Month: January 2021

Crypto Strategy

| roger nunn

It’s interesting to be part of a change, I can watch the crypto world evolving around me while trying to learn about it myself.

Even without talking about new developments I am trying to see the best way to find a strategy in crypto.

If I look only at buying and selling coins on exchanges, it resembles Fiat currency trading but much faster and with much higher movements in exchange valuations.

A coin exchange strategy therefore means learning to identify patterns that lead to big changes in coin values.

Also, I think that as the crypto market matures the automatic trading will soon reduce the chances of getting very gains of over 100X.

So now I have to plan for both a medium and long term strategy.

In the meantime let’s just continue to play the crypto exchanges.

What is a crypto exchange?

| roger nunn

I am writing about individual parts of the crypto world as if they are discrete. They are not discrete but I like to see the function of each part as separate, it helps me to see clearly.

Holding crypto is a matter of having the right series of numbers, something that is simplified through software in wallets. Trading crypto is the ability to buy crypto with fiat currency ($, €, etc), exchange one crypto currency for another or buy fiat with crypto.

Buying crypto with fiat or selling it back relies on using banks, and so is subject to bank charges, regulations and delays that can be imposed at any time.

An exchange is one way to trade one crypto for another. The user creates a trading account on the exchange and then can transfer crypto from a wallet for trading. The exchange does not normally buy and sell the crypto directly, it is a market place where traders put in buy or sell requests. So when you want to exchange crypto (e.g. exchange bitcoin for etherium), you are relying on another trader who wants to make the same trade reversed. The exchange simply facilitates it by hosting the traders’ accounts and charging for the service.

Once you start trading in crypto you see the benefits of a market that is open 24/7, has fast trades and low costs. It doesn’t help you choose your strategy, though, as it’s easy enough for the crypto that you are hodling to drop hugely in value in a matter of minutes.

Using an exchange can be very exciting, though, especially if you can learn to control your emotions and follow a trading strategy.

This is a very simplistic view of exchanges, it is supposed to help by giving an overview of its place in the crytpo world

What is a crypto wallet

| roger nunn

Understanding a crypto wallet necessitates getting your head around the way that crypto works.

When I started looking at Bitcoin I learned that getting access to the coins is done through simply knowing the right unique string of numbers. This the only way to access your Bitcoin and is what gives rise to the expression “Not Your Keys, Not Your Coins”.

A wallet is software that stores the numbers for you and provides an interface for transferring (or trading) your coins. The software is password protected. When it is installed, it creates a set of recovery words that can be used to re-create the numbers in the event of forgetting or losing the password.

The recovery words can be used by anyone to use the coins so they are usually written down and hidden away safely.

In writing this I realise that although I use software wallets to keep and transfer coins I don’t have a clear enough picture of how they work. I will read more about it.

As software wallets are susceptible to being hacked or being emptied through information collected through a phishing attack there are also hardware wallets.

Hardware wallets are used to store the crypto numbers and accessed through software. This means that the coins are protected through both the software and needing physical access to the wallet. This extra level of security brings an extra level of complication, as with most things on the internet.

How to keep my money safe

| roger nunn

We all want, I think, to keep our money safe. After all, what’s the point of going to work and finding that the money you have been working for is not worth what it was. Even if you keep your money safe from theft or loss, there is a nasty and constant drain on your value.

Inflation.

Inflation is so much part of our financial world that it seems to be inevitable and we just get used to the idea that our hard-earned money is worth a bit less this year than last. This loss of value is what happens in good times, it is so insidious that most of us just put up with it.

I read an interesting comparison where it seems that in Roman times, I full suit of clothes for a soldier cost around 1oz of Gold. As far as I can see, it is still the case. This shows that inflation is only the result of the usefulness of inflation to decision makers. I am not going to write about how central banks work, it tends to be technical and doesn’t really add to the point I am making.

In the current climate of zero interest rates for savers and massive “quantitative easing” I can not see any easy way to avoid the likely inflation that is on the horizon. Gold is a store of wealth but it has quite high storage costs.

I believe that this uncertainty is the reason for the current increase in interest in buying Bitcoin. No one, at least so far, is able to take it away from you. When you link this to the big profits that can be made in trading in “ALT coins”, it is not surprising that so many people are getting into crypto.

Bitcoin is designed to be immune to inflation. Let’s hope it stays that way.

Am I too late to invest?

| roger nunn

I find that people often want to start investing (in shares or in crypto) following a news item that talks about skyrocketing values. The news item usually gives headline figures showing how much someone has made or could have made in a particular market.

Most of the time the changes in crypto are much faster and much more extreme than in shares, so I this is the most interesting case.

Bitcoin is an good example. It is now close to its all time high (ATH) and so does that mean that I have missed my chance to invest?

No.

The price of Bitcoin (in US$) goes down as well as up so there is always likely to be the chance to make money. I am only talking about the simplest of trades, buying or selling at the current moment (spot).

All through Bitcoin’s history it has had ATH values, all of which have later been surpassed. There are well known patterns of price change, none of which is perfectly predictable but all of which are sure to happen.

One of the easiest to follow is the phrase “pump and dump”, where buyers (usually automated traders) keep on buying in a rising market, thereby pushing the price higher and higher. While it is rising you can sell at any time and make a profit. After a period of time, there will be a big sell off (dumping), where the price drops very fast.

