Crypto

A Crypto Currency is a virtual currency that is set up using a concept called a block chain. This is a huge, decentralized underlying database that when traversed, contains every transaction ever made. The database is a collection of remote servers scattered all over the world with built in redundancy and backup. It is designed to be virtually impossible to hack due to its distributed nature and also impossible to control by any one entity, like a government.

It has gained in popularity largely due to these reasons. There are now a few businesses that accept bitcoin as payment, but not many, and it is somewhat difficult to use it as a form of payment for goods and services.

For now it is mostly considered to be an investment, similar to gold or silver, though it is not a physical commodity. Many people are reluctant to put money into the Crypto markets for this reason. All you have is a long string of numbers that allow you to access your Crypto, not anything you can actually hold or see.

But this is not the only reason Crypto investing is not more popular. Another big reason is that the options for storing your money are antiquated to say the least. And it has come a long way from what it was a few years ago. Also Crypto had a couple of collosal failures early on that gave it a terrible name. Here is a little history for starters.

We will start with Bitcoin itself. No one knows who built the initial infrastructure for Bitcoin, but they were clearly a genius. It has been credited to someone named Satoshi, from Japan. In fact a single unit of Bitcoin, the equivalent of a penny in US Dollars, is referred to as a Sat, short for Satoshi. A programmer named Jed McCaleb got interested in it and in 2010 decided Bitcoin buyers needed a repository to keep their Bitcoin, so he developed Mt Gox, an on-line bank of sorts. He sold it to a French programmer living in Japan in 2011. On June 13, 2011, Mt Gox was hacked and reported about 25,000 Bitcoins were stolen from the exchange. This was a catastrophe for the nascent industry.

Over the next 3 or 4 years Mt Gox struggled to find lost coins and fight off lawsuits. Other online banks sprouted up during this time where people could store their Bitcoin, but as you can imagine everyone was a little apprehensive about putting any appreciable amount of money into any of these places given the rocky history of Mt Gox. By 2016, creditors claimed to have lost $2.6 trillion in Mt Gox and it filed for bankruptcy.

During this time, and since then a number of seemingly reputable vendors started up, but it took awhile before investors were comfortable leaving their coins there. Of course these companies are HIGHLY incented to protect the assets at any cost. Given the history, any bad behavior or hacking could bring a company down over night.

So all that said, I will now say a few things about the technical aspects of depositing and moving money around in these accounts.

Here are a few examples. I am not exaggerating with any of these things.

Foreign Exchange

The Foreign Exchange (ForEx) market is the exchange where the price differences are set for various currency pairs. The market is a trillion dollar market with huge amounts of money passing through it each day.

It is broken into currency pairs. A given currency is matched against another pair, for example the GBP/USD. In this case the GBP refers to the British Pound and the USD is the US Dollar. The value of the GBP/USD is a number that moves up or down constantly, dependent on how the market feels the two compare to each other at any given moment.

This comparison is based on economic conditions in BOTH countries. So while one country might be having good economic success (we will look at the meaning of this in a minute), their currency might be falling in value against another countries currency because the other country might be having better success.

The order the two pairs show up matters. The way you see it listed on your broker is the way it will always be. So the GBP/USD will always be the GBP/USD and never the USD/GBP. Here is what the order means. The GBP/USD is how many British Pounds you can get for 1 US Dollar. So if the price is say 1.4000 it means it takes 1.4 US Dollars to get 1 British Pound. If the price were 1.000 it means you can get 1 GBP for 1 USD. And if it were 0.6543 it means you need 0.6543 USD to get 1 GBP. So if you were travelling to the UK, your dollar would go a lot farther if the GBP/USD were less than 1.0000 as opposed to greater than 1.0000.

In order to trade in the Forex, you must deposit money at a broker that is connected to the Forex market. There are a lot of these, but you must be very careful which one you choose to give your money to. Just like the crypto industry, there have been a lot of broker problems, but unlike the crypto industry, the problems were not caused by hacking but rather unscrupulous brokers that were reticent to give traders their money in the unlikely event they made decent profits. I will explain this comment later, but for now lets focus on the brokers themselves.

Many of these brokers were initially based in far flung places like Seychelles, the Netherlands Antilles, the Canary Islands, and other places where regulation was lax. But even the ones based in the US or UK have never been under the same regulation as stock or futures brokers. In fact, at one point in 2015, the Federal Trade Commission, in response to complaints that traders were losing huge amounts of money and even their homes in the Forex, came out with a new regulation limiting the amount of money traders could deposit at these places, effectively cutting it in half. But this did not in any way address the issues of broker manipulation and cheating, it only lessened the amount traders could be cheated out of.

This is not to say that everyone who lost money was cheated out of it. In fact the vast majority of Forex losses are due to inexperience and false expectations. There are hundreds of training courses available that attempt to teach traders how to trade based on following dozens of indicators and doing all sorts of plots and graphs to try to determine the way the market will go next. There are sold as great predictors but in reality they are extremely unreliable and prone to setting false expectations. Traders tend to make some small trades and make a little money then increase their trade size until they lose all their money.

Anyway this type of trading is called Technical Trading because it is based on technical indicators. You put your favorite indicators on the chart and when most of them say something is going to happen at a certain place, you make a trade in that direction for an amount you feel comfortable with. The vast majority of traders trade this way.

There is another style of trading called Fundamental trading or news trading. Here is how it works. At certain days of the month, each country releases data points that indicate how weak or strong their economy is. For example each country releases the CPI, Employment Change, GDP, and a whole host of other releases during the month. THese releases are set to come out at a certain day and time, set at least a month in advance. To prevent leaking, reporters are escorted into a “lockup”, a room with no access to the outside and no cell service. The release is given to them 20 minutes before being released to the world so they can write up analysis that will be sent out as soon as the information is made public.

Each release has 1 or more numbers associated with it. For example, the CPI number might come out as 2 numbers, CPI and Core CPI, where Core CPI is the CPI number minus auto sales, which tend to fluctuate more than other things and skew the number.

A couple weeks prior to each release, a bunch of the top economists make predictions about where the release will come out, and the currency pair adjusts itself to those expectations. As the seconds tick down to the actual release the pair gets real volatile, moving up and down sporadically. When the data is released, a couple of things can happen. If the economists were close to being right, the pair will push up and down a little but not more too far in any one direction. But if they missed by a lot, the pair will spike in one direction or the other to compensate for the missed expectation.

News traders will place orders above and below the current price milliseconds before the news is released. If there is a big spike, one of the orders goes live and often is very profitable in a second. There was a period of quite a few years when this worked like clockwork. It does require a good bit of skill to get the orders in properly and to manage them properly, and lots of traders lose in volatile markets like that, but skillful ones can do very well.

Here is why this is an issue with the brokers. We will start from the beginning, back in the 2006-2007 timeframe.

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