Some of Your Top Crypto Questions Answered - The 5 Minute WrapUp by Equitymaster
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Some of Your Top Crypto Questions Answered

Dec 26, 2017

Tanushree Banerjee, Editor, The 5 Minute Wrapup

Dear Reader,

As investors we can no longer ignore the existence of the new asset class that is taking the world by storm... Bitcoin has shown us it can turn just a few bucks into a fortune, but its dips and rips are more volatile than in any other market in history.

That, combined with the mysterious nature of the cryptocurrency, and we're all a little more confused and a little less comfortable with this phenomenon than we'd like to be... me included.

At Equitymaster, we've been getting questions from readers - and not knowing how to answer them, we did the next best thing. Went out there and discovered the leading voice talking on behalf of this cryptic currency - someone who can explain away the mystery and tell you EXACTLY what you need to know...

Tama Churchouse is a leading crypto guru and has a team of highly trained cryptocurrency experts on hand to answer his subscribers' questions and walk them through the basics of buying, storing, moving and selling cryptos.

Below he answers readers' questions about cryptos...

Happy reading,

Tanushree

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Over to Tama Churchouse

Few sectors inspire as much confusion as cryptocurrencies.

As crypto investors, we are witnessing and participating in the birth of a new asset class... and that means there's likely to be a lot of confusion and questions about how things work.

So today, I'm sharing some of the top questions I've received from my readers...

    Question: Is bitcoin real money?

    Answer: The fundamental characteristics an asset must have to be considered money are:

      Uniformity: In other words, every "dollar" or bitcoin is the same as the next one. When you're talking about using seashells or cows as currency, uniformity is hard to achieve.

      Divisibility: Dollars and bitcoin need to be divisible, broken up into small increments to cover a wide range of value transactions. Cows? Not so much, unless you're hosting a barbecue.

      Portability: Your currency must be easy to transfer and store.

      Durability: Older, agriculturally-based forms of money had a shelf life. Gold is the ultimate when it comes to durability. Paper notes deteriorate.

      Limited Supply: A currency is worthless if there's no scarcity to it. In our office here in Hong Kong we have a 500 million dollar note issued by the Zimbabwean government - it's a simple reminder of what ultimately happens when governments try to endlessly print their way to prosperity.

      Acceptability: To be considered money, the asset has to be widely accepted. People all over the world will take U.S. dollars. They won't however take Turkish lira.

    Bitcoin holds all of these characteristics with the exception of acceptability - although that is rapidly changing. Japan passed a law earlier this year that made bitcoin acceptable as legal tender.

    And the digital element of bitcoin? Well, more than 90 percent of all money that exists today around the world is not even physical... it's purely digital, existing only on computer servers.

    Question: Can bitcoin be hacked?

    Answer: In certain circles, bitcoin and cryptocurrencies in general are synonymous with hacking - thanks to some high-profile hacks of cryptocurrency exchanges - like Mt. Gox in 2014 or Bithumb in 2017.

    In an area so nascent, of course there are hackers looking to exploit individuals' inexperience, or find technological loopholes. Hackers have always and will always be a risk to ANYTHING where value resides on a computer network.

    But bitcoin is one of the most secure assets an individual can own - it's just that it's 100 percent up to the individual to secure it themselves.

    Cryptocurrency exchanges have been hacked. They are third-party platforms where you have no visibility as to how customers' digital assets are being secured. That's why I've said repeatedly that you shouldn't keep large amounts of bitcoin on an exchange because when it's on an exchange you don't own it, they do.

    Likewise people's computers have been hacked, or they've fallen for phishing scams and fake websites. But Bitcoin itself has not been hacked.

    And when it comes to hacking, you are far, far more at risk from other cybersecurity vulnerabilities - just look at U.S. credit reporting agency Equifax who announced recently that the Social Security numbers along with other personal information of millions of Americans may have been compromised.

    That's a catastrophic breach. And this kind of thing happens all the time. So there's no use worrying about bitcoin "hacking" when you can take full personal control and accountability for securing it yourself (rather than be at the mercy of an incompetent third party).

    Question: Will bitcoin be volatile going forward?

