4th Quarter 2016 BTC Pump & Altcoin Reaction

In the 4th quarter of 2016 BTC surged from approximately $600 to $1000, a  67% increase. This had some interesting and very obvious affects on almost all Altcoins. Only by remembering the past can we keep from repeating it.

Data below taken from Coin Market Cap.

Q4 2016 Ethereum – High of $13.28 on 10/01 down to $7.31 on 12/26 (45% drop)

ETH

 

Q4 2016 Decred – High of $1.14 on 10/03 down to $.42 cents on 12/27 (63% drop)

DCR

 

Q4 2016 SC – High of 75 sats on 10/01 down to 22 sats on 12/28 (70% drop)

SC

Let’s take the SC example and learn something important. Imagine today is October 29th, 2016. You have watched for an entire month as the price of SC has dropped from 75 sats to its current price of 53 sats. All around you people in the #trading channels have been buying what they thought were bargains, and then grumbling as somehow, inconceivably, Alts continued to fall. Not you though. You are holding some heavy bags, but are one of the lucky few who managed to save a little BTC just for this occasion. Siacoin is down 30% and has shown signs of recovery. What a bargain. There is no way it can fall further…

It is another two months before the price of SC starts slowly turning around, and March of 2017 before it gets back to 53 sats again. For five months that BTC was locked in SC waiting to just get back to what you paid for it… and you thought you were getting a great bargain.

That is a real life example that happened to me personally. All of my BTC was tied up, and when things really did start to turn around for Alts I had no way to buy. I learned important lessons including…

  1. Don’t try to catch a falling knife. If the crypto market (or an individual coin) is in freefall, don’t try to guess the bottom. Use the tools at your disposal, including charts, news and experienced traders, to decide when to get back in.
  2. If you make a call that is not going how you imagined it would, it is probably better to sell for a small loss than to hold on and get deeper and deeper into trouble. Selling for a 5% loss is difficult. Stomaching a 50% loss for five months is painful.
  3. Bitcoin is not just good to have for buying Alts. It is a digital currency also, and may give you a great return. A year ago I bought Bitcoin below $450. Today it is at $1400. You do not have to be 100% in Alts to profit, and sometimes it is really sweet to have that BTC on the side to buy with.

It is also worth noting, while the Bitcoin ratio of most Alts was ravaged, the downward pattern does not repeat for every coin. For example, Monero (XMR) was up in the 4th Quarter of 2016.

Take heart though. Remember BTC was up 67% USD in the 4th Quarter, so if the coin you are looking at was down 40% in relation to BTC, you were still ahead in fiat value.

Q4 2016 Bitcoin – Low of $609 on 10/01 up to $1050 on 01/04 (72% Increase)

BTC

For more analysis on related earlier article I wrote, please see Where To Be When Bitcoin Pumps

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Where Do You Want To Be When Bitcoin Pumps?

In the 4th Quarter of 2016 the price of Bitcoin went from $600 USD to $1000 USD; a 65% increase in price. During this time I learned three important lessons as a Crypto trader. In life we often learn the hard way by experiencing unpleasantness, but we also have the ability to learn from others who have already experienced the pain and can avoid the same mistakes.

I have talked to a few experienced traders who also went through the same Bitcoin price boom and corresponding Alt decline. Some are convinced it is not going to happen again because there is so much money coming into Crypto at the moment it can sustain an increase in price for BTC and everything else. I don’t think this is true. In my opinion, it is only a matter of time before Bitcoin goes way up in price again. This leads me to the first lesson I learned:

  1. Every other Alt is measured against the price of Bitcoin.

We all know this, but read a bit further and make sure you understand the next sentence when you are done reading. When the ‘fiat price’ of Bitcoin goes up, it results in the ‘Bitcoin Ratio’ of Alts going down. Make sure you understand these are two different things. The ‘Bitcoin Ratio’ is the small portions of BTC called ‘sats’ every Altcoin is measured in. The ‘fiat price’ of an Alt can be calculated by taking the ‘Bitcoin Ratio’ and applying the conversion to your local currency.

The fiat price of Alts does not necessarily go down when Bitcoin surges. If the Bitcoin fiat price doubles and the Litecoin ratio drops by 50%, Litecoin is still worth the same Price in fiat terms… even though the Bitcoin Ratio is way down. While it is possible for the fiat price of Litecoin to change, the fiat price of Bitcoin should not actually change the fiat price of Litecoin. Yes, I know it will, but it shouldn’t. For the purposes of my points below I just want you to understand the Price and Ratio are two different numbers.

