A path to riches and rags - crypto trading and investing

Cryptocurrencies are a fascinating development in technology. At the same time being an ingenious application of cryptography, the software designed to run it, and the currency that flows through the system. It is perhaps this tantalising mix of emerging technology and money that drives a lot of people that discover cryptocurrencies to greed at some point in their experience.

A lot of people got rich with this technology already, whether through investing, innovating, gambling or dumb luck. Those people are often visible and praised, but let's not forget about the survivorship bias - there are probably just as many if not more people that have lost a lot of money trading cryptocurrencies.

The gold rush

A number of people I've talked to seem to be going through something akin to a "gold rush" at some point of their crypto career. This usually happens early on - you discover this new technology, figure out it's a form of money, then look at the past gains and tell yourself "wow, this can make me rich!". You immerse yourself in the crypto world, take in the torrent of information, then try going into mining, trading, or something similar. In my case - it was discovering the GPU mining during the first few days of the first Bitcoin bubble (where the price went to a whopping ~$30 in the end).

In most cases, the rush is rather unsustainable as a hobby - mining is a specialised industry, short-term trading is a gamble, and services developed by inexperienced developers can be a liability. You are more likely to get burned than to make an actual profit.

From here, you can generally see a few transition options - deciding to cut one's losses and leave crypto altogether, "buy and hold" approach, or going professional.

Crypto as an investment

It is possible to treat cryptocurrencies as an investment - a high-risk investment. If you're lucky, you can get high returns. If you're not - you will end up with nothing.

A long while ago I came across an idea that "buying bitcoin is like investing in the entire bitcoin economy". Given Bitcoin's finite supply, the only way for the Bitcoin economy to grow to accommodate larger trades is through increase in velocity (how fast the coins circulate) and through the increase in value. Assuming you expect the Bitcoin economy to grow, you can expect the value of Bitcoin to grow as well. Same goes for other cryptocurrencies adhering to similar principles.

That being said, it is very important to remember that an investment in a cryptocurrency is not the same as an investment in a company that makes that cryptocurrency. XRP is not the same as Ripple Labs, factoids are not the same as Factom, etc. By investing in a company, you enter into a legally binding agreement. By buying the tokens, you're just holding the tokens. The company may do well developing projects unrelated to the token it initially created, which will increase the share price, but not necessarily the token price. Same is true the other way around - someone else may step in and make the token valuable, or possibly manipulate the price (for example, the hairy MAIDSafe presale on Mastercoin). The distinction is important to make.

While there are a lot of investment vehicles available for people in the developed countries, cryptocurrencies might be a more inclusive way to invest for the less fortunate people, or those wishing to hedge away from their government's monetary policy altogether. While this sort of way of investing can certainly yield great benefits, it can also be a fertile ground for scammers.

As usual, the age-old advise applies - don't invest more than you can afford to lose, hold, don't try to day trade, keep your coins safe.

I'd also add an advise to buy coins with long-term growth potential - coins developed by competent people, being a dominant player in their own crypto niche, etc. Those have a higher chance of sticking around than the flash-in-the-pan copycoins.

Crypto trading

An alternative to buying coins and holding them is to do trading. Bitcoin, the biggest crypto out there is certainly a volatile currency. Altcoins are just a wild ride, pumpers exist to exploit people, whales can sway the market, the honey badger don't care, etc. If you can make sense of this madness, there is certainly a lot of money to be made here.

However, the same riches can be lost as easily as they can be gained. A few interesting words of wisdom:

• The market can stay irrational longer then you can stay solvent
• Leverage trading in a volatile market is essentially gambling
• Meaningless pleasure is worthless, gambling doesn't produce anything but debt

Generally, trading cryptos is about speculating on which system will deploy the next big feature, get the next big headline, or score the next big partner. The only problem here is that the markets are so thin in comparison to the wallets of the big players, that they can be easily swayed in a direction that is not rational - this is why short-term trading is very risky.

If you don't know what you're doing, don't try to be too smart

In my crypto career I've had ample opportunity to make mistakes and learn from them. In the end, I came out ahead by sticking to what I know and not trying to be too smart for my own good. Here are some lessons I've learned along the way:

You can't really predict the market - don't try to trade if you're not a trader.

Never go full fiat. I once sold all of my coins when the market slowly crawled to about $25/BTC in early 2013. I had to buy them back at $35/BTC when the signs were clear the market wasn't going back down.

Don't diversify your portfolio into stupid things, don't invest in any company that can't realistically outperform Bitcoin. Back in the day I liked the idea of being able to buy stocks in Bitcoin companies with bitcoin itself. In the end, I'm a few coins poorer, have some mostly worthless "stocks" held by a company in Panama.

Don't keep your coins at a rickety company. While I was lucky / smart enough to survive a number of Bitcoin exchanges going under without losing any coins (I've used Bitomat, MtGox, BitCurex, Cryptsy, etc.). The two times my coins were lost were due to Ripple - some at WeExchange (a gateway that also had some crypto stocks AFAIR), and others due to the Ripple's official wallet being a brainwallet by default.

Don't lend crypto. Back in the day, I tried BTCJam. Lost all of the coins I put in, and it didn't look like the company had any plans of trying to enforce the collections. Other users have similar experience of high default rates. I've been staying clear of such websites ever since.

Be patient, make informed, long-term decisions. In the end, this approach has been the most successful for me. I haven't sold a single coin in a long time and I have a decent diversity of cryptos I expect to do well for themselves in the long run.

Conclusions

Cryptocurrencies are a high risk investment. They can yield great returns, but also end up losing you all that you've invested in them overnight.