Bitcoin is now bigger than ever.
We’re in 2016 and the Bitcoin price is $674.62 USD (as of writing this) and things are only looking up in the mid-to-long term.
That is because the Bitcoin technology has been proven to be unbreakable, which has eliminated the naysayers. And now big investors and even everyday people are starting to catch on to what this technology has to offer.
But actually, the power behind Bitcoin is what makes it so special. And we’re not talking about what the mainstream media has pushed at you — it’s not the ‘Blockchain’ at all. Instead, it is the power of cryptocurrencies.
This is what many fail to get educated on when they first learn about Bitcoin …
‘Bitcoin is a Cryptocurrency’
Okay, you might be wondering what a cryptocurrency is so we’ll try to explain that in a simple way for you.
So let’s look at how Bitcoin works …
There are almost 16 million bitcoins in circulation today. This number will never exceed 21 million; while a coin cannot technically go out of circulation, some will be ‘burnt’ and they will never re-enter the supply total.
This means the currency is fixed to 21 million BTC, with each BTC containing 100 million units which are called ‘satoshis’. These coins are created through ‘mining’ which occurs primarily by designating graphic card power towards solving a complex equation.
3,600 bitcoins get created each and every day through mining. This number will cut in half to 1,800 bitcoins daily after the ‘halving’ takes place tomorrow.
The significant decrease in production was a leading force in the parabolic rise, so much of the halving effect is already ‘priced in’ per se. Bitcoin prices are in the $650 area; they have been range trading between $620 and $680 for a bit now. This comes after a huge spike to $789.78 on Bitfinex, which is the leading U.S. Bitcoin exchange.
Is Bitcoin Mining Profitable?
Currently, there are around 1.5 billion GigaHashes mining on the Bitcoin network. This number is growing as there has been a renewed interest in Bitcoin; after reaching a trading range in the low $200’s it established a bottom and has been rocketing up ever since.
But mining bitcoins is usually not as good as buying them outright. There is a very simple explanation for this too. If you buy coins outright and the price goes up you gain instantaneously, but if the price goes down you can still hold out before selling. But once you buy a miner your investment capital is gone and if the price goes up the difficulty follows and you get less and less.
Further, you can buy mining contracts but these won’t help when you are paying a premium to do the same thing. You are only going to have a good time investing in cryptocurrency mining if you do it on certain altcoins. There are already $100 million-plus Bitcoin mining farms that exist, so it’s not really a market open to competition.
Altcoins Are Cryptocurrencies Too
There’s nothing fake about all these other coins you see. Whether it’s Litecoin, Dogecoin, Ethereum, or something else. They are all built similarly, and they all serve the same fundamental purpose — they power their blockchains / networks.
But there are differing factors. Some can only be mined with GPU graphic units, while others might use ASIC mining equipment. Heck, there’s even Burst which is a technology that is powered by hard-drive mining. So the way the coins are powered can differ, but they all have striking similarities from an investment standpoint.
When you invest in altcoins you are playing within a portion of the Bitcoin economy. At current time, 16.4% of Bitcoin’s $10.2 billion valuation is held in altcoins. Ethereum alone holds almost $1 billion of this, but there are only about a dozen other altcoins worth $20 million or more.
You can examine coin values and stats through CoinMarketCap.com, and when doing so you will notice only around 70 coins have a market cap over $1 million. Yet, there are currently 649 cryptocurrencies listed; there are many of these coins that can see tremendous price gains via quality developments.
However, you must remember that investing in altcoins can also be seen as playing with fire. These are penny stocks when compared to Bitcoin, and many of them go belly up in the long run. For instance, if you invested in Clam at .01+ BTC when it was popular, right now you would only have about an eighth of your initial investment.
So no matter how you invest in cryptocurrencies, you need to be safe and you must know what to expect before getting started. Far too many new investors lose too much when it’s not necessary at all.
The Traditional Ways to Earn Off Cryptocurrencies
Typically, people are making money through one of the three following methods: day-trading, long-term investing, or mining.
We have already explained much of what you can expect from investing in mining, but we’ll cover altcoin mining in more detail below anyway. As a new investor though, you really need to be aware of the risks (and potential rewards) involved in speculative trading cryptocurrencies.
Once you get more experienced you can find many other ways to make money off cryptocurrencies. Some do offline exchanges through LocalBitcoins for profit, others set up mining rigs and offer cloud mining contracts; the sky’s the limit because cryptocurrencies literally have an unlimited application potential.
Day-Trading Bitcoin and Other Cryptocurrencies
Once upon a time, day-traders saw their Bitcoin holdings cause a 10x return on their fiat investment in under a month. Some could even double or triple their holdings in one volatile trading day.
