Adventures in Crypto Finance
This is not meant to be a guide for anything. I am in no way a financial adviser and none of this should be taken as investment advice. These are all my opinions based off of the research I have done (which is in no way extensive).
Introduction and outline of goals
This project is two-fold, and can be presented with 2 questions:
- Would I be willing to pay $1000 to enroll in a course on cryptocurrency?
- Can we utilize rational financial analysis to reliably risk manage a cryptocurrency portfolio?
The first question represents the justification for the initial investment. The cryptocurrency is an extremely volatile and emotional space, so I have to be 100% ok with throwing away the initial investment. This means that this investment has to be for some purpose other than getting a steady return, and that purpose can be for learning more about this whole space. A $1000 investment is about 2/3 of what I paid for a single class at CU, so if I can gain 2/3 of a class worth of knowledge over the life of my $1000 investment, then I have gotten a return on investment outside of actual dollars. The goal here is obviously to not completely waste that money, but if that happens and I learn a lot, I won't regret it.
So investment, in what exactly?
Going along with my original thought, it made no sense to me to dump all of my initial investment into an exchange with a 5% exchange rate and then have a bunch of coins that I know nothing about. This is what got me into trouble when I did a Dogecoin investment all of those years ago. I knew absolutely nothing about cryptocurrency and saw an upward swing and jumped on it. The people who made their money at Dogecoin's peak made their money off of me. I wanted to avoid having a bunch of money tied up in another currency that I knew nothing about.
So, I instead invested this money into the other way to earn cryptocurrency, a miner. Mining has a pretty long-term return on investment, but the good news is that you can "exchange" that investment to other currencies for free. Have a new, hip coin you want to invest in? Mine it for a few days when it's at its lowest difficulty and leverage that later within the trading portfolio.
All of this talk has been about a $1000 initial investment. Instead of putting that exact amount, I decided to have some fun with it, drop by Microcenter and buy the following setup:
- ASUS GTX1080 6GB: $250 w/ $30 rebate
- EVGA 650W 80+Platinum PSU: $130 w/ $15 rebate
- ASRock A8M-G MoBo: $65 w/ $10 rebate
- AMD A10-7860K: $90
- EVGA 8GB DDR3-1600: $50
My only regrets here are the power supply (could have gotten away with lower-efficiency for about $40 cheaper, but can't complain with 96% efficiency) and that processor/MoBo combo which could have been about $30 cheaper if I waited for things to be in stock, particularly the Pentium 1150 combos. Having $70 worth of regrets is a pretty ok way to get out of this though.
We'll talk more about my adventures with this hardware later, but the initial investment worked out to $636. Could I have gotten out of this cheaper, yes. My priorities were in time, however, especially with Ethereum difficulty going a bit crazy (yay exponential functions). Waiting for RX 6xx wasn't realistic, and the leftover money gives me some power cost breathing room.
Ok, so the first question essentially verifies that I'm throwing away some money to learn all about cryptocurrencies. The second question is where we answer "where is that money going to disappear towards?" The current plan involves about 3 months worth of mining time that is then going to give way to fooling around with trading. Crypto is a crazy space. I was talking to a friend on the morning of June 21st about the volatility of crypto, and on that day Ether has a flash crash down to as low as $0.10 from over $300. The resulting slump is looking to be about $222 today on June 26th.
Volatility is scary to big financial institutions, but volatility introduces the greatest potential for leveraging said volatility. If you can manage volatility, it's an extremely powerful tool.
Anyways, this brings up the overall question, can we utilize rational financial strategies to manage this volatility, or is it futile to reliably invest in cryptocurrencies right now? Yeah, you might bet right on an Initial Coin Offering (ICO) and make 2000 times your money, but 2000 other times you will lose it all. Can we leverage that?
Introductory looks at this point to one HUGE fact. This space is extremely emotional.
They say the reason Warren Buffett was such a good investor was because of how calm and collected he was when conducting investments. The dude invested in Bank of America during the financial crisis. A bank. Emotion comes with risk, and it's a risk that could taint an otherwise excellent portfolio. Feelings don't drive currency prices, markets do, so focus on the market first. That being said, this emotion might be a good entering point for further analysis. If you can make investments without emotion and base them on those who have emotion, you might just be able to manage the risk that other people create for themselves.
