is the block and put it through a mathematical formula. This produces a new, shorter, random-looking sequence of letters and numbers called a hash. This hash is put at the end of each block. Just by looking at the hash, you can’t tell the data in the block.
But if even one character in the block is changed, the hash will completely change. Information from the previous block is also used to create the hash, so it’s impossible to remove any blocks. Because this entire blockchain is stored on the computer of every miner, a change in one blockchain would be immediately revealed by its difference from the blockchains held by others.
This feature opens the door to authenticating records, keeping records and transactions secure and unhackable, verifying contracts, accounting for inventory, and enhanced security for business and financial transactions. Legal contracts, health records, equity trading, and banking transactions all would benefit from hack-proof storage, transmissions, and transactions.
A lot of virtual currencies use many computer engineers or groups of engineers called ‘miners’. They perform the complex calculations to come up with the hash codes that verify and time-stamp the transactions. Miners compete to produce the hash code that seals off the block. Miners are paid in the cryptocurrency for their efforts. For example, each successful Bitcoin hash is rewarded with 12 BTCs.
While it’s easy to compute a hash, Bitcoin makes the process more difficult. It requires ‘proof of work’. That means the hashtag must have a certain number of zeros at the beginning. Miners can’t predict this, so they must rework the transaction over and over. They can vary the data with one random bit of information called a ‘nonce’ to try to find an acceptable hash number.
It takes high energy usage, exceptionally fast computing, and specialised equipment to mine. Often miners join a mining pool in the hopes that their combined computing power will produce the right hash. As of March 2017, it took 3,596,936,257,000,000,000 attempts per second to produce a hash and one is created every 10 minutes.64
Bitcoin protocol permits only a certain number of coins to be mined each year. By the year 2040 21 million Bitcoins will have been mined and the number will stop. Since one Bitcoin may be worth thousands of pounds, Bitcoin is set up to be divided into relatively smaller parts. That way it is still useful for smaller transactions. It can be tracked out eight decimal points to the ten millionth place. 0.00000001 of a Bitcoin is called a Satoshi, named after Bitcoin’s anonymous founder who went by the pseudonym Satoshi Nakamoto.65
Bitcoin can be bought and sold on a variety of online exchanges, at Bitcoin ATMs, or even in some physical Change Spots.66 Buyers can fund their Bitcoin in dollars, euros, yen, etc. through credit cards, PayPal, cash, and bank transfers.
14.4 Building on the Blockchain: Crypto-Tokens
The security of the blockchain ledger makes it attractive for a wide range of applications. Secure, non-hackable but traceable transactions have use in government, business, financial, and informational markets. Blockchain technology stands to vastly reduce costs for these transactions as well. As companies expand to explore this new technology, they are using blockchain technology to finance their companies as well. This revolutionary kind of start-up no longer requires IPO or angel investing in the traditional sense.
Instead of offering stock in a company in return for equity, they are selling crypto-tokens in what is now called Initial Coin Offerings (ICO). The advantages of this kind of offerings are:
- Tradable any time, day or night
- Liquid with fewer investor limitations compared to equity
- Anyone can issue
- Reduced restriction and regulation
- Raises a lot of money very quickly
- Small investors can participate
You can find new coin offerings on sites such as Ether.camp, CryptoCompare, and Smith & Crown.67 Some of these coins require you to hold them for a time before trading them. These crypto-coins are not really intended for a currency replacement. Instead, they act more like a share in the company. The value is based on how investors believe the technology will pan out and how the company is growing.
Using virtual currency lets companies incorporate virtually. They don’t need a physical location; they can live on the blockchain. Everything is in the ether. Each coin is similar to a share of stock and it can trade on any cryptocurrency exchange that accepts it. The company or project is called a DAO or Distributed Autonomous Organisations.
What makes these companies different from geography-based businesses is that the management system is different. Blockchain is established and based on computer formulas, not people guiding a company in a traditional way. A development team supports the application, but it cannot define how it runs once it starts.68 Wise investors look at the development team for experience, success rate, and ethics to determine the potential of the DAO.They check out it’s ability to problem solve and the publicity put forth to promote the novel solution to users.