It was easy to make a lot of money if you knew how to trade the swings. But now, most Bitcoin day-traders are high-volume investors or “whales” and the only other way to increase your profitability in this large market is through leverage.
Coin Trading with Leverage / Margin Trading Explained
Trading with “leverage” is usually referred to as margin trading. This can be done in different levels, depending on where you trade. Some websites allow for as much as 100:1 leverage, which means a small shift in Bitcoin’s price could make you broke or rich in a hurry.
For the most part, beginners should steer clear of using leverage and even day-trading in general. If you get involved with any of the altcoin currencies it is easy to get hustled out of a lot of your stash by day-trading. These markets are a lot thinner and often they get controlled by big investors or “bagholders” that have a lot to sell off.
Margin Trading Altcoins – The Right Way
But if you do get involved in margin trading, a good way to start is by betting a long-hold position. If an altcoin price seems to have just risen from its bottom, you can buy the coin and then hold it and buy more on margin (through Poloniex) to get major gains. The coin would need to drop about 40% to liquidate you, and for any 40% uprise you’d get 2x your margined holding and the gain off your initial investment.
As an example:
Say you buy MAID at 10,000 satoshis and the price goes up to 14,000 satoshis, you would double your investment because of the 40% increase. So if you entered the ‘long’ position with BTC this means 1 BTC becomes 2 BTC. But, if you buy MAID with your 1 BTC at 10,000 satoshis, you have a 0.40 BTC gain on top of your double up. So you could end up with a 140% gain off a 40% price rise by margin trading correctly.
The good thing is that, once the market rises from its bottom, your gains could be unlimited. But you don’t have to hold off to sell if you don’t want to. And if the price crashes before you profit, you can put more funds in your ‘collateral’ to cushion the investment. That way, the coin would have to crash to practically zero if you played your cards right.
Further, you can average out your buy-ins by using margin trading. Say you buy 1 BTC of MAID at 10,000 satoshis without leverage. If it drops to 5,000 satoshis for instance, you might margin trade to buy another 2 BTC worth. This equals 3 BTC invested at around a 6,666 satoshi average. The price would have to reach around 3,000 satoshis to liquidate you, by 10,000 satoshis you would be making lots, and any uptrend would be incredibly profitable.
Still, hold off on the margin trading for now — and read https://poloniex.com/support/aboutMarginTrading/ to get an idea how it works before starting. Even if you use leverage elsewhere, their explanation is pretty beginner-friendly.
Bitcoin and Cryptocurrencies as Investment Vehicles
The Bitcoin network has proven itself, and this has caught a renewed interest in all cryptocurrency-related technologies. Hundreds of millions of dollars are getting thrown around at kickstarters just because of the unlimited potential that cryptocurrencies offer.
So when it comes to ‘betting on coin prices’ there is a lot less betting involved now. It is more like poker or Forex trading; if you have the right knowledge and patience, you have the skills necessary to be a profitable coin trader.
With that said, there are two key things to know:
1) Trade the ‘silent waves’
If Bitcoin is jumping up that means altcoins are dropping down. It is a self-fulfilling prophecy that has not failed in six years. Some altcoins will follow Bitcoin in its rise, but most will just see a drop. The truly valuable altcoins will have a substantial drop at first but then they will recover; if you time your buy-ins right you can leverage your earnings this way. If Bitcoin goes up more, so does your stash, and it won’t take much for your altcoin holdings to jump 2-3x if you buy near the bottom.
You will notice, especially on Poloniex, that everything tends to trade uniformly. All the margin trading coins will be pushed down into the red for the day when Bitcoin has a volatile uptick. If things are quiet or dropping, the altcoins might all be big in the green.
The cool thing is that most altcoins are capable of making big moves. And if you aren’t trading with leverage, you only have to sell once you’re into profits. If you aren’t investing with more than you can afford to lose, any ‘losing investment’ with real potential can just be held and ignored in the meantime.
2) Learn how news affects cryptocurrencies
The outside economy and mainstream media can have an indirect (but very large) impact on Bitcoin and altcoin prices. For instance, the meteoric rise of Bitcoin this year triggered a big drop in altcoin prices. But every news story that signified an end to the Bitcoin price rise caused altcoin prices to rally.
If Bitcoin is very active, and if people feel like mainstream news is coming, they are more likely to try and hold their bitcoins. This is because there’s the chance to “sell the top” and immediately gain around 5-25% in Bitcoin holdings. Further, many traders see it as a reason for altcoin prices to drop so they leave those investments until the Bitcoin trading settles.
Meanwhile, a mainstream media story about an altcoin specifically can be a big speculation booster.
Take Factom as an example; this coin is backed by an actual company and currently has a $12 million market cap. Its coin is used to power its blockchain, which is essentailly a record-keeping database. The price reached over 850,000 satoshis, which was nearly a 4x rise in a few days after they announced partnerships in China.
