Buying the first Bitcoins.

The easiest and most obvious choice is to open an account at Coinbase. You will have to verify your identity by uploading a few documents. Once you are verified you can transfer money via bank transfer. If you have a European passport you can do a SEPA transfer for zero fee but you can only transfer Euros (as of this writing). If you are U.S. based you should be able to use Dollars. Once your money arrives you can immediately buy Bitcoin, Ether or Litecoin. There is one minor catch. There is a small fee charged on top of the spread. Not a big deal but for a trader it is a no-go.

Bitcoin Exchanges

So if you are a trader you move on to Coinbase’s actual exchange, Gdax.com. You can login with your Coinbase credentials and voila you get access to normal bid/ask order book. You may need to further verify your account to trade on the exchange.

One problem I have with Coinbase is that it does not allow E.U. based clients to deposit U.S. dollars.

So moving on I tried Bitfinex. The interesting thing with Bitfinex is that it allows margin trading as well as margin lending. In other words you could not only trade on a reasonable margin but you can lend out money and get interest, much higher than you would in any bank. Bitfinex also trades multiple altcoins, so it seemed like a reasonable choice, at the time, for a smaller diversified account. After going through an extremely detailed verification process I was approved very quickly. No wonder… The next day Bitfinex announced it will not allow customers to withdraw funds in currencies via Bank transfer. This story is still unfolding as of today (17/5/2017)

There are a lot of other exchanges one can use. I was interested in ones that are regulated in the U.S., so Gemini and itBit seemed interesting. Both exchanges look like they are setting up for institutional level, over-the-counter trading where one side could eventually be a regulated investment fund or in Gemini’s case the ETF the Winklevoss twins are trying to set up. Gemini claims a 25 BTC minimum trade, so itBit seemed better for someone starting out. Moreover at ItBit, a “maker” pays 0% fee.  A maker is someone who places a limit order and waits for the market to come to him, thus providing liquidity. This sounded good to me. The process of opening the account and verifying was easy. The wire transfer had to go through 2 U.S. intermediary banks and get to the Singapore based headquarters (for non U.S. customers) and was a bit complicated. Surprisingly, it did go through in less than a day and the fee was a reasonable $10 flat. Itbit does not have a fancy UI in terms of trading charts and other goodies and only supports Bitcoin trading in U.S.  dollars, but it seems safe. One thing I am starting to see is that one never really know who is safe, so as always, it is best to diversify.

Another exchange that has large U.S. dollar volumes is Bitstamp. It usually carries a better price on BTC/USD than other exchanges and is also one of the few exchanges that you can buy Ripple with USD.

Cryptocurrencies markets vs stock/futures markets

Coming from a traditional investing environment, there are some glaring realizations as one starts the investment process in digital assets.

•  Cryptocurrency exchanges have very high fees compared to stock brokers. At 0.25% commission, a $10,000 trade costs $25.Compare that to a $5 commission that most online stock brokers carry.
• There is no insurance for non-U.S. investors.
• It is an accepted reality that someone can hack an exchange and cause you to lose capital. Like walking into a bad neighborhood with a fat wallet in your back pocket: If someone holds you up, no one feels obliged to apologize to you but rather your loss is seen as the cost of doing business in that particular neighborhood.
• Bitcoin (BTC) is the new dollar in the crypto-world. Many Altcoins are quoted in BTC rather than in U.S. dollars. Some of the biggest exchanges (example: Poloniex) do not deal with ‘fiat’ deposit/withdrawals and only accept BTC in and out. So to trade any Altcoins in the crypto world, first you have to convert to Bitcoins.

Then the adventure starts.

Bitcoin investing and crypto portfolios

For some time now, I have been following news on various “crypto-coins” including Bitcoin, Ethereum, Dash, XPR and others.  I have watched in awe at the booming world of Initial Coin Offerings (ICO) and the millions willingly thrown at dubious new ideas (just look at MatchPool a “dating” service that raised $6 million in 2 days) as well as the ease that new market indexes are built and get to dominate the crypto markets in days not years (see Iconomi buying 9% of Byteball without spending a dime).

As I am building a new portfolio based on these new assets, I wanted to put down some of my thoughts and processes as I try to apply traditional investing principles to the brave new world of blockchain-based investing.

I am by no means an expert in Bitcoin or the blockchain. There are some very interesting aspects that are pulling me into this exciting world:

The world is changing – There is a need for an alternative store of value.

There is a growing distrust of governments, fiat money and banking institutions. This has been true since the 2008 crisis but it has developed into a political mistrust of powers-to-be. Just look at recent elections in the U.K, the U.S. , France, Italy, to name a few. In less developed countries where capital markets are restricted this mistrust is a given as people are threatened by devaluations, seizure of property and political risk. There is a growing war on cash as well as privacy as governments have agreed on increased exchange of financial information (list of countries). Even traditional safe heavens like Gold, require a third party (a bank/ a vault) to either store it or verify it’s value. Bitcoin, on the other hand, is border-less, portable, cannot (easily) be confiscated and can be easily set up for family wealth  and inheritance purposes.

Institutional money may be coming in.

A portfolio manager’s main problem when constructing a portfolio is to find a negatively correlated asset to the equity market that has a positive bias. In other words an asset that goes up when the SP500 goes down and that gains in value as time passes. In the past, two such assets existed: Treasuries and Gold. Now there is a third: Bitcoin. No wonder, recent deveopments point to the fact that institutional as well as retail money may be slowly coming in. Regulation and KYC rules are becoming mandatory. Once they are in place, the path for mainstream funds to enter the cryptomarkets will open. There are U.S. based exchanges (Gemini, itBit) that seem to be set up mainly for institutional level trading. If and when a ‘trusted’ ETF is set up, the sheer volume of new funds could further raise prices.

Bitcoin may not survive but one of the alternative coins will.

There are many problems in Bitcoin land: Disagreements between developers, so-called hard forks, miner’s oligopolies, large Chinese influence to quote a few. One that strikes me as important, is the electricity consumption needed to keep the Bitcoin blockchain safe. This does not mean that the underlying technology, the blockchain, will cease to be of use. The technology behind is useful and increasingly relevant in a changing de-centralized world.

We are moving into a ‘virtual’ economy where workers are spread across the world living in different countries, their paychecks and expenses traveling across currencies and tax regimes. This will be a challenging environment for the governments to collect taxes. They may eventually be forced into embracing the technology as a means to retain their status quo and ability to collect taxes. If that happens then crypto world will go mainstream and some of these companies (and coins) will gain dramatically in value. Diversifying across coins and companies may be a good way to participate in a growing economy even if Bitcoin is not its main product.

Setting Up for Bitcoin Trading

Unlike regular investments, setting up for crypto-currency trading/investing is a fairly tedious process with a lot of unknowns. I will try to document some of these in the next articles.