However, once the crypto-company is up and running, it’s the technology and the problems it solves that will make the success or failure of the venture. Often the technology is open source so it can be viewed by those who want to know the strength of the technology.
These new blockchain companies don’t necessarily grant legal protection or voting rights to those who buy the coins. At this point, they don’t seem to fall into any government’s jurisdiction so it’s a wide-open field. While this freedom allows people around the world to invest in new companies and new technologies, it also opens the possibilities to scams, frauds, wild successes, and disappointing failures.
Some of the markets are completely undeveloped at this date. These new companies offer speculation and hope. Exercise care and research well. The exciting part is that small investors can buy what is essentially an IPO, or stock sale, of a company by buying their crypto-tokens. These coins can range in value from a few pence to many pounds. As the company gains traction, builds software, and finds clients, investors expect the value of the company and the price of the tokens will increase.
Some companies combine the equity token with a currency function. For example, Voxelus69 is a virtual reality (VR) content platform. It created Volex token through crowdfunding, giving investors a stake in the company (the equity portion). However, Voxelus VR users can create designs and assets to be used in virtual reality. They can exchange the designs for Volex tokens, other currency, or to buy content for their own virtual worlds (the currency function).
Steem70 is a blockchain social media platform where users earn tokens for posts and can share in the profits of the company. And Peerplay71 is a gaming and wagering platform using blockchain. It offers the security of trusting your wagering partner to pay-out even if you don’t know them. Due to the security of the blockchain, users can trust the system will be a level playing field without hacking or cheating. Again, coins can be used to make transactions on the platform or to participate in the profits from the company.
Some investors do not want to go to the bother and effort of exchanging their government currency to cryptocurrency. They can still trade on the price movement of these highly volatile currencies through CFDs. It’s a simple way to gain the benefit from a profitable move without needing to worry about crypto wallets, hacking, etc.
14.5 Cryptocurrencies and Tokens
The CryptoCurrency Market Capitalizations site listed 971 different cryptocurrencies in July 2017 and the number keeps growing!72 At that time only seven coins were had $1 Billion market cap: Bitcoin, Ethereum, Ripple, Litecoin, Ethereum Classic, Dash, and NEM. The couple dozen or so were over $100 million and the following 200 top a million. The bottom 175 or so are so small that their total market cap is less than a cent.
In less than one month in 2017, the number of cryptocurrencies in the million dollar market cap increased nearly 50%. Who can imagine which coins will climb to the top? Which will fail? Bitcoin emerged in the last 7 years. Ethereum only began July 30, 2015, and in under 2 years reached a billion in market cap. So it’s possible any of these small players could rocket to prominence, and equally likely some of the more familiar coins might fade.
Because the coins are designed to do different things or to handle some problems faster or easier, there is room in the blockchain world for a number of successful coins. And as with many volatile assets, they offer great trading opportunities. The volatility also increases risk, so trade with caution. Let’s take a look at the most popular cryptocurrencies and tokens as of May 2017.
Augur: Augur (REP) is a software built on the Ethereum blockchain that facilitates betting and gaming. It uses open source coding to build a predictive decentralised market. Augur seeks to learn more about crowd wisdom, or collective intelligence, to become the most accurate forecasting tool. It collects data without bias because it’s a machine. The coin was crowdfunded to begin the company.
Anyone can set up a bet on real world events. Want to guess which team will win the championship or who will win the election? You establish a bet and know that the contracts are secure and payment will be made. Pay $.50 to cast your vote. If you are right, you win $1 for each vote.
Bitcoin: Bitcoin (BTC) is the grandfather of all cryptocurrency and by far the largest. It has a market cap of over $39 billion (as of this writing) and is about twice as large as its closest competitor Ethereum. Bitcoin was designed as a currency replacement, immune to quantitative easing because the number of tokens is fixed.
It is open source coded and not controlled by any specific government. It could be considered community money. Bitcoin only exists because people believe in it and attribute a specific value to it. Bitcoin is accepted as currency at thousands of outlets from reputable companies such as Del, Amazon, and Microsoft, to corner pubs, bookstores, and clothing shops.
