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Table of Contents
1.0 Glossary
2.0 Bitcoin: What It is and How It Works
2.1 The Bitcoin Blockchain in 250 Words or Less
2.2 Buying Bitcoin
2.3 Inflation and Forks
3.0 Other or “Alt” Currencies or “Coins”
3.1 Ethereum
3.2 Ripple
3.3 Dash
3.4 NEO
3.5 Litecoin
3.6 Iota
3.7 Monero
3.8 NEM
4.0 Wallets
4.1 Considering the Safest Options
4.2 Bread
4.3 Mycelium
4.4 Exodus
4.5 Copay
4.6 Jaxx
4.7 Armory
4.8 Trezor
4.9 Ledger Nano S
4.10 Green Address
4.11 Blockchain.info
5.0 Exchanges
5.1 Important Initial Considerations
5.2 Shapeshift
5.3 Coinbase
5.4 Gemini
5.5 Cex.Io
5.6 Poloniex
5.7 Kraken
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6.0 Technical Trading
6.1 Technical Trading’s Potential
6.2 How to Read a Chart: The First Teeny Baby Steps
6.3 Common Analytics
6.3.1 Simple Moving Average
6.3.2 Exponential Moving Average
6.3.3 Moving Average Convergence Divergence
6.3.4 KDJ Indicator
6.3.5 Bollinger Bands
6.3.6 Relative Strength Inex
6.3.7 Bias Ratio
6.3.8 Williams % Range
6.3.9 Fast/Slow Stochastic Oscillator
6.3.10 Volume Moving Average
6.4 Common Trading Patterns
7.0 Introduction to Patterns
7.1 Gaps
7.2 Head and Shoulders
7.3 Triple Bottom
7.4 Double Bottom/Top
7.5 Saucers
7.6 The T-30
8.0 Understanding Derivatives
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Welcome to the world of cryptocurrencies, the next step in the evolution of the means of value exchange. This is
the part where many authors would veer off into the fascinating history of money. Though that is or at least can
be interesting, it’s ultimately a side note — and one that, frankly, isn’t going to make you any richer.
Instead, this book will begin with and focus on what you need to know to participate in and potentially profit
from this white-hot frontier investment space. With that in mind, we’re not going to begin at the beginning and
regale you with tales of humankind’s early currencies or some such; instead, we’re going to take the leap off the
high board and start to teach you right away about the now and the newest computer-based currencies.
So while the glossary is, properly, often placed in the back of most books, it’s in the front of this one. That’s
because the world of cryptocurrency has its own language; and it’s a jargon that everyone buying bitcoin or other
digital currencies must be fluent in. There’s just no way around the need to recognize and begin to truly
understand these words.
Whether you read it straight through or simply refer to this glossary often, this new vocabulary can rightly be
described as the coin of the realm in the new borderless international financial empire. This, coupled with other
detailed explanations of cryptocurrency — in plain English, the way normal, non-financial people talk — will set
you in good stead to pursue bitcoin and altcoin profits. And, hey, there are the first two words you can start with.
Enjoy.
Address. A unique alphanumeric string of characters from which bitcoins or altcoin may be sent to or sent from.
This address, much like an email address, can be shared with anyone to initiate a value exchange. In this way,
cryptocurrency is said to be synonymous rather than anonymous — it is ultimately traceable.
API. “Application programming interface.” Cryptocurrencies whose code allows for API can run separate apps so
as to increase functionality. Bitcoin does NOT have API. Some see a lack of API as a serious drawback.
Bits. Bits are smaller bitcoin units that make up a whole, just like pennies make up a dollar. A bitcoin is made up
of a million bits.
Block. An aggregated series of verified transactions that have taken place during a set time period, usually 10
minutes.
Blockchain. A large data file that contains THE definitive record of every bitcoin transaction. Anyone can look
at the blockchain. It is not considered anonymous but synonymous.
BTC. Bitcoin’s ticker symbol. Always be sure when looking at any chart that you are viewing the correct security.
Every crypto has a ticker symbol, just like a stock or a mutual fund. Some cryptos will quote in fiat currency,
typically dollars, euros or pounds, and many will also quote in other cryptos. Be sure to understand what stands
for what, and always double- and then triple check your conversion calculations.
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Distributed computing. Spreading a bunch of computing tasks over a large network to process simultaneously
in lieu of running all tasks through one central processor. Cryptocurrency is “distributed.”
Decentralized. A network-based workflow system not managed by a central processing authority. Bitcoin and
altcoin are decentralized because the work typically done by a huge mainframe computer, like at a bank or credit-
card processor, is distributed in little jobs to tons of smaller machines that are connected by the Internet.
Centralized. A hierarchical organization with a main processing unit that is “in charge” of all operations and
actions within a network.
Cold Storage (or “cold wallet”). Keeping coins’ private keys offline — not connected to the Internet. These can
take the form of a portable USB drive, a computer without an online connection or an actual printed copy of the
private key (without which the coin cannot be used). The Ledger Nano is a form of cold storage.
Confirmation. A bitcoin transaction is considered unconfirmed until it has been included in a block on the
blockchain, at which point it has one confirmation. Each additional block is another confirmation. It takes three
confirmation to etch a bitcoin transaction into the stone of the blockchain.
Cryptography. The use of complex mathematics to safeguard information. Cryptography create currencies,
wallets, allows transactions to be digitally signed and to verify transactions on the blockchain.
Hash. A unique transaction identifier or an arithmetic function that miners perform on blocks to make the
network secure.
Hot Wallet. A Bitcoin or altcoin wallet that’s based on a device (such as a phone) that’s has an online connection.
A wallet installed on a desktop computer, tablet or phone is usually a “hot” wallet. Because everything electronic
is theoretically hackable, a hot wallet is seen as less secure than a cold wallet or cold storage, which takes place
on a device or other storage method that is not connected to the Internet.
Know Your Customer. Banking rules that require financial institutions to verify their customers’ identities. If
someone asks you about about KYC, they aren’t looking for a bucket of chicken and some cole slaw.
Ledger. An electronic log book detailing transactions and balances. The Bitcoin blockchain was the first
distributed, decentralized, public ledger. Most cryptocurrencies have some sort of public ledger at the heart of
their coding.
Miner. A computer (or, in some cases, a group of computers) that add transactions to blocks and verify blocks
created by other miners (or “nodes”) in the distributed network. Miners are rewarded with a transaction fee for
their effort and expense. Mining requires powerful computers — and quite a bit of electricity to keep their
ultrafast computer chips firing on all cylinders.
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Multi-Signature. Also referred to by the shorthand “multisig.” It describes a bitcoin or altcoin transaction that
requires electronic signatures from more than one party to be carried out. Multisig is an effort to strengthen
cryptocurrency’s security.
Node. A participant in a network. Nodes each have a copy of the blockchain (the public ledge than records ALL
transactions). Nodes share information, relaying new transactions to other nodes for verification and completion.
Open Source. Software code that is publicly available and that can be distributed to anyone for free. Bitcoin is
open source. Linux, for example, is an “open-source” computer operating system.
Paper Wallet. Just what it sounds like: A (cold storage) piece of paper where private crypto keys are printed.
Considered the safest form of storage.
Peer-to-Peer is sometimes abbreviated P2P. It’s a distributed networking term that simply means nodes on the
network talk to each other rather than communicating via a top-down hierarchical (“centralized”) computer
system. Bitcoin is P2P, as are most flavors of altcoin.
Private Key. A string of alphanumeric characters that must be used to “unlock” bitcoin and other
Cryptocurrencies before they can be spent. Keys are associated with an address.
Proof of Importance. A software protocol that advances some transactions to the front of the line for processing
by miners, typically because of their size, the account holder’s total number of coins, or both.
Proof of Work. A piece of data that requires a significant amount of computation to create but requires a
minimal amount of computation to be verified as being correct. Bitcoin uses proof of work to generate blocks.
Public Key. A string of letters and numbers that is derived from a private key. A public key allows one to receive
transactions.
QR Code. These are big square barcodes that can contain information and be scanned with a digital camera to
be used inside an application. This was a sort of Internet fad about five years ago, to the point where some stores
were even putting them on signage to direct you to their app or website. While the fad has mostly abated, the
technology is extremely useful and has found a niche in the bitcoin space, where they are used to store public
and private keys.
Signature. An element of a transaction that proves that the owner of the private key has authorized the
transaction.
Satoshi. The smallest divisible unit of one bitcoin. There are 100 million satoshis in one bitcoin. Named for Satoshi
Nakamoto – the Japanese version of “John Smith” – who is said to be the inventor of bitcoin. His or her identity
remains unknown.
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Transaction. An entry in the blockchain that describes a transfer of coins from address to address. Each Bitcoin
transaction can encompass several inputs and outputs, leading to hundreds of billions of potential combinations
that miners must unlock as they post and verify transactions.
Transaction Fee. The amount of bitcoin or altcoin that is paid to miners as a fee for performing the tasks on the
bitcoin network. A typical bitcoin fee amount might be 0.0001 BTC.
Wallet. A software program, piece of hardware or even a piece of paper that contains the private keys that unlock
cryptocurrency.
Cryptocurrencies with Greater Than $100M in Capitalization
Ran
k Name Market Cap Price Supply Daily Volume
1 Bitcoin
$68,281,610,66
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$4,135.8
2 16,509,812
$2,240,110,00
0
2 Ethereum
$28,416,910,22
0 $302.19 94,036,878
$1,004,300,00
0
3 Ripple $6,086,586,429 $0.16 38,343,841,883 $106,986,000
4 Bitcoin Cash $4,976,055,009 $301.70 16,493,388 $102,895,000
5 Iota $2,649,409,352 $0.95 2,779,530,283 $57,330,000
6 NEM $2,323,890,000 $0.26 8,999,999,999 $9,739,960
7 Litecoin $2,308,171,641 $43.99 52,468,582 $122,558,000
8 NEO $2,277,725,000 $45.55 50,000,000 $196,370,000
9 Dash $1,676,431,196 $223.66 7,495,411 $57,736,000
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Ethereum
Classic $1,370,292,994 $14.49 94,587,115 $63,861,700
11 Qtum $847,594,000 $14.37 59,000,000 $63,050,800
12 OmiseGo $820,245,727 $8.34 98,312,024 $156,284,000
13 BitConnect $721,094,172 $111.72 6,454,304 $7,455,380
14 Monero $710,351,589 $47.54 14,943,539 $9,329,870
15 Stratis $630,710,102 $6.40 98,505,357 $20,043,200
16 TenX $489,240,340 $4.67 104,661,310 $36,468,800
17 Waves $470,044,000 $4.70 100,000,000 $3,414,580
18 EOS $458,564,419 $1.60 287,396,695 $24,787,600
19 Zcash $421,551,367 $213.56 1,973,906 $16,073,400
20 BitShares $368,113,691 $0.14 2,597,930,000 $24,063,600
21 Tether $319,871,924 $1.00 319,501,302 $140,994,000
22 Steem $278,403,581 $1.16 239,608,560 $1,055,590
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23 Iconomi $258,194,843 $2.97 86,900,350 $1,489,350
24 Bytecoin $251,540,439 $0.00
183,246,354,93
9 $2,067,440
25 Veritaseum $244,030,507 $121.38 2,010,533 $375,905
26 Lisk $241,804,168 $2.18 110,997,245 $5,552,720
27 Golem $224,920,306 $0.27 833,032,000 $3,559,700
28 Augur $224,625,500 $20.42 11,000,000 $1,280,750
29 Siacoin $221,270,556 $0.01 28,637,654,550 $13,048,300
30 Byteball $216,435,233 $411.22 526,327 $1,943,310
31 Populous $211,893,812 $5.14 41,252,246 $711,425
32 Civic $206,719,320 $0.61 340,000,000 $10,642,300
33 Stratus $205,059,781 $0.06 3,470,483,788 $13,603,300
34 Basic Attention $203,541,000 $0.20 1,000,000,000 $3,024,240
35 Stellar Lumens $201,439,405 $0.02 11,039,771,873 $9,722,620
36 Gnosis $199,867,828 $180.94 1,104,590 $1,471,170
37 Bytom $196,056,171 $0.30 664,126,673 $22,095,800
38 Dogecoin $194,384,229 $0.00
110,672,589,21
5 $4,602,640
39 MaidSafeCoin $180,829,988 $0.40 452,552,412 $2,750,560
40 Factom $163,141,627 $18.66 8,745,102 $2,785,970
41 Ark $159,405,463 $1.64 96,930,122 $20,045,400
42 DigixDAO $157,640,000 $78.82 2,000,000 $791,473
43 MCAP $151,699,328 $2.09 72,433,345 $310,243
44 Metal $148,410,747 $7.69 19,300,994 $1,186,010
45 Decred $137,973,273 $24.85 5,552,066 $1,806,300
46 GameCredits $134,301,871 $2.10 63,847,164 $4,049,290
47 Ardor $132,621,179 $0.13 998,999,495 $1,400,740
48 DigiByte $130,187,893 $0.01 8,742,253,657 $14,774,000
49 Komodo $128,296,696 $1.27 100,945,510 $801,592
50 Binance Coin $124,747,000 $1.25 100,000,000 $25,543,800
51 ICO $124,158,000 $1.24 100,000,000 $19,112,200
52 MobileGo $117,703,285 $1.20 98,028,887 $1,265,040
53 Bancor $109,843,337 $2.69 40,772,871 $3,132,300
54 Nxt $109,638,250 $0.11 998,999,983 $10,051,600
55 PIVX $106,948,244 $1.98 54,061,774 $794,284
56 Storj $101,840,979 $1.37 74,526,878 $6,583,300
SOURCE: CoinMarketCap.com, Aug. 16, 2017
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10
2.0 Bitcoin: What It is and How It Works
The story of digital payments begins with an international man of mystery: A heretofore unknown computer
programmer, referred to only as Satoshi Nakamoto — the Japanese equivalent of John Smith1 — devised a
unique methodology for digital payments.
The year was 2008. In the wake of the subprime mortgage bubble, the pillars of the global financial system stood
askew, threatening collapse. Consumer trust in government, banks and fiat currency – that is, those little bits of
paper emblazoned with engraved portraits of presidents, statesmen and monarchs issued by central banks –
evaporated.
The notion of a secure, transparent means of exchange resonated and quickly gained traction on Wall Street as
well as on Main Street. This was the state of a world ready for something new — ready for Bitcoin.
In those days, bitcoin actually had no monetary value. It wasn’t worth anything. It was just an idea to see if the
concept would work. Well, not to ruin your day, but sure that was a great time to get in… Because today, the
value of a single bitcoin is several thousand dollars. But take heart, because even with bitcoin’s rise to date, there
is still plenty of money to be made.
The worldwide cache of these digital golden nuggets is worth some $50 billion, or roughly half of the total market
value of all cryptocurrencies. Bitcoin is the 400-pound gorilla that can’t be ignored, so we might as well use it as
the starting point for understanding this new frontier. Let’s be clear, though, this is a frontier that could put the
power of currency into the hands of investors – sorry, “the people” – instead of governments.
It’s an idea whose time has come. Worldwide global conflict and a decline in longstanding institutions, particularly
of the financial type, has created the perfect conditions for digital currency to begin to enter the mainstream.
Some houses on the market are even being priced in bitcoin right now. That’s the good side.
The trouble with any currency is that the dark side of human nature tends to take over and mess up a perfectly
good thing: Bitcoin is also what hackers have started demanding from corporations as payoffs not to torpedo
their computer systems. What’s more, any time any item of value is created, society eventually must deal with
theft and counterfeiting and other potential means of defrauding someone of their property.
One rather elegant solution, then, is to reward transparency and honesty. This is what bitcoin is built on. It takes
the weakness of stealable and fakable old greenbacks and turns them into a strength. If there is no reward for
dishonesty, most people won’t be dishonest.
1 No one really knows who Satoshi really is. (Really!)
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If dishonesty can hamper the system, then, presto, everyone who chooses to act in an honest way has an
advantage and, critically, one who seeks to engage in dishonest behavior has an active incentive not to. The
answer was something called the blockchain.
2.1 The Blockchain (In 250 Words or Less)
It breaks down like this:
Andy pays Jennifer for a new hoodie.
He uses the private key to his bitcoin to initiate the transaction, which, in this case, means a change in the
ownership of the currency.
Nothing else changes hands.
The bitcoin network, known as miners, get word of this transaction using their very powerful computers.
They run these machines full blast using a trial and error approach that fills in the blanks on the data from recent
transactions.
This creates a big puzzle that has only one solution.
The first miner to fill in all the appropriate transaction numbers correctly wins the right to bundle all of the recent
deals into a patch of data known as a “block.”
But that’s still not the end. After other miners verify that ALL of the data in the block is 100% error-free and that
all the transactions in the block meets all the requirements to be deemed valid, the block is added to the larger
blockchain of ALL previous transactions.
This is the so-called “public ledger.”
The miner who put the block together gets a bitcoin (or part of one) for the effort.
