Update: This is a old post I wrote some time ago about investing in cryptocurrency. I am publishing it here because it is related to ‘early retirement planning’. I am not actively investing in digital currency, but do operate a home made mining rig.
Let’s say you want to jump on to the cryptocurrency train and invest in Bitcoins or whatever. You just don’t know how. You have little understanding and no clue where to start. What do you do? Well, I suggest you read this post in which I elaborate a bit on my own thoughts and findings. Hopefully it gives you a few insights before you decide how and where to invest.
The easiest way to invest is to buy some bitcoins. Or more likely, a fraction of a bitcoin, because one bitcoin is worth thousands of US dollars. Buying bitcoins has some clear advantages. It doesn’t require any particular skills, anyone with a bank account and/or a credit card can buy them. So you get some and pray the value will go up. Not very different from buying shares.
I bought bitcoin a little while back. At that time one bitcoin was worth around 5,000 US dollars. My main sentiment was that it was probably too late. No way bitcoin could continue to climb in value. Yet I did buy them. Or rather, I bought 0.02 bitcoin, for a little more than 100 US dollars. For the same amounts I bought some ether and litecoin as well (digital currencies, just like Bitcoin). 300 dollars, that’s hardly an investment you could argue. But initially, it was not about how much I could get, but to learn how to get them in the first place.
What I learned is that you can buy bitcoins at an exchange, such as Coinbase. Coinbase also offers ether, litecoin and bitcoin cash. These are digital currencies like Bitcoin, but their value is currently only a fraction of Bitcoin’s value. Is that bad? Not at all. Personally, I bought a bit of everything. Ether because I read good stuff about its blockchain technology, which looks promising to me, but also because Ether lags behind Bitcoin in terms of its value. Lots of space for some nice gains I figured. The same applies to Litecoin.
After my initial investment I have bought more of the above currencies. It has been a bit of a bumpy ride. At some stage I had a return on investment of more than 100%. But prices have dropped significantly and I am far from those early, stellar returns. However, I will not exchange my coins back to US dollars. For me this is not about a quick win. I am in it for the long run.
This ‘investing for the long run’ is a decision you need to make. You can also go for quick wins and pull out your money as soon as you can make a profit (or limit your losses), but I approach it like this: The money I invested in digital currencies is gone, spend. I do no longer have it. I do not count on any profit.
Obviously, I can only do this because I do not need the money right now. That’s the point. Invest only as much as you can afford to lose. That’s a general principle, not specific to investments in digital currencies. But maybe it’s especially relevant when investing in digital currencies as they are so volatile.
You can also invest in regular stocks – of companies that operate in the ‘blockchain space’. In the what?! Blockchain space. To understand this, you should know that at their core, digital currencies use blockchains to record and track transactions. Banks are obsolete. It’s a technology that has a range of other potential applications and there many exciting developments taking place as we speak. As such, the technology is still immature, but I expect to hear much more about blockchain and initiatives that build on it in 2018, 2019 and following years.
I did not buy stocks of ‘blockchain companies’ yet, but I am keeping an eye on Nasdaq and other exchanges to see whether there are some interesting developments.
Another way to invest is to buy tokens. Tokens are not that different from main digital currencies like Bitcoin, but they usually operate on top of an existing blockchain (they don’t have their own blockchain like Bitcoin, Ether, Litecoin, etc.) For example, the digital currency ether uses the native Ethereum blockchain. Raiden Network Token on the other hand doesn’t have its own native blockchain, but operates on top of Ethereum. Any transactions in raiden network token are recorded on the same Ethereum blockchain as transactions in ether.
Why would you buy tokens instead of main currencies like Bitcoin? Good question. Take Raiden Network Token. This is a project token that will facilitate payments over the Raiden Network, which is an infrastructure layer on top of the Ethereum blockchain (an off-chain scaling solution, enabling near-instant, low-fee and scalable payments). You can read much more about it here: Raiden Network
The question remains. Why would I buy them? The answer is that I believe the Raiden Network may solve a fundamental problem of current blockchain implementations, which is the lack of performance. Really, blockchains currently don’t scale very well and are painstakingly slow. There are multiple initiatives to fix this, Raiden Network being one of them.