Currently, Bitcoin is the entryway to most all blockchain technology. It is the base currency to which all other coins are tied. People typically need to buy Bitcoin first with their fiat currency such as euros or sterling. Then they are free to trade Bitcoin for any of the hundreds of other cryptocurrencies. As the price rises and more investors buy Bitcoin, the transaction speed has slowed down. It takes 10 minutes or more to make a trade. That’s still substantially faster than the three days it may take to transfer assets with fiat currencies.
As of April 2017, Bitcoin faced the risk of a hard fork. This is when an unalterable change is made to the blockchain code. Some programmers want to change the code so the transaction speed can increase. Others say the strength of the coin is the inviolate nature of the code and it should not be changed. If the coin forks, investors will get a proportional amount of both currencies. In past forks with other blockchains, one currency declined and one rose to the top. But no one can be sure which will be the winner. Some traders also worry that a fork will damage the Bitcoin brand strength and allow newcomers to overtake it.
If you are entering the cryptocurrency market, Bitcoin is an essential coin to own. If you are trading CFDs, the volatility of Bitcoin makes it attractive. An increasing number of platforms trade Bitcoin as a currency. While a Bitcoin ETF has been rejected by the SEC again in 2017, other Bitcoin ETFs are in the wings seeking approval.
BitConnect: A newcomer, BitConnect (BCC) hit the markets in January 2016 with an ICO. It offers security, speed of transaction, and decentralisation built on the blockchain technology. It also gives every owner the opportunity to earn interest on their coins. It uses both proof of work and proof of stake to mine the coins. Because of the sharp rise in price in just a few months, BCC had to increase the difficulty of its mining.
BitConnect has a strong community of investors and lenders. It eliminates banks and other institutions in offering secure lending. Using the newest technology, mining BCC is much less energy intensive than mining Bitcoin. Total coins are expected to reach 28 million coins before stopping production.
ColoredCoin: This coin was designed to create a protocol or standardisation for the creation of other digital currencies. It’s an open source banking system for digital money. Imagine a company like Amazon wanting their own money. Or even a movie theatre that uses coins for tickets. The attraction is that you could never double-sell a seat. This platform allows a new currency to issue a ‘colour’ tied to a specific Bitcoin. The user could then hold a wallet with only these coloured coins. They could track the coloured coins through the Bitcoin system.73
ColoredCoins could act like coupons to redeem air miles. Or it could become a ‘currency’ where one coin equalled one rental car for a day. Because it builds on the Bitcoin blockchain, users know they have security, privacy, and the item will not be sold twice.
Dash: In March 2015 Darkcoin changed its name to Xcoin, then to Dash (DASH). When it was created, there were many emerging altcoins, or alternatives to Bitcoin. Some of them were scams or flashes in the pan. Over time, Dash has solved early problems, risen above the pack, and developed into a solid cryptocurrency. Its strongest benefits are the features of privacy, anonymity, and speed of transaction.
Like many cryptocurrencies, in early 2017, Dash saw an unexpected and sudden rise in price from about $14 per coin to above $100 in a matter of days. In one day alone, it increased 34% in value.74 Its precipitous rise launched Dash into the select billion dollar market cap group. Then dropped 40% in value, climbed back, and continues to be highly volatile.
Dash expects to limit total supply to 22 million coins. However, the master node owners of Dash need to keep 1000 Dash in a secure wallet to own a master node and benefit from distributions. This keeps some coins out of circulation. Simply buying those 1000 coins lets anyone move into the duties and benefits of the master node position. The purpose of master nodes is to provide a second tier network that’s used to execute Dash’s PrivateSend and InstaSend. Master nodes also help with Dash governance, while miners perform tasks similar to Bitcoin miners. The profits from mining and master noding are split three ways:
- 45% to miners
- 45% to master nodes
- 10% to the budget or treasury to be used for projects that improve Dash
Dash offers digital cash similar to PayPal. It lets you make instant, private, secure payments. You can pay online or in-store at some locations. Payments are accepted for transactions such as:
- Payments to friends and family
- Gaming and gambling
- Gold and precious metals
- Web and graphic designs, digital mining equipment, Virtual Private Networks (VPN)
- Commodities like cigarettes, water, plants, jewellery, clothing, wine, books
- Services like photography, law, health
It uses an open source, peer-to-peer, secure exchange like Bitcoin. Your money is privately held on your computer giving you full control. Transactions happen instantaneously. Dash may be the first cryptocurrency to offer a debit card.