Bitcoin has no central computer: It farms out all the data jockeying to a bunch of the computers connected to
the Internet.
This is called distributed computing and it is why cryptocurrencies are referred to as “decentralized.” There’s no
“central” mainframe in some data farm keeping everything going, like with credit-card approval networks.
Blocks are limited to one megabyte of data.
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All of the blocks are linked, all must be correct all the time. That is what the technology demands. When they are,
the system is secure and the transactions sail through at a certain maximum rate, with a certain maximum reward
for the miners.
That’s it. That’s what all the fuss is about.
Not so hard, right?
2.2 Buying Bitcoin
We have to start, as financial stuff always seems to do, with a little bit of fine print. You’ll want to have some of
this alphabet soup front of mind as you make your decisions about how to buy bitcoin or one of its alternatives.
Banks and financial institutions are heavily regulated, and they wider their reach, the more stringent the
regulation. In the context of digital money, the primary concern is the world’s various anti-money laundering
laws, or “AML.” Chief among these is a subset of rules referred to as “Know Your Customer.”
This is often abbreviated to KYC, which a lot of traders confuse with a chicken joint. In any case, it has three
flavors, and which you choose should be based on how much personal information you want to reveal about
yourself to, well, the entire Interweb. KYC isn’t sinister or painful, it just means verifying the identity of new
customers through various methods. It also depends on where you live, as AMLs vary from country to country.
Zero KYC means the site or service provider asks no questions as to who you are. They have no ID document
requirement, and you can pay with cold, hard cash or a wire like Moneygram or Western Union. This is typically
the case when the transactions are Peer to Peer with real oversight or verification attempts other than the
inherent blockchain technology that safeguards the currency, if not the individuals using it. These sites are usually
on the expensive side. Evidently privacy has a price.
A “light” version of KYC can sort of figure out who you are by tracing your phone number, bank account, paypal
info or credit card details. A lot of exchanges will let you dip a toe in to buying at least some bitcoin knowing
only this traceable info.
The full KYC Monty means you gotta come up with documents that truly and unequivocally prove your identity.
Passports, licenses, even utility bills or voter IDs can be on the approved list of the ID that a financial institution
will accept — and generally you’ll need a combination of them. This process can go a long way — you might
even be asked to submit a photograph of you holding your driver’s license or require a notary signature or a
letter documenting your identity from your bank.
The point here is to track down bad actors who might try to use bitcoin to launder drug money or otherwise
avoid taxation, so the larger the amount you are trying to buy, the more hoops you can expect to be asked to
jump through to verify your identity.
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After you’ve convinced your cryptocurrency provider that you are, in fact, you, the next hurdle to clear will be to
choose what you will use to buy bitcoin. The answer here is almost always dollars for new investors, so you’ll
wanna have some sense of just how you want to send those greenbacks in.
If you live in the United States, good news, you have lots of choices. Other locales may have more limited options.
To review:
•Bank transfers. When you bank chooses some electronic means of beaming dollars to your service provider,
which is the only deposit method many will accept. This can take as a little as a day. Expect a wire fee in the $10-
$40 range regardless of amount sent.
•Plastic. You can buy with a credit card, but this isn’t particularly common in the crypto space. Yes, the whole
world lives on plastic, so it’s natural to assume everyone would take American Express. But the kicker is that any
credit-card transaction can be reversed with a phone call, while bitcoin transactions cannot be unwound.
Of course, there is also the risk that someone could be using a card they filched out of your Burberry when you
were eating dinner, which is a risk trading platforms and exchanges just don’t want to bother with. Ditto PayPal.
•Other popular U.S. payment channels like cash or Western Union are not usually accepted. If you’re in the EU,
though, you’re in luck, because some of their widely used money-sending methods are accepted by domestic-
based exchanges, among them Germany’s Sofort or the Dutch iDeal system.
Actually Making a Purchase
Where are we? Fine print explained. Methods covered. Now let’s actually put hammer to nail. Here’s how to buy
your first bitcoin. Don’t worry: It’s actually very easy.
Method 1: The specialized ATM. You buy with cash and typically need to go through some minor KYC steps,
usually employing your mobile phone’s technology or a biometric reading, like a fingerprint. Online, you can find
one of these machines anywhere on Earth by visiting Coin-ATM-Radar.com. Expect to pay a pretty fat toll to drive
this highway, though, as fees to purchase can reach north of 6%. That cost comes right out of the profit margin
on your trade, so keep it in mind.
For this reason, this method is not recommended. Some vendors sell gift cards that can be redeemed for bitcoin,
though generally not in the United States. Again, the fees are high and it’s prudent to look elsewhere.
Method 2: Exchanges/Brokers. This is where you set up an account, a wallet and your payment method just as if
you were going to open an account at Merrill Lynch. These are covered in greater detail in an upcoming chapter.
Method 3: Peer-to-Peer Sales: These online gathering places of bitcoin owners are where buyers and sellers
meet to exchange directly with each other. Fees are low — 1% is generally top of the mark, and nothing isn’t
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unheard of. The difference between the asking price and the selling price — called the “spread” — will vary in
direct proportion to the network’s liquidity.
If you have one seller who wants $5,000 for a bitcoin and one buyer who's willing to pay $4,000, the two sides
aren’t likely to come to a deal. Add 10,000 traders into that cauldron and the deals start to pop as the bid and
ask prices dance ever closer. You have the option of entering what amounts to a limit order — I will sell for this
but no less — in addition to simply accepting the current lowest offer/highest bid.
2.3 Inflation and Forks
Cryptos are unique among currencies in that they “release” additional money to pay the miners that run the
network. These coins are generally unleashed upon the successfully verified addition of a new block to the block
chain. Each individual coin very, very, VERY slightly decreases the value of all the others, which is the same thing
as inflation. It is important to bear this in mind, as it is a factor in determining your ultimate profitability.
Additionally, another feature of cryptos is a phenomenon called the fork. At the center of digital currencies are,
you guessed it, digits. There is an enormous ton of data stored in the public ledger that details all previous
transactions, and as this file builds it grows more cumbersome for even the fastest computers to digest it. The
solution is the fork, which is when a section of the currency breaks off, or forks, into a new sub-species of the
old, using the same underlying code but changing its name and going off on its own.
This can manifest itself in a number of ways. For instance, bitcoin has a maximum block size of a megabyte. If
enough users (miners) agree, then that could be raised to two megabytes, twice as large, which theoretically
would slow the rate of forks by half. Other solutions include dumping some sort of functionality while retaining
the rest of the code.
With three forks, there are three varieties of bitcoin. Plain old bitcoin has the one-megabyte file size limit and
allows for a technology called segregated witness. Bitcoin Cash has an eight megabyte limit and no segregated
witness. “SegWit2/New York Agreement” — a catchy, roll-off-the-tongue name if ever there were one, moves
the limit to two megabytes and retains segregated witness (which is a way of stuffing more transaction details
into the same amount of space, a sort of file compression methodology).
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3.0 Other or “Alt” Currencies or “Coins”
t’s nearly impossible to keep up with the constant changes in the cryptocurrency space. Investors interested in
trading currencies have nearly as many if not more options than they do with fiat currencies issued and backed
by the world’s governments.
While a deep and completely thorough understanding of these high-tech software-based currencies requires
nearly a doctoral level of software engineering, there’s no reason an investor has to know their history or their
specific unique technologies to trade them — just as an urban speculator need have little understanding of gold,
wheat or bacon to play in those markets. But even with that in mind, it’s not a bad idea to review the genesis of
the major currencies — Bitcoin, Ripple and Etheruem — as well as some of the more important minor currencies.
We address the Biggies in greater detail, naturally, but also think it is important to offer at least a brief description
and some interesting facts to help you gain understanding and, perhaps, to pique your interest in this exciting
investment space.
And exciting it definitely is. While frontier investments areas do have their own risk profiles — which can be
significant and which must be clearly understood BEFORE trading — it’s pretty much undebatable that there are
huge sums for even novice cryptocurrency investors to capture, with many of currencies seeing daily price swings
that can exceed the annual per Forman experience of the Standard & Poor’s 500 Index!
Let’s take a look.
3.1 Ethereum
Price:
Ticker:
Market cap:
Daily trade volume:
Ethereum is a cryptocurrency officially introduced in 2015 based on the C++, Go and Rust programming
languages (usable in Linux, OS, Windows, Posix and Raspbian operating systems) and a lot of functionality. The
actual tokens are referred to as Ether. The most important is a feature called “smart contracts,” which make it
easy to create a deal or other agreement online with an unknown counterparty. Plus its ecosystem encompasses
the Ethereum Virtual Machine, which runs scripts on a network of private nodes. Two other abilities to keep in
mind: a digital payment token called ether and “gas,” a way to establish transaction costs, combat spam and
ensure that the network has the proper resources where they need to be.
Vitalik Buterin conceived of Ethereum (or the shorthand “ETH”) in a 2013 paper that explored the notion of adding
apps to cryptocurrency. The next year, a Swiss consortium called Ethereum Switzerland and, later, the nonprofit
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Ethereum Foundation. A crowdfunding initiative provided the initial capital in late summer: People could buy the
Ethereum value token (called “ether”) as well as bitcoin. Several versions have emerged: The current one,
Homestead, is thought to be stable, though future upgrades, Metropolis and Serenity, are in the offing and could
deliver even more stability and functionality.
Then came DAO, which threw a monkey wrench into the works. The year was 2016 — an ice age ago in the
cryptocurrency space. A group called The DAO introduced the smart contract concept, raising $150 million in
crowdfunding — and an unknown someone got their hands on $50 million worth. A discussion ensued as to
whether Ethereum should engineer a hard fork — that is, a split of two types of currency — to reallocate the
stolen funds. The solution was to split the network into Ethereum and Ethereum Classic, which are now rival
currencies. In late 2016, Ethereum beefed up its protective abilities and managed to stop other hack attacks.
The value of tokens has been volatile, which has presented some fantastic opportunities for traders. For instance,
the value of Ether fell to $8 from $21.50 when hackers hit The DAO. Those who bought at this new basement
level of support did pretty well for themselves: By June 2017, ether’s value had surged above $400, a stunning
5,000% increase since the Jan. 1. Ether later saw a massive crash stemming from a gigantic sell order on an
exchange that dropped the price to a dime — on its way to $300!
Ether is estimated to see a 14.7%% increase in supply in 2017. This increase will wane over the years until it
reaches a growth rate of 1.59% in 2065. A new version of the software is based on proof of stake rather than
proof of work, which could reduce the inflation rate even more over time.
Ethereum has several unique features to bear in mind.
The Ethereum Virtual Machine is the backbone behind smart contracts. The EVM is “sandboxed” — that is,
isolated from the main Ethereum network. All of the nodes in the network executes the same series of steps in
the EVM to carry out tasks.
Smart contracts carry out the exchange of value and also can facilitate, verify, and enforce the terms of the deal.
Contracts on the Blockchain can be public, which opens up the possibility to prove functionality, such as proving
that a lottery is demonstrably fair to all participants.
Ethereum is being reviewed for use in enterprise software by companies like Microsoft, IBM, Chase and Deloitte.
The Enterprise Ethereum Alliance was launched with 30 founding members, now there are more than 115,
including Cornell, Toyota, Merck, Samsung, Accenture and Santander. Chase is working on an overlay called
Quorum. The Royal Bank of Scotland has constructed a clearinghouse mechanism based on Ethereum’s
distributed ledger.
3.2 Ripple
Market cap: $7 billion
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Supply: 38.3 billion
Daily volume: $60 million
Ripple users transact business with cryptographically signed transactions. It has user-verification protocols: Trust
has to be officially and literally extended for a deal to go down. Users basically set credit lines for each other.
“Gateways” can accept currency deposits and create balances on Ripple’s ledger. Bitstamp, Mr. Ripple, Gatehub,
Ripplefox are among the popular Ripple gateways.
An early cryptocurrency called Ripplepay was invented in 2004 by a Canadian who worked as a trader in
Vancouver. His idea was to make a new monetary system to be used online. This led to the conception of a new
system by Jed McCaleb, which was built by Arthur Britto and David Schwartz.
They added in the consensus transaction approval by network members instead of the blockchain-centric mining
process Bitcoin employs. This makes everything faster and reduces bitcoin’s need for centralized exchanges and
because it needs less computational assistance, it also uses less electricity. The Canadian trader said goodbye;
the other programmers started a company called OpenCoin — Google was an early investor; it’s now called
Ripple Labs — which came up with a new idea.
This is, as you could have probably guessed, yet another acronym, this time the mouthful RTGS, which stands for
“real-time gross settlement system.” This is the Ripple Transaction Protocol (or “RTXP”) or just plain “Ripple
protocol.” It’s an open-source ecosystem that uses a consensus ledger and the Ripple currency, which is
sometimes abbreviated XRP. Ripple is the brainchild of Arthur Britto, David Schwartz, Ryan Fugger and was
released in 2012. Today, it is No. Three among the cryptocurrency heavy-hitters, behind Bitcoin and Ethereum.
In July 2013, Ripple Labs informed the world it was linking to Bitcoin using what it called the Bitcoin Bridge, which
lets Ripple holders send payments nominated in ANY currency to a Bitcoin address. The media was abuzz that
this development could ultimately be a threat to money-sending services like Western Union.
Fast-forward a bit. In 2015, FinCEN fined Ripple Labs for violating the Bank Secrecy Act. Ripple Labs pledged its
full compliance to fix the problems. It has been as good as its word: About a year later, Ripple was granted a
virtual currency licenses by New York State, the fourth company to do so.
A few months later, a group of Japanese banks said they’d use Ripple’s technology for payments: The 42
participating banks hold more than 80% of total Japanese bank assets. Thereafter a cabal of other financial
groups entered the fray to create the Global Payments Steering Group. Among them: Bank of America, Mitsubishi
Financial, the Royal Bank of Canada, Santander and Standard Chartered.
The group will oversee rules, standards, fees and new payment capabilities. The best thing about Ripple is that
banks like it. The best thing about Ripple is that banks like it. Seriously, keep in mind that BANKS LIKE THIS
ONE. Ripple was lauded as a Technology Pioneer by the World Economic Forum in Davos.
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3.3 Dash
Price:
Market cap: $1.5 billion
Supply: 7.5 million
Daily Volume: $30 million
Dash — an amalgamation of the “d” in digital plus the “ash” in cash — began life as Darkcoin, then adopted the
name XCoin. The brainchild of Evan Duffield, it functions like bitcoin though it can be used for entirely private
transactions, using a feature called PrivateSend, which are not recorded in a blockchain. Dash also can be used
instantaneously with InstantSend. Like bitcoin, Dash is decentralized and independent of any government
backing or fiat power. It debuted in January 2013. The supply will decrease 7.1% until Dash reaches its limit at
19 million coins.
Dash has two layers: The first of its two-tier architecture is made up of the miners who secure the network and
record transactions in the blockchain. The other tier is a collection of master nodes that give Dash its more
sophisticated features.
Nearly 2 million coins were mined in Dash’s first two days of operations. Then, trouble. An error in the code
behind Dash “incorrectly converted the difficulty, then tried using a corrupt value to calculate the subsidy,” which
led to the so-called “instamine” phenomenon. Duffield suggested a re-release of the code to address the
problem, but users decided they liked the feature and tended to be vocal about it. Duffield then offered to
execute what he called an air drop of coins to extend Dash’s initial distribution. Again, the user base balked, and
things continued on.
With Bitcoin, all the work on the network is distributed out to be completed by active Dash miners. Dash does
that but goes a step further with masternodes. These operators do the heavy lifting behind Dash’s PrivateSend,
InstantSend and administrative functions. A masternode must possess 1,000 Dash tokens as collateral.
The sort-of downer is here is that the masternode crowd gets half the block reward — each group gets 45% of
the block reward, with the other 10% allocated to fund a "treasury" or "budget" system to hire developers and
employees and pay for connecting to coin exchanges and API providers. There’s also a nifty little democracy
feature: Each masternode operator gets a vote on various proposals posted via Dash.org forums or through
community sites like DashCentral.
3.4 NEO
Price:
Market cap: $ billion
Supply: million
Daily Volume: $
20
Founded by Da Hongfei, NEO brings a deep bench of professional experience. It shows. NEO got its start as
Antshares. Some predict it will become China’s answer to Ethereum. Calling NEO Ethereum 2.0 might be
appropriate.
It’s certainly a step forward, and one that is seeing a lot of gains in a fairly short time. The conventional wisdom
is that’s because the technology is good.
NEO has its own blockchain coding algorithm, a new take on the smart-contract concept. NEO is based on code
that a lot of programmers know. This seems wonky, but it’s worth pointing out. If you’re a large financial
institution looking for a digital currency platform, it’s a lot easier to get your geeks working on something they
know how to use rather than asking them to start over and become fluent in yet another code. Ultimately, buying
is a huge bet on our Chinese friends embracing NEO as their Ethereum.