    Answer: Most people look at bitcoin's daily price changes and write bitcoin off simply because it's more volatile than your typical blue-chip stock. But these swings are growing smaller, as more and more people move money into bitcoin.

    According to investment firm ARK Invest, at the beginning of this year, "bitcoin's daily volatility was about one-fifth that of five years ago, and 28 percent less than January 1, 2016."

    And this trend should continue, as time goes on... and more money flocks into this space.

    That said, even with this level of volatility, bitcoin delivered better risk-adjusted returns than stocks, bonds, gold and real estate over the past five years. In fact, over the past year alone, bitcoin performed twice as well as stocks, on a risk-adjusted basis.

    I'm not saying bitcoin won't be volatile. Like any asset, cryptocurrencies will continue to experience rallies and corrections. Don't fall into the trap of thinking "this time is different" and that bitcoin will go up forever. The cryptocurrency could absolutely be in for a short-term price bubble. But over the long term, the upside is far from over. You just need to proceed carefully. And "invest" no more than you can absolutely afford to lose.

    Question: With bitcoin's recent price explosion, am I too late to buy?

    Answer: There's no "now or never" with bitcoin.

    The overall trend I see remains upwards. The upside potential I see is still huge. But that doesn't mean it won't go back down to US$9,000 or US$7,000 on its way to $25,000.

    Cryptos are the most volatile asset class on earth, so we need to be ready to ride out the downturns, which WILL come.

    Question: Can a few hundred dollars be invested to buy a fraction of bitcoin itself?

    Answer: Bitcoin is divisible down to eight decimal places. The term "bitcoin" is just a unit of measurement. This is the same for nearly all crypto assets. So, for example, you can buy 0.1 bitcoin or more... or less.

    Question: How should we know when to give up on a trade - what about if we see a 10 percent fall?

    Answer: As I said, cryptos are the most volatile asset class on the face of the earth. A 10 percent fall isn't a "high decline", it's noise.

    Some cryptos will see hundreds of percent gains... but if you want to be able to participate in hundreds of percent returns, you also need to be prepared to sit on losing positions. It's not unusual to see a position down 80 percent or more in a correction (heck, even bitcoin was down 40 percent in two weeks in early September).

    Remember, cryptos are like the wild west, more volatile than anything you've likely invested in before. And it's a genuine rollercoaster, but it's only just beginning.

    Make sure you position your portfolio accordingly - and don't invest money you can't afford to lose.

    I've said this many times, but I'll say it again: bitcoin and crypto investments should only represent a very modest (low single digit) percentage of your investable asset allocation at most. It's highly speculative and risky.

    These are just a few of the top questions I get about cryptos. As I said, it's an entirely new asset class. And it can be confusing.

    Good investing,

    Tama

Editor's Note: We hope this helped clear the air for you a bit...and that you know you don't have to swim through the cloudy crypto waters alone.

The above Q&A is excerpted from Tama's original piece published here. There's more info coming your way. So stay tuned...

Bank Regulations Ignore the Common Man

The Financial Resolution and Deposit Insurance (FRDI) Bill on the table at the Parliament is already giving the common man sleepless nights. And the one concerning clause causing this insomnia is the provision for a 'bail in'. In essence, the bill empowers a distressed financial institution to utilise its own public deposits to set its house in order.

Only Rs 0.1 million worth of bank fixed deposits are presently insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). What the FDRI Bill proposes is, to utilise deposits above the insurable limit of Rs 0.1 million by converting the funds into shares of the bank. In other words, the FRDI Bill is simply an extension of the DICGC Act and is not draconian as it is made out to be.

It simply bypasses the bitter truth that the insurance cover for public deposits is woefully low. Sample this, even the BRIC countries like Brazil and Russia have comparative insurance covers of Rs 4.2 million and Rs 1.2 million, respectively. Also, smaller countries like Honduras and Ukraine provide much higher insurance cover for public deposits. But in the absence of social security programs in India, fixed deposits continue to remain a preferred investment vehicle. No wonder, the share of insured deposits has fallen drastically from 75% to less than one third in the last two decades.

Fixed Deposits Losing their Safety Tag?

