Getting Started With Bitcoins & Cryptocurrency
Hey guys, Rules for Rebels here. I've been talking a lot about Bitcoin and cryptocurrencies on the channel lately and while we've kind of touched on all the info someone would need to get started, it's been kind of spread over various videos and blog posts.
I got a comment on Youtube today from @ImpermanentHuman and he had a lot of great questions regarding how to get started. I imagine many of you have the same questions so I thought I would make a video to try to address some of these.
This is going to kind of be a Bitcoin and Cryptocurrency FAQ or frequently asked questions post.
What are Cryptocurrencies?
This is a tough thing to wrap your head around. Many people new to cryptocurrencies have a hard time wrapping their head around the fact that physical coins don't exist, they exist only in digital form.
This is somewhat even more complicated by the fact that cryptocurrency today is much more than Bitcoin. There are coins like Bitcoin which are strictly a currency a store of value or a transfer of value. Then we had cryptocurrencies like Ethereum which can do smart contracts and we have others like ARK or LISK that are meant to act as a bridge between other currencies and technologies.
Then we can get into ICO's which aren't so much a currency as they are either a token to be used for a service be it data storage or something along those lines while others are more like stocks. Many new technology companies are using ICO's to fund their business in the same way a company might to an IPO and issue stock. This is kind of to skirt SEC rules about being an accredited investor which limits who can invest in a company. To be an accredited investor you need to have a net worth of a million or make $300,000 in a year.
I've gotten a bit off topic, I think a good starting point is to understand Bitcoin, how it's mined, how it's created, and how the system works. Here's a very short video that will at least give you the very basics.
Which cryptocurrencies to buy?
The "safest" play, if there is a safest, play as cryptocurrencies are very volatile would probably be Bitcoin, Ethereum, and Litecoin. These are kind of known as the core three cryptocurrencies, in large part because Coinbase, probably the largest, most user friendly, and most well known exchange deals in these three.
I would say these three are the most established, most well known, and most stable, however at the same time with risk comes reward so if you're wanting to see those 100x gains you may have to branch into some of the various altcoins that are like spot 50-100 market cap. These coins are more risky and more volatile but have more upside in my opinion. That said Bitcoin, Ethereum, and Litecoin have plenty of upside themselves.
I'm not going to tell you what to buy. I'll mention some cryptos I'm holding or have on my watch list just to give you an idea of some you may want to investigate further. Monero, Ardor, Komodo, Vertcoin, Dash, Steem, ARK, LISK, XEM ie New Economy Movement, EOS, TenX, Factom, Navcoin, BAT Coin, Metal Coin, Stellar Lumens, IOTA, Waves, and Maidsafe Coin, and ReddCoin.
Never buy something solely off what someone on Reddit or a forum says. Crypto is the wild west, there aren't really any rules or laws or a governing body like with the stock market so people will try to run pump and dump schemes and encourage others to buy a certain coin.
I typically check out Youtube, Reddit, etc. If I see a lot of people talking about a coin I'll investigate it further. With coins that are strictly a currency you have to ask yourself how it stacks up against Bitcoin or Litecoin, two other currencies. Does it do anything better? Is it more private? Are transactions faster or cheaper? If so it may be worth buying. If not then why would it knockoff an already established coin with a bigger name?
Other coins have utility. I'll give you an example. Reddcoin, many would consider a "shit coin" however I think it maybe has some promise. Reddcoin is a social media tipping application. Basically the same way that Patreon allows users to tip a Youtube Creator or VidMe allows a viewer to donate and support a video creator, Reddcoin allows social media users to tip other users.
What's kind of cool about it is even if you don't have a Reddcoin wallet or account, I can send you Reddcoin, and if a year down the road you decide to open a wallet and attach your social media accounts those coins will be waiting for you.
Why I think this could have some promise. I see a lot of people getting tired of the gatekeepers of advertising ie Adwords, Youtube, etc. Some types of content are not allowed, some creators have had their advertising accounts closed, etc. With Reddcoin or really any crypto for that matter nobody can get in between two private parties so any type of content can be monetized. I see things going in this direction so I think the coin may have promise.