3.5 Litecoin
Price:
Market cap:
Supply:
Daily trade volume:
Litecoin, or LTC, is a decentralized P2P cryptocurrency and open-source software platform introduced in 2011
by former Googler Charlie Lee. Litecoin functions the same way as bitcoin, but with a few twists that give the
network more capacity to process transactions. Transaction costs are very low.
And the system handles payments at quadruple bitcoin’s speed, just as someday there will be four times as many
litecoin as bitcoin. In May 2017, Litecoin began using a technology known as Segregated Witness and was able
to move a fraction of coin from Switzerland to the United States in less than a second. Litcoins split every four
years. Eventually it will reach a maximum of 84 million coins. Difficulty levels rise after each series of 2016 blocks.
Litecoin has seen some fantastic returns for its early adopters. In late 2013, it gained 100% in value in just 24
hours. Litecoin uses a password technology called scrypt,— say ess-SCRIPT — in the proof-of-work algorithm.
It gobbles up a ton of memory, which is thought to level the mining playing field (obliterating the advantage of
some mining computational methodology on the hardware side.
3.6 Iota
Market cap:
Supply:
Daily volume:
21
Iota is a peer-to-peer, permission-less distributed ledger launched in July 2016. The first three letters are IOT,
which stands for the Internet of things, to which Iota traces its roots. Theoretically, Iota is the money that your
refrigerator would use to replenish the items on your shopping list.
Instead of the blockchain, it is based on a “directed acyclic graph” called the tangle. In the blockchain, every block
can be traced to a unique descendant, whereas in the tangle, a block links to two earlier blocks to confirm
them. This linking is intended to convey a confirmation of the previous blocks. Iota has a fixed supply of
2,779,530,283,277,761 units (with zero inflation).
The system uses a coordinator as an intermediary between counterparties to a transaction. A deal is confirmed
when a Coordinator include the transaction in a set of released milestones. To send a transaction, a user must
validate two others. A sent transaction has to gather a certain level of verification to be accepted by its recipient.
The coordinator role is meant to be removed eventually, once the network reaches a certain critical mass in its
user base.
The smallest unit in Iota is called an “iota.” Because of the huge number of iota coins, units are typically expressed
together in larger groups to make things a little easier. The usual decimal notation (what you’re accustomed to
using with computers) is employed.
Thus a kilolota (expresses as Ki) is 1,000 iotas, a million is a megalota, then on to gigalota and teralota, ad
infinitum. A “seed” is the key users must employ to access the Iota network. Seeds can be up to 81 characters,
which provides the most security: Each character must be the numerical digit 9 or a letter, which gives 27 unique
options per.
3.7 Monero
Price
Market cap:
Daily trade volume:
Monero is an open-source cryptocurrency that’s sometimes abbreviated XMR. Its focus is privacy and scalability.
It’s not an offshoot of the bitcoin platform and is instead based on the CryptoNote protocol. Introduced as
BitMonero in 2014 — “bit” in deference to bitcoin plus “monero,” which is Esperanto for coin.
Try to just forget that Esperanto is a made-up language that no one speaks… Monero’s market cap skyrocketed
to about $185 million from roughly $5 million in 2016. Much of its volume stems from its adoption by AlphaBay,
a large darknet marketplace. It’s used worldwide, running on Windows, OS and Linux. Miners will have access to
18.1 million coins by the end of May 2022. The appeal here is PRIVACY, PRIVACY, PRIVACY. Hey, you see three
privacies, you get three reasons why. First, the signatures are set up so as to hide the sending address of the
payer. Two, the amount is concealed. Lastly, as you may have guesses, is the fact that the payee is also hidden.
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3.8 NEM
Price:
Market cap:
Daily trade volume:
NEM is something of a newcomer to the game. It went live on the last day of March 2015. Its Big Idea is “Proof
of Importance,” which sends your transaction to the front of the line for approval based on how many coins you
have and how often you use them. The starting entry point is 10,000 coins; less than that and your transaction
gets a zero importance score. NEM is built on blockchain technology, with a block time of a minute. NEM has
one fewer than nine billion coins. It uses Nanowallet, which can run in any browser. The system allows no direct
line of attack from the node system to the wallet, which affords one more layer of protection.
Groups of NEM can be customized into Mosaics, which can be designed to be transferable (or not) and the
creator also gets to decide whether they can be divided. Moving Mosaics through the network necessitates
additional fees. The system also keeps an eye out for bad actors — as well as good ones — with its node
reputation system, which monitors quality of work performed on the network and helps ensure network
efficiency.
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4.0 Wallets
n the context of cryptocurrency, a “wallet” is not a piece of folded leather to physically store paper bills. Rather,
it’s a piece of software. Its job is to store cryptocurrency “keys” and interface with a technology known as
blockchain. Wallets also help people keep an eye on their account balances and value. Wallets are not optional:
You simply must have one to be an active cryptocurrency investor.
Again, the key point is that the wallet does not actually store the cryptocurrency. The blockchain is the only “real”
method of verifying an authentic bitcoin or participating in a bitcoin transaction.
The blockchain is, frankly, pretty intimidating on a technical level. But conceptually, it’s really nothing more
complicated than a ledger — a list of who paid what to whom and when. All it says is, “Hey, I owned this bitcoin
until I sent it Frank (or whomever).” If someone sends you a bitcoin, it arrives in your wallet with a little packet of
information that adds to the blockchain saying that the payer has signed off on his ownership of the bitcoin and
is assigning it to someone else.
For a digital currency transaction to be valid, your wallet uses a special key that must match the public address
to which the cryptocurrency is assigned. If they do, the transaction is completed — your account goes up by the
number of bitcoins received at the same instant they are subtracted from the sender’s account. The actual coins
do not change hands, only their ownership does.
Wallets come in several different types that offer their own ways to store and use digital currency. Wallets can
be separated into three categories: Software, hardware or — believe it or not, paper.
On your PC or Mac, whether a laptop or your reliable old desktop, a wallet program can be downloaded and
installed with just a few mouse clicks. Desktop wallets tend to be highly secure, though they do carry the risk of
hackers and are susceptible to computer viruses. So use common sense safety precautions as you would when
making any financial transaction on your computer. Ensure that your security preferences are set to provide you
with the most protection.
And always keep in mind to trust your instincts. If something seems amiss, it is the investor’s responsibility to
perform his or her own due diligence. Cryptocurrencies are not government-sponsored, and regulations are light,
so it’s a good idea to maintain a constant vigilance.
It is also possible to place your wallet in the cloud rather than to hard-install the software on the device you keep
handy. This allows you to access your cryptocurrency from any connected device. That said, at the heart of your
new digital money is the private keys that unlock it, and storing those keys in the cloud puts them in the hands
of a third party. So the convenience of easy access does have a risk to bear in mind — they are theoretically more
vulnerable to loss from theft.
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Mobile wallets add another dimension to that convenience, allowing cryptocurrency users to access and deploy
their funds from anywhere they wish. This apps tend to be fairly lean in terms of functionality, as a mobile device
often has significantly less storage space than a typical desktop computer.
How can your digital currency be stored in hardware? Think USB drives, which can accommodate the massive
amount of data required. Your coins are stored offline and are thus invulnerable to hackers.These hardware-
based wallets can be used with other cryptocurrency platforms. All the owner has to do is plug the drive into a
computer or mobile device, enter a personal identification code, send money and confirm the transaction.
Many people are surprised that these currencies have paper options. And many people are glad to learn of this,
as it somehow makes digital currencies seem more tangible. The paper might refer to a physical printout of your
public and private keys. But “paper” also can mean software that securely generates tandem keys that must be
used in pairs to effect a transaction. Transferring your coins to your paper wallet means transferring funds from
a software-based wallet to the public address referenced in your paper wallet. If you need to withdraw or
otherwise spend your coins, you can simply transfer funds from your paper wallet to your software wallet. This is
called “sweeping,” and it is accomplished by manually entering private keys or by scanning a QR code printed
on your paper wallet.
4.1 Considering the Safest Option
Sometimes a little repetition helps make a point: Wallet security varies. Wallet security varies. Wallet security
varies.
Offline storage is substantially more secure than leaving your coins in the cloud, especially if the service providers
are on the weak side. But remember: This is not because the base technology is flawed. To the contrary, the
cryptocurrency model is highly secure — and simply does not work if fraud is detected or transactions cannot
be verified. That said, though, your keys can be stolen, and that is a threat that must be constantly guarded
against. The gist is this: Regardless of which wallet you use, losing your private keys can lead to irreplaceable
loss.
Safety Guidelines
It’s prudent to keep these safety guidelines at the forefront of your mind. First, always update your software. You
might not really care all that much if your iPad is running the latest and greatest version of the Facebook app,
but you have to ensure that you are always up to date with the most current version of all cryptocurrency
software. This is also true for the operating software on whatever computer or other device you use to access
your coins, as well as the software for any coin-related service providers.
Make sure you have the most up-to-date version of your wallet software available. Many of these programs will
check for updates and install them automatically. Ensure this functionality is enabled — generally the only reason
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it is turned off is to save data. The fix is to not worry about the bandwidth, which is cheap, and keep your focus
on your coins, which are not!
The days of using the same password for everything from Amazon to your email account are over. You need to
use long and complex and mostly nonsensical passwords to keep things safe. Some browsers will suggest (and
remember) passwords. This is a great feature — unless someone gets his hands on your device. So use a password
on your device, for your wallet and for any other service providers whose software you install. Repeat no
passwords, and put yourself on a schedule to change them irregularly. This takes a lot of diligence. This is,
admittedly, a real pain. But it offers you an essential protection.
In that same vein, add as many other layers of security as you can. It bears repeating: Choose a wallet that has a
good reputation — read these tips as well as other online reviews — and that offers additional security layers
such as personal identifcation numbers and two-factor authentication. Another technology to be aware of in this
space is called “multisig,” or more than one signature. It’s basically akin to asking permission from other users
on the network before engaging in a transaction. It’s like your neighbor coming over to your house to ask
permission to mow his own lawn. One of two things happens: You either tell the neighbor “no” because you’re
hosting a dinner party or give permission: “Sure, Phil,” you say, “It won’t bother me.” No permission, no dice.
Finally, backup your wallet. Hey, you do it with your iTunes purchases. So do it with your cryptocurrency, too. It’s
a good idea to store only the funds you will need in your wallet. The rest goes in the bank, so to speak, or at least
the safe in the basement. So-called cold storage (that is, hardware or paper) will help protect against computer
failures.
It’s possible to use one wallet to hold different types of cryptocurrencies. This makes it easy for you, but it also
makes it easier for hackers or other thieves to get to your whole stash. Use the wallet that works best with each
currency and with which you are the most comfortable. Keep an eye on fees, which tend to be on the low side
but are not zero and, in fact, opting for the lowest possible transaction fee could slow down the transaction’s
confirmation. Count on an average of about 12 cents per transaction.
Also, bear in mind that your coins are not anonymous. You can set up a pseudonym, but your coins are ultimately
traceable. The blockchain does not record your home’s address, but it does include your wallet’s virtual address.
This means it is not totally private. A few currencies are more private than others: We address this is in Chapter
XX where we review each type of cryptocurrency.
You have a lot of choices in this space, and more are on the way. Your wallet choice should be predicated on
how you intend to use cryptocurrency. The decision point boils down to two critical factors: Are you going to
actually use coins for purchases or just hang on to it for an investment, and where will you need access to your
wallet — at home or wherever you go? Bear those elemental questions in mind as you peruse these popular
wallets.
4.2 Bread
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Type: Mobile
Stores: Bitcoin
What it is: Send coins as easily as a message. No server means no hackers.
Get it: App Store, Google Play.
Similar: Ethereum Freewallet, Monero Freewallet, Coinbase, Digibyte Core, Coinjar, Coinapault.
Note: No desktop access.
Overview
Bread’s a standalone client with no central server, so users have 24/7 access and are in full control of their funds
at all times. The design is elegant, security continually improves. It is used by cryptocurrency newcomers as well
as more experienced users.
From Bread
“It’s safer than a bank vault and easier than sending an email. No personal information required, just download
the app.”
From the Reviews
“Now available for Android. Dead simple security for beginner. Open source and stores keys in trusted hardware
when available. Not very feature rich due to simplicity, would love options to sign messages or edit fees. Units
are confusing and hard to change.” -whiskeykilo
“Easy-to- use basic functionality present. I have used it since its beginning and have had 0 problems. Sometimes
I wish I could choose the transaction fee, because the default is a bit low, therefore slow transactions. Otherwise
5/5.” - laurent
4.3 Mycelium
Type: Mobile
Stores: Bitcoin
Launch: 2008
What it is: A wallet that does NOT give a third-party control.
Get it: App Store, Google Play.
Note: For advanced users, not for beginners.
Overview
Mycelium offers enterprise-level security that’s generally regarded as better than competing apps and even said
by some to be superior even to cold storage and encrypted PDF backups. It features an integrated QR-code
scanner, a local trading marketplace and secure chat with other users. It is widely considered one of the strongest
wallet choices.
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From Mycelium
“Tested by hundreds of thousands of users. No alternative has more stars on Google Play.”
From the Reviews:
“Mycelium is one of the leading mobile wallets for Android users. It packs a ton of security features without
reducing the convenience factor. Moreover, the integration with other services make buying and selling Bitcoin
a breeze. Mycelium is one of the most popular Android Bitcoin wallet solutions for a good reason. The app offers
a lot of functionality, while still being easy to use by novice Bitcoin enthusiasts. Moreover, there is a strong focus
on security, which makes it an option well worth checking out for anyone who wants to keep track of their Bitcoin
wealth on the Android operating system.” -themerkle.com
4.4 Exodus
Type: Desktop only
Stores: Bitcoin, litecoin, ether, dogecoin, dash.
What it is: Intuitive to use wallet with a great backup guide.
Get it: App Store, Google Play.
Note: For users of multiple coins.
Overview
Exodus is that it has a built in shapeshift exchange that allows users to trade altcoins for bitcoins and vice versa
without leaving the wallet.
From Exodus
“All-in-one app to secure, manage and exchange blockchain assets. Exodus is the first desktop multi-asset wallet
with ShapeShift built in.”
From the Reviews
“Even though Exodus is hardly mentioned within the cryptocurrency circles, there is no doubt that it is one of
those wallets that most traders prefer to use. … This is a wallet that supports more than just bitcoins; they have
gone a step further and integrated altcoins such as dash, Ethereum, Dogecoin and Litecoin. … Any wallet is as
good as its user interface, virtually. They have a user pie-chart that enumerates a one's digital currency holdings
based on the assets that they have chosen to put their money into. It might not seem much, but this feature is
very convenient for investors who would wish to keep easy visual track of their cryptocurrency holdings. Wn you
combine this flexibility with an easy-to-navigate platform, then you understand why most crypto traders and
investors have stuck to this wallet ever since they were ushered to the world of virtual, anonymous money.
In addition to this, Exodus seems to be among the few wallet-based platforms with a built-in internal exchange.
This is a feature that has received commendations from various factions especially traders who specialize in
instant and day trading. This exchange works for each of the five supported digital currencies, and the prices are
usually adjusted in real time basis. Despite the numerous upsides of Exodus, it is not exactly flawless. One striking
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downside is that Exodus lacks the very basic option of controlling separate wallet addresses for each supported
digital currency in one's portfolio.
This means that it is not easy to have a regular Ether or bitcoin address and a separate watch-only address while
using this wallet. Although this is something that can be fixed with an extensive software update, the developers
behind Exodus are yet to do so.”-Bitcoin Exchange Guide
4.5 Copay
Type: Desktop, mobile or online
Stores: Bitcoin
What it is: Solid, convenient multisig platform.
Get it: App Store, Google Play.
Note: Good for beginners but with enough functionality to satisfy more advanced users. Can be slow
and unresponsive, limited user support
Overview
Copay is a bitcoin wallet that uses a hierarchical deterministic, multi-signature wallet. This system generates a
new address each time a transaction is received, making you virtually untraceable. It supports multiple wallets
stored in the app at any one time and uses the full Bitcoin payment protocol (BIP 0070-0073).
From Copay
“Secure bitcoin on your own terms with an open-source, multi signature wallet. Copay users can hold funds
individually or share finances securely with other users with multisig wallets, which can prevent unauthorized
payments by requiring multiple approvals.”
From the Reviews
“Copay is different than other Bitcoin wallets, and is often mistaken for an account or a service which is held by
a third party. This is not the case. You are in control of the private keys, so that even Copay does not have access
to your funds. A feature which makes copay stand out is its multi-signature functionality; you can choose up to
5 people to share a wallet with and require 3 of them to sign a transaction. This is a great feature if you share
funds or are working within a company that uses Bitcoin as a payment method.” -Jackmanmania
4.6 Jaxx
Type:
Stores: Several types of altcoin (Ethereum and Ethereum Classic, dash, DAO, litecoin, REP, Zcash, rootstock but
primarily built to handle bitcoin and ethereum.