Simple Illustration:

October 1st

BTC Price = $500 USD

LTC Ratio = .062

LTC Price = $31 USD

December 1st

BTC Price = $1000

LTC Ratio = .031

LTC Price = $31 USD

  1. You do not want to be 100% in Alts when the Bitcoin Price surges and the Altcoin Ratio declines.

The previous illustration showed the price of Litecoin staying the same from October to December. The numbers I used are fictitious, but reality is similar to the example. Our goal is not to maintain the current value of our portfolio, we want to increase it, and one obvious way to do this in the scenario above is to be in BTC instead of LTC.

When deciding which Altcoin to invest in, remember keeping your money in Bitcoin is always an option. Bitcoin is just a big Altcoin itself. It might be more fun to buy and sell Alts, but I am personally not here to have fun (well, maybe a little). I keep score by looking at the value of my portfolio, and often being in Bitcoin is the best way to insure profits.

If I sold my 1 LTC on October 1st in the example above and held .062 BTC instead, on December 1st the fiat Price of my investment is $62… twice the $31 value of 1 LTC.

  1. The true advantage of having your investments in BTC when the price surges is being able to take advantage of the drop in the Bitcoin Ratio in Altcoins.

On point 1 I argued if you hold Litecoin through the drop you will still have $31 worth of Litecoin at the end. On point 2, I argued if you held Bitcoin instead during the surge you will have $62, twice as much. On point 3, I want to point out the most important aspect of being in Bitcoin instead of Altcoins during a price increase.

At some point the price of Bitcoin will stop increasing and it will be time for Altcoins to shine again. When this happens, do you want to have your investment stuck in Litecoin or would you prefer to have Bitcoins available to buy discounted Alts with?

If I am holding Bitcoin on December 1st in the Bitcoin example above, and I feel like Bitcoin has stopped increasing I can choose from the discounted Altcoins to find one I feel will increase in value. If I don’t have any Bitcoin, I won’t be able to take advantage of the low Bitcoin Ratios. For example, if I have $62 in Bitcoin available, I can now buy 2 LTC at $31 each in anticipation of Litecoin increasing in value.

That is my opinion on where we want to be when the Bitcoin Price starts surging. If you believe there is so much money flowing into Digital Currencies it can sustain an increase in the price of Bitcoin and the Altcoins, then you need to understand what that really means.

If Alts & BTC are both increasing it is a double increase in the price of Altcoins. Not only are they increasing in relation to the Bitcoin Ratio, but are also increasing in Price based on Bitcoin. This is an amazing situation to be in if you can find it, but it should not be the norm.

For more analysis, including charts, please see my article titled 4th Quarter 2016 BTC Pump & Altcoin Reaction

Quantum Computing Concerns for Digital Currency

When researching information on the effects quantum computers will have on Bitcoin and other cryptocurrencies I found many different opinions. One thing people seem to agree on though… all technology must continuously evolve or be compromised.

Quantum computers are going to vastly increase the speed of even the fastest machines in the world today. Many people in the Bitcoin and Altcoin communities fear this speed increase will allow the private key of any crypto-transfer to be deciphered from the public key in the time it takes for the transaction to be sent and received. This would potentially allow the transaction to be altered or disrupted. This is not only a cryptocurrency problem. It could potentially cripple many banks and businesses.

To understand the power of quantum computers, you need to have an idea of how quickly this new technology could change things. I have been trying to come up with a way to explain how quantum computers will work so anyone can understand. This is a difficult explanation to give because if it was something that could be done with technology we have today, it would already be built. Quantum computing will be something new.

As you probably know, today’s computers use bytes which are sent with one of two values, a 0 or 1, to pass information. The best simple explanation I found defines a quantum computer as being able to handle multiple 0’s and 1’s in a single byte. Each set of 0’s and 1’s used is called a qubit.

For example, if a quantum computer utilizes 2 qubits, it has 4 possible combinations in a single byte:

 

0, 0

0, 1

1, 0

1, 1

 

This would allow twice as many combinations as computers have today, potentially doubling the speed data can be passed. If you add a 3rd qubit, you double it again to 8 combinations, and a 4th qubit doubles it again to 16 times as much information passed at once. As quantum technology emerges and improves, you can imagine how the speed of these computers will explode exponentially. Someone recently claimed to have the technology to incorporate 10 qubits, which would send 1024 times as much information in a single byte as computers can pass today.

