Cryptocurrency Speculation and Blockchain Stocks

(December 16, 2017 by Dafang Wu; PDF Version)

After Chicago Board Options Exchange began transactions of Bitcoin future contracts last week, cryptocurrency (“coin”) is becoming mainstream.  We are quite late to this game, as many coins have appreciated more than 100 times so far this year, but it is never too late. This situation is similar to the early era of internet development, so we will need to understand the situation and cautiously catch up.

Similar to many articles I wrote on airport finance, this article provides information rather than recommendations.  Many coins are almost scams; many publicly traded companies claiming to be in blockchain technology, especially those traded over-the-counter (OTC), are also scams. Therefore, further research is required to make investment decisions, if we call coin speculation an “investment.”

Background

Instead of discussing the history of coins or technology, here are the basics that we need to know:

• Coins are digital currencies issued by organizations or teams; ownership and transactions are recorded in a public ledger
• There are more than 1,000 coins, with Bitcoin having the highest market capitalization of nearly $300 billion
• Each coin has a name, such as Bitcoin, and a trading ticker like stock, such as BTC
• There are more than 7,000 coin exchanges
• Some exchanges allow us to purchase coins using real life money, which they refer to as fiat money
• Some exchanges are not regulated, and only allow us to trade among coins.  For this type of exchange, Bitcoin is typically the currency.  To switch between two other coins, we will need to sell the first one and receive Bitcoin, and use the Bitcoin to purchase the second one
• There is no customer service for any coin – if we accidentally lose it or send to a wrong party, there is no way to get back
• Security threat and fraud always exist for coin trading – search Mt. Gox

If we still decide to put a small amount of portfolio into coins, there are three approaches:

1. Buy coins
2. Buy cryptocurrency stocks or Exchange-Traded Funds (ETFs)
3. Initial Coin Offering (ICO), which I will not address in this article

Buying Coins

There are many websites providing articles on how to purchase Bitcoin with U.S. dollar.  One relatively safe approach is to purchase from https://www.coinbase.com, because Coinbase is insured by Federal Deposit Insurance Corporation up to $250,000. After a relatively easy verification process, Coinbase will set a transaction limit for purchase on credit card (higher fees), bank account, and wire transfer, and transaction may initially take several days due to security reasons.  If the initial limit is set at $3,000 per week, wire transfer of additional money will stay in the USD wallet until the limit is replenished over time.

Coinbase offers three coins: Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC), because Coinbase positions itself as an exchange for beginners.  I purchased ETH instead, because transaction time and cost for BTC are getting worse.  After we purchase ETH, we can easily send ETH to anywhere in the world. As of today, there is no regulation prohibiting sending ETH overseas.

https://coinmarketcap.com/ is probably the website providing the most comprehensive information on coins and exchanges. The trading volume page ranks all exchanges by volume, with Bithumb in South Korea as the largest. Not all exchanges provide trading of all coins. If we have a particular coin in mind, we need to check the available exchanges on Coinmarketcap, such as this page for Monero.  I registered at Bitfinex and mainly use Bittrex.  Both appear to be top legit exchanges, with relatively easy verification process. 

After an account is established, we can go to the wallet, and click “+” beside the ETH symbol. A very long address will show up, such as 0xb4d8080d7f93e54xxxxxxxxxx620a442467138. 

This is the address we should put into the “send” address in Coinbase. It is very important that we copy and paste the correct address. Otherwise the fund is lost forever, and no one has ability to help. For any new account, always send a small payment to test.  ETH transactions should complete within an hour or much faster, but BTC transactions may take longer.

This page lists the coins (and tokens, which we can view them as coins) by market cap. The following table is my personal note for the top 50 coins as of December 16, 2017, with interesting coins highlighted. To re-iterate, this article provides information but not recommendations.