Cryptocurrencies 101: Frequently Asked Questions

Welcome! If you have a question about cryptocurrencies or our investing approach in Crypto Asset Strategies, please review the FAQ below.

There’s a very good chance that we’ve provided a thorough answer to your question. If not, you can always reach us via email at mailbag@earlyinvesting.com.

What are cryptocurrencies?

Cryptocurrencies are decentralized digital currencies that use cryptography for security. They are referred to as “decentralized” because they operate beyond the control of centralized banking systems such as the Federal Reserve. Corporations and governments cannot produce additional units of cryptocurrencies in order to manipulate supplies.

Thousands of cryptocurrencies exist around the world today. Encryption is used to make buying and selling transactions private, secure and anonymous.

How do you buy cryptocurrencies?

Cryptocurrencies are bought and sold on exchanges. Not all exchanges are created equal. Their user-friendliness, accessibility, fees and security measures can vary greatly.

To buy my recommendations, you will need to purchase bitcoin and then use some of it to initiate your “altcoin” purchases. (Altcoins are cryptocurrencies other than bitcoin). Coinbase, Gemini and Kraken are my favorite exchanges for purchasing bitcoin.

Their interfaces vary, but each of these exchanges helps you accomplish the same goal: buy bitcoin with fiat currency (or “real money”) like U.S. dollars. All you’ll need to do is link a bank account, debit card or credit card.

Of these options, I prefer Coinbase and Gemini. However, you can also use Kraken if new account creation is not possible on the others. If you live outside the U.S., you’ll need to research local exchanges that operate in your country of residence. You can do so by Googling “[your country] bitcoin exchange.”

The list of exchanges we’ll use for altcoin purchases is growing (and will continue to grow) because there’s no “one size fits all” exchange that offers every coin we may wish to buy.

Right now, I recommend that you create accounts on the following altcoin exchanges: Bittrex, Binance and Kucoin.

These are solid, secure exchanges that I’ve personally vetted and tested. However, one or more of them may have restrictions in place pausing the creation of new accounts. If you find that this is the case, remain patient and continue trying to create your accounts. As I mentioned, there may not be an “official” communication when the restrictions are resolved.

What kinds of cryptocurrencies will you recommend in Crypto Asset Strategies?

I will be recommending altcoins and initial coin offerings (ICOs).

Altcoins are bought and sold on a variety of different exchanges that are “crypto only” – meaning they deal exclusively with digital currencies and do not accept fiat monies.

An ICO is a fundraising mechanism for emerging cryptocurrencies. Investors are offered units (“tokens”) of the new cryptocurrency in exchange for other cryptocurrencies with immediate liquid value, usually bitcoin or Ethereum. The tokens represent the investor’s stake in the brand-new cryptocurrency.

ICOs are gaining popularity because they allow cryptocurrency startups to bypass traditional (and highly regulated) fundraising requirements. They are essentially a new form of crowdfunding, and anyone can participate.

As with any speculative investment, however, ICOs carry “high risk, high reward” potential. If the value of your tokens increases, you can make large sums of money. But no ICO is guaranteed to produce returns for investors.

In Crypto Asset Strategies, we’ll only consider investing in premium-quality ICOs backed by legitimate companies with compelling products and trustworthy leadership.

Where do you store cryptocurrencies?

You need a digital “wallet” to store your cryptocurrency.

Some exchanges (like Coinbase, Gemini and Kraken) provide you with a free wallet when you set up an account. These wallets are secure, convenient and easy to use.

If you’re interested in taking additional security precautions, you might also consider a “hardware” wallet. These devices often look like USB thumb drives or keychains, and they’re a good option to consider if you’re looking for extra security or holding large amounts of coins. (I recommend the Ledger Nano or Trezor device.)

Please keep in mind, not all wallets support all cryptocurrencies. Like exchanges, there’s no “one size fits all” wallet. As you build out the altcoin segment of your crypto portfolio, you’ll need several different wallets to support the different coins that you own.

So, when I issue a new altcoin recommendation, I will generally provide a recommended wallet for that specific coin.

I understand that, at first blush, this may feel clumsy and tedious. My best advice is to make organization your top priority. Here are some additional tips you should implement today to better manage your crypto investments:

• Maintain a file (written or electronic) of the exchanges and wallet providers with which you have an account.
• Include a listing of the coins you hold in each wallet.
• Bookmark the webpages of each exchange so that you can quickly and easily access your accounts.
• Consider using the app “Blockfolio” to monitor all of the positions in your cryptocurrency portfolio.
• Create accounts on my recommended exchanges as soon as you possibly can. There’s no way to predict when any exchange may temporarily halt account creation, so this is the best way to avoid that scenario.