So, how secure is the average crypto-currency blockchain transaction today? Could a computer working over a thousand times faster than today’s super-computers break Bitcoin’s security quickly enough to cause problems?

In basic terms, the key to securing most blockchain transactions is the SHA, or Secure Hash Algorithm. Bitcoin, and almost every other cryptocurrency, currently runs on SHA-256 encryption which creates a 64 character string to represent the information within a transaction. If you were able to decipher the SHA-256 string for a Bitcoin transfer quickly enough, you could see the details before it was confirmed. (Note: There is more to breaking a Bitcoin transaction than just decrypting the Public key. I am keeping it simple for this illustration.)

Here is a site you can visit to get an idea how SHA-256 encryption looks. Type whatever you want in the box to see the hash value created.

 

http://passwordsgenerator.net/sha256-hash-generator/

 

SHA-256 encryption is recommended by the NSA and is complex enough to remain secure for today’s blockchain transactions. Technically, it is possible for a supercomputer to break it, but not nearly fast enough for a Bitcoin transaction to be deciphered before it is confirmed.

Improved encryption already exists. SHA-512, for example, is a similar algorithm generating 128 characters. Compare the hash value you receive from the SHA-512 generator below to what you received for SHA-256.

 

http://passwordsgenerator.net/sha512-hash-generator/

 

SHA-256 and SHA-512 security were developed in 2002 and run using a hash function called SHA2. In 2008 NIST, the National Institute of Standards and Technology, held a competition to find an even more secure possibility, and the SHA3 technology standard was created. SHA3 is rarely used today because SHA2 has still proven itself to be unbreakable for the average data transfer.

 

Read more about SHA2 & SHA3 here:  https://en.wikipedia.org/wiki/Secure_Hash_Algorithm

 

This SHA3 technology has already been defined and is available to make Bitcoin and other currencies more quantum computer proof than they are today. A few cryptocurrencies, such as Nexus, have already embraced the more secure SHA3 security, but most others are at possible risk.

Does this mean Bitcoin is doomed by quantum computers as some would have you believe? No… or at least probably not. The jury is still out. Some people say early quantum computers will not be able to break SHA-256 quickly enough. Others say Bitcoin, and most other currencies, will be vulnerable and need to update to stay secure.

However, the undeniable truth is someone, someday will have a computer that runs fast enough with a program complex enough to break the SHA-256 security used today. Will it be when quantum computers come out? Will it be ten years down the line?  We cannot be sure. We do know Bitcoin, and other crypto currencies, have become extremely valuable, and people are working every day to find a new way to steal some for themselves.

So the question for us, the entire crypto community, is… Are we doing something today to prepare or are we going to wait for the day disaster strikes to fix the inevitable problems quantum computers will pose in the future? The answer for each currency may be the difference between the ultimate winners and losers.

If you have found the information here helpful, it is widely encouraged in the crypto world to send a small tip in appreciation.  You won’t find many crypto sites charging fees.  Instead people share ideas, information, and even programs freely in exchange for voluntary donations.  On one of my other sites I received only .002 BTC in the last year, so I am always appreciative of anything people are gracious enough to give.

My Bitcoin Address: 1EPyFDbRtfxMvpAhCyXBH2xwMuJ77Wwb41

Calculating the Value of Your Digital Currency Investments

I have been trying to put the relationship between Bitcoin and Altcoins into perspective for new Digital Currency investors, but even now, nearly a year after buying my first non-Bitcoin Altcoin, I have not really grasped all of the complexities. Perhaps at no time in recent history have two such volatile assets been so intimately tied in value.

Below I want to compare the three options you have for each Altcoin investment at any time. Option one would be to sell for dollars, or whatever your fiat currency is. Option two is to sell for Bitcoin. Option three is to hold (or HODL, whichever you prefer). There is some basic math below, but I tried to keep it simple and define each scenario for you.

In October 2016, Bitcoin started the move from around $600 to $1000 USD by the end of the year… a 60% increase. This devastated the ‘ratio’ between Bitcoin and other digital currencies, but did not have a great impact on the actual dollar value. It is important to understand this, so here is an example.