Cryptocurrency platforms like Poloniex.com let people buy and sell Dash and other coins. Some fiat currency trading platforms allow traders to trade Dash as well.
Decred: This coin is billed as ‘[t]he first cryptocurrency of the people, for the people, and by the people’.75 Rather than having miners or stakeholders control the cryptocurrency, Decred (DCR) lets every member, every coin-holder, have a say in deciding the direction of the coin and the technology. Miners and coin-holders will vote to implement Lightening Network’s payment process and then vote to improve or add features. If agreed on, developers work on projects in full view of the community.
Currently, Decred offers coin-holders opportunities to solve puzzles for high stakes prize money. They work against the clock as the prize money decreases with time.
Dogecoin: Dogecoin (DOGE) started in December of 2013 as a joke. But it gained a fan base and by March 2016 it had a market capitalization of $22.2 million USD. It uses a private key and a public key like many other cryptocurrencies and is mined similar to litecoin. This means miners can switch between coins and mine either DOGE or LIT. Dogecoin is used by the Reddit community for fundraising and as a form of tipping. They’ll send coins as a way of rating comments.
Dogecoin bills itself as a fun peer-to-peer internet currency and has a mascot, a Shiba Inu dog native to Japan.76 Its meme reflects the playful nature of the coin and its community. Doge claims a friendly user base that supports charitable causes. They even have a Dogecoin Foundation to support and grow this cryptocurrency.
Surprisingly, Dogecoin has been traded more frequently than Bitcoin and has been the most traded cryptocurrency to date.77 Coins have a small value calculated in Satoshis or 1/10,000,000 of a Bitcoin. As of April 2017, Dogecoins were valued at about 0.00000033 Bitcoin. In other words, it takes about 27 DOGE to equal one cent USD. As DOGE expects to continue unlimited mining, the price may stay low. Even with this small amount of money, however, Dogecoin enthusiasts have been able to raise money for a NASCAR racer, a water bore hole in Africa, and sponsor the Jamaican bobsled team for the Olympics.
Several online currency exchanges now offer DOGE trading. It’s possible to trade DOGE/BTC, DOGE/ LTC (litecoin) and even DOGE with the yuan, the USD, and the Canadian dollar. Trading with CFDs can also make it simple. Traditionally, DOGE has been one of the most stable of the cryptocurrencies.78
Ethereum: Ethereum (ETH) was launched in 2015 and by June 2017 it had rocketed to a $32 billion market cap. It has been called Bitcoin 2.0 since it solves many of Bitcoin problems and can perform more applications than Bitcoin. Ethereum founder Vitalik Buterin realised there needed to be radical changes to the blockchain protocol to realise the full potential of the technology.
The Ethereum platform makes it possible for any developer to build and publish next-generation distributed applications. It allows smart contracts to be written into the code on the blockchain. This means that once the contract is fulfilled, the money is released. Ethereum stands to be an incredibly disruptive technology. It’s possible to do all banking transactions, all securities trading, or record all deeds and attorney contracts on this blockchain platform. It has wide applications for:
- Currencies and banking
- Financial derivatives
- Hedging contracts
- Savings wallets
- Full-scale employment contracts
- Data feeds
- Computational problems
- Title registries
- Online voting
- And thousands of other applications
Since the contract is written into the code, it needs no third party to verify it. No judge. No Jury. Just the code. And it’s fast. The transactions can take place in 1.5 minutes. With open source coding, anyone can write an app for Ethereum. They can create their own rules for ownership and transaction formats. Many applications are too small to go to the cost and effort of creating their own blockchain. Ethereum makes it possible for these small decentralised applications to work together or independently on the Ethereum system.
Ethereum’s code is written in a low-level, stack-based bytecode language called Ethereum Virtual Machine code or EVM code. Each byte represents an operation.79 Ethereum’s method of block building and storage allows it to use between five and 20 times less space than Bitcoin, saving on computer storage.
