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In recent days, Rob McNealy shared a five-part series on crypto currencies here. I read them, enjoyed them, and found them pretty much spot-on from my own experiences.  I haven’t founded a cryptocurrency and have no particular dog in the fight, so here’s the take of a relative novice layperson with almost a year’s experience in the crypto universe.

Yes, my name is John and I enjoy trading crypto. I’d describe it as a constant roller coaster ride of thrills, loops and gut-wrenching drops…including the one we’re in right now as I write this.

I know many of our TTAG readers have more knowledge about their favorite guns than they do about crypto. Rob also noted, correctly, that folks sometimes fear things they don’t understand.

Rob also made a strong case for gun shops to begin accepting crypto payments, just as they accept credit cards. What’s more, he talked about how crypto offers some advantages for both gun shops and consumers who value their privacy. After all, big banks, big government, big journalism, and big politics don’t have a lot of love for gun owners, gun rights…or gun sales.

While you may not own this newfangle “money” today, you may want to start soon. Think of going back in time to the late 1980s or early 1990s and asking yourself why you would want to mess around with the Internet or a “smart phone.” Today both are ubiquitous and essential in our world.

Yes, “crypto” is relatively new. However, its capitalization has grown to $2.5 trillion (with a “T”) over the last dozen years. Its astounding growth shows a lot in common with the early growth of internet and smart phones in the 1990s. Young people embraced both of those back then and now they’re doing the same with cryptocurrencies.

I will share some of what I’ve learned (sometimes the hard way) so if/when you decide to dabble, you’ll avoid some common pitfalls.

Legal disclaimer: the following is not meant as financial advice.

Why Crypto?

In theory, cryptocurrencies make it easy to transfer funds directly between two parties anywhere in the world without going through a bank and paying steep transfer fees. Hence gun stores can accept crypto payments and bypass steep transaction fees, banks that blacklist stores, or credit card companies that discriminate against firearm retailers.

Yes, crypto has critics aplenty. Some pan this “new kid on the block” because they don’t understand how it works. Others trash-talk it because doesn’t make them any money on commissions. After all, you don’t need need a broker or pay big premiums to buy crypto online.

The returns speak for themselves. In 2021, Bitcoin rose 69%. Ethereum went up 328%.  That will keep you in ammo, even at $1 per round.

Meanwhile, the S&P 500 was up 26% for the year. Remember all those endless radio commercials pitching you what a great time it was to invest in gold as an inflation hedge? Gold declined 3% in 2021.

Speaking of inflation, if you believe the government’s claims early in 2021 that inflation was 1% or 2% and just transitory, I’ve got some 9mm ammo to sell you at ten cents per round. All you’ll need is a certain DeLorean equipped with a flux capacitor to get it.

Getting started

There are a number of online platforms for trading crypto. I looked at a few and liked the Coinbase exchange for its simplicity initially. Within a month or so, I migrated to its sister site, Coinbase Pro, which has more tools (like computer-driven limit buying and selling, more on those in a moment) and Coinbase Pro’s transaction fees are substantially lower than regular Coinbase’s.

You may find a better platform. Great. Just make sure it’s one of the bigger ones and that it has no history of security breaches. After all, you don’t want to lose five or six figures to a hacker.

Once you submit your “know your customer” personal information (just like opening a bank account), you’ll link your trading exchange (like Coinbase) to your bank account. This will take a day or three.

Uneasy with allowing them access to your bank account? I was. Instead of giving them access to the family finances, I opened a new, dedicated account just for crypto funds.  This insulates your household finances from any unauthorized withdrawals.

Regardless of the exchange you sign up to use, enable two-factor authentication. That’s where the exchange (in my case, Coinbase) sends a code via text message to your phone as part of the initial login process and before it will execute a transfer of funds out of the exchange. Yes, it’s an inconvenient additional step, but you want to keep your portfolio secure.

An even stronger two-factor authentication process requires the use of Google’s Authenticator which uses a one-time, time-based algorithm. I highly recommend it.

Personally, I run Authenticator on a pair of devices I store in my gun safe so even if someone stole my phone or computer and somehow managed to break the very strong password, they still couldn’t transfer my funds out of Coinbase.

Once the bank link is set up and verified, you will electronically debit your trading bank account to make deposits onto the trading platform. Then it’s off to the races.