What it is:
Get it: App Store, Google Play.
Keep in Mind: Code isn’t open source. It can be slow.
Overview
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Jaxx can be utilized on a variety of platforms, including Windows, Linux, Chrome, Firefox, OSX, Android and iOS.
Jaxx facilitates conversion between Bitcoin and Ether using Shapeshift and by importing paper Ethereum wallets.
The Jaxx developer team does a good job of integrating new currencies and is clearly a leading wallet from users
who invest in more than one cryptocurrency.
From Jaxx
Jazz Philosophy:
1. We never access or hold onto user funds.
2. We offer a client-side security model, with private keys hosted locally and never sent to any servers.
3. We are design-oriented, offering simple, attractive user interfaces and experiences.
4. We use standards that ensure should we ever go down or cease to exist, your keys can be imported into
another service.
5. We remove friction points whenever possible.
6. We never require users to input any personal information including email addresses.
From the Reviews
“The design is great, the user interface is amazing. The first thing I’ve noticed about Jaxx is the design. The wallet
uses beautiful, minimalist black screens that bring simplicity to the user. However that’s not what got me sold on
the wallet. What was truly amazing in my opinion was the simple interface. Even if you’re a complete newbie
you’ll probably manage to use Jaxx without a lot of trouble.
The setup is pretty simple and the ongoing use is limited to the basics such as “send” / “receive” and changing
the currency type. With Bitcoin and cryptocurrencies being such a technical subject we really need this type of
products that don’t scare the user away. However, the fact that the interface is minimal doesn’t mean that Jaxx
doesn’t supply the user with advanced features.
Once you click the “menu” button (top right) you get all sort of advanced features including: Adding / removing
different currency support, using different exchange rates, setting up transaction fee size for faster / slower
confirmations, backup and displaying the private key of the wallet, among others. These options probably cover
most, if not all, of the features I usually look for in a wallet. Also, each feature comes with a small tool tip that
explains more about it so you don’t have to go searching the web for explanations.” -Ofir Beigel
4.7 Armory
Type: Desktop only
Stores: Bitcoin
What it is: Feature-laden and highly secure platform for experienced crypto users.
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Get it: App Store, Google Play.
Note: Not for beginners.
Overview
Features include cold storage, multisignature transactions, one-time printable backups, multiple-wallet interface,
GPU-resistant wallet encryption, key importing, key sweeping and more.
From Armory
“Armory is the most secure and full featured solution available for users and institutions to generate and store
Bitcoin private keys. This means users never have to trust the Armory team and can use it with the Glacier
protocol. Satoshi would be proud. Users are empowered with multiple encrypted Bitcoin wallets and permanent
one-time ‘paper backups’. Armory pioneered cold storage and distributed multi-signature. Bitcoin cold storage
is a system for securely storing Bitcoins on a completely air-gapped offline computer.
Our team is highly experienced in cryptography and private key ceremonies. For example, they have collaborated
with Verisign on developing an innovative ID verification specification for establishing trust on the Internet.
At Armory, we strive to constantly improve the best bitcoin wallet with new security features. Armory pioneered
easily managing offline bitcoin wallets using a computer that never touches the Internet. Everything needed to
create transactions can be managed from an online computer with a watching only wallet. All secret private key
data is available only on the offline computer. This greatly reduces the attack surface for an attacker attempting
to steal bitcoins.
By keeping all private-key data on the offline computer only someone with physical access to the offline
computer can steal your Bitcoins. The actual process of creating a transaction and signing it with the offline
computer can take less than a minute and then you can broadcast it to the network so bitcoin miners can include
it in a block.
Plus, Armory employs many security practices so that even if someone physically stole your offline system then
it still may take centuries for them to get through the advanced wallet encryption. And multi-signature addresses
are available using Lockboxes in a completely distributed way.”
From the Reviews
“Although Armory takes a little while to understand and use to its full potential, it’s a great option for more tech
savvy bitcoiners looking to keep their funds safe and secure.” -user8
4.8 Trezor
Type: Hardware
Stores:
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What it is: Open-source wallet that can’t be affected by malware and that never exposes your coin’s private keys.
Get it:
Keep in Mind: Designed for storing large amounts. The Trezor must be with you to send bitcoins
Overview
Trezor is open-source and transparent: All technical decisions benefit from community consultation. User-friendly
interface makes getting started easy, and Trezor works with WIndows, OS X and Linux. Recommended for inactive
savers and investors. comes with a microUSB cable and a recovery seed booklet. The device itself is made of
plastic, there are a 128×64 pixel OLED display and 2 buttons on the front, and a microUSB port on the bottom.
It costs $99.
From Trezor
“No matter whether you're new to Bitcoin or already a security expert. Trezor is the Bitcoin wallet choice #1 for
everybody. Leave behind the viruses and keyloggers. Forget about doing regular backups, reading encryption
manuals, printing paper wallets and making offline storages. Next time you see another 10+ steps guide to
secure your bitcoins, just skip reading it.”
From the Reviews
“A hardware wallet is the ultimate solution. The best hardware wallets at the moment are Trezor and Ledger Nano
S, I chose the Trezor since it is the most popular. Setting it up is extremely easy, even for Bitcoin newbies. After
a couple of minutes, the Trezor is ready to use.
Every time I need to access the Trezor wallet, I will need to enter a 6-number PIN. The difference is that you won’t
be able to enter the code with your keyboard. Instead, the device’s screen will show you 9 numbers in a
randomized order, you will look at positions of those numbers, then enter your PIN correspondingly on
computer’s screen with your mouse.
Before completing each transaction, you will need to confirm the amount, the address, and the fee on the Trezor’s
screen. The private keys are kept inside the Trezor, so someone can steal your Bitcoin only when they have your
recovery seeds or have the Trezor and know the PIN. Your Bitcoin is protected even when your computer is
infected by a virus. A great feature of the Trezor is that they started the native wallet integration with some
exchanges like Bitstamp.
That means you can deposit and withdraw funds right on Bitstamp, and don’t need to open the Trezor wallet
interface. Apart from storing Bitcoin, you can also use Trezor to store other cryptocurrencies like Litecoin, DASH
and Zcash. Ethereum is also supported but you will have to use a different wallet interface from MyEtherWallet.
The Trezor is one of my favorite techs of the year, therefore, I highly recommend you to buy one if you can. You
will never have to worry about losing your Bitcoin again since you have a total control now.” -Tuan Do
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4.9 Ledger Nano S
Type: Hardware
Stores: Multiple currencies
What it is: A hierarchical deterministic multisig hardware wallet for bitcoin users.
Get it: Electronics retailer or online merchant. Amazon carries it.
Note: Cannot create hidden accounts
Overview
The nano aims to eliminate a number of potential hacker approachways by using a second layer of security. It’s
a compact USB device based on a smart card, about the size of a little flash drive, with a weight of less than six
grams. The screen is protected by a movable cover. Supports multiple cryptocurrencies and can run third-party
apps. Recovery is very easy. It costs about $200.
From the Manufacturer
“MULTI-CURRENCY: Nano S supports Bitcoin, Ethereum, Litecoin, Dogecoin, Zcash and Dash. Hold different
assets and spend them from the same hardware wallet. Compatible with Electrum, Copay, Mycelium, GreenBits
and MyEtherWallet. SIMPLICITY : Plug and play! Easy on-device configuration. PIN protection. Paper wallet
backup for immediate recovery of your assets in case of loss or destruction of the device. SECURITY :
Your private keys are secured inside a strongly isolated environment (secure encrypted chip) locked by a PIN
code, and are never exposed to the host computer. Check transactions on the OLED display and confirm using
the physical buttons (anti-malware second factor). Alternate PIN for plausible deniability, passphrase
compatibility. MULTI-APPS :
In addition to crypto-currency wallets, use third party apps such as FIDO U2F, GPG, SSH or build your own.
MAGNETIC USB CABLE: Protects port from dirt, lint, and damage over time with use. Protect your hardware while
it protects your keys. Quick magnetic connection means no fumbling, scratching, or bending.
From the Reviews
“I bought this item in July of 2017. I spent a couple of days to figure out what is what as I was looking to buy my
Nano S. I'm glad I did. For the price of a dollar you get a magnetic cable similar to Mac's power cable. I would
probably pay more for this cable for one simple reason:
Nano S has micro USB connector on the unit itself. If you dealt with these you would know that they are very
delicate. I almost broke one on my old phone. So, the cable that MintCell provides you can insert into Nano and
leave it there forever. To disconnect the device you just separate the magnetic connection. The tiny insert stays
in the unit and is small enough that the metallic cover closes in right over it, so it's not in the way of normal unit
operation.
In other words, you don't keep inserting the cable into the unit, so you don't wear out the inner part and can't
break it off. This cable addition is genius and I highly recommend this package instead of the regular Nano S
item sold here as well. The Nano S that you get is the same exactly thing you would buy separately. So, if I had
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to buy it again, I would go for this package. Highly recommend. If for some reason you don't want to use the
cable, just don't use it and use the wallet as one you would buy separately. It's the same exact thing.” AudreyK ,
via Amazon
4.10 Green Address
Type: Desktop or mobile
Stores: Bitcoin
What it is: Solid security, multiplatform and multidevice, multisig, beginner-friendly, open-source software.
Considered a hot wallet.
Get it: App Store, Google Play. Can interface with Chrome and Android.
Note: Free. Strong contender for beginners.
Overview
This software uses multi-signature addresses & two-factor authentications for enhanced security, paper wallet
backup, and instant transaction confirmation. One drawback: Green Address is required to approve all payments,
so you do not have full control.
From Green Address
“The safer Bitcoin wallet that puts you in control. It uses multisig to improve security (adding two-factor for
instance or limits) and Hierarchical Deterministic addresses that improve your privacy. This wallet offers the
advantages of a web wallet: Ubiquitously available, two-factor authentication. Features transactions
limits/restrictions, GreenAddress instant transaction and the advantages of a local software wallet like Electrum.
Mnemonic seed backup - set once and forget. Your private keys are never on the server, not even encrypted. No
long wait to synchronise the full client with the Bitcoin blockchain.
Features:
- Improved support for segwit
- Reduced roundtrips
- Improved transaction fee handling
- Update translations”
From the Reviews
“Green Address is an extremely robust HD wallet. It's got multisig security, is available only through a chrome
extension on desktops for added security, offers 4 different types of two-factor authentications, and has a number
of really nice bells and whistles, detailed below, that will appeal to more experienced bitcoiners. For noobies, it
might be best to start with a more simple product, as GreenAddress might overwhelm.
However, once you've gone through the laborious process of setting up your wallet (laborious in terms of security
steps, not in terms of difficulty), sending and receiving bitcoin is basically the same as anywhere else - but if you
don't really need a fancy wallet, there are simpler products that are also very safe. Green Address is available on
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desktop only within the Chrome Web Store. While many users might not be familiar with using chrome
extensions, this does provide an additional layer of security whilst going through the higher risk sign up process,
which includes copying down the mnemonic which can be used to recover the private keys. After creating your
wallet and copying the mnemonic, you'll be asked to jot down a password, which will encrypt your mnemonic
into - a new encrypted mnemonic! This mnemonic plus the password will show the unencrypted mnemonic.
This here is a bitcoin wallet chock full of features! For more advanced bitcoiners this is a really great product; it
might be a bit overkill for noobies just getting into the market. Anyway to make a long story short - HD wallet,
multisig security, available on both desktop and in native android and iOS apps, no personal information stored
server side, and tools to increase privacy. We are definite fans.” – Bitreview
4.11 Blockchain.info
Type: Uses any browser or phone.
Stores: Bitcoin
What it is: The most popular wallet
Get it: App Store, Google Play.
Keep in Mind: Weak privacy
Overview
Accessing this wallet with any browser or phone. Browser users can enable two-factor authentication; mobile
users can enable a PIN requirement to use the wallet app each time it is opened. Your wallet is stored online; all
transactions must route through the company’s servers, though Blockchain itself never has access to your private
keys.
From Blockchain
“Blockchain is the world’s most popular bitcoin wallet. We are on a mission to build a more open, accessible and
fair financial future one piece of software at a time. Loved by User. Praised by Geeks. Recognized by the press.
We make using bitcoin safe, simple and fun. Securely store your bitcoin and instantly transact with anyone in the
world.
Our step-by-step security center helps you back up your funds and protect them from unauthorized access.
Blockchain works with exchange partners all around the world to make buying bitcoin in your wallet both a
simple and seamless experience.”
From the Reviews
“One of the most widely-used wallets due to its ease of signing up, web access and mobile access, factors that
will appeal greatly to new users of Bitcoin. This said, it may not be the ultimate choice for experienced users who
want full control of their own Bitcoins and security.
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Because of its direct web access and its availability as a mobile app, Blockchain.info’s wallet is probably one of
the more convenient methods of accessing and spending your Bitcoins. As long as you have your wallet ID, you
can enter it via a web browser connected to the Internet to access your funds.
That does mean you have to store your wallet ID somewhere on your desktop or mobile, however, although the
use of browser caches can help you get past this.
Some mobile users also face a rather annoying problem of not being able to copy and paste Bitcoin addresses
within the mobile app. So unless you have photographic memory, the simple act of sending someone Bitcoins
using the Blockchain.info app is going to be a pain.
In the past, however, high traffic to the website has caused overloading and server issues, leading to users being
unable to access their wallets for substantial periods of time. Lately, performance seems to be improving but if
you’re a user, then you’ll always have to contend with server performances from their side.
This means that you do risk not being able to use your Bitcoins on demand. Blockchain.info is one of the oldest
companies to offer a free wallet solution and maintains a high level of trust within the Bitcoin community. Because
your wallet is stored online on their servers (although you still control your backup phrase for recovery), this does
mean that users have to trust Blockchain.info so this hybrid solution may not be your long-term wallet options
if you want to control all your own information and privacy (including data on your transactions).
If you’re keen on using Blockchain.info, then do remember to make full use of enhanced security features offered
from its Security Center (accessible once logged in). When creating your wallet, you will already be asked to verify
your email address, which is used in the login process. You’ll also be asked to create a 12-word backup phrase
which you must keep safely in the event you need to recover your wallet. You can use an IP filter to also block
access from TOR-linked IP addresses commonly used by would-be intruders.” – bitcoinmillionaire
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5.0 Exchanges
Unless you happen upon a cache of cryptocurrency through a private transaction, such as selling your vintage
Jaguar XKE for a boxcar of Ripple, you’re going to need to go to an exchange to purchase some, ostensibly for
cash.
As silly as it might seem to caption the obvious, the first real step in selecting an exchange is to consider what
sort of crypto it sells and what is accepts in return — be it another crypto, euros, the U.S. dollar or even airline
miles. It’s fairly easy to find an exchange that deals in bitcoin — there are at least dozens of them, and they are
easy to find. Locating a platform on which to purchase some of the lesser-known alt coins can take some digging.
Keep a few things in mind as you look:
5.1 Important Initial Considerations
Reputation is key. One of the great things about the Internet is the ability to find information on just about
anything, from some random geek’s 50,000-=word critique of the trailer for the newest Star Wars picture or a
side-by-side comparison of low-wattage compact fluorescent light bulbs.
Clearly this is helpful when choosing a new Subaru in lieu of another Accord, and it’s not something your should
overlook when choosing an exchange. That said, of course, be mindful that some people on the Internet are just,
well, grumps — and grumps that are cheesed off about their experience often tend to write hysterical and/or
histrionic reviews. So be mindful to pay attention to thoughtful reviews that reference specific features, pro and
con, Check out several sites. (And, frankly, steer clear of information overload like Reddit, which can do more
harm that good.)
Security. Be sure to investigate all of the site’s security protocols. Let your nose be your friend — if you smell a
rat, or think you smell a rat, then steer clear. There’s nothing wrong with buying your coins on an exchange
parked heaven knows where on the Web. It likely will turn out fine, as most online purchases do.
But if you don’t want to take any chances — and there is not one thing wrong with that — then go to a large
bank and let them help you.
Crypto is a new world, and it’s prudent to be cautious. If you feel like you don’t quite understand the security,
then either do some additional research or consult with an expert. We found ourselves consulting with plenty of
bright 12-year-old as we wrote this!
The next consideration is volume. The more volume, the better likelihood you have to capture returns by trading.
Most of us are keyed to process volume data in the context of the stock exchanges. Avoid this natural mental
comparison.
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Volume needs context, just as does every number in the financial world, but the only number that really matters
is the volume on that exchange the day, week and month before. Compare that with other exchanges to get an
apples-to-apples look at what’s going on.
Finally, look at usability. You’ll likely encounter this in the reviews, but it bears repeating. If the exchange is tough
to use, or tough for you to use, then the odds greatly increase that you will miss a trick. Find an exchange where
trades can be placed easily, the trading environment can be easily navigated and, in the best of cases, that have
a ton of data available for you to check out — and use to discern trading patterns.
