The Maths behind why I don’t buy Bitcoin to exchange for Altcoins
In this post I will explain why I do not buy Bitcoin to exchange for other Altcoins on exchanges such as Bittrex, Binance etc. This information is especially important for people who are relatively small volume traders in the Cryptocurrency space, as well as people who buy coins regularly, such as every month when they get paid. New users to crypocurrency will also benefit from the advice in this article who may not be aware that his method is possible, and therefore avoid high Bitcoin transaction fees when wishing to actually obtain assets other than Bitcoin.
Many common mistakes that new users to Cryptocurrency will make stems from the fact that on almost all exchanges, you need to hold Bitcoin to exchange to other Altcoins. This therefore leads new users to buy Bitcoin from “on ramps” such as Coinbase, send to their wallet on the exchange, and convert. However, when trading small amounts, or trading regularly, this causes the user to lose a high proportion of their initial investment in Bitcoin transaction fees.
Below is a snapshot of fees from week commencing Monday 8th January 2018 to transfer around 1 dollar USD of the following currency from Coinbase to a Bittrex wallet. Of course these fees may vary with time or if your trade is of higher value. The reason why the following currencies are chosen is because at the moment, these are the only currencies that can be purchased with Fiat currency from Coinbase.
Bitcoin Network Fee – 0.00114625 = $16.69
Bitcoin Cash Network Fee – 0.00000226 – $0.006
Ethereum Network Fee - 0.00022600 - $0.05
Litecoin Network Fee – 0.00273000 - $3.6
So if we take an example of a $100 dollar purchase of any of the above asset, straight away you can see that moving that asset would have cost you the same or more than the amount listed above. We would lose 16% of our purchase using Bitcoin, 3.6% if using Ethereum, and very negligible amounts using either Bitcoin Cash or Litecoin, which leads to the next point.
We can see from the above values that at this moment in time, the cheapest way to move currency away from Coinbase is by buying and moving Bitcoin Cash, however this feature is currently disabled and should be online by the end of January 2018. So instead you should use the next best option which is Litecoin.
So a question you may currently have is “Why would I want Litecoin when I need Bitcoin to exchange into the currency of my choice?”. The answer is very simple, you can exchange Litecoin on the exchange you use into Bitcoin and will ultimately end up with more Bitcoin that you would have done if you had purchased Bitcoin directly, by avoiding the Bitcoin transaction fee.
So purchase Litecoin and send this to the Litecoin wallet on the exchange you are using. You then sell this at the spot rate on the exchange, and will receive the equivalent amount of Bitcoin. To take Bittrex as an example, they will charge 0.25% on any trade using their platform. This is clearly much less than losing the 16% by moving Bitcoin itself. You may also lose a small amount of currency in the trade itself, but nowhere near the amount that you would lose by moving Bitcoin. The other side of this equation is if you are exchanging very high amounts of assets, whereby 0.25% of the trade would be higher than the Bitcoin transaction fee (ie 0.25% of $1 million is $2500). But this article is not focused on such traders and therefore if you do not fall into that category, this is not a concern.
Another benefit of using this method is that, at the moment, moving currency with Litecoin or Bitcoin Cash is much faster than Bitcoin itself. So the asset will arrive in the exchange much faster than if you were to have used Bitcoin, which can help you capitalise on your required investment quicker.
Some things to consider/recommendations…
• Ensure that the Exchange you are using supports the coin you are going to buy, and supports the coin you will exchange for Bitcoin from Coinbase (ie in our example, Litecoin). Coinmarketcap.com has this information readily available under the “markets” section of the coins page.
• Prices between coins can move very quickly both up or down, for instance if Litecoins price against Bitcoin drops, you may not end up with the amount of currency you anticipated. However this can go in the opposite direction, and as Altcoin traders you should be aware of this fact. To eliminate risk, trade as quickly as possible.
• Coinbase may charge you a small fee for using the platform. Here in the UK it is £2 GPB to purchase any asset. This cost may vary by payment method or country. You can find a full list of charges on the Coinbase website. The charge is also displayed before your transaction is processed.
• Keeping Cryptocurrency on an exchange is not recommended as there is an increased risk of the exchange being hacked, or closing down due to country regulations, business closure etc. it is recommended to move your currency into your own wallet off the exchange where you control your own private keys/mnemonic phrases.
• Further protect your online accounts using 2 factor authentication where a one-time code is required to access the account. I personally use Google authenticator installed on my smartphone. Without this code, your account cannot be accessed.
• I will not be held responsible for any monetary losses or gains by following this advice. Always do your own research and I wish you good luck.
I hope that this article has been helpful. If you do not already have a Coinbase account and would like one, please use the following referral link. If you choose to use the link and purchase $100 dollars or more of currency, you will receive a bonus $10 paid in Bitcoin, and I too will receive $10. So its win/win.
https://www.coinbase.com/join/594fad98c268080602559e71
Thank you for reading.
Twoperscent
