Join me as I conduct an experiment into buying Bitcoin and Ripple.
I will cover the steps involved and the share the experience I gained.
I will share some final closing thoughts and opinions on the whole cryptocurrency space.
There are a lot of articles on Seeking Alpha about cryptocurrencies and what price they will reach and what valuation they should have. While those articles are excellent, no article that I have yet read talks about any hands-on experience buying and selling Bitcoin and other altcoins. There is not much more that I can say that has not already been said about the valuation and price of these tokens but I can add value to understanding the cryptocurrency phenomenon by giving you my actual experience in buying and selling these tokens.
Background:
For this experiment, I have allotted about $100 which I fully expect to lose and never see again. I consider that money gone forever but at least we all get an article out of it and hopefully some entertainment value.
Setting up the accounts and exchanges
To start with I researched around the internet and tried to find out which exchanges are the best to use, which have issues and which might be scams, etc. It is hard to find definitive answers on all this, as it is the wild west out there: there are a ton of differing opinions and it is hard to know what the truth is.
So, after doing as much due diligence as I could I settled on Coinbase. The reason is that they allow use of a credit card to make purchases and that makes it easy to transact for the purposes of this experiment. Coinbase only allows you to trade Bitcoin, Litecoin and Ethereum, though, and it is limited to what we retail speculators can buy. Coinbase was easy to set up - just open an account and provide your phone number for 2-factor verification.
Since Coinbase was limited in what can be traded, I also set up an account at Kraken to allow me to exchange different types of tokens - in particular Ripple, which is what I had been thinking of buying since I began this experiment. I choose Kraken as it seems to be the only exchange that has passed an audit test proving that they have the reserves to back up their clients' holdings. However, my own research into this audit did not help me understand what it is and whether or not it actually means anything.
Kraken does require a lot more work to set up than Coinbase does and does appear to take greater care in terms of who they deal with. There is a greater demand for personal information and differing levels of verification. There are 5 tiers in total:
Tier 0: You can look around but you can’t deposit, withdraw or make any trades. You need to provide your email address for this level and it is the first step I took.
Tier 1: You can deposit and withdraw in digital currency only. Trading, however, is enabled in digital as well as fiat currencies. Full name, date of birth, country and phone number are required.
Tier 2: You can deposit, withdraw and trade in digital currency, and depending on your country of residence; fiat currency funding may be accessible to you. Bank deposits and withdrawals are available to clients in some areas and countries at this tier and higher. You are required to provide your mailing address.
Tier 3: Fiat currency funding is available to Tier 3 clients and funding limits are much higher than Tier 2. You are required to upload a valid government ID and a recent proof of residence. In order to deposit fiat in the US, Canada, Germany, Japan, and other countries, depending on what currency you intend to deposit, Tier 3 verification is required. Also, some funding options require photo ID and other government issued ID.
Tier 4: Similar to Tier 3 but with even higher funding limits. There are both individual and corporate Tier 4 accounts. The required documents for Tier 4 individual accounts include a signed application form and know-your-client documents.
Now, after setting all this up it takes time to actually get verified, so you are not going to be trading in 2-3 minutes as you would with Coinbase. It can take several hours to verify you and at the tier 3 or above levels it can take several days because those allow you to use margin.
Right - enough talk on the setup. Let’s get down to the fun and trade these tokens and get rich quick. Time for me to “seek alpha”.
Trading
Here is my plan. I first need to buy Bitcoin on Coinbase so that I can then transfer it to Kraken, which will let me trade Bitcoin for Ripple and other tokens as well. So, I put in an order for $100 worth of Bitcoin, giving me about 0.0053 bitcoins. However, there is a fee of about 3% just to buy Bitcoin. You need to keep this in mind, as the fees during the trading process can be quite high depending on which exchange you use. After buying the bitcoin I then need to send it to Kraken to convert it into Ripple.