First thoughts (6/27)
It has been 1 week since I dove into cryptocurrency head-first, and I have been mining for about 2 days. My current ETH balance is 0.018, and I get my first payment at .05. ETH has dropped $100 since I started researching it, and $150 from its high point in the last month. I have watched Reddit go from a keep strong and hodl on attitude to reassuring each other about their losses. Articles talk about how ETH is dead after the flash crash. I knew the space was emotional going in, but had no idea how emotional it really was. I even had to stop myself from running out and buying another GPU just to "reduce" my payback time. It's crazy, I almost have to write my thoughts down as a form of therapy to not get emotional about all of this, and remind myself of my overall goal, knowledge.
Ok, now getting into the progress I've made in research and mining. Let's start with the mining
The rig is set up. A dead MoBo left me with an extra trip to Microcenter, but all in all it was about a 5 hour start to finish build to get a headless ETH node up and running. The 1060 I bought is running super steady at 19 MH/s, which amounts to about .01 ETH per day at current difficulty. I also ended up transferring my 970 (hopefully) temporarily instead of buying another card. Even though it's less efficient than the 1060, the power costs much, much less than the extra card would have. It's running at 18 MH/s right now, and seems steady despite having no room at all for air flow. Kill A Watt comes in from Amazon tomorrow, so we'll see how the power consumption actually looks.
I'm planning on using the stock ASUS BIOS and underclocking on my Windows desktop. I know custom BIOS is an option, but it doesn't seem right to me right now to potentially brick the 1 graphics card I have less than a week after I got it. Playing it safe for the time being, even if that means lowered efficiency. I would want to do custom BIOS at some point, but maybe wait until I have some coin in my wallet.
trading strategy research
The longer I spend researching crypto trading the happier I am that I don't own any coins right now. Mostly because at this point I would 100% lose everything within a day. My findings come down to the following:
1) Don't lose coins
I haven't actually read this anywhere, it's just a strategy that I think will work for me. Essentially the idea is when you're trading across crypto, it would be better to hold a voltatile coin for a week than to switch it back and forth and lose your initial investment. So, say I'm trading from ETH into BTC, and the BTC-ETH ratio crashes. I want to hodl my BTC or dump it into another non-ETH coin rather than transfer back to ETH, because as soon as I do that all of my trades have resulted in me losing ETH.
2) Run Sentiment Analysis
Reddit in particular is super spicy when it comes to peaks and troughs, and Twitter gets wild too. There's one paper on BTC and a few sprinkles of things here and there saying that people trade on this, but it doesn't seem as leveraged as it could be.
3) Don't dump into ICOs... yet
I simply don't know enough about crypto to know what makes a good coin, so there's no reason to dump money into the new ones.
...Second? thoughts (7/15)
As I write this, Ethereum is at $180. I caved and ended up buying $190 worth of it when it was at $240. It has blown past multiple support values. I've stayed surprisingly calm about it though, I've blown more than $40 on a single dinner, why would I get emotional about it when it's at a long-term investment. I've been reading the EthTrader daily discussion threads on Reddit for about 2 weeks now, and it seems that although there are a lot of silly predictions, most of the posts follow the market super well. The good news is that all crypto is super volatile right now, and while that might persist in the short term, in the long term I don't see crypto as a whole disappearing.
Here's what my totally uninformed opinion is: lots of the emotional people are getting weened out of crypto from these dips. The more "stable" people are BTFD (buying the freaking dip). The people who bought in at $4 or $.04 are hodling like they do. In the end, this Bitcoin branch might kill Bitcoin, but even if Ethereum gets to the point where it is no longer valuable, it will persist as a technology platform alone. Simply put, I think the move here is to stay minimally invested and hold out. I don't think I'm going to quadruple my money by dumping it all in Ether, but I do think there is a good case post-flippening for $1000.
The mining is going well, I have about .27 Ether from that alone right now, and am close to getting my first SIACoin payout of 500. I overclocked up to 40MH/s stable and feel good about leaving it as is for the foreseeable future.
That's about all I have for now. Off to learn more!