 

How do you send and receive cryptocurrencies?

Once you have a wallet established, you will be assigned a “public address” and a “private key.” Each is a string of numbers, uppercase letters and lowercase letters.

Your public address is what others will need in order to send you cryptocurrencies. Without it, they cannot transfer or send coins to you. Likewise, if you want to send coins to another person or entity, you would need their public address.

Your private key, on the other hand, is extremely vulnerable. It’s important that you never share your private key with others.

Your private key is applied, almost like a signature, as verification when you send cryptocurrencies to others. If someone were able to obtain your private key, they could send your cryptocurrency to themselves… or steal your coins!

So it’s critical that you never provide your private key to anyone – ever.

Is bitcoin needed in order to purchase other cryptocurrencies?

You should think of bitcoin as the reserve currency of the cryptocurrency world. In most cases, you will need bitcoin in order to buy smaller exchange-traded coins and ICOs.

To buy my recommendations, you will need to purchase bitcoin and then use some of it to initiate your altcoin purchases. Coinbase, Gemini and Kraken are my favorite exchanges for purchasing bitcoin.

Their interfaces vary, but each of these exchanges helps you accomplish the same goal: to buy bitcoin with fiat currency (or “real money”) like U.S. dollars. All you’ll need to do is link a bank account, debit card or credit card.

Of these options, I prefer Coinbase and Gemini. However, you can also use Kraken if new account creation is not possible on the others.

If you live outside the U.S., you’ll need to research local exchanges that operate in your country of residence. You can do so by Googling “[your country] bitcoin exchange.”

Why are some exchanges preventing new customers from opening accounts?

Cryptocurrency exchanges are exploding. During the second half of 2017, nearly every major exchange experienced a record number of new user sign-ups.

The result? Growing pains. Several exchanges have experienced temporary outages or even crashes during periods of high volume.

With surging cryptocurrency prices, tens of millions of new entrants are flooding the market each day. The exchanges are facing major infrastructure concerns, as most do not have the resources in place to support such a breakneck pace of growth. In recent weeks and months, several major exchanges (including Bittrex, Binance and CEX.IO) have periodically halted the creation of new accounts.

While we expect these pauses to be temporary, there’s no way to know exactly how long they will last. But new members should not feel discouraged. My advice is to continue regularly trying to set up new accounts on the exchanges I recommend.

If you experience difficulty setting up an account on Bittrex or Binance, for example, try Kucoin. Kucoin offers a growing list of more than 250 different altcoins and is a viable alternative to Bittrex and Binance.

The price of my crypto just dropped! The market seems volatile! What’s causing the dips and how long will they last?

With the gains the crypto market offers, there’s bound to be temporary pain. Pullbacks are expected, as there is no way any market could withstand such rapid growth in a short period.

The good news is it will be temporary. There’s no concrete news that’s scaring everyone here. It’s just pent-up fear being released.

But bumps like this will be par for the course this year and beyond… so if you’re in it for the long haul, you’ll need to buckle up.

Right now, what I see happening is a lot of the “new” crypto money freaking out and panic-selling. A lot of that new crypto money happens to be hedge funds and other speculative cash piles. So we’re seeing big dramatic moves given how large the market has become.

In the year ahead, nervous money will continue to flow in and out as governments and regulatory agencies around the world navigate this uncharted territory. We’ll see prices ebb and flow as a result. But these seemingly significant peaks and troughs will ultimately have little bearing on the broader upward trend of bitcoin and the smaller cryptocurrencies in its wake.

Bottom line: The strong hands will hold, and the weak will shake out. It’s the nature of markets. We’re making a bet on the future of money here. And we’re staying long.

How much should I invest?

In Crypto Asset Strategies, we’re targeting speculative opportunities.

The small coins and ICOs I recommend could skyrocket by 200%, 500% or even 2,500%… but, there’s no guarantee that any single investment will pan out accordingly. So it’s important that you allocate your portfolio wisely.

I recommend that you allocate no more than 3% of your total investable capital in any single cryptocurrency position.

What kind of hold time can I expect in Crypto Asset Strategies?

In this service, we will primarily take a strategic long-term approach. We’ll be purchasing small exchange-traded coins and ICOs based on research expertise suggesting that they will see a substantial rise in value. Thus, a medium to long time horizon is required.

However, there will be occasions when I advise taking some profits off the table. In these special situations, I’ll recommend that you sell a portion of your position. This way you can cover your principal and continue to benefit from the price appreciation of your cryptocurrency.