Keep in mind that virtually every transaction you make out of or between coins will have to be reported to the IRS. Of course, you only pay taxes on net profits (and you get to write off losses). Also and emphatically…don’t blow off the reporting requirements. Joe Biden’s IRS hired thousands of new auditors specifically for crypto investigations.

At the same time, don’t be intimidated by the IRS reporting. Instead, consider the use of a website like Cointracker.io to handle the tax reporting. For a modest fee of about $100 or so, they’ll compile the relevant data and provide the forms and info you can give to your accountant to accurately report your gains (along with relevant losses and expenses) at tax time.

What next? Some platforms like eToro allow you to “practice” day trading with virtual currency. Instead of using pretend money, I started by buying $100 in six coins (Bitcoin, Ethereum, Algorand, Aave, Stellar Lumens and Chainlink).

Back in February 2021, I started in crypto instead of taking a trip to the gambling boat. I then watched that first $600 I “spent” grow into $630 – a 5% return – in a couple of days. That excited me, so I poured in more “capital.”

I thought I had the world by the tail. LOL.

Then the market corrected. My 5% gain turned into -12% over a few days. Then after another week, I gained it all back and then some, only to experience a bigger correction in April. That one hurt, but soon came a surge that felt like a tsunami that put me back in the green. And then a bigger correction hit.

After my first 9½-week fling with crypto, I was up about 9.1%. Not great, but not terrible to quote a certain Soviet engineer from Chernobyl. Especially after some silly mistakes, including foolishly buying at near all-time highs, missed opportunities, and a fat-fingered trade.

At the same time, I can remember not so many years ago when an 8% annual return on mutual funds seemed impressive.

Keep in mind that Bitcoin and Ethereum are the “big dogs” in terms of market capitalization. The other coins are known as “alt” coins in polite company. While Bitcoin and Ethereum can show volatility, some of the smaller altcoins can exhibit break-neck changes or even collapse. Ten to twenty percent volatility in a day are normal for at least a few coins each day. Or 50%. Or more, sometimes in minutes, not hours.

Translation: don’t panic. They don’t call it, “Hold on for dear life” (HODL) for nothing.

Rule of thumb: the smaller the capitalization of a coin, the greater its potential volatility.

No matter if you’re a gun shop looking to get into crypto for retail transactions or a regular person wanting to buy in for fun or to buy a gun from a shop that accepts this new “currency,” I sincerely hope you do even better than I have. If you follow the suggestions below, you should have a good shot at avoiding some common mistakes.

The Seven Golden Rules of Crypto

1. Use two-factor authentication for your account. If you don’t use two-factor authentication, you risk a lot on a one lone password. Especially if it’s a weak password.

2. Only invest what you can lose. Don’t “invest” your mortgage payment. Don’t take out loans to buy crypto.

3. Diversify.  Don’t put all of your crypto in a single “coin.” Most long-term investors have Bitcoin and Ethereum in their portfolio, with those two representing about 30-50% of their holdings. I’m more of a day trader. Bitcoin and Ethereum represent less than 20% of my holdings. Currently Filecoin and Chainlink are my two largest holdings, but those change over time. Not so long ago, Solana and Cosmos filled those spots until I sold the bulk of them taking profits.

4. Avoid FOMO – fear of missing out – at all costs. It usually happens when you see a coin rocketing upward in value and you feel like you need to invest right effin’ now to avoid missing the rocket ship ride to the moon. Or, alternatively, you see a coin falling in value and feel obligated to dump your stake before it crashes further. Either scenario almost universally ends poorly. (Additionally, see Rule #7)

5. Bitcoin and Ethereum are the big dogs for a reason. While many “alt” coins will come and go over the years, these two will almost certainly remain for the long-term investor. Even if there’s a correction, they’ll come back handsomely and then some if history is any indicator.

6. Buy the dip, dummy. And the corollary: Never buy at the all-time-high (ATH) or within 15% of one.  Look for a promising coin that’s suffered a significant dip of 40-60% (perhaps because of a huge market correction). That’s the one to buy. Repeat after me: Never buy at an all-time high.

Minor sell-offs happen usually at least once or twice a month. Big corrections happen a couple of times a year. Think of the corrections as big “sales” on the coins you want to buy.