5.2 ShapeShift
If this were a cutesy review, the headline would be, ‘Well, it’s functional.’ Think of ShapeShift as the cryptocurrency
drive-thru. It lets you buy and sell bitcoin, Ethereum, Monero and Dash, among others. Some traders want to feel
like they have a relationship with their broker.
This ain’t that. This is the no-tell hotel of crypto trading: You don’t need an account and you don’t need to leave
your coins on the exchange. It is not trouble for a beginner to navigate easily and use effectively. The downside
is limited payment options — sorry, no cards. Dashboards, info and other tools are damn light. Another option
along these lines is CoinMama.
5.3 Coinbase
Among the most popular exchanges, Coinbase is trusted by millions of users all over the world, including
beginners. Users like that it’s easy to use — to buy, sell or store currency. You can buy bitcoin, Ethereum and
Litecoin; its digital wallet runs on Android or iOS.
If you prefer, you may choose to trade directly with other users on Coinbase’s GDAX platform, which stands for
Global Digital Asset Exchange, and there aren’t any fees to move funds between Coinbase and GDAX. It’s secure.
GDAX is meant for technical traders. Don’t use it for buying and holding.
5.4 Gemini
Gemini is probably the platinum standard, the Goldman Sachs or Bessemer Trust of the crypto world. It’s nicely
rendered and easy to use, with strong tools for more sophisticated traders, and there is plenty of liquidity.
Gemini is regulated, it’s licensed by the United States, which means it must meet strict capital requirements and
other benchmarks just like a bank. (Check whether your state allows for full access to the site; only 42 do.)
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Gemini keeps all dollar deposits in an FDIC-insurerd bank, which are guaranteed by Uncle Sugar up to a quarter
mil. Additionally, Gemini keeps most of its coinage in cold storage, which is extremely safe. The drawback, though,
is selection: Users are limited to the dollar, bitcoin and Ether. Deposits and withdrawals are free; you pay to trade,
and high-volume players get a little discount.
5.5 Cex.io
Cex.io is a professional-grade site for users who know what they are doing — the trading dashboards are very
good. Margin accounts available. Security is strong, and CEX even accepts credit cards. While it has a lot of bells
and whistles, this is a site that newcomers can feel comfortable with, even if all they want to do is buy and hold.
Coins may be kept in the cloud or in cold-storage wallets. The data here is dependable and complete, and CEX
has a lot of altcoin choices, though bitcoin is still the biggie.
The mobile version has been reviewed favorably, and the exchange rates are good. The one gripe some have is
that the verification process is onerous, but the flip side to that, of course, is greater security and less concern
over bad actors getting in. A word to the wise: Keep an eye on fees. All of them, all the time.
5.6 Poloniex
Poloniex is what some would call the “Mall of America” of cryptocurrency. It’s been around since 2014 and is
today considered among the world’s leaders. Setting up an account in a cakewalk. It has more than 100 currency
pairings, so it can feel like trying to get a sip of water from a firehose because of the sheer amount of info
available. Expert traders will love the analytic tools — and the volume, which is substantial.
Fees are reasonable, but should you always know what the freight charge is coming and going. Reviews say the
customer service is lousy.
5.7 Kraken
Kraken is a massive and reputable bitcoin exchange, with significant volume in euros, yen, dollars, Canadian
dollars and the British pound, which opens up some fascinating arbitrage opportunities for sophisticated traders.
Kraken also lets you invest in or trade in a ton of altcoin, among them Ether, Ripple, Monero, Ethereum Classic,
Litecoin, Dogecoin and Zcash.
Margin accounts are available — though these are not recommended for anyone without significant trading
experience. Kraken is feature-rich like a Bloomberg terminal and about as intuitive to use, which is to say not
very. This is an excellent site to investigate when you have mastered the basics on a site like Coinbase.
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6.0 Technical Trading
Fundamental analysts look at and think about price charts in a wholly different and far more simplistic way than
technical traders. The charts that you most often see in the newspaper, investing magazines and on financial
news channels plot price on the vertical Y-axis and time (in various intervals) on the horizontal X-axis.
These price charts usually show relatively smooth curvy lines rendered by connecting the data points. Such graphs
are not entirely useless for technical analysis, but most serious traders prefer a different type of chart that’s
loaded with a lot more data..
A candlestick chart encapsulates one day’s worth of trading activity. Each candlestick shows the open, high, low
and close. The high price for the day forms the top point of a line segment; the low price during the session is
the bottom.
The close and open are marked onto this line by horizontal dashes, which form an elongated rectangle called
the body, the candle or candlestick. The segment reaching up from the body is called the upper shadow; the
segment below is referred to as the lower shadow (or wick or tail). Since it is impossible to tell which hash mark
is the open and which is the close, the box is typically color-coded:
If the open is higher than the close, the body is usually black or red. If the close is above the open, the graph
usually will display a green or a hollow/uncolored/white candlestick is used. The body of the candlestick is
described as long, normal or short relative to its proportion to the lines above or below.
Just in case you’re ever on Jeopardy: Some postulate this type of chart came from a well known rice trader in
1700s Japan and, in homage, a few purists insist on calling them “Japanese candlesticks.” Candlesticks create
more than 40 recognized patterns, some of which we will cover in a later chapter.
6.1 The Efficient Market Hypothesis
Before opening an account or even clicking a mouse, traders need to do some thinking about a little morsel of
Economics 101 that most of us probably haven’t thought of since called the Efficient Market Hypothesis. The Big
Idea is that the participants in any market price in all known information about the security being traded.
It sure sounds pretty good. History seems to bear it out, too: One need look no further than the (often) significant
price swings that occur when new information, such as an earnings report, is released. Chipotle battles an E. coli
outbreak and its share price plummets. Another big company might announce layoffs that investors cheer by
bidding up the price on the notion that cost savings will increase profitability. And so on. But there is, to be sure,
a limit to how far the Efficient Market Hypothesis can go.
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Assume Company A and Company B both have equal revenue and earnings. They might even pay the same
dividend and have similar balance sheets. But the value of these companies will not only change, it can vary
hugely, because no two companies are exactly the same so straight apples-to-apples comparisons are simply
impossible. The best we can say is that they are pretty close, which, in reality, might not be close at all.
Another part of the pricing difference is simply chronology — time. As time passes, more is revealed about a
company, its results and other industry dynamics. But a larger element of that pricing difference will stem from
the fact that investors do not always act in their ultimate best interest.
To put it another way, investors sometimes make irrational decisions based on impulse, instinct or emotion. The
Efficient Market Hypothesis is, thus, mortally flawed. If it were true, there would be no need for exchanges —
buyers and sellers wouldn’t set prices, prices would instead be determined by algorithm, not double-blind auction
haggling.
The point bears repeating: Investors do not always act in their own best interest. Even if they did, that interest
and the factors that comprise it change so often that said interest is rendered moot. If the Efficient Market
Hypothesis is correct, it is only correct in the long term. In the short term, traders tend to overreact. No one –
well, very few, anyway – ever went broke underestimating the myopia of the short-term market. It is those
fluctuations that Mr. Morgan noted that traders are betting on.
The question becomes, then, what approach is best used in the trading of crytocurrency? Most investors start
with fundamental analysis — the deliberate process of studying and comparing a company’s financial
underpinnings. This is counter to the Efficient Market perspective: Investors are studying known information that
all market participants have immediate access to.
In the information age, the idea that one lone analyst could stumble upon some heretofore unconsidered or
unrealized fact is outright silly. But for the sake of argument let us assume that fundamental analysis, which wisely
rejects the Efficient Market Hypothesis, is as sacrosanct as holy scripture. The trouble is, there is no fundamental
analysis to crytocurrency. There are precisely zero fundamentals to assess.
Market participants only know how many bitcoins there are and what the market says they are worth at any given
instant. That leaves traders with only one source of hard data to go on, bitcoin pricing. The only logical approach
to bitcoin trading, thus, is technical analysis, which eschews all information about a company except for price. It
is pure trading.
Okay, so that was kind of a lecture. Let’s get down to brass tacks. The market is always right, but not always in
the short term. It tends to overreact. In the short term, it’s a ballot box – prices swing like a politician’s approval
numbers – over the long term, though, it’s a scale that weighs results. In the meantime? Utter pandemonium. A
perfect place to trade.
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6.2 Technical Trading’s Potential
Technical trading not only offers a simplified approach to investing, it also has far greater return potential than
simply buying and holding. Now, to be sure, the buy-and-hold strategy does works Over time, the potential for
capturing strong gains on your money using this method is, in fact, not only very strong but statistically likely.
A dispassionate assessment of the U.S. stock market, for example, shows that from 1965 through 2015, the
Standard & Poor’s 500 Index returned an average annual gain of 11.1%. This equates to a compound annual
growth rate of 9.5%, which includes the reinvestment of all dividends.
At this rate of growth, an invest’s value doubles roughly every 7.5 years. This is easy to calculate: If you divide
any rate of return into the number 72, the result will be the number of years it takes for the investment’s principal
to double. This is known as the Rule of 72.
That’s good. But the good is always the enemy of the great. So while a 9.5% compound annual return is pretty
good, there’s no reason to settle for that when outright great is within reach. Consider: If you execute 26 trades
in one year that return an average of just 1.25%, you will achieve a nearly fourfold rate of return. That’s because
the math doesn’t work out to 1.25% times 26 times initial principal.
Rather, it works out to 38.5% a year – nearly FOUR times what can rationally be expected of the market. That’s a
great return. Even assuming one could capture (only) a gain 25% is still a reasonable annual, the result. After five
years, it’s truly remarkable: The stock market as measured by the S&P 500 Index likely would earn what it has
always earned, about 9.5%. In five years, $10,000 would grow to roughly $15,000. But even modestly successful
trading turns that same ten grand Into more than $30,000!
It’s no sin to play with the numbers from there. For instance, merely upping average gain to 1.30% moves the
needle to a 40% annual return. And achieving that only requires that a trader achieves a net success rate of 1.25%
every two weeks. Is this possible? Absolutely. Just ask the trading desks at the major financial houses like Goldman
Sachs and Renaissance Technologies.
At the end of the day, it really doesn’t matter at all what is being bought and sold by whom or for what reason.
That’s for the fundamental investors, who prefer the long-term buy-and-hold approach. All that matters to a
technical investor is there is trading. Once there’s a chart, there’s a trade to be made.
6.3 Introduction to Short Selling
The first step to understanding pure trading is to wrap your arms around a concept you might have heard before
known as “short selling.”
For most investors — for lack of a better term the “buy and hold” stock-market crowd — investing means buying
something. The idea is easy enough to understand: Bob buys 100 shares of General Electric because he thinks
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the price of the company’s shares will rise, for whatever reason. In the best-case scenario, Bob buys his GE shares
for a lower price than he later sells.
The difference between the price he paid and the price he sold for is profit. Buy low, sell high. We’ve all heard it
before. To be clear, it is a failsafe way to make money in the market. But — and this is a biggie — there is no rule
on this good earth that says an investor has to take those two steps in any particular order.
What in the world does that mean? To be sure, it can be a little counterintuitive until you get the gist. But stick
with it, because this is a vital concept for ALL successful traders.
If the way an investor “bets” on a price increase is to buy low and sell high, then it follows logically that the way
an investors bets on a price DECREASE is the opposite, to sell high and buy low — in other words, to take the
steps backward.
If one wants to bet on IBM rising, one might elect to buy the shares to attempt to capture a profit. If one wants
to bet on the price falling, then one has to sell. The obvious question is how an investor can legitimately sell what
he does not own. And the answer is easy — the investor simply borrows it.
To bet on a price drop, that is, to “short” a security, an investors borrows a quantity and immediately resells it. If
Frank thinks 3M is going to fall, he shorts the shares. Say they are at $150. Frank borrows 100 shares and sells
them at that price. His account shows a credit balance of $15,000. How much does Frank owe his broker?
If you said $15,000, you’re wrong. Frank did not borrow money. He borrowed shares, and it is shares that he must
return. (This the adage: He that sells what isn’t his’n/ buys it back, or goes to prison.”
At this point two things can happen. Either the stock can rise, forcing Frank to buy it back for more money than
he paid, or the price falls, and he can buy it for less. If the price drops to $140, Frank the seller will clear $10 a
share from the decline, just as a buyer would pocket the same sawbuck if the price were to rise the same amount.
Frank sold high and bought low. No one ever went broke making that trade. (Certainly not the brokerage, which
gets a nice fee.)
Short selling assures market liquidity. Liquidity is vital to any market, which must have both buyers and sellers to
function. The broader point, of course, is that a savvy trader can make money in any market as long as there is
immediate transparent pricing. Here’s the key takeaway once you understand and embrace shorting: Prices don’t
need to trend up or down for traders to make money, prices just have to move.
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6.4 Support and Resistance
Charts and the patterns that you can discern will put all buying and selling into perspective by merging the forces
of supply and demand into a simple line on a graph. Patterns provide a framework to analyze the constant tug
of war between the bulls and the bears.
The first concept is the twofold idea of “support” and “resistance.” Support is the basement price that’s so low it
attracts buying. As more buy, demand rises and so does price. A jillion factors might go into the reasoning behind
these trades, but all technical traders are interested in and focused on is the price.
Resistance is the opposite. It’s the price that investors just won’t pay. Lilly might be willing to pay $49.95 for a
share of Facebook, but she just won’t pay $50. Again, there’s no reason to speculate as to the reason.
The point is simply to realize that everything can become too expensive, at which point other owners might
decide to sell and take their profits. When this happens in sufficient quantity, the additional supply has the
opposite effect of demand and lowers the price. As a technical trader, you need know only that prices tend to
float between their support and resistance levels.
6.5 Trend lines
Chart pattern analysis can be used to make short-term or long-term forecasts. The data can be intraday, daily,
weekly or monthly and the patterns can be as short as one day or as long as many years. Gaps and outside
reversals may form in one trading session, while broadening tops and dormant bottoms may require many
months to form.
Technical trading entered the investment conscience in the early part of the 1930s, which was a period of massive
legal transition on Wall Street. The 1929 Crash had not only caused the Great Depression, it had also ushered in
a new era of securities laws designed to foster fair markets.
Believe it or not, most of the rules that your broker and Wall Street have to follow were devised before most of
them were even born. In 1932, Richard Schabacker published Technical Analysis and Stock Market Profits, which
established much of the foundations for pattern analysis as we know it today. In the book, thought, Schabacker
is quick to issue a warning:
The science of chart reading, however, is not as easy as the mere memorizing of certain patterns and pictures
and recalling what they generally forecast. Any general stock chart is a combination of countless different
patterns and its accurate analysis depends upon constant study, long experience and knowledge of all the fine
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points, both technical and fundamental, and, above all, the ability to weigh opposing indications against each
other, to appraise the entire picture in the light of its most minute and composite details as well as in the
recognition of any certain and memorized formula.
Schabacker unambiguously characterizes chart reading as science. But it there is also a degree of artistry to it.
One must also acknowledge that pattern recognition is open to interpretation and thus subject to personal bias.
Defending against this means employing other aspects of technical analysis. Think of it as the Island Rule: No
number stands alone. Any price, ratio or other metric is useful only in the context of rational comparison. No
number on Wall Street can be taken purely at face value. It must be contextualized.
No information, even price, exists wholly in a vacuum. With a nod to the Efficient Market Hypothesis, which,
though flawed, can be instructive. The trick is to assess all available data to verify or refute the investment case
being considered. Are the conclusions accurate? Check and double check.
No one can see every pattern, no one can predict the future precisely. So bear in mind that while many patterns
may seem similar, none are exactly alike. False breakouts, inaccurate reads and, to be sure, exceptions to the rule
are all part of technical trading.
6.6 Thinking Like a Chartist
Imagine a line on a graph tilted upward fairly steeply, say 45%. This is the (hypothetical) price chart for Wimpy’s
Hamburgers. Let’s consider how a normal fundamental market analyst would approach this image to make a
buy/sell decision.
The uninterpreted upward slope of the price chart betokens a very successful and rapidly expanding enterprise:
Quarterly results continue to impress. The growth strategy is strong, the market is deep, and the company’s
outstanding products give it a sustainable competitive advantage over its rivals. A fundamental analyst is likely
to issue a “buy” recommendation, and perhaps even a strong buy recommendation, based on the company’s
past performance. You don’t need a Ph.D from the Wharton School of Business to get the concept here:
The analyst simply looks at the past results, determines their compound growth rate, which she will discount a
little in the name of prudence and to make up for real-w unknowable like supply-chain interruption or currency
fluctuation. The result of this analysis is nothing more complicated than a line. The thinking is simple: If the price
is X today and one can rationally count on 8% annual earnings growth, then future price is the solvable variable
in a fairly simple equation.
“If the price is $40 today,” the analyst would say, “It is reasonable to assume, given current industry trends and
the company’s history of financial performance, that the shares should reach $52.50 in the next 12 months,
exceeding the expected likely return of the broader market.”