The price of Litecoin in Bitcoin terms on October 1st was approximately 630000 sats (.00630000 of 1 BTC). At the end of the year, LTC was 450000 sats, a 30% decrease. Many Litecoin holders were terribly, and vocally, upset at the drop in the value of their LTC. Let’s say we own 100 LTC and do some math to calculate its value before and after the pump…

(Qty * BTC ratio) * BTC Price = October LTC USD Value

(100 * .0063) * $600 = $378

End of Year LTC USD Value

(100 * .0045) * $1000 = $450

100 LTC at the end of the year, even though it was only worth 450000 sats, was worth $72 more in USD. This is a 20% increase in fiat value. This is the obvious sell for BTC side of the trade, and while I expect there was a lot of whining in all of the chat rooms, my thought was the complaining was being done by people who had not seen the basic math above.

This calculation was the theme of an earlier article I wrote. At the time, to a new trader such as myself, it seemed like a revelation and I wanted to explain it to the complainers and tell them to get over it. It turns out I was the one being short sighted though. I was only calculating the obvious side… the Hold side. I neglected to take the less evident aspect of the trade into account. I forgot to ask, “What would the profit look like if I had sold my Altcoins (LTC in this case) for BTC instead of holding?”

Let’s again do the math…

(Qty * BTC ratio) = BTC value of 100 LTC October 1st

(100 * .00630000) = .63 BTC

I guess that is pretty obvious after the first calculation. If I sold 100 LTC October 1st, I would have .63 BTC, which is still worth $378, just like it was above (.63 * $600). What would this be worth at the end of the year?

(BTC Qty * EoY BTC Price) = End of Year BTC USD Value

(.63 * $1000) = $630

Simply stated, the loss by holding our LTC is not actually a loss of fiat value. Remember, we gained 20% by holding. The loss is the difference in profit between the value of holding and the value of selling on October 1st.

End of Year Value of Holding 100 LTC = $450

End of Year Value of .63 BTC (Selling LTC October 1st) = $630

Difference = ($630 – $450) = $180

The conclusion based on those numbers is there actually is a loss of $180 by holding versus selling. Talk about confusing. If you do not sell, you gain. If you do sell you gain more. The only way you do not gain is by converting your BTC back to dollars on October 1st before the rise in the price of Bitcoin. The three scenarios you have to consider (not just for this example, but for each trade in Crypto) are:

  1. Sell LTC for USD October 1st ($378 at end of the year / $0 gain)
  2. Hold LTC until the end of the year ($450 at end of the year / $72 gain)
  3. Sell LTC and hold BTC until the end of the year ($680 at end of year / $302 gain)

So, I guess the people holding and watching the price of LTC drop versus Bitcoin do have something to cry about.  There was a better option, but c’mon man! You gained 20% in three months. What other investment has that kind of return?

Only in crypto do we see such madness. The real takeaway from all this is Bitcoin price controls the value of all other digital currencies. When Bitcoin is on the rise, it is where you want to be. In reality, it is just another currency… by far the biggest, but just a currency. You should treat it as such. Just like the others it can go up 100% in a few days. Selling your other alts for Bitcoin when it is going up is an option you should always take seriously, but many people feel they need to be 100% in alts at all times. I tried that. It does not end up well when Bitcoin is increasing.

My advice: Don’t be too attached to your Altcoin investments. You need to remember Bitcoin is a Digital Currency as well, and be prepared to accept it as your best option to profit. I am sure you have seen the projections by people saying Bitcoin will explode in value. It makes sense to have some of your Crypto Investments in Bitcoin to take advantage of this if it happens, don’t you think?

A friend of mine reminded me the other day, if you own 21 Bitcoins, only one million of the over eight billion people on the planet could ever have as much as you. What happens if just .1% of those eight billion people decide to buy Bitcoins? The price will multiply many times over. I believe we are fortunate to already be here to take advantage of it.

My Bitcoin Address: 1EPyFDbRtfxMvpAhCyXBH2xwMuJ77Wwb41

An Introduction to Crypto Currency

I often find myself explaining the basics of digital currency (AKA crypto currency) to friends and family.  I thought it might be a good idea to simply describe it in one place where I can send anyone looking for information.  This guide is free, but if it has been informative for you, or you have used it to help introduce others to this amazing technology, please consider showing your appreciation by sending a small tip to the address on the bottom of this page.

First, I need to define digital currency in the very broadest terms as I am going to explain it in this series of articles.  Digital currency is technically anything used as a medium of exchange which exists only in digital format (not physically).  In almost every case, these currencies are completely internet based, and use a ‘decentralized blockchain’ for accounting.  By the time you are done reading this page, the term decentralized blockchain will make much more sense.

