Today I’m sharing an article written by my friend Tama Churchouse, who with his father, Peter, runs Churchouse Publishing in Hong Kong. Peter and Tama write The Churchouse Letter, a monthly publication about investing in Asia, along with a free email called Peter’s Perspective, which you can sign up for here. Today, Tama writes about bitcoin, the (possible) currency of the future, and how you can learn to trade it.
Why you should buy US$100 of bitcoin
By Tama Churchouse
Do you remember the first time you ever bought a stock? I do. I remember being nervous as I drafted and re-drafted that first buy order email to the broker.
I wanted to make sure I got it right. I didn’t want the broker at the other end to see me for what I was, a naïve teenager out of his depth.
I remember I’d come across the term GTC, short for “Good ‘til Cancelled”, an order that is in force until either the stock is bought, or the order cancelled.
So, I threw in a “GTC” at the end of my order for good measure. That way, I thought, he’d know I was a pro.
Over time, buying and selling stocks has become routine. Now it just takes a few clicks of a mouse, and tens or hundreds of thousands of dollars of stock can be bought or sold in an instant.
I used to feel a little surge of adrenaline when I placed an order. But that has long faded.
I bring this up, because recently I went through the process of buying an asset online that rekindled the feelings I had all those years ago as a teenager placing his first stock buy order.
I was a nervous. It wasn’t a small amount of money at stake. But more importantly, it was not a process I’d been through before.
But over the past few months, as I’ve traded a bit more, and gained some familiarity and comfort with what I’m doing, and I’m now at ease at moving around this asset, and trading it.
As the title of this short missive suggests, I’m talking about bitcoin.
A bit about bitcoin
Bitcoin is digital money that is created and held electronically. At the core of bitcoin technology is a kind of super database called the “blockchain.” The blockchain is public and accessible to anyone, just like the internet.
The blockchain contains every transaction in the history of bitcoin, and is constantly growing. When you use bitcoins to buy something, a global network of computers checks the blockchain database, verifying that you own the bitcoins. It’s like thousands of computerised notaries automatically checking, authenticating and guaranteeing every transaction.
This is different from using a credit or debit card. When you buy something with a credit card, a financial middleman, like a bank, verifies every transaction. This takes time, and they charge you a fee for the “service.”
In a bitcoin transaction, the verification and transfer are performed instantly by the blockchain. There is no middleman. A lot of people think that as bitcoin-like technology matures, it will be used to process everything from stock trades to voting. These more efficient, less costly transactions could end up saving individuals and corporations billions of dollars – while making them far more secure.
As the possibility of a bitcoin ETF grows, so does its price
Bitcoin and blockchain are all over the news right now, with bitcoin currently hitting all-time highs, in part on speculation about the possible approval by the U.S. Securities and Exchange Commission (SEC), the American stock regulator, of the first bitcoin ETF.
If the ETF is approved, it’s assumed that plenty of buyers will flock to the ETF, which in return will bid up the price of bitcoins, the ETF’s underlying asset.
I don’t think you should buy bitcoin because you think the price will go up. And I don’t think you should start allocating any meaningful portion of your portfolio to bitcoin either.
But I think you should go out and buy some bitcoin in order to familiarise yourself with how it works and how to trade it.
You see, bitcoin is here to stay. And what’s more, so are cryptocurrencies.
Now is the time to get to know cryptocurrencies
Cryptocurrencies aren’t just alternatives to bitcoin. They’re blockchain-based digital assets created, increasingly, as a means of ownership of a blockchain-based business.
Some of the most exciting early-stage investment opportunities in the months and years to come will come in the form of cryptocurrencies. So if you don’t even know how to buy a bitcoin, you will automatically be at a disadvantage.
Bitcoin is the “on-ramp” to buying these cryptocurrencies.
Let me take a recent example.
You might have heard about Ethereum. It’s a virtual currency network that’s been in the press recently as a wave of top blue-chip I.T. and financial companies (including J.P. Morgan and Microsoft) have announced the formation of an alliance that will use Ethereum for blockchain related opportunities.
Ethereum is up 40 percent in less than 2 weeks.
But if you want to buy Ethereum, you have to buy bitcoin first. Bitcoin is the “reserve” currency of cryptos.
So, it makes sense to understand bitcoin first. And if you just bought US$100 worth of bitcoin, you’d already be well ahead of the pack. Most people I know haven’t taken the time to figure it out yet, but this train shows no sign of slowing down so you should take some time and get on board early.
How to buy bitcoin
There are two things you need to start trading virtual currency:
- An on-ramp
- A wallet
An “on-ramp” is simply a website where you can convert fiat currency (i.e. U.S. dollars), into bitcoin.
Bitfinex is one I’ve used. You create an account, go through a simple verification process, deposit some dollars, and buy some bitcoin.
The “wallet” is where you store your bitcoin.
Whilst a platform like Bitfinex allows you to trade (along with other exchanges like Poloniex, my favoured exchange), I don’t like storing much bitcoin with an exchange.
I’d rather keep it in my bitcoin wallet. Exchanges can (and do) get hacked. My wallet of choice is Bitcoin Core.
Having spent months looking into blockchain and the cryptocurrency space, I’m convinced that this technology will only grow in scale and opportunity, and being on the outside (and not understanding it) will limit your ability to profit from it.
Going through the process of buying a few hundred bucks of bitcoin, transferring it to a wallet, and maybe transferring it to an exchange to buy another cryptocurrency (say Ethereum) is an excellent way to put yourself way ahead of the pack.
I’m glad I did it.
P.S. “The Truth About Blockchain” from the Harvard Business Review is one of the best articles I’ve read on the topic in recent months – I highly recommend taking a look.
P.P.S. Would you be interested in me providing an onscreen recorded demonstration of how to buy, move and trade bitcoin and cryptocurrencies? If so, please reply and let us know. If there is enough demand, then I am happy to create a simple step-by-step video and walk you through it.