Anytime you hear about a coin look into what the project behind it is and see if it actually has utility. I'll give you one more example BAT Coin or the basic attention token. It's the coin for the Brave Browser. It was created by the creator of Mozilla Firefox. In the case of a coin like that I'll look at the creators, do they have a history of success? In this example yes they were able to take a good portion of the browser marketshare from established browsers like Chrome, Safari and Internet Explorer. Are the developers active and putting out updates on their product? Having meetings? Engaging with the community? Those are the types of things I'll look into to judge a coin.
Lastly, this is my personal opinion, not everyone will agree with me but I don't like coins that try to be a currency for a specific industry. Bitcoin or Litecoin or Vertcoin are well known and can be used for anything. I personally don't think we need a coin for buying music, another coin for buying video games, another coin for buying weed, etc, so I stay away from those types of coins.
What avenue to buy coins? Where should I buy?
Personally I use Coinbase/GDAX to buy my Bitcoins, Ethereum, and Litecoin. I think Coinbase is a great place for beginners to start. In my opinion it's the best user interface, very intuitive, easy to use, etc. They accept bank transfers, bank wires, and credit and debit cards. You can also setup automatic purchases if you like to Dollar Cost Average meaning making a buy each week to average out your buy in price.
I would start with Coinbase, once you get comfortable setup a GDAX account. GDAX is the same company as Coinbase but it's more of a trading platform. Slightly more complicated although if you've traded stocks before you should pick it up pretty quickly. The benefit of using GDAX over Coinbase is the fees are 0.25% as opposed to 1.25%. GDAX uses a maker/taker model meaning you can actually trade for free if you place limit orders as opposed to market orders as your adding volume to the platform instead of taking it away.
As far as buying altcoins. I would trade on GDAX for a while to get the hang of things first, however after that you can move over to an exchange like Bittrex, Kracken, or Poloniex to buy/sell/trade altcoins. I personally use Bittrex. They have the widest selection of coins, they tend to get coins faster than other exchanges, and I hear the least amount of complaints about them. If you Google or research exchanges you'll find someone has a complaint about every single one, however Coinbase and Bittrex in my experience have the least number of complaints of accounts being frozen or other issues. I personally use Coinbase/GDAX and Bittrex.
Trading on altcoin exchanges gets complicated because you are trading pairs. On GDAX you buy Litecoin for $50, you sell it for $60 and you've made $10, pretty straightforward.
With Bittrex on the other hand your trading currency pairs ie BTC/LTC or BTC/ETH. This gets complicated because even if your currency gains value, if Bitcoin has gained more value then your coin you may sell at a loss. When trading on these exchanges you have to get the idea of US Dollars out of your head and only pay attention to are you getting more Bitcoins on the sale than you paid when you bought them.
One last tip for exchanges, typically most people recommend you don't want to keep large amounts of money on exchanges unless your trading, and always use 2FA or two factor authentication meaning your using Google Authenticator or are getting sent a code via text on every login that you have to verify. This makes it more difficult to hack you and steal your money.
Which wallet to use?
Okay so for wallets we have exchanges like Coinbase, many people wouldn't consider this a wallet but some people store their coins there. If you do that I would recommend using their vault feature.
We also have heavy software wallets like Multibit which downloads the entire transaction history of BTC and we have lite options like Electrum which don't bog down your computer as much. While I prefer a hardware wallet Electrum is a great wallet.
We also have mobile wallets. I personally wouldn't recommend keeping large amounts of money on your phone or interacting with exchanges. A mobile wallet such as Mycelium or Breadwallet are popular secure wallets but treat it like your real wallet. You probably wouldn't walk around with thousands of Dollars in your pocket, so don't keep thousands on a mobile wallet.
