2018: Year of Bitcoin & Alternative Currencies

 Last year I suggested I was going to devote more time to Bitcoin and the Alternative Currencies many of which have been derived from it.  I will in the future introduce individual coins and discuss their relative merits, but today I wanted to go over some basics.

First, why do people place any value on digital coins?  Bitcoin was the first digital coin to gain any notoriety,  and it addresses a libertarian mindset that values community over government. If you want as little government involvement as possible, then one of the more important places to address that problem is in who controls the money. Libertarians like Rand and Ron Paul have complained that the dollar is not linked to Gold, and that the US Federal Reserve cannot be trusted. In other countries a similar mistrust of the government control over money is even more rampant.

To address this problem most digital currencies like bitcoin (and alternative coins), assure that the control of digital coins belongs to the community rather than the government. The bitcoin ledger, where they keep track of each transaction belongs to and can be accessed by anyone who own some of the coin, with the right knowledge and patience. If you own Bitcoin (especially if you mine it)  you could have some say in what happens to it.

While Bitcoin is the best known crypto-currency, close on its heels is Ether and other alternative currencies like Steem. Many of these have improvements like greater functionality, but all of them have advantages over dollars, yen, euros and other centralized currencies.  Whether and/or when to buy them is a different question, but I will discuss those issues later.

 

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Cryptocurrencies: Time for a Look Under the Engine

The Psychology of Cryptocurrency Investing

I, from time to time, give investment thoughts and perspectives (not recommendations) with an eye towards better understanding the psychology involved.  Since Bitcoin and Ether are the next big thing I thought I would spend a little time on them, trying to put it in perspective.

Bitcoin and Ether are both coins, but they are not tangible. They are instead digital and as such are both more secure and safe (if you take necessary precautions), and they cannot be controlled by centralized power brokers the way countries can control their own currency. Bitcoin has been around the longest, and while it suffered a long drought in it’s early days, it is now getting wide acceptance, especially internationally. People from Japan, Korea, China, and other countries are enamored with it, and it has been on a roll. Bitcoins are also becoming more widely accepted at the retail level.

Ether costs a lot less per coin, but it has been rising (and falling) even faster than Bitcoin. While it has not been around long (2015) it is more useful than bitcoin, because software can be developed with it that makes the new economy sing. I will leave a discussion of blockchains to a later article.

People who are buying digital currency are usually buying them either because they understand the ideas behind it, or because they have heard someone say how much money they made in the past few months. For many, it is more of a gamble than an investment. If you try to catch a wave (buy low and sell high) you will likely suffer the same fate others do in the stock market getting it wrong more often than not. It is best to buy for the long run, planning to hold your coins for several years, adding to it on a regular basis, say once a month or once a quarter.

If you want to speculate, so you can begin to make big money (it would still require a fair amount of knowledge), you would do best to diversify – either by owning a fund that invests in a variety of alternative currencies (altcoins) or by buying  (for very small amounts) several start ups. These currency equivalents of the IPO (Initial Public Offerings in stocks) are ICO’s (Initial Coin Offerings). You can buy in at the start of companies or projects, all of whom are on the cutting edge of the new economy. If you do some research, your odds may be quite good that one or more of these ICO’s will reward you handsomely for your diligence, again only if you hold them for long enough to wait out the variance.