Ethereum differs in other ways from Bitcoin. While Bitcoin has a fixed number of coins, Ethereum will continue to produce coins called ether. Ether is the cryptofuel used to power the applications Ethereum produces. So businesses will need to spend ether in order to run the applications. The more complex the contract or transaction, the more ether it will consume.
In Feb 2017 JP Morgan, Intel, Microsoft, and other companies joined together in an Enterprise Ethereum Alliance. The purpose? To seek ways of using Ethereum to lower costs and increase security.80 This news shot ETH from about $15.40 a share to over $53. By June 2017 it spiked over $400.
Ethereum Classic: A hard fork in Ethereum split the coin into Ethereum (ETH) and Ethereum Classic (ETC). In April of 2016 Ethereum created a decentralised autonomous organisation (DAO) – a method of creating new applications built on the ability of Ethereum to handle contracts. However, a hacker used an error in the DAO smart contracts code to steal $60 million.
The blockchain technology showed where the money went. But reversing the transaction was against the immutable structure of Ethereum. To retrieve the money would take a change in the code and a hard fork. The Ethereum group, led by founder Vitalik Buterin, voted to change the code and retrieve the money. The classic fork side claimed changing the code violated the immutability of the blockchain.
Many people expected the classic fork to die after the split. It dropped in price to about $.75 but by June 2017 it had risen past the forked price to over $18.00 per coin.
Ethereum Classic has the same advantages of Ethereum listed above. It’s competing with ETH by claiming its protocol in keeping the blockchain immutable gives it superiority. Ethereum Classic also intends to grow coins beyond the current 89.3 million, but limit total coins to 230 million. And it seeks to highlight its transparency and diversified group of miners. Enthusiastic management may help Ethereum Classic keep a place in the cryptocurrency world.
Factom: Factom (FCT) works as a publishing and auditing engine that secures data by several layers of encryption. With Factom all parties can verify and audit the data as needed. It proves the truth of the data and makes it impervious to fraud or manipulation. It’s like a private notarization system, which makes it attractive to banks, governments, and security organisations. The Department of Homeland Security in the USA is running a trial of Factom to see how well this increases their security.
Factom is faster and cheaper than Bitcoin and can handle more volume. It works on top of Bitcoin and anchors itself into the Bitcoin blockchain for redundant security. It allows users to theme track, or link together, data they want to track without including unneeded data.
Factom uses factoids as currency which can be traded on exchanges like other cryptocurrencies. Factoids are created by mining and ICOs and used or ‘burned’ when paid as entry credits used to run applications.
Golem: Golem (GNT) is a decentralised system that rents computer usage all over the world for business computing and programming. You can rent out your computing power and earn money. Some call it the Airbnb of computing. It makes high-speed computing available for a fraction of the cost. Need to render a complex computer generated image? You can do it in minutes instead of days with Golem.81
As companies discover this fast computing for less, Golem expects to prosper. It is built on the Ethereum blockchain and offers a highly skilled programming team and high-quality software development. In February 2017 Golem nearly doubled in value overnight.82
Litecoin: Litecoin (LTC) is a peer-to-peer internet currency that was one of the earliest competitors to Bitcoin. It was established in October 2011 and came as the result of a hard fork in Bitcoin. The major differences are shortened block generation times and increased transaction speed. It also excels in lower transaction costs.
Litecoin uses technology and miners nearly identical to Bitcoin and Dash. The open source software allows anyone to verify the code. Mining blocks will be halved every 4 years until a total of 84 million litecoins are produced. That’s about four times as many as Bitcoin’s ultimate total. LTC doubled in price in one month in late 2013 reached the $1 billion market cap. It retraced, but in mid-2017 it soared about 700% in a month
The advantages of litecoin are:
- Near instantaneous transactions
- Low-cost transactions
- Capability of higher transaction volume without slowdown
- Wallet security lets you see your transactions and account balance, but you must enter your password before spending for added protection from wallet-stealing viruses.83
Recently litecoin had a breakthrough. OpenBazzar, an open source market, is working to add other coins as payment since the cost of Bitcoin fees is rising. Charlie Lee, the creator of Litecoin, has offered developers to help OpenBazzar incorporate litecoin.84
LTC can be traded on cryptocurrency platforms as well as some forex trading and CFD platforms.
