Let's discuss how Bitcoin trading works
In the last post, I went in detail on the basics of Bitcoin. If you missed it, take a look here. This is definitely not financial advice, and you need to make your own decisions, but for me the decision was easy. A small portion of my assets needed to be allocated to Bitcoin. It’s too important an asset not to have some exposure. To be clear, when I say small, I mean like 1% or less of my net worth. Could I see this rising to mid-single digits percentage? Sure thing, just not right now at these prices.
If you’ve made the decision to take the plunge and buy some Bitcoin, let’s talk about how to do this. First point is that in the early days, buying Bitcoin or any crypto was a giant pain. Now, it is super easy. Let’s take a minute to review digital wallets and keys.
For big, sophisticated players, there is an option to create your own digital wallet through MetaMask or a number of other options. In these digital wallets, you can own crypto and other digital assets, and you hold the digital key to your wallet. These are called Non-Custodial Wallets. No one is providing custody to your assets, you have direct control. Think of this like holding paper stock certificates in the old days, just digitally. There are advantages in privacy and direct access. However, for most people the risk of losing your digital key, and thus your assets, is just too high. When you read horror stories of people who had Bitcoin when it was worthless and then lost their wallets, they are referring to these types of Non-Custodial Wallets.
For most individuals, a Custodial Wallet is the better option. Especially for a novice buyer that plans only a small purchase the easiest thing to do is just open an account at Coinbase or Robinhood. Those brokerage firms work much like a traditional equity broker. They custody your assets in a Custodial Wallet. You work in finance, you get it. They hold your key to your wallet. You use a traditional login and password just like with your regular brokerage account for stocks. Coinbase and Robinhood are huge companies with tons of resources, let them do the work. Increasingly traditional equity brokerage firms are setting it up for their clients to buy and hold Bitcoin, and FinTech apps like PayPal and Square are doing this too. Pick one you like and get an account opened.
There is no centralized, regulated exchange for trading Bitcoin or other crypto yet. They don’t trade on the NYSE or NASDAQ. While there is a Bitcoin futures contract on the Chicago Mercantile Exchange (CME), very few individuals trade it or even know about it. Trades are routed to various unregulated crypto exchanges for execution. Coinbase manages their own exchange and brings in hedge funds to provide liquidity. There is no real guarantee of best execution since it is hard to arbitrage these trading exchanges. Just accept that this is the early days for the Bitcoin market and the bid/ask spreads are somewhat high right now.
In addition to high bid/ask spreads, most of the brokers tack on a hefty transaction charge. You can forget about the free stock trades model here for now. For small trades of $1-10K, you can expect fees around 1.5% of the trading price. Yup, it’s a $150 fee to buy $10,000 worth of BTG, ugh. This is like the early days of stock trading from decades ago, or more like trading in less liquid fixed income products. It sucks, but I am fairly sure competition will push these fees down quickly.
The good news (or bad news?) is that the price of Bitcoin is so volatile that you’ll barely notice the high bid/ask and transaction fees. They will seem small with 3-5% typical daily price swings. Oh and one other fun fact, most of the brokerage firms only allow for market orders. Coinbase only has limit orders or stop loss orders for their Professional account class, not for individuals. Robinhood has more flexibility on this but given the volatility it may not be a great idea to use these types of orders. Be careful.
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*I also wanted to include quick note of thanks to all the people that have subscribed since I launched the Crypto Executive Guide last week. I am pumped to see so many people excited about this important topic. If you like the content, please share with a friend and get them to join us on this journey.*