Bitcoin is by far the most popular and well known digital currency, but there are hundreds of others out there commonly referred to as altcoins.  New coins are being created all the time, and vary drastically in value.  Each coin is part of a project which has a unique idea or vision for the future of their currency.  For example, some of these altcoins have a goal of improving on the security or transaction speed of Bitcoin.  Other projects are using the unique properties of these digital currencies to create online marketplaces, games or other real world applications.

These altcoins are typically purchased on exchanges specifically set up to trade them.  They are traded world-wide, so the exchanges base altcoin value on the one coin most widely accepted and valuable of all, Bitcoin.  A typical altcoin trader purchases Bitcoin (symbol: BTC) with their local fiat currency, and transfers it to one of these exchanges where they use their BTC to start trading in the other coins.  I am going to cover the value and investment side of digital currency in another article.

Earlier I promised to define the term decentralized blockchain.  I will explain decentralization first.  It is simply the distribution of activity or administration from a single source to many sources.  Think of the fiat currency in your nation.  It is completely controlled by a government. They print the money.  They distribute the money.  They even manipulate the money by printing more or monkeying with the interest rate it is loaned at.

Decentralized currency is administered by many on a large distributed scale.  For example, Bitcoin has tens of thousands of computers doing the accounting for its transactions.  Anyone who wants to download the software can put their computer on the Bitcoin network and attempt to assist as well.  Each person with this software can see all of the transactions done for Bitcoin going back to the very first block ever created.  In this way those thousands of computers assure nothing ever changes in the accounting ledger.  Nobody can manipulate the entries already created without everyone noticing.

This brings us to the blockchain.  Each digital currency has a time period associated with each block of accounting data.  For Bitcoin each block contains ten minutes of transactions.  Every ten minutes, the latest block is attached to the end of this blockchain for all the other thousands of computers to see and agree upon.  The only way the blockchain could be manipulated is by what is called a 51% attack, and to do this one entity would have to control 51% of the computers attached to the Bitcoin network, and would have to agree that a different version of the latest block, one they created, was correct.  This has never been accomplished, but it is technically possible and helps illustrate the effectiveness of the blockchain system.

Associated with the blockchain is also the term mining.  All of these thousands of computers on the Bitcoin network are competing to assemble all of the transactions more quickly than the others.  The first processor to do so and add the block to the end of the current chain is rewarded with a specific number of Bitcoin for their effort.  The race to win this reward is called mining.  With BTC currently so valuable, only the fastest computers in the world have a chance of winning this race, and most of us without deep pockets will not be able to compete.  There are still other altcoins us average guys can mine though.

I want to explain the transactions I have been talking about as well.  When you own any digital currency it is kept in a wallet.  This wallet is typically on an exchange, or it may be on your personal computer.  These wallets have addresses associated with them like the one below, which is a Bitcoin address I use.

1EPyFDbRtfxMvpAhCyXBH2xwMuJ77Wwb41

This wallet address above is an anonymous hash string.  Each altcoin uses encryption for these strings based on its programming.  At the push of a button, you can typically create a new anonymous string to send or receive from.  In this way it is nearly impossible for anyone to track the transactions happening from a particular wallet.  When a transaction heads out to be completed, it contains the encrypted information such as the from address, to address and amount sent.  Processers world-wide have access to this information as they try to add it to the end of the blockchain, but there is no personal information within the transaction itself, even if they could break the encryption.

For each coin, all of the miners are working on the same blockchain.  The blockchain for each has specific characteristics built into it such as the size of the blocks.  Occasionally the project developers will want to change these blockchain characteristics.  To do this they ‘Fork’ the currency to a new blockchain with the new characteristics, and give program updates to all of the miners so they are working on the correct blockchain.  Sometimes forking has unintended consequences.  In 2016 a coin called Ethereum forked against the wishes of many in the community.  As a result, some people decided not to mine on the new blockchain, but instead keep mining the old.  The result is a currency now called Ethereum Classic, which some people say is the only true version of the coin.

If you have found the information here helpful, it is widely encouraged in the crypto world to send a small tip in appreciation.  You won’t find many crypto sites charging fees.  Instead people share ideas, information, and even programs freely in exchange for voluntary donations.  On one of my other sites I received only .002 BTC in the last year, so I am always appreciative of anything people are gracious enough to give.

My Bitcoin Address: 1EPyFDbRtfxMvpAhCyXBH2xwMuJ77Wwb41

Those are the very basics of digital currency.  I want to go into more detail in regards to different aspects of the crypto world.  Take a look into the other articles I have posted to find more specific information on topics that interest you.