MaidSafeCoin: MaidSafeCoin (MAID) is designed to fight cyber crime by decentralising and encrypting data. It connects unused global computing capacity to create storage space. It also slices and dices data to send to various locations, making hacking virtually impossible. The files are moved autonomously as computers are turned on and off.
MaidSafeCoin started as an ICO, but coins will continue to be generated as people loan their computer storage. The loaned storage allows them to ‘farm’, or earn, the crypto-tokens as their resource is used by the system. Eventually, SAFE software will host messaging, email, social networks, video conferencing, data storage and more as more apps are built on the system.85
This uses P2P technology and a Proof of Resource (POR) model that pays users for hosting data on their computers. When the system is fully running, MaidSafeCoins will be exchanged 1:1 for SAFEcoins.
Metacoin: Metacoin (MET) is an add-on protocol to Bitcoin. It saves in costs of mining and development since it piggybacks on the Bitcoin technology. But it adds advanced features and protocols that Bitcoin is not equipped to handle. Metacoins may be able to handle things like financial contracts, name registration or a decentralised exchange. One weakness in this system is that metacoins can’t ensure Bitcoin does not encode the rejected or erroneous transactions from the protocol.86
Monero: Monero (XMR) sprang to life in an awkward birth from a Bytecoin fork in 2014. Early scams and miners squabbling made for a difficult beginning.87 However, Monero broke away from the pack as core developers used solid technology to make a stronger coin. Monero seems to be committed to continued change to improve the currency, placing high value on privacy.
Monero conceals the sending address and creates stealth addresses for the receiving address. In January 2017, Monero introduced Ring Confidential Transactions that provided an added measure of security by obscuring the amount of money transferred to everyone not a part of the transaction.88 Part of Monero’s attraction is the ability to hide the blockchain and to reveal it with a viewkey. This viewkey specifically allows transaction transparency in situations that require it, such as auditing or the public display of charity finances. This makes it an ideal blockchain for banks and other financial institutions that must work within government regulations.
XMR expects to produce about 18 million coins over eight years. Rather than halving the coin mining, it will gradually reduce them. Even after mining stops, it will permit minimal mining to provide less than 1% annual ‘inflation’.
Its strengths are:
In the first six months of 2017 the price has moved from $10 to nearly $60 USD, and market cap has ranged from $11 million to over $736 million. Trading takes place on cryptocurrency platforms and some forex sites.
NEM: Created by the New Economic Movement, NEM (XEM) is more blockchain technology than strictly cryptocurrency. NEM was a community-based movement to create a new cryptocoin. It rolled out originally in June 2014 with the latest update in March 2015. NEM is not mined and coins are expected to top out at 4 billion. Originally, about 3000 stakeholders received 75% of the coins.
As users create more and larger transactions, those trades give NEM users more power and control over the system. This is called proof-of-importance as opposed to Bitcoin’s proof-of-work and Ethereum’s proof-of-stake. NEM offers a peer-to-peer platform that lets users manage payments, messages, and names and build assets. The EigenTrust++ system lets NEM run securely and efficiently. Japanese banks are working with NEM.
PIVX: PIVX (PIVX) stands for Private Instant Verified Transactions. It is a fork from Dash and a name change from Darknet. PIVX has a strong community base with over 1,800 masternodes to add to security.89 This is a fast blockchain payment system. Its SwiftTX give users transactions that happen in a matter of seconds, allowing you instant proof and security guarantees.
Ripple: Ripple (XRP) was created as an international payment system with a goal to help banks move large amounts of money around the world. It’s designed to work much faster and at a lower cost than current methods. This direct-to-bank settlement eliminates intermediate financial institutions and currency exchanges. It offers instant settlement and real-time processing of funds so they can be promptly verified.90
Ripple is less expensive and more secure than Bitcoin. It can transact huge payments using a fiat currency like dollars or euros as well as cryptocurrencies, commodities, or any other unit of value. Other units of value include things such as mobile minutes or frequent flyer miles. It can also escrow funds and release them without needing trusted intermediaries.