So it is never too late to invest, just make sure that you sell before the next dump. By the way, choosing the right moment is easier said than done.

I’ve made a profit

| roger nunn

There is a very good feeling that comes when you sell coins for a higher price than you paid. The same thing happens in lots of businesses but few of them happen so quickly or directly from your phone. I like making a profit, but it doesn’t always work.

So let’s say that you have bought some crypto, watched its value 5X or even 10X and you sell it. Great, you have now improved your finances by making a profit. It is very satisfying if you are very clever (or just lucky) and sold just before the price dropped. However, it is unlikely. You are more likely to sell and then watch the price go on up and up, which brings a feeling that you should have waited.

Now you have your profit and feel successful. The problem is, what next? The difference between when you started and now is that your capital value has increased, but you still need to decide what to do to make more profit.

This is why you need to have a strategy that includes buying, selling, extracting profit and using it to build your portfolio.

My strategy is fairly simple. I don’t sell at a loss, and sell some of my holdings as the prices rise. Of course the outcome of this is that I accumulate various coins that have not risen since I bought them and that I never have a really big profit that comes from a large investment that goes up 100X.

I listen to various youtubers who devote a lot of time to forecasting the most likely big gainers. The ideal would be to find one who uses our money to make a profit. There are lots of people offering this possibility but it doesn’t fit with the idea “not my numbers, not my crypto”

Earning interest on cryptocurrency.

| roger nunn

I remember when I could deposit my money into a savings account at a bank and earn interest. It is a fascinating idea that has always been central to banking.

What happens is that you put your money into the bank for an agreed period of time and the bank uses the money to lend to someone else who needs it. The bank charges the borrower interest for using the money and pays you interest for depositing it. The bank earns its own profit by charging the borrower more than they pay you.

This whole thing is great when it works (worked). Those who had spare money could earn interest (compound interest, of course) simply by leaving it in the bank and those who needed it could use it for a cost.

Unfortunately for that simple model the financial markets have completely changed in recent years. Now interest rates are so low that putting cash into the bank is no longer beneficial. In fact it’s likely to cost you both in terms of lost purchasing power through inflation and through what is euphemistically called negative interest. Negative interest simply means that banks now do (or shortly will) charge you to look after your money, while still using it to earn interest.

Please note that this is a very simplified model of the way banking works and the recent changes. I simply want to demonstrate the point that the nature of money is changing.

Now it is possible to deposit your cryptocurrency and earn interest on it. At the moment I am earning around 7% pa on my deposited bitcoin while also gaining the benefit of not being affected by inflation. I am not addressing the fluctuations on the value of Bitcoin, though I expect that to be an added bonus.

For those who want to borrow, they can deposit Bitcoin and borrow the equivalent the currency of their choice. This deposit requirement means that debt defaults can’t happen as the Bitcoin can be simply used to replace the loaned amount.

I am still experimenting with this aspect of Bitcoin and have deliberately avoided the more risky ways of earning much higher interest.

Overall, I feel comfortable with this model as I can both HODL my bitcoin and earn interest on my savings. I also have instant access to my capital. I will say more as I learn more…..

HODL or not to HODL?

| roger nunn

From the first days of crypto currencies they have been subject to ridicule as being just a game for computer nerds, cyber punks, etc. This lack of belief coupled with the “Wild West” nature of the new developments meant that they were volatile from the beginning.

Volatility in the crypto world is like volatility in financial markets multiplied by a factor of 10. At least.

This volatility makes for exciting times allowing people to make profits (or losses) very quickly just by trading in and out of various coins. I believe that the word HODL was coined in 2013 by a trader who mistyped that he was going to hold some coins even though they were dropping. It has also be renamed as “hold on for dear life”, which represents the difficult choices in crypto trading.

If you HODL you could get a massive gain (100X or more) or you risk losing virtually all the value. This is why one of the common trading practices is to invest, sell at a profit while the price is rising and then HODL the rest. This way you are able to get your capital back while still keeping some for the big rise.

Don’t forget that HODLING alone may bring you an increase in value but it doesn’t give you any profits along the way.

The volatility is still with us, something that can easily be seen through today’s drop in the value of Bitcoin by over 20%. Just imagine any other form of money that could drop 20% in a day and then bounce back soon afterwards. Obviously I don’t know what’s going to happen, but I feel confident that there will be a rebound.

So, should I sell now and make some profit, or should I HODL in the hope of a rise?

What does FOMO mean?

| roger nunn

FOMO is Fear Of Missing Out. It refers to the feeling that everyone else is getting something and you are missing it.

Fomo creates a need to take action to join in. Fomo has always been part of life but the immediacy of social media and the strong snowballing effect on anything shared has accentuated its effects.

Fashion has always been affected by Fomo but it’s a much slower effect that sharing of ideas online. The strength of online Fomo is because of the geometric effects of its growth, hence the phrase “going viral”.

Once you link the speed of online trading of crypto currencies with Fomo you get fascinating results, where a single news item can create a movement in a coin’s value which then escalates because of Fomo.

When you add 24 hr trading to the mix you add huge volatility to the price. It gets exaggerated because the professional traders has automatic trading setup to take advantage of price changes far faster than a human can.

So there are lots of people getting richer just by hooking into the power of Fomo.

I’m now looking for the best way to use AI with a trading bot. When I find it I will start it off and watch it earn my living for me.