To be sure, it is a defensible position. And one to which a chartist would reply, “You sir, are completely out of
your head.” How can our polite chartist assert this bold claim? Math.
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The same arithmetic that the analyst used to predict a future price can also point to a different conclusion. While
the line on the chart represents price, the bottom axis of the chart shows a far more important variable — the
passage of time.
Newton’s law of motion states that an object in motion tends to remain in motion unless acted on by an outside
force. In other words, a thing will move at a certain rate indefinitely unless Something Happens. And this is where
the Island Rule comes into play. The price chart over any period of time must be compared to another price chart
for the same period.
And while our theoretical Wimpy’s Hamburgers saw its example price only rise, this phenomenon has not
occurred in real life. Prices might move in an upward direction during a period, but they will decline along the
way as well. Our chartist is merely employing some simple but very sound coin-flip statistics: The penny will land
on heads eventually. As the sample size increases, the data will show the odds of heads and tails is perfectly even.
That’s the math when there are two outcomes.
In the market, of course, there are an infinite number of outcomes. A wiseacre might say that all probabilities are
50-50 — either a thing will happen or it won’t. A chartist will take exception with that line of thinking. He will
endeavor to use math to process past results to narrow the odds. Assume instead of a wager over two outcomes,
heads or tails, two parties agree to bet on the outcome of the Standard & Poor’s 500 Index — whether it will
exceed its average annual return for the next year. Each party has only a list of the index’s past performance and
no other information.
The wiseacre assesses these odds at 50-50. His prospect is for a gain or loss of 100% — just another pure risk
game. He’s not looking at his real chances. In fact, the only actually reliable predictor of his choice is his last bet.
The chartist takes a more prudent approach. He first determines the market’s average annual return — the
arithmetic mean. That’s easy enough: Add the values and divide by their total number. The more values, the
better (that is, the more accurate) the average. This offers a rational point of comparison — par, to borrow a term
from golf. Those values, o course, will vary, in this case from year to year rather than from hole to hole.
With that variance from the norm in mind, the chartist literally measures by exactly how much they vary each
year. It turns out this makes even random events relatively predictable. Statistics show that about two-thirds of
all outcomes in a random series occur within a certain range of the average.
This is called standard deviation, or “sigma,” and it is expressed as a unit of measure, as though on a graph. So
instead of saying the odds are 50-50, the chartist can now go a little further and say that in nearly seven years in
10, the S&P will return within one sigma of the median return.
That average, incidentally, is 11.1% (using data from 1965 to 2015). The crux of the decision comes in determining
whether it is likely that the index will exceed its average. Here again, the chartist will refer to the historical data:
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For instance, if the previous two years were “up” years for the market, during which they exceeded their historical
average return, the chartist would then make a list of what happened in the third year.
If it can be said that in every instance after which the market rallied for two years it failed to meet its historical
average, the odds of a correct prediction have increased significantly, and the only question left for the respective
bettors is how much they are willing to risk given the odds they have calculated for their potential success.
Regression analysis requires serious computation but the takeaway is simply this: Most outcomes will be average.
So by looking at what happened last time, it is possible to gain a significant advantage in predicting what’s going
to happen next time. It’s not infallible, but you can use the power of pattern recognition and statistical analysis
to stack the odds in your favor.
The fundamental analyst sees this a clear buy. The chartist could not find a stronger sell signal. They both can be
successful — it all depends on the time frame of the trade. It may well be that the long-term holder achieves a
favorable or in fact even an equal result.
Fundamental versus technical is simply a matter of intellectual perspective, a question of methodology. Though
Benjamin Graham, the father of fundamental analysis and mentor to Warren Buffett, sniffed at trading as more
speculation and somehow inferior to his incessant prattle about ratios and percentages. It isn’t. There is nothing
wrong with trading. If you wish to denote a difference between trading (or, scandalously, “speculating”) and
investing, that’s up to you.
6.7 Restate and Review
1. Begin with an examination of long-term charts. Don’t listen to anyone else, don’t accept another’s chart
without doing your own. Start your analysis with monthly then weekly charts, and keep the long perspective –
years. Your GPS shows you the next street, sure, but you have to keep the overall map in mind. Overall, the
market extends you more visibility with the longer-term perspective you embrace. After you feel comfortable
with the macro, then you’re ready to begin trading in the micro. Daily and intraday charts come into play here.
Remember, the short-term view can be deceptive.
2. Follow the trend. Maybe it’s a long-term trend, it might well be a very short term trend. Determine which you
wish to trade and equip yourself with the right chart to guide a prudent decisions. As an example, buy dips if the
trend is up. Sell rallies if the trend is negative. Intermediate trends mandate daily and weekly charts. Daily trades
use daily or intraday charts. Either way, don’t lose sight of the long-term trend you identify. Don’t forget. Don’t
fight it, and don’t force it.
3. No matter which time frame you select, determine support and resistance. This is common sense and a little
counterintuitive at the same time – the best plan is to buy at support and sell near resistance. BUT – please,
please remember this – NO ONE, NO ONE, NO ONE can buy at every bottom and sell at every top. Remember
the old Wall Street saying: Bulls make money, bears make money – and pigs get slaughtered!
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4. Draw trend lines on your chart. They’re simple but effective, and all that’s needed are a ruler and two points
on a chart. “Up” trend lines are drawn along two successive lows.
“Down” trend lines are drawn along two successive highs. Prices often tend to pull back to the trend line before
resuming their trend. Breaking trend lines often typify a trend change. The longer a trend line has existed, the
more ties it has been tested and the more critical it becomes as a predictive tool.
5. Moving averages are your friend. They can provide objective buy/sell signals. They can show you if the trend
you perceived is still in play. That’s the good news. The bad is they can’t tell you in advance if a trend is about to
change. Here again we run into the context problem and need to seek out a little more data to make the picture
more clear:
A combo-pinch of two moving averages is a popular way to ascertain trading signals. Try looking at the 4- and
9-day moving averages, the 9- and 18-day, and the 5- and 20-day. How to spot this signal? It’s when the shorter
average line crosses the longer. These so-called “price crossings” – either above or below a 40-day moving
average – are a strong trading signal.
6. Never ignore volume – it’s a strong confirming indicator. Volume trumps price. During an uptrend, expect to
see strong volume on up days. Increasingly strong volume double checks new money is supporting the prevailing
trend. Falling colume can indicate a trend is at its ebb. Takeway: A solid price uptrend should always be
accompanied by rising volume.
6.8 How To Read a Chart
Chart Identification. Every chart will have one, and you want to make sure you know exactly what you are
looking at. For this you will need to not only need to know the name of what you are looking at but you should
double-check that the ticker symbol, which most charts rely on to some degree, is both accurate and what you
are looking for.
This might seem obvious, but everyone has made a trade based on the wrong chart – it just happens, and the
results can be an unwelcome gut punch.
Time Period. It is ALWAYS the x-axis. For those of you who haven’t thought of the classic mathematical quadrant
since Adlai Stevenson was running for president, that’s the horizontal line on the chart. Again, this might seem
like a dumb thing to point out, but the fact is a trader might look at 25 charts of the same underlying security
and the time period is the most important immediate contextualization factor. Always look. Remember the old
newspaper editor’s motto:
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“If your mother says she loves you, check it out.” Don’t assume anything and take nothing for granted. Double-
and triple-check with your eyes wide open.
Daily Trade Range. The price charts you are probably used to are lines made up of connected dots that generally
represent the closing or intraday prices of whatever is being traded. Technical traders demand more data than
that. In lieu of a dot, they use a series of vertical lines called Candlesticks, which we mentioned earlier.
Again, the top point of the line is the high price the security reached that day. The bottom point is the low, and
the open and close are hash marks on the line somewhere between. You will want to carefully review how your
trading platform displays these and what the color scheme represents.
Volume. This one comes last but it is really not least, because volume – the number of units being traded – is of
prime importance to the technical trader. Volume is displayed below the chart as a bar graph, the higher the bar,
the greater the volume. Sometimes the bars are color-coded, with red indicating a down close from the previous.
Generally a red line runs through the bar graph showing an average figure.
6.9 Common Chart Lines
If you’ve been trading stocks, you’ve likely been primarily considered with only one real line on the chart – the
price. But there can be many others, and they all offer their own insights. While professional trading software can
have hundreds of graphical options, we’ll get you started with the ones that are readily available, and free, at
Google Finance.
Be sure you are using the most current version of your browser, with Flash and Java enabled and updated. Note:
These charts will literally just stop working and not show up on your screen if you don’t do this. Setting your
operating system to automatically search for and install these crucial software upgrades is a prudent move. And
it bears repeating that you want to be running the most robust anti-virus software available.
6.9.1 Simple Moving Average
An arithmetic moving average is computed by adding the daily closing price for a number of time periods, then
dividing that figure by the number of time periods. A 10-day moving average would show the 10 most recent
daily closes. After 10 dyas, that is, on the eleventh day, the first closing price in the series is deleted, No. 2 slides
up to the No. 1 spot and the new close is added in the tenth place to recalculate the “running average.”
Critical takeaway: Moving averages smooth out daily volatility.
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6.9.2 Exponential Moving Average
It’s like a simple moving average, but it puts greater weight on the most recent days. That’s the concept – don’t
overthink it. And frankly, the math here, while not difficult, looks like something that they dug out of the wreckage
at Area 51.
Just for fun, here’s the Formula:
EMA [today’s] = (Price [today] times K) divided by (EMA [yesterday’s] times (1 - K))
In which:
K = 2 ÷ (N + 1)
N = the length in days of the EMA
Price [today] = the current close
EMA [yesterday] = the previous EMA figure
EMA [today] = the current EMA figure
Begin by creating either a simple average of the first fixed number (that is, “N”) of periods and use that value to
initiate the EMA calculation, OR use the first data point (the closing price) as the seed and calculate EMA from
that point forward. Or for God’s sake let the microchips do their thing!
Critical takeaway: The idea behind “EMA” is to make sure one-day events don’t skew the average and point to a
trend that isn’t really occurring.
6.9.3 Moving Average Convergence/Divergence
Developed in the 1960s by Gerald Appel, MACD monitors trend momentum by comparing two moving price
averages. It is computing by subtracting the 26-day exponential moving average from the 12-day EMA. A third
element, the 9-day EMA of the MACD, known as the signal line, is drawn atop the MACD. Its reading is used to
discern buy/sell signals.
When a short-term average crosses ABOVE a longer one, traders perceive increasing upward price momentum.
It is a buy signal, one that shows, from the data, that prices are increasing at a faster rate in the now than they
have in the recent past. But remember our wise mathematican friend Carl Jacobi, who tells us: “Invert! Always
invert!” And in this case, happily, that works. When a short-term moving average crosses BELOW the longer-term
average, the opposite is trye and prices have begun to move downward at a faster rate in the now than in the
recent past – a classic sell signal.
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Again, you don’t have to do this math. The chart will do it for you.
Critical Takeaway: This is used for short-term holding periods.
6.9.4 KDJ Indicator
Here’s something to love about financial writing. Be prepared, it’s a grabber. “The KDJ indicator is actually a
derived form of the Stochastic with the only difference being an extra line called the J line. The J line represents
the divergence of the %D value from the %K.”
So: Yikes. That is a mouthful. Learning any new language is difficult, so let’s break this down one morsel at a
time so we don’t choke on the geekiness.
Stochastic describes the random-yet-predictable nature of the stock market. On any given day, or at any given
second, anyone who tells you he can predict anything in the immediate short term is likely full of balloon juice
and/or trying to sell you something of dubious value.
That said, using the immutable laws of statistics – the arithmetic mean, standard error and standard deviation,
all covered in the first week of the intro freshman course – we can say that in roughly two-thirds of all outcomes
the annual performance of the S&P 500 will be within one sigma of the historical average annual return (1965-
2015) of 11.1%. If you know the value of sigma, the greek for standard deviation, then you can give a reasonable
prediction of the market’s likely range in fully two-thirds of all years. So stochastic means simultaneously random
but also statistically predictable.
Divergent just means separated in two directions. How far they diverge is what is being measured by the J line,
which compares the distance of the %D value from the %K.
%D Value is the Moving Average times the %K Value.
%K Value is 100 times (Close-Lowest Low [of last “n” periods]) / (Highest High [of last “n” periods] – LowestLow
[of last “n” periods])
Here’s how it works In Real Life: When the oscillator exceeds 80, the security (in this case the currency) is
considered overbought. When it goes down to 20, the security is said to be oversold. So the “buy” signal flashes
when the J line goes under 0 when K and J are in oversold territory. The “sell” signal goes on when J line goes
above 100 when K and J are overbought.
Critical Takeaway: Most of the time what you’re going to see is a value between 20 and 80 which indicates the
market conditions are effectively neutral. This indicator moves pretty slowly and as such is sometimes thought
of as a lagging indicator.
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6.9.5 Bollinger Bands
Bollinger Bands are a visual representation of price volatility, and this is a nifty indicator for newbies to embrace.
The bands are drawn above and below a 20-day simple moving average. They constantly measure standard
deviation, which moves as volatility rises or falls. The outer bands are set two sigmas — or standard deviations
— above and below the middle band. They widen as volatility increases and narrow when volatility goes down.
John Bollinger contends his namesake bands should contain 88% to 89% of overall price action, so a move
OUTSIDE these bands is meaningful — but still far from guaranteed!
Critical takeaway: With Bollinger bands, prices are thought to be relatively high when they rise above the upper
band. On the flip side, prices are thought to be relatively low when they fall below the lower band.
6.9.6 Relative Strength Index
In his 1978 book New Concepts for Technical Trading Systems, Welles Wilder introduced a momentum oscillator
that measures the velocity and change of prices. The RSI is a scale between 0 and 100. When RSI exceeds 70, the
security is deemed overbought (and it’s time to sell). If RSI drops below 30, the security is thought to be oversold,
which means it’s time to buy. It’s a simple scale that’s easy to use and is very popular with trading newcomers
and pros.
The formula for this one is easy:
RSI = 100 – (100 / 1+ RS) when RS = Average Gain / Average Loss
The first calculations for average gain and average loss are simple 14 period averages. That just means you add
up all the gains for the past 14 days and average them, and then you do the same with the total losses for the
past 14 days. Then divide to determine RS. A cakewalk. Especially when you let the computer do it, even though
now you know how…
Critical takeaway: This is a good indicator to watch on its own – but try using it with other lines to double-check
a buy/sell signal.
6.9.7 Bias Ratio
This ratio is a relative newcomer to the technical space that dates to 2001, though it wasn’t publicly discussed
until 2004 and wasn’t published until 2006. It detects, well, bias, in the sense of price manipulation. It’s a concrete
metric that measures abnormalities in the distribution of returns that illuminates the presence of bias in pricing.
It works by comparing how far the returns are from an unbiased distribution.
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Critical takeaway: Though you shold be aware of it, this is not a tool that’s helpful with digital currency trading.
Since you had to read this, you’re entitled to a Fun Fact. This was how they got Bernie Madoff.
6.9.8 Williams % R
Properly said as “Williams Percent Range,” this is a oscillator that seeks to determine if a security is overbought
or oversold. Use the Williams Percent Range to set entry and exit points (that is, prices) as you trade. The range
works by comparing a closing price to the high-low range during a 14-day period. It was invented by a trading
expert named Larry Williams.
The formula:
%R = (Highest High – Closing Price) / (Highest High – Lowest Low) x - 100
Critical takeaway: Best used as a predictive indicator to signal an imminent market reversal at least a day or two
in the future.
6.9.9 Fast &Slow Stochastic Oscillator
George Lane came up with the stochastic oscillator in the 1950s. It shows the location of the closing price relative
to the high and low price range for a 14-day period. Lane’s contention was that – all other things being equal –
the speed of a price movement changes before the actual price does. The oscillator’s sensitivity can be turned
up or down by adjusting the time period OR by using a moving average of its reading.
The Formula: %K = 100(C - L14)/(H14 - L14)
Where C = the most recent closing price,
L14 = the low of the 14 previous trading sessions,
H14 = the highest price traded during the same 14-day period,
%K= the current market rate for the currency pair, and
%D = 3-period moving average of %K
Critical Takeaway: Readings above 80 indicate the security is at or near the top of its high-low range. Readings
below 20 are thought to signal the security is trading near the bottom of its high-low range.
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6.9.10 Volume Moving Average
Self-explanatory: A moving average to assess volume.
That concludes the major charting functions you will find on Google Finance. You have certainly earned a break!
If you are feeling lost or overwhelmed right now, don’t worry. That is perfectly normal. Technical trading is
complicated and, initially, isn’t always intuitive, especially to non-math folks. But it’s a skill that CAN be learned
and honed. Give yourself time.
There’s only so much you can glean by reading this or even memorizing it word for word – it’s something that
you will have to use and use a lot to become familiar with the nuances of each indicator. The best advice is to
practice, practice, practice. Use these tools until they become intuitive. No one starts out understanding how all
of this comes together. It is a multi-event mental gymnastics meet.