As of April 2017 more than 75 banks have signed on with Ripple, including heavyweights such as Standard Chartered, SHRB, UniCredit, and ATB Financial.91 The Bank of England FinTech Accelerator recently selected Ripple to illustrate cross-border transfers.92 Ripple is designed to handle tens of thousands of transactions per second, as fast as Visa.93
Ripple began in 2012 priced about $.004 per XRP and quickly grew to 10 times that at $.05 only to drop back to the fractions of a cent. It lingered there with only a brief surge in Jan 2015 until it shot up to $.43in May 2017, reaching a market cap of over $16 million USD, only to drop 48% in the next month.
This volatile cryptocurrency trades on cryptocurrency and some forex platforms.
Stratis: Stratis (STRAT) is a flexible blockchain development platform. It builds applications to run with Bitcoin, Ethereum, and Bitshares. Its strength is that it lets businesses take advantage of blockchain technology in a faster, easier, and less costly way.94 It simplifies and speeds up the development process for new applications. Stratis combines the latest advances in blockchain security and stability with innovation in speed and scalability of applications. It uses proof of stake to produce STRAT coins that can be used to purchase or run the applications. They are exchanged on several cryptocurrency exchange sites.
TaaS: TaaS (Token as a Service) uses cryptocurrencies as an investment fund. TaaS launched with an ICO in 2017. It is a closed fund that invests in cryptocurrencies. The contract is built on Ethereum. The fund holds 10-30% in Bitcoin and the rest in different cryptocurrencies. Investors receive quarterly dividends (in Ethereum) of 50% of the profits. One-half of the remaining profit is reinvested in cryptocurrencies and the final 25% is paid to the development team.
TaaS distributed 100% of its tokens in the ICO. They will be available for trading on currency platforms, but no more coins will be issued. TaaS stands out from other funds in that it is transparent and on the blockchain. It also has reputable leadership. This is unlike other managed high yield investment programmes that invest in cryptocurrencies. They lack the transparency of TaaS and thus are at much greater risks of scams.95
Tether: Tether ties the blockchain technology to fiat currency such as the US dollar (USDT), euro (EURT) and Japanese yen (JPYT). This vastly reduced the volatility of this cryptocurrency. It holds 100% of the fiat currency in reserve and claims to be transparent. So you can compare the number of Tether coins with the dollars or euros held in reserve.
The advantage is you can store, send, or receive these digital tokens across the globe nearly instantly for a very low fee. You do have to comply with the ‘know your customer’ process and prove your identity before getting the coins.96
Zcash: Zcash (ZEC) began with impressive parentage at Johns Hopkins, Massachusetts Institute of Technology and Israel’s Technion working together to create an improved Bitcoin. The cryptocurrency they produced is a unique code and completely separate from Bitcoin. Design began in 2014 and it was formally announced in January of 2016.
It is faster, more efficient, and offers greater privacy than Bitcoin. The payments show on the open source blockchains, but the sender, receiver, and amount remain private. Zcash is mined and will max out at 21 million units. While Zcash uses open source it is not an open source community but has been established as a company.97 The founders put money in to develop the coin. In return, the founders charge a 20% ‘tax’ on the first 4% of the mined coins.
14.6 Trading Cryptocurrencies
The above listed cryptocurrencies were the top 20 as of May 2017. Cryptocurrencies and tokens will continue to emerge, rise, and fall. This book can only give you a spot-check on the status of the coins, as they are constantly in flux. You will likely be shocked at the price changes between the time the book goes to press and when you read it. Price changes of 100% to 1000% are not uncommon and market caps will continue to expand exponentially.
Cryptocurrencies can be traded two ways. Either you purchase the actual tokens and trade them on a cryptocurrency platform, or you trade CFDs based on the underlying cryptocurrency price.