The inadequate insurance cover compounds the risk for a vast majority of the population, particularly retirees and senior citizens, who rely on bank fixed deposits for social security cover. With 67% of the total bank accounts having deposits of less than Rs 0.1 million, the small depositors may seem well guarded against bank failures. However, the false sense of security becomes apparent considering that this segment of deposit holders has a mere 8% share in the overall deposit base. In contrast, accounts with deposits of over Rs 1.5 million but less than Rs 10 million constitute 17% of the overall deposit base, with an average deposit size of Rs 3.7 million.

A majority of these high-value deposits are likely to be retirement nest-eggs senior citizens have saved to fund their family needs such as a kid's marriage, higher education, or a medical emergency. Unfortunately, they are likely to be hit the hardest in the event of a bank failure. Therefore, apart from firefighting measures to salvage financial institutions, it is equally important to safe-guard the interest of small deposit holders. And the much needed solution is to raise the insurance cover in order to protect the hard-earned money of the common man.

Top Auto Players Defy Competition

Normally, rising competition entails big companies losing out some market share to aggressive entrants. But not in the passenger car industry, where the entry of players fortifies the stronghold of the top three players. As per Society of Indian Automobile Manufacturers (SIAM), the market share of the top three players has risen from 65.6% in FY13 to 72% in FY17, and further up to 74% in the first seven months of FY18.

And the reason is apparent. The biggest moat for the auto industry is the sales and service network. While established car companies such as Maruti Suzuki, Hyundai and Honda have wide and well entrenched networks, new companies are unable to reach the sales level to create a network. And with low reach out, these entrants continue to remain fringe players even as the big players keep consolidating their positions.

What the Markets Looked Like Today

Indian equity markets opened the day on a firm note. At the time of writing, BSE Sensex was trading lower by 11 points and NSE-Nifty was lower by 6 points. Both the mid cap and small cap indices are trading up by 0.5% and 0.7%, respectively. Stocks from the automobile and pharma are among the gainers.

Investment Mantra of the Day

"The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch." - Warren Buffett

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5 Responses to "Some of Your Top Crypto Questions Answered"

Prakash Vora

Jan 5, 2018

The writer forgot to mention two important aspect for qualification of a currency. (1) The Government promises to pay the bearer the sum of XX rupees or pounds or dollars (whatever). Does bitcoin carry such promise ? (2) The assets have underlying value, if above (1) is not applicable. You can sell gold / cow / agriculture produce in the market and encash it. In case of bitcoin, there is neither promise to pay OR underlying asset.

Like 

suresh

Jan 4, 2018

Hi,
It is a rollercoaster where only those who can afford to play or those whose nerves are strong can play. It is not for chicken hearted guys.
Offcourse there was lot of money for those who invested in the early years.
There are several crytocurrency and hence we need to study which is the option among crytocurrency one can choose

Like 

D.K.Motiwala

Dec 29, 2017

Can any one in this universe know 1. who had invented Bitcoins ? 2. How many bitcoins can be mined ? What is the authenticity of Figure 21 Million / billion bitcoin can be mined ? How many Bitcoins has been mined till today ? Who are holding how much bitcoins - any one in this universe know ?

It is just like I am selling dreams if any interested to purchase pay me and fulfill the dreams .
God shall not come on earth to tell u that Pehle murgi aaye ya anda . Jeski Maa Baap ka pata nahi it is ur choice u want to adopt him or leave to orphanage .

Like (1)

BILGE

Dec 26, 2017

This one is for complete noobs, I suppose! That is okay. When it comes to quest for knowledge, everyone has to start somewhere. I have always loved the reports/articles about the Indian economy. But when it comes to crypto, the writer/speaker needs to be corrected on the following point:
*Uniformity: I assume that you are trying to let people know that BTC has the property of fungibility. But, this could not be further from the truth. Since, ll transactions are pseudo-anonymous, one can track the origins of each bit, and hence there is something called dirty bitcoins, for certain people who are concerned by this.
Other than that, this is a very well written piece of information about the wilde ride of cryptocurrency-world, for the uninformed and paranoid investor.

Regards,
A value-investor (HODLer), Solidity coder and a trader

Like (2)

B B Raina

Dec 26, 2017

Hi!

That was good on Cryptocurrency to begin with. Hope to hear more and more on the this raging subject. It is like a bull in China shop.
Thanks

Like (2)
  
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