If you are thinking of making some money on the side through trading in cryptocurrency, you probably already have an idea that it’s a seriously complex business, but you’ll also know that the potential rewards can be better than most other types of investment.
This risky activity is certainly not for the fainthearted, or for any technophobes amongst you, or anyone without the patience or inclination to get to grips with the concept, the market and the technology.
So, do you have what it takes and to make some money on the side trading cryptocurrencies? Let’s go back to basics, just briefly.
What is a cryptocurrency?
Feel free to skip this part if you already understand the concept of cryptocurrencies. For everyone else here’s a very short summary.
Bitcoin (BTC) was the original cryptocurrency. The others, know as Altcoins (short for Bitcoin Alternative), came later.
First conceptualised in 2008, Bitcoin was the first of a new revolutionary type of hybrid digital currency, generated and held electronically.
Cryptocurrencies, which operate independently of a central bank, employ encryption techniques to verify and regulate the generation and transfer of currency units. They make use of peer to peer technologies using a huge public leger with multiple public confirmations of all transactions making fraud virtually imposible.
Unlike traditional currencies, which come in the form of notes and coins and are regulated by a central authority which prints and distributes the money, Bitcoins and other cryptocurrencies are de-centralised and do not exist as a physical entity. They are stored in digital wallets, which are similar to regular bank accounts, but much easier to get!
With a rising value and a growing community of over 2.5 million users, Bitcoin is currently the most common alternative to traditional currencies. As an increasing number of businesses accept Bitcoin as a legitimate form of payment its value continues to rise and it is traded like any other commodity on exchanges all over the world.
Bitcoin was given to the world by a mysterious character known only as Satoshi Nakamoto who released the code for the Bitcoin system to the world just after the 2008 financial crash then promptly disappeared.
What is Bitcoin mining?
Bitcoin mining describes the process of recording transactions to Bitcoin’s public ledger, which is known as the block chain.
Fully describing how the block chain works is well beyond the scope of this article but in a nutshell… the block chain employs highly specialised software and hardware to approve and confirm the integrity of transactions thereby keeping the Bitcoin network safe, stable and secure. Here’s a good description of how it works.
To protect the market against inflationary pressure, the release of Bitcoins into circulation is controlled by complex algorithms, and unlike fiat currency there is a finite number of bitcoin. Bitcoin is also safe from government interfernce in its value, the dangerous quantative easing we have seen (printing money) to try and keep a creaking economy afloat cannot be inflicted upon Bitcoin.
Who’s getting into cryptocurrencies?
Bitcoin has been around for nearly a decade. With interest rates so low right now, and the staggering rise in the value of Bitcoin over the summer ’17, it’s no surprise that more and more people are looking into cryptocurrencies as a way to make a decent return, including fund managers and investment banks.
Is there money to be made? Yes, but…
Yes, perhaps not on the same scale as some of the better known Bitcoin millionaires, but there is still some serious money to be made. Always remember that, with some cryptocurrencies fluctuating by 100% or more in one day, the market is volatile. The value of your investment can go down as well as up, so only invest what you can afford to lose… a bit like gambling, eh? Yes, it’s more than a bit like gambling.
Now that the PSA is out of the way, let’s move on.
Is it right for you?
First and foremost, you’ll need a reasonable amount of money to kick-off with – let’s say £500 to make it interesting while at the same time keeping it real. As with gambling, the golden rule is don’t bet what you can’t afford to lose, especially on such a risky investment.
You’ll also need to have the maths and computer skills to get to grips with the process and avoid any expensive mistakes.
To be successful you must have the time and inclination to do the research and then be able to make a decisive investments in the face of conflicting advice and opinions. You’ll also need to keep a close eye on those investments. A lot of investors are simply buying and holding (known as HODLING) bitcoin whereas day traders try to buy when in a dip and sell when the price has gone high again. Recently the CEO of JP Morgan Jamie Dimon made derogatory statements about Bitcoin in the media making helping the price to drop and when it did European JP Morgan traders were there to buy in at the lower price. Draw your own conclusions.
3 things you’ll need to do before you start in cryptocurrency investment
3. A wallet to enable you to store your bitcoin long term. It’s not advisable to store your coins in an exchange and there are various off and online wallets to choose from.
Always use two factor authentication to keep online accounts secure.
Choosing a wallet
If you are a relative newcomer to the world of cryptocurrency trading you might want to start out with a mobile app or desktop . One such wallet is https://wirexapp.com/ which stores your digital cash so that it’s ready to use in local currencies using the Wirex payment card which works like a regular debit card.
You can also install the app on your phone for full-functioning mobile banking. Another similar option is the CryptoPay cloud wallet.
The most secure types of wallet, and recommended for storing large sums of currency, use specialised software that plugs into your computer via USB known as a hardware wallet. Trezor is a popular one.
This ensures that your wallet can only be accessed using the USB device that unlocks it.
As most currencies are traded in Bitcoin getting into that is a good place to start.
You can buy from exchanges or direct from other individuals. The most common means of payment include credit card, bank transfer, PayPal and cash at selected ATMs (see ATM location map here https://coinatmradar.com/).
If you want to buy online in the UK Coinbase and Bitpanda.com accept credit cards and transfers. Once you have bought bitcoin it can then be sent as bitcoin to one of the exchages where it can be used to buy other alt coins, if that’s what you want to do.
You’ll normally have to go through some photo ID verification processs in order to be able to properly use these accounts, which doesn’t take long and only has to be done once.
What to invest in?
Here is where all the hard work comes in… with hundreds of different cryptocurrencies out there on the market, you need to put the time in watching the price charts and researching the prospective companies via as many channels as possible. Don’t forget to check out Facebook, Twitter and Reddit being aware that there is a lot of misinformation out there.
You’d also do well to check out all the crypto-related forums and and set-up google alerts to keep you fully up-to-date with the latest news about the market. Global events and changes in legislation can have a huge effects on currency values.
At the end of the day you’ll have to make your own decisions about investments as you will hear and read conflicting opinions on the various currencies out there.
Here is a quick list of the main players:
Bitcoin (BTC) – the first decentralized peer-to-peer financial technology and the inspiration for all the others. Still the market leader. Still fluctuates but not as volatile as those that compete with it for market share.
Etherium (ETH) – the first Turing-complete cryptocurrency has been around for two years. Experts predict that this is the one with the potential to overtake Bitcoin.
Litecoin (LTC) – a peer-to-peer cryptocurrency based on the Bitcoin protocol. Well established now after over six years and considered to be Bitcoin’s nearest competitor.
Ripple (XRP) – controversial for its ties with the ‘establishment’ banks, and volatile, it can be used for superfast international transfers of funds.
Monero (XMR) – a privacy-centric cryptocurrency established in 2014 based on the CryptoNote protocol.
A final word
Investing in cryptocurrencies may not be an easy ride, so it’s worth saying again that you shouldn’t go into to it for more than you can afford to lose.
Those listed above all have the potential to give you a good return but do not take this as investment advice.
Do your homework and if you want to play it safe you might consider spreading yourself over a number of currencies.