We have hardware wallets as well, in my opinion the best option. John McAfee of McAfee anti-virus says if you don't have a hardware wallet it's not a matter of if, but a matter of when your Bitcoins will be stolen. The two most popular options are the Trezor and the Ledger. I believe both companies are rolling out new wallets later this year so if you like having the latest newest thing you may want to wait but both the Trezor 1 and Ledger Nano S are great wallets.
I personally bought the Trezor because it seemed easier to use, and also because it was available. At the time the Ledger Nano S was backordered. The Ledger stores more altcoins but I'm happy with my Trezor purchase and would highly recommend one. I actually did a Youtube video showing mine off if you want to check it out.
The last option is a paper wallet. A paper wallet is not as secure as a hardware wallet unless your doing everything offline and it's somewhat confusing to create for new users so I would recommend the above option of a hardware wallet.
How are Bitcoin and Cryptocurrencies Taxed?
I'm not an accountant so I can't give you tax advice but let me touch on this and share the little bit of knowledge I have. So taxes are complicated, the IRS has issued some guidance on this, and you are supposed to report gains on the schedule D form 8949.
As far as the cost basis or accounting basis, I've heard it said your supposed to use first in first out, however have also heard you can use whatever method you like as long as you are consistant with it.
Crypto taxes can get very confusing in that the way it's classified you're supposed to report gains on purchases. For example if I buy Bitcoin at $4,000, Bitcoin goes up to $5,000, and I purchase a computer with that money, I'm supposed to calculate my gains on that purchase. There is legislation under way which would make purchases under $600 no longer need reporting as it's not realistic to ask people to track every cup of coffee or pizza they buy and track gains on that.
As far as reporting altcoin trades, while some argue trading Bitcoin for Litecoin is a "like kind" exchange and not taxable, others argue that is a taxable event.
There is a program out there called Bitcoin Taxes which is free for under 200 transactions, but costs money for transactions above that.
There are several other softwares out there designed to help you figure out profit and loss and tax obligations with cryptocurrency. One is Cointracking.Info, however I have found it doesn't accurately track coins I hold and cost basis. Same goes for AltPocket.
Coinbase themselves offer a download of a excel file which will tell you your tax obligation but it's not 100% accurate as they consider transfers out of Coinbase to be sales ie sending from your Coinbase account to your Trezor they consider a sale even though in reality that is not a taxable event.
I would say the best course of action would be to print out a transaction list of all buys and sells from Coinbase, GDAX, and Bittrex and give them to your accountant to figure out.
I don't know anyone who uses cryptos?
This is an interesting comment you made. John McAfee in a talk a while back compared Bitcoin and cryptocurrency to a fraternity. He said it was almost as if you needed a friend or family member or co-worker to hold your hand through the process.
While I myself and many others do figure it out on their own or through watching Youtube videos, it can be nerve racking with money at stake and definitely helps to have someone experienced helping you. If you don't have someone you know and trust I'd turn to Youtube, there's a lot of step by step guides on how to do everything from buying on Coinbase to setting up a Trezor.
I think you made a very astute comment when you said that as it gets easier more people will adopt it. McAfee also echoed this. He said it's overly complicated right now and says until a non-techy housewife can use Bitcoin it won't be mainstream. He also went on to say that the whole point of software is to simplify things our brain has a hard time understanding so he's pushing very hard on developers to make Bitcoin and cryptos friendlier to use.
Wrapping Up
I know this was a lot of info to take in. My suggestion is to get started and learn as you go. I realize money is at stake and that's scary but start small. You don't have to buy a whole Bitcoin for $4,000, you can buy a fraction of a Bitcoin for $20.
I often recommend people buy a small amount through Coinbase, setup an Electrum Wallet or get a Trezor and practice sending money to and from Coinbase, maybe even make a small purchase using Bitcoin. Just get a feel for the technology and how it works and as you get comfortable start buying more, maybe branch off to Bittrex, etc.
Feel free to drop comments below this blog post or the corresponding Youtube video and I'll make sure I answer them for you.
