As many of you know from prior posts (here and here), last July I invested about $3500 USD in Bitcoin, Ethereum and Ripple. I sold my bitcoin at $14,000 in early December and used to proceeds to buy more Ripple and Ethereum, some Bitcoin Cash, ZCash, and Lumens. Around Christmas, this amount ballooned to about $65,000 before settling back to about $50,000 this week. What a wild ride! Interest in cryptocurrency keeps growing as do the headlines: Just last week cryptocurrency prices across the board fell sharply as both China and South Korea announced legislation to more closely regulate trading.
In this post, I want to discuss my experience actually investing in cyrpto (spoiler alert: it’s not easy) as well as some of the pros and cons of major ways to invest. After reading reviews of different exchanges, I chose Coinbase which is the largest US-based exchange but only trades Bitcoin, Litecoin, Ethereum and Bitcoin Cash. Because crypto trading regulations are spotty in the US, and vary by state, Coinbase requires a fair amount of authentication before you can open an account. Because I was an American living in Canada at the time, there was no way for me to open an account with Coinbase, so I was forced to use a less known exchange, Kraken. Although smaller than Coinbase, Kraken has fewer requirements and also supports trading literally dozens of cryptocurrencies and multiple traditional currencies (USD, CAD, Euros, etc.).
In hindsight, my choice of Kraken was very fortunate as most of my gains have come from less popular cryptocurrencies like Ripple, Bitcoin Cash, ZCash, etc. that were not traded at the time on Coinbase. However, setting up a Kraken account is much more difficult to set up than Coinbase, which only requires linking a bank account or even using a credit card. (Note: Going into credit card debt to “invest” in highly speculative cryptocurrencies is a very, very bad idea). Setting up a Kraken account requires going to your bank and wiring money to a bank in Japan. I remember being in the bank and thinking to myself, “I will never see this money again!” However, after a few days the money showed up in my Kraken account and I was ready to trade.
Trading on Kraken is a bit more complicated than trading stock. Basically you need to choose a “currency pair” before putting in an order. Basically, this is choosing which currency you want to trade for which other currency. For example, if you want to use USD to buy Bitcoin, you would choose the USD/BTC currency pair. This approach, though complicated at first, is quite useful as you can trade between cryptocurrencies, meaning I can convert my Bitcoin into Ripple without turning it into USD first.
Although I have only traded on the Kraken platform, there are some important aspects of cryptocurrency trading which is common across all platforms:
- Due to the tremendous growth of interest in crypto, all of the exchanges are scrambling to keep up with demand. This means that all of the exchanges are very slow and often crash. This can be very frustrating!
- Because crypto is new and exchanges are few, most crypto is highly illiquid meaning that trades take a long time to process. When I trade stocks they clear within seconds. When I trade crypto, trades can often take up to 20 minutes to process (if they process at all).
- Although I have not yet taken any money out of my accounts my understanding is that withdrawals can be a frustrating experience. Users across all platforms report withdrawal limits, slow response times, and other issues.
- The issues listed above are very inconvenient, but I expect them to improve in time as the exchanges scale to properly meet demand.
It should be noted that due to the increased interest in cryptocurrency investing, new ways to invest are emerging including an ETF (exchange traded fund) called the Bitcoin Investment Trust (ticker: GBTC). Like all ETFs, you can invest in GBTC like any stock which addresses the liquidity issue associated with buying Bitcoin directly from an exchange. However, there are MAJOR downsides to GBTC including very high fees and a HUGE “premium” to the actual price of Bitcoin. GBTC actually owns a finite number of Bitcoins meaning there should be a clear relationship between the actual price of Bitcoin and the price of GBTC. For example, if Bitcoin is worth $15,000, GBTC should be worth exactly $1500. However, as of this writing, Bitcoin is trading at $14,300 and GBTC is trading for $1,970, a premium of 38%!
Although I have experienced a lot of success investing in crypto I have no more insight into what the future holds for crypto prices. Because I invested a very small amount of money and losing my initial investment would not lead to financial distress, I intend to hold for a very long time. However if you are considering investing in crypto I strongly recommend investing no more than 1% of your net worth as crypto is still new and highly speculative.
In my next post I will provide both “bull” and “bear” arguments as to what may happen to crypto going forward.