Update: On the same day I posted this article, two more businesses I backed successfully closed their offers by paying off the rest of the money ahead of the schedule.…
Buying Ethereum: How I Started Investing In Cryptocurrency
Update: The post was published on June 24, 2016 and since that, it invoked so many questions that in December 2017, I decided to write an update. Read it here.
Once you start getting a revenue from your niche websites, how do you spend it? Maybe, paying off a mortgage or saving up for a vacation? Investing? Living from it? For example, Ilya from OnlineMoneyz decided to use his online income to pay for the college. I think this is a great idea and a great goal!
Me, on the other hand, I prefer to put the money back into the business or to invest. Eventually, I do plan to live off my cloud income (this is my ultimate goal) but for now, my day job pays all my bills so my online income is spare money for me.
Usually, I invest into Kickfurther, an online platform for crowdfunding inventory as well as in regular stuff like stocks.
But the investment I did this time was not a usual one. It was neither Kickfurther nor mutual funds nor bonds.
I decided to go a special route: Investing in cryptocurrency. More specifically, in Ethereum.
Ethereum And Its Crash
But what is Ethereum?
Ethereum is a public blockchain platform with programmable transaction functionality. It provides a decentralized virtual machine that can execute peer-to-peer contracts using a cryptocurrency called ether (from Wikipedia)
If you read Hacker News, you definitely have heard about “the DAO meltdown” that happened a week or two ago. Basically, a part of Ethereum was hacked and its currency, Ether, has crashed. It went down by almost 180%, from more than $20 to about $10 per ether.
What happened to it?
Why Ethereum Crashed?
Here is a good article explaining what happened (and what Ethereum is) by uk.businessinsider.com.
In short, Ethereum is not just a cryptocurrency. It is a whole platform that allows writing programs that execute some automated actions. “An auction might automatically transfer deeds of ownership to the highest bidder after a certain time has elapsed, or father’s contract might automatically send his son a set amount of money every year on his birthday,” that’s how uk.businessinsider.com explains it.
And since these are programs, they may and do have bugs.
And of course, some hacker found a vulnerability in one of the programs (or contracts as they are called in the Ethereum world) and stole almost $50 million dollars worth of ether, the platform currency.
The money was stolen from a particular organization built on top of the platform. It is called the DAO, Decentralised Autonomous Organisation, and is somehow similar to investment companies in the real world. It runs its own set of programs, which contained the exploited vulnerability.
This was obviously a bad news for the platform so ether crashed as many lost belief in it and in the platform.
Programs have bugs, that’s true. But they only have them because writing bugless programs are expensive – very expensive. Believe me, I am a software developer.
However, making programs bugless is not impossible! Modern technologies – well modern programming languages – already allow writing such programs. Yes, it is expensive but this is one of the cases when such investment makes a lot of sense.
The approach is to use precise types. Such types allow the computer – more precisely, the compiler – to guide a software developer towards writing correct programs. The programmer can better specify what they want to do. The compiler then can check if the code does a correct thing and whether it contains any errors or bugs. This makes the code safer as well as prevents a buggy code from running – if the code does not compile, it cannot run. However, it also means that the developer has to deal with much more constraints while crafting their piece of code. That’s why it makes it harder.
Currently, these modern programming languages (Agda, Idris) are more academic than practical and the software development industry has not adopted them yet.
But I am sure it is only a matter of time. There are research papers existing that show how the technology makes the Ethereum contract development safer (check one here if you are curious). Having $50 million stolen, this is a damn good incentive to start writing code with precise types!
Once this happens, the Ethereum will go up. And this is my bet.
Disclaimer: It was not my idea to invest into Ethereum.
It was Sam (my boyfriend) who noticed the crash and realized that the problem was not such a problem. He is also a software developer and his passion is precisely typed programming languages – exactly like Agda (check out his blog to find out more). Sam knows that it is possible to make Ethereum contracts bug free. He has been wanting to invest into cryptocurrencies since a long time and finally saw an opportunity to do so. And I just jumped on the bandwagon 🙂
My Steps Were Quite Complicated
My path to acquire ethers was following: CAD -> Bitcoin -> Ether.
Why like this?
Because it was easier. I live in Canada and the cryptocurrency market here is not very strong. There are many websites that sell cryptocurrency online; however, they all seem to require US debit or credit cards for payment.
While I do have one, Sam does not, and we wanted to find a solution that would work for both of us. Better to stick together while doing something for the first time!
In hindsight, I now realize that I could have saved quite some money by going with my US bank… Oh well, I can still do it the next time I decide to invest in cryptocurrency.
Despite the weak Canadian market of cryptocurrency in general, Montreal actually has a physical place that sells bitcoins for cash. It is called Bitcoin Embassy.
Before going there, I got Mycelium, a Bitcoin wallet for Android phones. The Embassy recommended this particular wallet for bitcoin operations so I just followed their recommendations.
So I went to the Embassy and bought $1250 worth of bitcoins with my debit card ($1600CAD). I got something like 1.6 bitcoins hehe.
Now I could use it to buy ethers.
Choosing Ethereum Wallet
But first, I needed to find a good Ethereum wallet.
Ether is not a very popular cryptocurrency so the choice was small.
I read a few reviews and decided to go with Jaxx, a wallet that supports both Bitcoin and Ethereum.
In fact, I did not need a wallet. What I needed was something called “cold storage”. This is a way to store a cryptocurrency offline where hackers cannot reach it.
I did a research but could not find anything good enough. While there are many more or less convenient solutions for storing bitcoins, there are few of them for Ethereum.
So I gave up on the cold storage and decided to use a regular wallet.
So I needed to exchange bitcoins for ethers.
I googled for an online cryptocurrency exchange and found ShapeShift. Turns out it was a very convenient solution!
I simply provided my Bitcoin wallet address, my Ethereum wallet address, specified the amount of bitcoins I wanted to spend, scanned a QR code… and the exchange operation got initiated.
First, I tried to exchange just a small amount of bitcoins worth maybe $1. After it went well, I exchanged the rest of the money.
Each transaction took a while, 20-30 min.
What was the total commission I paid for exchange CAD -> Bitcoin -> Ether?
It turned out to be quite high – about 7.5%. I spent $1250 ($1600CAD) to buy bitcoins and I got about $1120 worth of ethers.
Next time, I will try to exchange USD directly to ethers.
Buy low, sell high!
The plan here is to hold onto Ethereum for a long time until it grows a lot.
Look at the Bitcoin. Its exchange rate is $669.70 at the moment of writing this post (June 24, 2016). It worked super well for them.
Even when Bitcoin experiences some turbulence, it bounces back. For example last year, Bitcoin dropped a lot; however, this year it climbed back like nothing special.
Once precisely typed languages get adopted in the industry and Ethereum is proven to be a safe platform, Ether will go up.
So, I will hold tight and keep riding it until it goes high!