Lesson 1: The Mechanics of Exchanges and Trades | The Absolute Beginner’s Guide
The point of this lesson is to save you money. Probably lots of it. I’ll also teach you how to double your Ether holdings for free.
To explain, let’s begin with a story. My cousin Jason Purcell and his partner, Marie, opened an account to start bubble trading Bitcoin a few months back. She wanted to start small, so she deposited $500 and bought as much Bitcoin as she could when it was priced around $46,000.
Then she noticed something unexpected in her account: the transaction cost for that $500 purchase was $25! When she decided to sell, she realized, it would be another $25. In total, she would spend $50 just buying and selling Bitcoin.
That’s 10% of her initial investment in transaction fees!
Unfortunately, this is not uncommon in the cryptocurrency world. Gemini and Coinbase are the only exchanges available for people in New York and they both have platforms that charge you enormous fees. Many other platforms are similar even if you live elsewhere.
There’s an easy fix for this, however, and I’m going to review that for you here.
I’m also going to save you money by explaining why you need to have different cryptocurrency and stock brokers. You absolutely shouldn’t use Robinhood for everything (sorry).
Then I’ll explain how to solve the stupid transaction cost problem Marie encountered. Finally, I’m going to cover something an absolute beginner has never heard about: bid-ask spread problems. This can cost you thousands of dollars, but the solution is again simple.
In sequential order, we’ll cover the following.
- Where Can I Go To Buy Stocks for Bubble Trading?
- Why Can’t I Just Use Robinhood for Everything? (How to Double Your Ether)
- Where Can I Buy Bitcoin and Other Cryptocurrencies?
- What’s A Bid-Ask Spread About?
- What are Limit Orders and Why Should I use Them?
For right now, let’s get on with the lesson.
1. Where Can I Go To Buy Stocks for Bubble Trading?
Ok, so bubble trading is both cryptocurrency and stock focused. Bubbles can happen everywhere and as I explained in the Lesson on Black Swans, there is safety in trading more than one.
Also, you’ll want to be able to trade both stocks and options pretty cheaply.
I explain what options are in the terminology guide. But to keep this relatively self-contained, options are contracts that give you the option to buy (or sell) a stock in the future at a certain price. If the stock goes up a lot, for example, and your option allows you to buy it cheaply, then you get to exercise the option at the lower price and sell all those shares immediately at the higher price.
The easiest place for beginners is Robinhood. I’m going to plunk my affiliate link here and if you sign up we’ll both get a free stock worth between $3 and $5.
Otherwise, you can just go to Robinhood.com and sign up. I won’t get anything and you won’t either.
I do use Robinhood myself and Etrade and other stuff–I’ve been doing this a while and my needs are not the same as most beginning users.
If you have more than $250,000 that you plan to start with, use Interactive Brokers. Their customer service is terrible for people who don’t have much to invest, but at that level, they’ll actually get back to you in a timely fashion.
Robinhood has gotten a lot of bad press lately, because of the $GME fiasco, but I can say that on literally every other broker that I use, shares of $GME were limited.
Why do I like it for beginners? Because it is super easy to use. You can get started in under 10 minutes. Just answer their questionnaire honestly when you get to that part.
2. Why Can’t I Just Use Robinhood for Everything?
You’ll notice that on Robinhood you can buy cryptocurrencies. The thing is, you don’t really own them. Robinhood acts as a custodian, but you can’t take the coins off their exchange.
That matters because you won’t receive forked coins.
A coin fork happens when there is a software update on the coin and there is a big disagreement among the people who maintain it in existence.
If there is enough disagreement, some maintainers will keep to the old protocol while others will go along with the new one. The result is that the original blockchain splits into two.
This is probably happening with Ethereum in late July (it looked like early August originally). It happened with Bitcoin in 2017 when it split between $BTC and $BCH.
If you move your coin off an exchange–which you can’t do with Robinhood–into your own wallet, then you’ll get both coins. In this case, you’ll probably get to double your ethereum holdings for free.