Don’t try to learn it all in one day. Be patient and keep studying. Grow comfortable using each of these indicators
on the target range before using live ammo.
Take a close look at the data and analytic tools available on the various trading platforms before you commit to
opening an account. Many will also offer additional learning opportunities, such as video tutorials, which
beginners simply cannot get enough of.
Now that we’ve covered the chart basics and a few of the analytical tools you are likely to encounter, let’s take a
look at some of the most common patterns you will run into as you learn to trade cryptocurrency.
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7.0 Introduction to Patterns
Past performance, says every financial disclaimer ever written, “is no guarantee of future results.” That’s true as
far as it goes, at least in the mind-numbingly dull prospectuses that investment companies must include with
any securities offering. Frankly, it’s a little disingenuous: No, there aren’t any guarantees. On the other hand, what
else is there to go on?
The human race has arrived at its present condition partly because of our brains’ ability to recognize patterns.
One can imagine it didn’t take too long for primitive man to notice that if someone got too close to, say, a
crocodile that he ran the risk of getting eaten. Or to notice that the possibility of rain increased greatly when it
was cloudy.
Even setting aside whatever debates exist in the area of evolutionary biology, think about taking a walk down a
busy street in an unfamiliar city. Your subconscious mind is constantly assessing all of the visual data so as to
glean whatever clues it can. If you’re skeptical of this, try an easy experiment: Walk 20 blocks concentrating only
on the faces you see. Before you make it from First Street to Third, it’s a safe bet you will spot someone who
looks like someone you know.
Your brain subconsciously compares every face you see to every face you have seen before, looking for someone
familiar. In a very short distance, you’re likely to see dozens of faces that bring to mind people you might not
have thought about in decades.
Another version of the same trick can be accomplished with a drive somewhere you’ve never been: Your attention
is heightened because you have a hard-wired desire not to get lost. Your eyes sharpen as your grey matter
switches into ultra-high definition: That’s why you generally can find your way back in reverse so naturally —
pattern recognition and your homing instinct are two sides of the same coin.
To put it another way, you don’t notice things like the billboards along the route you take to your dry cleaner —
unless there’s a new one that interrupts the pattern. But when you’re on the road, your mind will actively seek as
much information as possible. You’ll find yourself reading billboards out of your peripheral vision, with your brain
filing all that visual data for future comparisons. With practice, you can harness and hone this ability to train
yourself to heighten your observations any time you like.
In the market, the price charts of securities are chock full of all sorts of patterns. To varying degree, these patterns
can be predictive of future outcomes. After you’ve introduced your brain to some of the most common chart
patterns, you will find that you have a surprising ability to pick up on what has happened, compare it to what
you know has happened in the past, and use it as a guide to predict the future. It’s not infallible, but the more
you study patterns and the more charts you look at, the better you will become at recognizing them reflexively,
by instinct.
This cerebral ability can keep your safe, help you find your way, allow you to recognize people you know (or
notice their doppelgänger) and, in the financial context, to give you an edge as you process the nearly infinite
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stream of data you can glean from thousands of charts. Past performance is no guarantee of future results. But
it can still give you a powerful advantage to engineer profitable trades.
One caveat, though — another morsel of trivia from the world of cranial geography. The same part of the brain
that gives you an mental jolt or even a mental high from the prospect of financial reward (called the nucleus
acumbens) is the same part of the brain that lights up when one uses drugs like cocaine.
It turns out the brain likes and indeed craves the endorphin rush that accompanies financial gain. That’s why you
feel elated when you chance to find a five-dollar bill in the pocket of a jacket you haven’t worn in a while. It’s
just a lousy five bucks; hardly enough for a respectable latte, but it still jazzes you up. So you have to be prepared
to go into your trading mindset with eyes wide open and your thinking as clear as possible.
Yes, your brain is great at pattern recognition. But it also likes the prospect of the neurochemical surge that
accompanies monetary gain. That’s why smart traders train themselves to use as many analytical tools, such as
the various chart lines we covered earlier, to guard against false positives. In other words, never allow your brain
persuade you into forcing a pattern on a chart that’s not really there. Remember: The people you see in San
Francisco who look familiar usually aren’t really the same folks you know back home in Scarsdale. They just look
like it. So stay sharp, stay vigilant and stay close to the data that can help guide you.
Here are some of the common patterns you should be able to recognize as a successful cryptocurrency trader…
7.1 Candlestick Patterns
•Big Black Candle. Long black body with a wide high-low range. Price opens near the high and closes near the
low. BEARISH.
•Big White Candle Long white body with a high-low range. Price opens near the low and closes near the high.
BULLISH.
•Black Body When open is higher than the close.
•White Body. Close higher than the open. BULLISH.
•Hangman. Black or white candlestick with a small body near the day’s high with little or no upper shadow and
a long lower shadow — two to three times the body’s length. If it occurs during an uptrend, it’s a BEARISH
pattern.
•Shooting Star. Small black or white body with a long upper shadow and little or no tail. During an uptrend, it’s
BEARISH.
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•Hammer. Black or white candlestick with a small body near the high, no or very little upper shadow and a long
tail. When the hammer appears during a downtrend, it’s BULLISH.
•Inverted Black Hammer. Black body in an upside-down hammer position. A reversal signal.
•Long Lower Shadow. A black or white body with a lower shadow that’s at least two-thirds of the candlestick’s
length. When this pattern shows up near support, it’s said to be BULLISH.
•Long Upper Shadow. Black or a white candlestick whose upper shadow is at least two-thirds the length of the
body's. At resistance, it’s BEARISH.
•Marubozu. A black or white body without a tail or shadow — the highs and lows are the open and close.
Indicates continuation.
•Spinning Top. Small black or white candlestick. Shadows range in length. On its own, the Top’s a neutral
indicator, but it’s a critical element of other patterns.
•Shaved Bottom. Black or a white tailless body
•Shaved Head. Black or white candlestick without an upper shadow.
•Doji. When the open and close are very close. Shadow lengths vary.
•Dragonfly Doji. The open and close occur at the highest of the day. A long lower shadow is BULLISH. If the
dragonfly appears at the bottom of the market it is said to signal a reversal.
•Gravestone Doji. Open and close are at the low for the day. A long upper shadow is BEARISH. If the gravestone
costs at the market top it’s thought to signal a reversal.
•Long-Legged Doji A Doji with two long shadows, upper and lower. Neither bullish nor bearish.
•Bearish Harami. Unusually long white candlestick followed by a small black body contained within the large
white body. BEARISH if it comes on the heels of an uptrend.
•Bearish Harami Cross. Large white body followed by a doji. A reversal signal that appears at the top.
•The Bullish Harami. An atypically long black body followed by a small white candle contained within large
black body. BULLISH if preceded by a downtrend.
•Dark Cloud Cover. Long white candlestick followed by a black candlestick that opens above the white candle’s
high AND closes in the white candle’s body. During an uptrend, it’s a BEARISH REVERSAL.
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•Engulfing Bear Line. Small white body contained within the following large black candlestick. If it happens at
the top it’s a strong reversal signal.
.
•Engulfing Bull. Small black candle contained within the following large white body. A major reversal signal
when it occurs at the bottom.
•Neckline. Black candle followed by a small white one with a close near the low of the black candle before it.
Occurs in a downtrend. BEARISH when the white’s low is penetrated.
•Three White Soldiers. Three long white candlesticks with progressively higher closes near or at their highs.
When it appears at bottom it is interpreted as a bottom reversal signal.
•Three Black Crows. Three long black candlesticks, each with a lower close, near or at their lows. When it appears
at top it is considered as a top reversal signal.
•Evening Star A large white body followed by a small body in black OR white that gaps above the previous
candle. The third is a black-body candlestick that closes well within the large white body. It is considered as a
reversal signal when it appears at top level.
•Evening Doji Star. A three-day pattern that begins with a large white body, then a Doji that gaps above the
white body. The final element is a black body with a close into the white body. More bearish than the Evening
Star. If it appears at the top, it indicates a reversal.
•Morning Doji Star. A large black candlestick followed by a Doji that happened below the preceding candlestick.
On the following day, a third white candlestick is formed with a price close well into the black candlestick before
the Doji. A major reversal signal. BULLISH.
•Morning Star, A large black candlestick followed by a small body (black or white) that appeared below the
large black candlestick. On the next day, a third white candlestick forms with a close into the black candlestick.
Considered a strong reversal signal when it appears at bottom.
Now it’s time to test your knowledge. Grab some index cards and draw each candlestick pattern on one side and
the name on the other. Double check these flashcards against the user key below. Don’t cheat – getting these
down cold can help make you money! Practice until you’re proficient, including as to whether the pattern is
bullish or bearish, then start looking for these patterns – and using the software to identify them.
Do be aware, however, that different trading platforms will have different and fairly subjective criteria about the
definitions, so be sure to check. (For instance, what is the cutoff point for a long, normal and short bodied-
candlestick? While you can eyeball it, a computer needs a set of rules.)
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NOTE: While anyone can take advantage of a bullish signal by buying, the only way to profit from a bearish signal
is to short. If you glossed over short selling in the earlier section, please take a moment to go back and review it,
and endeavor to ask your broker about a margin account.
7.2 Gaps
This is one of the easiest patterns to spot, so it’s a great pattern for new traders to keep their eyes peeled for.
Gaps happen when a security opens trading much higher or lower than its closing price the day before. Higher
gaps can indicate a new support level (a buying opportunity).
If the gap is lower, it signals a new resistance line. In both cases, conventional wisdom — that is, the conclusion
drawn by observing this phenomenon (this pattern) — holds that traders can assume the trend will persist in the
gap’s direction.
While technical traders might not even concern themselves with the specifics of why a patterns emerges on the
chart, gaps are typically caused by news events that occurred after the close of the previous day. Good news
tends to create higher gaps, and bad news leads to lower one.
Winner’s Tip: Gaps usually happen on atypically heavy volume. If a gap appears without significant trading
activity, be suspicious. If the volume is there, though, the trend is likely to continue until the priceline falls below
the opening price that initiated the gap.
Thinking Things Over: While gaps are an easy pattern to spot, tey might be more of a mental exercise for
cryptocurrency traders. That’s not because news doesn’t move the bitcoin and altcoin markets — it absolutely
does. The reason is that there has to be a pause in trading created by the end of a regular trading session for a
gap to emerge. As many crypto exchanges operate 24/7, gaps tend to be rare and only appear when some major
unexpected news event occurs.
7.3 Head and Shoulders
This one is a little more complex because it requires four distinct points: two shoulders, the head and the neckline.
And it’s worth noting that some people will not naturally “see” (or perceive) the literal head and shoulders, just
as some people can’t see the mythical figures created by the stars that make up the night sky’s constellations.
Software can be a big help in spotting patterns —
A head and shoulder forms when a previously identified uptrend reaches a new high, which establishes the LEFT
“shoulder.” From there, the price falls but then rises again to a second new high. That’s the “head.” Next follows
a price drop that honors the initial sell off from the left shoulder. The next step is another uptick, which matches
the initial high that set the RIGHT shoulder. When the priceline breaks the neckline, the pattern has run its course
and prices move back lower.
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Winner’s Tip: Head and shoulders marks a top (a sell sign) and simultaneously illuminates a downside price —
helpfully providing both the entry and exit point for the trade.
Thinking Things Over: The above description is for a head and shoulders TOP, but the pattern also works in
reverse in what is known as the “Inverse Head and Shoulders.” Pretend it’s Opposite Day and try your hand at
reversing the pattern!
7.4 The Triple Top
If head and shoulders seems hard to spot, a sort of subspecies might be more to your liking – the Triple Top. It
is a type of pattern that is sometimes called a reversal indicator: It marks an imminent change in the priceline’s
direction.
At the crux of this pattern is the idea of resistance – the point on the graph at which the market loses its
enthusiasm for a stock that has otherwise been uptrending. Once the same (or very close) high has been reached
for the third time, adherents to this pattern assume that a third reversal is in the offing and they sell (or “short”)
the shares.
It’s another chart that also works in reverse as the Triple Bottom: Once the price reaches the same trough (or low,
or “support” line), traders assume the shares will bounce again, so they BUY.
Winner’s Tip: The Triple Top is best used when evaluating a longer term chart – months instead of weeks.
7.5 The Double Bottom and the Double Top
This is the Reader’s Digest Condensed Version of the Triple Bottom, and it tends to occur a little more frequently.
The second time the price hits a high or low is the entry point of this trade. After two highs, the move is to sell,
just as after the price reaches the same low twice it’s time to buy. And this leads us to an important side note.
Winner’s Tip: One of the sadder side notes in the financial world is the odd fact that massive lottery winners
tend to go broke – sometimes even after winning hundreds of millions of dollars. Evidently winners assume that
such a sum could never be exhausted, so they overspend on silly depreciating assets like a Rolls-Royce Phantom
in a different color for every day of the week.
Many also tend to invest their winnings not in something prudent, like tax-free municipal bonds, but instead in
ill-conceived high-risk “business” schemes that can turn a king’s ransom into a memory in short order rather than
provide a reliable income for the rest of their lives. Alas.
One financial planner took a unique approach to this phenomenon, and it’s an instructive story for us to consider
in the context of trading. Her idea was simple: She sent each of her clients a Powerball ticket when the jackpot
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reached some ridiculously huge dollar figure. She enclosed a letter wishing her clients luck – and suggesting that
each should write down exactly how they would spend the $500 million prize.
Now, every financial adviser on God’s green earth tries and tries and tries to persuade his or her clients to write
and adopt rational household budgets. And to a person, each adviser eventually realizes the futility of this
advice. The fact is, people hate budgets, and they hate them for one reason. Budgets are just Too Real. They hit
too close to home. Budgets force people to make difficult decisions with their finite resources. In this case,
though, the response to the free lottery ticket and the chance to do a half-billion dollars’ worth of fantasy
shopping elicited a massive response. Sure, her clients loved the free lottery ticket, but it turns out they loved
“spending” the money even more.
A familiar scenario began to repeat itself, with two critical things happening. First, most clients put some real
thought into what such a windfall would mean to their lives. Everyone’s first instinct was similar: They said they’d
build a mansion, take a trip around the world and pick up a few toys at the Ferrari dealership or Harry Winston.
But what surprised this financial adviser was how many soon discarded those ideas, realizing after they really
thought about it that they didn’t need a 40-room estate, a month at The Ranch at Rock Creek (just Google it) or
a diamond the size of a kiwifruit. Not only that, but scores of her clients started to call to ask her where and how
they should invest their fantasy winnings. It was a really smart way to teach a lot of good lessons that people
otherwise have a difficult time wrapping their arms around.
It’s difficult to look at your household budget because it means making decisions with limited resources and, for
most people, putting off their wants to take care of their needs. Writing a spending plan with no real budgetary
caps, on the other hand, freed people to do some out-of-the-box thinking.
The moral of this story is that every financial move requires planning, and that planning must be centered on a
stated, concrete goal. In the trading world, it is not particularly difficult to create a simple flow chart with if-then
scenarios that cover the potential outcomes of a given action.
To wit: If I enter a trade at this point, my goal is to capture X return and then to close the trade. That covers the
upside, which is, believe it or not, the harder part. The plan should also cover the downside, of course, and with
more complex trades it should also include risk mitigation strategies – beginning with a stop-loss to automatically
exit the position if losses reach a certain threshold and perhaps adding in more sophisticated hedges as you
grow comfortable with them. (Some of these are covered in the next section, which will introduce or reintroduce
you to derivatives.)
Always have a plan. That’s true for the Powerball jackpot. That’s true for a trip to the grocery store. And it’s
certainly true, prudent and wise for any trade executed by any trader. It’s a dirty little secret of the investing world
that success doesn’t require ESP or an MBA in mezzanine financing.
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Rather, the most important characteristic of successful investing, as with any contact sport, is simply to
understand the fundamentals. The second most important trait is discipline – sticking to your plan not only in
the sense of guarding against losses but in protecting gains from your own brain’s own hard wiring. The most
dangerous thing you as an investor can tell yourself is, “this time things are going to be different.” No. No! A
thousand times NO. The whole point of technical trading and the statistical applesauce behind it is that patterns
repeat. Things are not going to be different just because you have some winnings on the table. Most outcomes
are going to be average – in fact, you can count on the fact that half of all outcomes will be BELOW average.
Fully two-thirds of them will occur within a highly predictable distance of the median. We’ve covered that
arithmetic, but it bears repeating. Here endeth the lesson.
7.6 Saucers
This pattern mixes things up a little, perspective-wise. Instead of relying on certain price points, the saucer pattern
is based on three separate long-term price trends. The first trend is a pronounced downtrend, a steep slide. Next
comes a period of sideways movement, typically along the support line.
That’s followed by a new uptrend. The trick is to buy along the support line and wait for the uptrend to take hold,
then sell at a profit – and hopefully a predetermined one. This can be pretty tough for new traders when they
make a profitable trade: They are tempted to hang on to capture a few more shekels. The trouble is that they
often hang on not only after their gain has evaporated and even turns into a loss. Planning ahead is the best
course of action to prevent this mistake.