First, I have to get the Bitcoin wallet address at Kraken to obtain a destination for the tokens. I enter the address into Coinbase as instructed, upon I am warned that I need to be sure to enter in the right details, as there is no recourse if the details are incorrect. That is one key takeaway from this experience: these transactions are not reversible. If you make a mistake and send, say, $10,000 worth of Bitcoin to a wrong address, you are not going to get it back.
I proceed after acknowledging the warning and enter in the amount of tokens to transfer - transferring my whole 0.0053 tokens - but I am told that I have insufficient tokens. I am perplexed. Why can I not move the full amount of tokens?
Ah, there is a “network fee” that you must pay. Coinbase is charging me over 0.0011 bitcoin as a network fee. This amounts to about $21.79 worth of the $100 of Bitcoin I have.
Now, this is the other key part of the experience that I want to share with you. Many articles have mentioned these high, and rising, transaction fees as being an issue with Bitcoin. This “network fee” is that exact fee we have been hearing about. It is the cost to transfer from one wallet to another over the Bitcoin network. Now I have read that this fee is a flat fee, and had I transferred $1 or $10,000 it would have been the same. Also note that this fee changes depending on supply and demand, so it is hard to know what you are going to have to pay from one day to the next.
So I hit the button and enact the transaction, which now goes into “pending” status. What does that mean? Here is the other aspect of Bitcoin that we read about in other articles: my transaction is now somewhere on the Blockchain so this should have taken 10 minutes to complete and 10 minutes to get to Kraken. However, it took more than 14 hours for it to arrive in Kraken. As people have mentioned, Bitcoin is slow as transactions are prioritized within Bitcoin based on who is willing to pay the most per byte transferred. The more you pay, the faster your transaction gets completed.
After a 14-hour wait 0.0042 bitcoin arrive in Kraken so now I try to buy Ripple with it to complete the final phase of this experiment. However, Kraken has a minimum tradable amount and that amount is 30 Ripple. Well, after the network fee has taken a massive chunk out of my Bitcoin amount, I no longer have enough to afford to buy that minimum at current prices. And I had thought I would have enough Bitcoin even after the massive fee, but the price has moved a lot due to the massive amount of time needed for the transfer.
This brings us to another key takeaway you need to understand when you buy these tokens: price discovery. The prices are all over the place and vary from exchange to exchange, making it hard to know how much (in terms of USD or Bitcoin) you will end up needing. The various exchanges do tend to follow each other in terms of the general price movement, but which exchange will offer the best price is impossible to know - and with Bitcoin it is not worth moving tokens around between exchanges to capture the best price, as it costs too much and takes too long. Once you pick an exchange to trade on you are locked in to using that exchange. It took a few days have my order filled it as I had to wait until the price eventually went low enough to allow me to buy the minimum 30 Ripple.
Now I will hold my 30 Ripple for the next 2-3 months and see what happens, and I will update you with the outcome of this, including how to get the money out. I have read through the steps but of course have not actually done anything yet, so I have no idea how this will really work in reality. I will have to leave that experience for another article.
Final Thoughts
This whole experience has really helped me understand what Bitcoin and Ripple are, how they work and the mania that is going on right now.
As for Bitcoin, we know the fees Bitcoin charges are an issue and I have now seen that myself. For very large transactions that fee may be quite reasonable, as it will be just a small portion of the overall amount. However, for smaller transactions - which is what most of the world needs - a payments system for Bitcoin is completely unsuitable and I would never want to use it. In addition, Bitcoin as it is now is quite frankly scary. I had no idea what was happening with my transfer, I had no idea when it was going to be completed, and there was no transaction reference number that I could use to track the transaction. There was also no way to cancel it that I could see.