Because I believe Raiden Network will fix a real problem and has the potential for widespread adoption in due time, I bought a few of their tokens. Will its value skyrocket and make me an instant millionaire? That’s a highly unrealistic scenario. Will Raiden Network Token increase in value if Raiden Network becomes the preferred fast payment solution in the future? That’s more likely. How much will the increase be? I really don’t have a clue!
Then again, why would you buy them? Well, to me owning a few raiden network token is simply interesting and exciting, because nobody really knows what will happen. That’s how owners of the first bitcoins must have felt as well. On the other hand, think of it as investing in a startup. You do your research, check the idea and the team behind it, and if you believe in it, you jump and invest a bit of your money. It’s a bit of a long shot, but not entirely uninformed.
How do you get hold of tokens? That’s a bit more tricky. Either you buy a bunch during an ICO (initial coin offering), which is an initial sale of tokens, or you exchange some of your bitcoins, ether or litecoin against them. You can’t buy them directly on Coinbase (which I use), so what I did was transfer some ether to binance.com, exchange them to RDN (Raiden Network Token) and from there transfer the RDN to my Ether wallet.
It’s beyond the scope to explain the procedure in detail, but I’ll probably dedicate some other posts to this topic, so stay tuned.
Another way to hop on to the cryptocurrency train is to start mining. In short, mining is the effort to solve cryptographic challenges using your computer. I will dedicate another post to explaining the topic more in detail, but the purpose of mining is to expand the blockchain with new blocks (on the blockchain, transactions are stored in blocks). Those who solve the challenge get their block added to the blockchain and receive a reward in the form of….crytpocoins.
In the early days you could mine using a run-of-the-mill computer, but those days are over if you are mining for profitability (and who isn’t?). Does it mean mining is out of reach for the average person? Not quite. You could for example buy a pre-build mining computer (also called ‘mining rig’), get it delivered to your door and start mining without too much effort.
Alternatively, you can build your own rig. It is cheaper than buying a mining rig, especially if you use second-hand components, but it means you will need to invest time and effort in building and tweaking it until it works as intended. This is definitely not an option for everyone, but as I am an IT consultant and used to build my own radios and transmitters in a time long gone, assembling and running my own mining rig is a great project to brush up some old skills and develop new ones as well. And hopefully I will earn some coins in the process.
Back to the investing part. Investing is about putting money into some financial scheme or venture and expecting a profit. So how about profit when building and running a mining rig? Currently, the data indicates that you can expect to earn back your initial investment within 1-2 years, but there are many factors that can affect profitability. You’re in control of some of those factors:
- Hashrate of your mining rig. The higher the better.
- Performance/efficiency of your mining rig (hashrate per watt) – remember, electricity costs money, so the more hashes per watt your rig can produce the better.
- Coin(s) you are mining. Profitability differs per coin. This changes over time so you should be prepared to switch.
Other factors you can’t control:
- Block difficulty. The more difficult, the more difficult it is to calculate the hash target. This simply implies it takes longer time to mine a new block, directly affecting your income.
- Network hash rate. The higher the network hash rate, the lower your relative contribution, the lower your income.
- Value of the currencies you are mining (in US dollars). If you mine ether and the price goes up and up while doing that, you’re the man (or woman). If ether suddenly collapses, so would your profitability.
- Cost of electricity. But this is a constant in the area where you live. Suffice to say that lower electricity costs will mean higher profitability.
Having said this, it really depends again on how you approach it. Personally, I’m diving into this with the following mindset:
a) By building and running my own mining rig, I gain knowledge and insights which I can use in another context later on.
b) At the very least, I want to earn back my initial investment and run a profitable rig.
c) I have hopes, but no set expectations on how profitable mining will be in the long run.
d) If it turns out to be profitable, I will build more rigs.
e) If I don’t want to continue mining, I will sell the components of my rig.
Actually, I believe that point e) will guard me against complete failure and loss of money. So if all goes sour, I still have point a) and e) to turn to. A win-win from my perspective.