On Trading Cryptocurrencies
On 20 April 2017 Yoni Assia, Founder and CEO of eToro said:
“The entire Crypto currencies market cap is under 30 billion where the stock markets are measured in trillions – but I have little doubt that in 10 years, the cryprocurrency world will surpass the trillion USD market cap – and therefore as an investment platform we should be a part of it”
As of 7 June 2017 the Cryptocurrency market Cap topped $100B
Buying Coins: Buying most all cryptocurrencies involves trading your country’s currency for virtual currency. You can upload your dollars, pounds, euros or yen to the platform via bank transfer, wire, or PayPal. At the moment, only a few sites accept fiat currency. Often the platform that will accept your fiat currency will not host a multitude of cryptocurrencies. Once you’ve converted your currency into Bitcoin, or perhaps Ethereum or Litecoin, you are free to buy other currencies and trade on a platform that hosts multiple currencies. Most cryptocurrency owners trade by buying and selling the coins on these exchanges.
Some ICO offerings accept fiat currency. Their sites may be set up to allow purchases of the coins. But more often the purchase must be made in Bitcoin or perhaps Litecoin or Ether. Sometimes those crypto-tokens from ICOs are not easily exchanged for other cryptocurrencies. Either they are only available on the digital platform that issued them, or they are not listed on many of exchanges because they are so small.
- BTCC – China
- BTC-e – origin unknown
- Bitcoin.de – Germany
- Bitfinex – Hong Kong
- Bitstamp – US
- Coinbase – US and Europe
- Cryptopay – UK
- Huobi – China and Hong Kong
- Kraken – US
- Localbitcoins.com – worldwide p2p
- OKCoin – China
Trading Cryptocurrencies with CFDs: eToro has been at the forefront of the cryptocurrency movement. CEO and founder Yani Assia delved into Bitcoin back in 2011 buying Bitcoin when it was just $1 a coin. Fascinated with the technology, he started a Coloredcoins project in September of 2012. It is likely that eToro will be the first trading platform to use blockchain technology to facilitate transactions. This could mean faster service and lower prices. Yoni is committed to offering the strongest cryptocurrencies to trade on eToro.
In 2017, eToro began offering CFD trading in Bitcoin, Dash, Ethereum, Ethereum Classic, Litecoin and Ripple, to let you enter the cryptocurrency trading market. You don’t have to go through the process of converting your currency into cryptocurrencies. You need not own a ‘wallet’ and have your fiat money tied up and hard to access.
When you daytrade cryptocurrencies you’ll want to use fundamental analysis and/or technical analysis to forecast price changes. Cryptocurrencies seem more susceptible to drastic changes due to political, legal, or business decisions rather than chart patterns. For example, news of hacking, China restricting BTC transactions, or Microsoft starting to accept BTC payments all affected the price. However, in quieter periods, you can see chart patterns with trading between support and resistance.
Crypto-Currency CopyPortfolio™: One of the easiest ways to play the cryptocurrency market is through eToro’s new Top Cryptocurrency CopyPortfolio™. It focuses strictly on the leaders: Bitcoin and Ethereum. In July 2017, the fund weights a little heavier with 65% in Bitcoin and the remaining 35% in Ethereum. The fund’s assets will be rebalanced monthly by the eToro investment committee as the volatile prices and market caps change.
CryptoFund CopyPortfolio™: This fund is different from the Crypto-currency CopyPortfolio™ in that it takes advantage of all the cryptocurrencies traded on eToro plus a few more that are not yet traded on the platform. It currently invests in Bitcoin, Dash, Ethereum, Ethereum Classic, Litecoin and Ripple. The fund’s initial allocations gave Bitcoin the greatest weight at above 50% with Ethereum taking the next quarter of the pie. The remaining cryptocurrencies have about 5% each with Ripple holding slightly less. The eToro management team will adjust the percentages as the currencies evolve.
Cryptocurrencies seem to trade in a narrow range and then break to the up or downside in a wildly dramatic manner. Due to the exceptionally volatile nature of cryptocurrencies, smart traders use preplanned trailing stops. They offer a high potential trade for the adventurous trader and a financial instrument to hold for the chance for above average growth.
This is a marketing communication and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without having regard to any particular investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared utilizing publicly-available information.
eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework. Your capital is at risk.
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