7. Patience is usually handsomely rewarded.

Again: life is hard enough. It’s harder if you’re stupid. Or do stupid things like failing to use good, two-factor authentication of your login credentials. Don’t invest your mortgage payment or fail to diversify. And don’t buy coins at an all-time-high because you fear you’re missing out on a hot prospect.

The Coinbase Pro trading screen for my son Jack.  Note the pending orders (bottom right field) to buy Bitcoin if it falls to 40,000 and another order to sell a previously purchased position at just shy of $70k which would yield about a 100% profit.  At the time of this screenshot it was trading at $41,815.  Click for full size.

The Helpful Hints

  1. Always watch Bitcoin. As the big dog of cryptocurrencies, Bitcoin calls the tune. If Bitcoin’s doing well, most of the altcoins usually follow, sometimes within seconds. The inverse also applies.
  2. Don’t be greedy. If you’re trading in the short term, don’t miss partially cashing in a 25% or 50% return over a day, week or month in fear of missing out on a 500% return.  Nobody ever went bankrupt taking profits.  Opportunities for huge returns will generally be very limited for short term investing. There’s nothing shameful about cashing in some or all of a modest 50% return after holding a coin for a few weeks.

  3. Don’t get married to any one crypto currency outside of Bitcoin and Ethereum. Just because “Coin X” did well for you earlier in the year doesn’t mean it will continue to offer great returns. Watch the news and pay attention. Be prepared to liquidate some or all of any position outside of Bitcoin and Ethereum if you see obvious reasons to do so.  Similarly, just because a particular coin hasn’t performed as well as you would like is NOT a reason to liquidate.  Remember: Patience is usually handsomely rewarded.  In the lingo of crypto, HODL (“hold on for dear life”). Especially for Bitcoin and Ethereum.

4.  Let the computers watch the market for you.  Let them do your buying and selling.  Here’s how it works:  After you have purchased a position, place orders (sometimes called limit orders) on your trading platform to have the computer take profits should the coin value spike sharply as many of these coins often do for seemingly little or no apparent reason.

I have a couple hundred of these sell orders running in the background. Generally, I structure them to execute a certain percentage holding (say 10% at each limit sale order) incrementally from a 50% profit to 500% profit. So if an obscure coin spikes out of the blue for a short time, my limit orders to sell will execute and allow me to grab a nice bonus while I’m living life elsewhere.

As an example, one morning I took my boys to daycare and when I returned home a half-hour later, I had $11,000 waiting for me from unexpected (but very welcome) profit-taking sales. Yeah, that was admittedly a truly exceptional day. Grabbing some profits at the highs locks in your profits, of course.

5.  I recommend holding back a significant percentage (say 50%) of your capital in “cash” after profit-taking. Then find coins you think have good potential for growth and place buy orders for prices just above their lowest traded price from the past six months to a year.  This way, if the market has a “black swan event” (such as happened in May 2021), you lock in some great sale prices.  These will pay off handsomely when the coin’s price normalizes and then later appreciates with the normal ebb and flow of the markets.

For me, I look for coins that have, at a minimum, traded at double or better yet triple their current price (or my desired “limit buy” price) within the last twelve months.  That way if Ethereum, for example, crashes from its current $4000ish per coin to $2000 for a short time (sometimes only seconds or minutes), a purchase order will execute without me babysitting the markets to watch for a great sale price.

At this writing, I like Filecoin, Chainlink and Balancer in particular for coins with great 200-300+% growth potential over the next few months. Your mileage may vary.

Also, by placing limit orders to buy and sell, you will position yourself to win no matter if the market surges or corrects. The only way you lose in that scenario is if the market consolidates and prices remain stable… and that seldom happens in cypto.

What has all of my trading earned me? Well, the learning curve has proven expensive, but I’m up about 40% as of this writing and my boys each now have about $4000 in crypto in their accounts, each started purely through my primary account profits. I remain a long way from buying a Lamborghini. But profit-taking has paid for a rifle, a thermal scope, a hobby solar power set-up, and a lot of buys of other coins.

Go ahead. Dip your toes into the water of the crypto pool and try some trading, even if it’s only a couple hundred bucks. With the big correction we’ve had since the first of the year, it’s a good time to buy. Besides, crypto trading remains about the most fun you can have with your clothes on that doesn’t involve pew pew pew, or unethical, immoral, or fattening endeavors.

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