Winner’s tip: The saucer pattern is not a quick trade. Trends take time to emerge. While some technical
indicators might play out in the course of a day, this one easily could take a year. The other way that traders can
confirm this pattern is to pay close attention to volume. It should be fairly low during the sideways trend.
7.7 The T-30
Now that you have been introduced to five common technical chart patterns, it’s time to add another factor into
the mix — the trend lines we reviewed earlier. You had to have seen that coming, right? In the T-30, the T stands
for “tail,” which is trader slang for a price with a pronounced drop that hangs down below a certain point. In this
case, that point is the 30-day exponential moving average.
To spot this trend, you will need to set up a chart window that shows the security’s price, its EMA and, if possible,
the 200-day moving average. The buy signal is the price drop on heavier-than-usual volume. The position is held,
with the expectation that several sideways trading sessions are likely in the coming days before prices begin to
rise.
Winner’s Tip: You need not buy the bottom of this tail for the trade to work. In fact, it is crucial to bear in mind
that no trader can buy every bottom and sell every top. Technical trading is not a target shoot where the winner
has to hit the bulleye’s to win the Kewpie Doll, it’s more akin to a game of horseshoes or hand grenades:
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Close enough counts! With that in mind, it’s a smart idea to heed the experts, who recommend that traders wait
until late in the session to initiate this trade after the tail — or “hammer” — breaks through the 30-day EMA (or
even reaches as low as the 200-day moving average).
Bonus tip: Use the full power of your trading platform. This software is unbelievably useful, and most traders
miss out when they only learn a few of the possible functions. Almost every trading platform out there is packed
with various how-to’s and tutorials, so be sure to take full advantage.
Be prepared for the inescapable fact that technical charts and the computer screens they live on can look pretty
intimidating. That’s why we’ve gone to such lengths to explain what the most common tools can do. One thing
many traders do when they begin is to try to make the chart window a little more manageable visually by
removing some elements, and volume is too often a casualty. Do not make this mistake. Volume does make the
chart seem a little daunting, but you will get used to it, and it can and usually does provide extremely vital
information.
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8.0 Derivatives Though no one ever truly masters trading — it’s an art like medicine, not a science like engineering even despite
all the graphs — chart patterns are not the final element of your training. The last lessons before Pinocchio
becomes are Real Boy are about a special kind of trading called derivatives.
“Derivatives,” like standard deviation, might seem like Just a Little Too Much Math. Unfortunately, the math you
told your teachers you would never use in real life is vital to successful trading, and you’ll not only have to learn
some new calculations, you will need to fully embrace a new way of thinking. While it will be a mental stretch at
first, it’s a skill you can build with practice. To be honest, it’s actually kind of fun. And the upside can be insanely
lucrative.
The term “derivative” comes from a word that we actually hear once in a while, “derive.” It’s a verb that means to
come from. The value of a derivative is based on — that is, comes from — something else, generally the price of
a security.
According to the Web site Investopedia, a “security” is defined as a fungible, negotiable, financial instrument that
holds financial value. It represents an ownership position in a corporation, a creditor relationship with a borrower,
or the right to ownership.
As is typical with the financial industry, that definition is about as clear as mud. That’s the game, after all: To
couch the actual simplicity of Wall Street, where buyer meets seller and nothing more, into something
complicated and intimidating.
If the general public thought finance was easy, after all, then people wouldn’t pay brokers and analysts jillions of
dollars a year to explain something as simple as interest or dividends. Yet here we are. So let’s translate this into
something approximating actual spoken English.
“Fungible” just means one is as good as another. Every dollar is worth 100 cents, so each is as good as another,
at least for spending purpoes. (As opposed to, say, collecting.) That’s fungible. “Equal” works just fine, too:
Financially speaking, one share of Berkshire Hathaway might be worth more than $200,000 so ALL shares are
worth the same amount at any given nanosecond.
To put it a third way, all derivatives are uniform. They’re standardized. If they weren’t, trading really would be
impossibly complicated and more akin to the way collectors grade stamps than the way bankers count stacks of
fungible bills.
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“Negotiable” just means you can sell it. The Brooklyn Bridge is nonnegotiable. Your lawn mower is negotiable.
We can mutually agree to a price.
The rest of the definition spells out whether the asset in question is a stock, a bond or this new idea of “the right
to ownership.” That final one is a derivative. It’s simply a contract (a legally enforceable) agreement between
buyer and seller. The contract gives the buyer certain rights and also obligates the seller to certain responsibilities.
These contracts are referred to as “options,” as in what they give the owner.
8.1 Types of Options
Options come in two flavors, calls and puts.
A “call” option gives the owner the right to BUY a security — in this case, digital currency — at a preset price
(called the “strike”) for a specified period of time. A March IBM 200 call option would give its owner the right to
buy IBM at $200 per share — in 100 share lots — before the March expiration date. (These contracts are also
standardized and thus fungible and thus a security.)
The question you might be asking is why in the world anyone would want to do this — to buy the right to buy
something. Believe it or not, options are one thing on Wall Street that was not designed to make money. Rather,
the initial idea was to mitigate potential financial risk. Options got their start in the futures market as a way to
prevent people from LOSING money.
Imagine a large bakery, the kind that turns out loaves of bread by the tens of thousands every day. Put on your
businessperson’s hat or green eyeshade and think about the invoices that must pile up on the managers’ desks.
What are the big ones? Labor, to be sure. Certainly real estate and energy also, as well as inventory. Inventory is
not only the finished items on hand for sale to customers, it is also the total of the inputs stored for future
production.
At a bakery, one of the key supplies is flour, the price of which obviously is directly tied to its base commodity,
wheat. Though all prices fluctuate, commodity prices can swing widely and in a fairly short period of time. Why?
In the case of flour, the price will be affected by random (and rapidly changing) factors such as weather.
If a major thunderstorm produces hail that levels the wheat fields across a large slice of the Midwest, you can
bet that the massive destruction of supply will increase the price of wheat and everything made from it, and
possibly by a lot. This presents a significant business risk.
Assume a well managed bakery can operate at a 20% margin. Any increase in input prices must come directly
from that slack. A dramatic increase in price could imperil the business’s prospects of continuing as a going
concern, and a prudent business owner seeks a solution for how to protect against this potential spike in prices
and subsequent drain on earnings ability.
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How? There are at least three ways. The first is to go buy a farm and produce one’s own flour. That’s capital-
intensive, takes a lot of time and still doesn’t really solve the root problem — the weather could just as easily
destroy that field, too. The second alternative is to buy a futures contract that will entitle you to take delivery of
whatever commodity you require (or which you could sell to cover your increased costs).
This is a good, basic way to “hedge” a risk, to try to mitigate the potential for loss. But prepaying for wheat to
guard against an increase in price might not be feasible. So Wall Street, which is always there to help, came up
with another idea:
The bakery’s managers can buy the right to buy the wheat if and only if they decide it’s needed. There’s no legal
way out of a futures contract: One party pays money, another party delivers wheat (or buys an opposite contract
to “cover” it). With a call option, however, exercising your right as an owner is — wait for it — optional. The owner
can either use his purview or not.
Plus it’s pretty cheap. (We’ll get to why in a little bit.)
8.2 Time Value vs. Intrinsic Value
Options are priced according to an formula called Black-Sholes, then the market takes over and prices are set by
what buyers are willing to pay. The price of an option is composed of two elements, and it’s critical to understand
both.
The first element is intrinsic value. Intrinsic value is determined by calculating the difference between the market
price of the security and the strike price of the option.
Okay, so that was a mouthful. Let’s break it down.
Halliburton is trading at $50 a share. Frank owns a call option that gives him the right to buy the shares for $40.
That option, like all options, covers 100 shares of stock. Its intrinsic value is the market price minus the strike
price, or $50 - $40, which is $10.
The trouble is, though, that an option with $10 of intrinsic value generally will not sell for merely ten bucks. It will
sell for more. The reason? Time. The option is worth $10 worth of intrinsic at the moment — but there will be a
lot more moments in which that spread could widen. The price also could fall, of course, but Wall Street tends to
assign a premium to upside potential.
That additional prospective upside isn’t free, it must be paid for. And this is known as the “time value” of an
option. Intrinsic value plus time value equals the option’s price. Always.
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Okay: Here is where the rubber meets the road…
An option can be described as “out-of-the-money” or “in-the-money.” An in-the-money option has intrinsic
value. An out-of-the-money option does not — it only has time value. Just think about it for a quick second, and
don’t overthink it. You can buy Halliburton for $50 on the stock exchange.
The right to buy the shares at $60 carries no intrinsic value unless the market price rises above the strike price —
whether it goes from being out-of-the-money to in-the-money.
To put it clearly:
A call option is in the money when the market price of the security rises above the strike price of the option.
Otherwise it is out-of-the-money. In-the-money options cost a lot more than out of the money options. The
market — getting back to the Efficient Market Hypothesis, such as it is — prices in possibilities known in light of
all available data. Out-of-the-money options cost very little because the market assigns very little probability that
they will ever gain intrinsic value.
This happens, of course, to varying degree based on immediate price proximity. If Halliburton is trading at $38,
a 40 Call will be significantly more expensive than a 50 Call. The market price could move two bucks based on
which way the wind is blowing — but the wind would have to reach hurricane strength for it to hit 50. Traders,
to continue to metaphor, see a clear weather radar. So the 50 Call stays cheap. But one credible rumor of a
takeover and all of the sudden — boom! — storm clouds on the horizon will push even the 50 Call higher.
For a put option, which is the opposite of a call, everything flips. The option is in-the-money if the market price
is lower than the strike price. If it is higher, then it is out of-the-money.
An option can also be at-the-money, just as a coin could theoretically land on its edge rather than heads or tails…
That’s the theory. Let’s see what it looks like in practice by assessing the rational reasons either side of this trade
— each counterparty, the borrow a little financial jargon — would buy or sell each flavor of option.
8.4 Why People Buy Options
Reasons to Buy a Call
Buying a call is bullish. You think the security’s price will go up before the option expires.
Reasons to Buy A Put
Buying a put is bearish. You think the security’s price will go down before the option expires.
Reasons to Sell (or “Write) a Call
Selling a call is bearish. You do not think the market price of the security will rise above the strike price of the
option before the option expires.
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Reasons to Sell or Write a Put
Selling a put is bullish. You do not think the market price of the security will fall below the strike price of the
option before it expires.
Thinking Things Over: Have you ever noticed how news outlets assume that a market is rise is good for
investors? That shows a huge lack of understanding of how financial markets actually function and what
outcomes means to various market participants. A down day across Wall Street might seem like bad news, but
it’s a Godsend for traders who have shorted a security, bought a put or sold a call.
8.5 Basic Option Plays: Strangles and Straddles
One thing about Wall Street is that it just can’t leave well enough alone. As if options can’t be mind-bending
enough, some traders love to complicate things further by using all sorts of different strategies to make money.
Remember, no one can really predict whether the market will go up or down on any given day.
The smartest thing ever said about this was when a reporter cornered the financier J.P. Morgan and asked him
what the market would do. “It will fluctuate,” the wise man said. And that is precisely what sophisticated options
traders are hoping for.
•The straddle, or “long straddle,” is a position where the trader buys a call and a put on the same security with
the same expiration date and the same strike price. This presents an enviable outcome, as the upside is unlimited
but the risk is finite. It is called a “long” straddle sometimes because the trader has bought the options. Long is
the opposite of short.
•The strangle is a variation on the straddle. The strangle entails buying a call and buying a put on the same
security with the same expiration date but with DIFFERENT strike prices – both out-of-the-money. It’s a bet on
big movement, but it does have limited upside.
Let’s play this one out nice and slowly: Assume a security is trading at $50. David buys a call and a put. The call’s
strike price is $55 and costs $400 ($4.00 for each option multiplied by 100 shares). The put’s strike is $45 and
costs $300 ($3.00 per option x 100 shares).
If the price of the stock stays between $45 and $55, the loss is the total premium paid – in this case $700. But the
strangle makes money if the price of the stock moves outside the range.
So say the price of the stock ends up at $35. The call option has no value and expires worthless for a $300 loss.
But the has gained value, and it is worth $700. The trader eats the loss and banks the gain and comes away with
a $400 win – even though she never owned the underlying security.
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8.6 Conclusion
At present, options trading in cryptocurrency is possible at deribit.com — a cutesy combination of the first
syllables of “derivative” and the “bit” from bitcoin. This area of trading is likely to be the fastest-growing area of
the financial space in the next several years, especially as the price of a bitcoin soars, making it harder to buy and
thus more attractive to bet on with options. Mastering trading means mastering options.
The best way to do that is to refer to Section 8.4 and review it until it becomes intuitive. Then test yourself by
checking any random stock or commodity and asking yourself how to take the fullest advantage of the direction
or the volatility you anticipate.
(And, not for nothing, but if all you take away from this book is an understanding of call options, you’re in good
stead to earn back the purchase price many times over. That’s because you can write – that is, sell – covered calls
on the stocks you already own.
For instance, if you have 1,000 shares of Altria (a great income stock), you can add to your dividend stream with
the premium earned by selling calls. If the market price exceeds your strike, you’re obligated to sell, but you can
engineer the strike so that you never sell at a loss. If the price fails to rise above the strike, you keep the premium
and the shares.
Say you write an out-of-the-money call four times a year and earn $0.50 a share each time. 1000 times 0.50 times
4 is $2,000 in free money. Check out your broker and investigate options. You will be asked to sign an options
agreement, and while it’s not required, it is wise to take the various educational courses at the Chicago Board
Options Exchange.)
Many traders also embrace options because it is sometimes seen as a less risky way to take either side of a trade
without having to maintain a margin account, which is a potentially powerful and thus potentially dangerous
credit instrument. (That means your broker is lending you part of the money you are betting with.
All short sales take place in margin accounts, which require certain minimum capital requirements. Those
requirements, if unmet amid a major market move, could force a broker to liquidate the assets in your account
to collect their money. There is no extension of credit required in an options transaction: You as the trader pay
the premium to buy the option, then you either resell it or let it expire.
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9.0 And, finally …
Though this book is brief, it’s packed full. In these relatively few pages, you have covered an immense amount of
material — concepts that full-time financial professionals take years to master. Along the way we’ve introduced
you to some of the various types of cryptocurrency, the software that manages them, the exchanges where they
can be traded and some of the patterns that traders use in their search for gains.
The last chapter touched on the nascent derivatives market. We’ve talked about economics, investor psychology
and statistics. Which leaves one question remaining — a question that, indeed, deserves to be answered.
Which crypto is the best?
Which exchange is the best?
What trading patterns are the best?
Most financial writers do not like this question. It requires a definitive answer, and no one likes to go on record
saying, “This is the way it is, period, amen.”
But it’s a valid question. One that deserves an answer.
So here goes:
•The best cryptocurrency is the one that you are most comfortable with.
•The best wallet and exchange are the wallet and the exchange that work best for you. (So look at a number of
them, play around. If you don’t like the one you started with, then there is absolutely nothing wrong with trying
another. You aren’t going to hurt bitcoin’s feelings.
•The best trading pattern is the one that you instinctively feel like you most understand and are comfortable
trying to perceive as you look at the charts. And those charts? Which is the best? You can probably answer that
for yourself. It’s the one that you can get the most data out of with a glance. It’s the one you can use the most
easily and intuitively.
That might not seem like a definite answer. But to be sure, it really is THE definitive answer.
It has to be.
In the world of investing, you have unlimited choices and unlimited opportunity. The way you process
information, the way you naturally approach investing, the level of risk that you are willing to shoulder — these
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are all decisions that only you can make. And while there’s no harm in learning all you can, nor in reading as
many reviews and recommendations as you wish, ultimately the decision is entirely yours.
The fact is, it really does not matter what anyone else thinks. You have to do what you feel like you can and
should do. Your preferences and tastes might differ from This Expert or That Guy, but so what? All that matters
is that you understand what you are buying, that you have gathered enough information to fully appreciate the
downside as well as the upside, and, critically, that you can sleep at night.
If you can’t, there’s a simple diagnosis. You're in over your head, and you need to take a step back and reassess.
It doesn’t mean you have to stop. It means you have to pause, breathe deep and feed your brain more
information. It means that what you are doing isn’t working and you have to find a way that will.
That takes time. No one becomes an experienced trader overnight. Everyone makes mistakes. Everyone —
everyone, ever — experiences losses sometimes. That’s true whether you’re concocting complex options
strategies on cryptocurrencies or simply buying a mutual fund.
Traders trade. But smart traders don’t trade without a reason, without a plan. They seek to develop a system, a
series of rules, and they hold fast too them — constantly balancing not only the intellectual demands of trading
but also constantly assessing their emotional condition, and NEVER ignoring it or pretending that it isn’t there.
It always is.
Thank you for joining us. Many happy returns.
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