So, this is the user experience that Bitcoin offers right now. Now, my experience is limited - I will grant you that - but these are known issues with Bitcoin and not just my experience. This is what Bitcoin is right now; this is the so-called system that is going to “change the world”. This is what you are buying when you buy Bitcoin and it is completely inadequate in any way, shape or form, as a method of payment. There is no way that people are going to want to adapt this in its current state. Now I know that the Lightening Network and/or other enhancements are supposed to change this, and maybe they will. But that is a maybe. Right now you are buying into a prototype system that is still in the very early stages and does not even have value over the current system in place.
As an investor in new technology I want to put my money in something that, while a prototype, at least offers a better way of doing business. But Bitcoin does not even have that. The product is inferior right from the start. It is costly and slow, and offers a very poor user experience. If just one of these points improved - for example, if it were slow but there were zero fees - then I could see some potential here.
Speaking of transaction fees, once all the bitcoins are mined the only remaining incentive to complete the blockchain will be the transaction fees. Without these fees, why bother keeping the blockchain alive? In fact, the incentive would be to increase the fees once the tokens are mined, as the mining revenue would then be gone. No one seems to be thinking about that end state and what happens to Bitcoin once all the tokens are mined. This is one gap that I feel needs to be addressed.
So, ask yourself: is this prototype system worth over $13,809 USD a token right now (January 10th)? That is the question you need to ask yourself if you are investing in this and thinking like an investor. If you are speculating, that is another matter altogether, as that is currently driven entirely by fear of missing out and the greater fool theory.
As for Ripple, here we have a token that has literally been created out of thin air. You don’t even have to put work into mining them! Ripple the company created 100 billion of these tokens and still holds around 60% of them. Now there are companies that have joined RippleNet, so it does sound like this is taking off.
But here is the brochure from Ripple’s website explaining RippleNet, and to be honest it is not clear, based on this, what XRP (Ripple’s token) is used for. There is only this one hint regarding Ripple’s token and how it might be used: “Banks and payment providers can use the digital asset XRP to further reduce their costs and access new markets.” That does not tell me anything as an investor as to why I should invest in Ripple. I have tried to find more detail on this, and Wikipedia says: “Users of the Ripple network are not required to use XRP as a store of value or a medium of exchange”. Yahoo Finance echoes this, though I could not verify it through Ripple’s publicly released information.
So, we have two sources noting that the token is different from and not needed on RippleNet, which is what major financial institutions are participating in. As with the whole cryptocurrency space, there is a lot of misinformation, confusion, misunderstanding and speculation going on.
Now let’s leave the tokens aside for a minute. The whole ecosystem around trading these tokens is still very new and there are a lot of risks involved. We have heard of the exchanges being hacked and people using wrong addresses for the tokens' origins and destinations. We have heard that hardware wallets or paper wallets are a solution to some of these problems - but not always, as noted in this Reddit post about a “hardware wallet scam”. There is still a lot of uncertainty in the entire space, so really be ready to go into this prepared to lose everything; that way, you don’t overspeculate with capital you cannot afford to lose. Write off whatever money you put into this as if it never existed.
Now, one final comment on blockchain technology: I do believe that it will serve to improve the ways we conduct commerce. But these tokens do not equal blockchain technology. The Bitcoin and Ripple tokens, just like the over 1,000 other tokens, are products built from the technology but are not the underlying technology themselves - and like any product, there are good and bad ones. So far, I cannot see the value in Bitcoin and Ripple in their current forms. This whole token and blockchain space is simply filled with mania. You know this has gotten out of control when companies are changing their names to include “blockchain” and offering no real details as to what they are going to actually do, and yet their stock prices soar. You know this has gotten out of control when you have a joke like Dogecoin - yes, this was created as a parody - worth over a billion dollars and currently ranked the 15th largest token.
Now, I suspect that this article is going to result in a huge amount of comments, and that some of them will be very heated. When replying, please keep in consideration that this is my experience, and it is my opinion that I have formed based on it. I look forward to being involved in the discussion as it unfolds and will participate in it with you. As always, thank you for reading.
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source:https://seekingalpha.com/article/4136955-bitcoin-ripple-hands-experience
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