And once you get inside the altcoin trading world, you’ll understand the ‘buzzwords’ and triggers for speculative rises. For instance, when an altcoin is announced for trading on a large Chinese exchange the coin will usually get bought up on other exchanges to fill the new demand. China is praised as being the driver behind the Bitcoin and Litecoin rallies, so whenever they’re connected with an altcoin it creates a ‘fear of missing out’ (FOMO) effect.
What else can impact coin prices?
Then you have other situations that can cause big speculative rises. For instance, some altcoins are used to buy ICOs through them. NXT recently did this and the price went from around 1,200 satoshis to over 4,000 satoshis in under a week. This is because people know that ICO buyers will weaken the purchasing coin’s supply and cause upward pressure on its price.
Invest in the underdogs long-term for maximum earning potential!
Bitcoin might make you gain or lose 10-50% of your investment. But an altcoin could make you lose most of it, or gain much more than you could ever imagine. However, you have to keep in mind that a long-term altcoin investment can vary in value based on Bitcoin prices too. These altcoins are priced in BTC value typically, not USD.
But just think of some of the big earners …
XEM (aka Mijin / NEM) has become pretty popular in Japan. It is seen as a potential competitor to Bitcoin as real banks are using it, and there have already been successful tests with the network withstanding 1,000+ transactions per second.
For the longest time, you could buy this altcoin for 30 to 50 satoshis. This was back when the Bitcoin price was less than half of what it is now. So the equivalent would be more like 15 to 25 satoshis today, yet the current price is 1,226 satoshis and it reached a high of 2,798 satoshis not long ago. This means well over 100x returns in just a year for the right lucky buyer!
There are many instances where coins go up by 10 to 100 times in the course of a year. Another example of a big earner is Expanse, which recently put out a Beta for ‘borderless technology. This one went from around 5,000 satoshis to just under 400,000 satoshis in under a month, and many investors had the chance at 20x to 50x returns.
Further, you can look at it as if you are designating your investment capital towards an altcoin you believe in fully. If you buy in and hold off for it to be worth 20x for example, you can easily re-invest after the price goes down a lot more. Then you could have a ‘multiplier gain’ and this is an easy profit as long as the coin you chose to invest in doesn’t crash without recovering.
A Quick Warning Before You Coin Trade
The thing you need to know is that coin trading is done instantaneously.
People bet on impulse on how prices will move because they think they understand where things are heading.
If a crippling news story (like the ‘DAO hack’) hits, the price would obviously drop a lot in the next days or weeks, so a huge drop could happen in minutes instead. Coin trading never stops, you don’t wait days for your trade to clear, so always be careful with what coins you hold and for how long.
Long-Term Investing in Cryptocurrencies
Most investors that purchase a good cryptocurrency and hold it for at least a few months to a year end up making a fair bit of money.
When traders do this, they typically look at the current market cap and the upward potential based on the coin’s roadmap.
If a coin has a market cap of $1 million but it has the power to earn $10 million a year once operational, then you could see your investment go up 10x just by the developers staying consistent. Likewise, a coin believed to be the ‘next best thing’ could go down 10x if the developers fail to deliver.
So you really have to invest in the underdogs or the safer bets. For instance, you could also invest in mid-sized ICOs which are likely to have a price floor around the initial amount.
Investing in Altcoin ICOs
Those that invested in big ICO’s (initial coin offerings) gained a tremendous amount.
Ethereum traded for more than 10-times its initial price on the first day of trading, and it reached well over 30-times the initial price not even a year later. This coin currently has a market cap of well over $800 million, and for a long time it was in great excess of $1 billion.
Lisk traded for more than 10-times its initial price in the first few days of trading, and its still over 4x the initial price now. This coin currently has a market cap of around $30 million.
These are just two examples … but among the good ICOs there were also some bad ones, such as the infamous ‘DAO’
The DAO got $168 million in funding, making it the single biggest crowd-funded investment in history. Hopes and ambitions were high, as the point behind the coin was to allow everyone to have a share of profits on anything the coin’s “fund” invested in. But in a turn of events, the “smart contract” empowering the fund was hacked and subsequently millions of dollars of Ethereum coins were drained.
As you can expect, this fiasco caused a quick drop in the DAO’s price. But something was learned from this experience — the community in the altcoin cryptocurrency industry is much greater and larger than any of us expected.
So as an investor, it seems like a lucrative chance to make some extra money. But it can be dangerous as well, which is why investing in mining equipment and mining ‘risky’ altcoins is a good alternative gamble!
We don’t claim to be cryptocurrency experts, but we’re outsiders that understand what all the fuss is about and why things are the way they are. If you’re also an outsider to the cryptocurrency industry and you really want some insight, feel free to ask questions below and we’ll try to help you out!