To be clear, a wallet is another application you need for cryptocurrencies. It is a program that can hold your coins just like a physical wallet.
On your phone, you can download the Coinbase wallet, which is not the same thing as the Coinbase exchange. That is an ERC 20 compliant wallet, so that’ll work for buying other things in cryptoland.
I also use Exodus and MetaMask. They are both ERC 20 compliant. MetaMask is a browser plug-in, so it’s super easy to use, but the least secure. Exodus is an app I run on my desktop, which makes it more secure than my phone app.
So, you need to download a wallet app too. In terms of security you have:
- Desktop Wallet
- Phone Wallet
- Browser Wallet
The most secure wallet is a hard wallet. You can buy a NanoLedger for example. It’s basically a thumbdrive, so unless you plug it into your computer, no one can hack it. But it does need its software updated regularly.
One guy on Reddit, apparently, forgot to update his wallet for years and then lost all his Ether–literal tens of thousands of dollars lost. So, if you decide to buy a Nano for extra security, make sure to update its software at least 2 times a year.
3. Where Can I Buy Bitcoin and Other Cryptocurrencies, then?
Now your problem is this. You have Robinhood for stocks and a wallet for getting free forked coins.
But how do you buy and actually own those coins?
Well, you need to sign up for a cryptocurrency exchange. Outside the US, I like Binance and OKEx. They have loads of coins and cheap transaction fees.
Gemini and Coinbase are your only options if you live in New York like me. But if you live in any of the other 49 states, you could use Voyager. They are trying to set themselves up as the Robinhood of cryptocurrencies, offering trades without fees.
The problem is, I can’t check them out to see how easy they are to use. Online feedback is all over the place.
What I can say is that if you use either Gemini or Coinbase, you need to upgrade to the Active Trader account (just click the link in the account) or download Coinbase Pro.
The easiest to navigate is probably Coinbase Pro. I just used it to buy Bitcoin at a high volume time and my trading fee was $2.49 rather than $25!
- In the US, Coinbase Pro is going to be the easiest to use (and I can verify that service).
- Outside the US, make sure to upgrade if that option is available.
I am not going to offer you a Coinbase affiliate link, even though we’d both make $10 if you sign up, because that link is for the version that will charge you $25 a trade.
I’d rather have you save money than make money through a crummy affiliate program.
The one drawback when you upgrade to a “Pro” version is that you have to learn about Bid Ask spreads.
4. What’s a Bid-Ask Spread?
Buying and selling a stock or cryptocurrency is like going to an auction. You have an asker who is trying to sell at some price and a bidder who is trying to buy it for less.
The auctioneer says: “Do I have a buyer for $101? Alright, how about $102? $103?” and so on.
The bidder says: “I’ll buy it for $100.50 and not a cent more.”
That difference, between the $100.50 and $103 is the bid-ask spread.
The only difference on exchanges is that the bidders and askers are very numerous and transactions happen very quickly because computers can communicate much faster than traditional auctions.
Look at the (admittedly confusing) image below of what the screen looks like for Coinbase Pro.
You’ll see the spread is in the second column at about $.01.
Now, you can close that spread by just agreeing to whatever the seller wants, but that’s like just agreeing without even negotiating a price. It’s called placing a market order. You’re likely to lose money if you do that.
With Bitcoin, you have a small spread, so you could just buy at a market order and be ok. But for less active coins, you’ll lose quite a bit. So you have to change from the default market order to a limit order.
5. What Are Limit Orders and Why Should I Use Them?
The solution to losing money with market orders is to place a limit order, where you say, as in the example: “I’ll buy it for $100.50 and no more. That is my limit.” If the seller agrees to come to your price, then the deal happens.
Just change the tab and then enter how much you want to buy and what your limit is. If the spread is small, you can probably go with what people are asking. But if it’s big, pick something between the orange and green prices.
Here’s a disaster story. A student of mine, Ivan, got excited about stock trading, learned about options, and decided to trade them on Robinhood–mind you, I absolutely don’t think beginners should do this, but he was acting on his own. I only learned about his situation after he realized he was in a crunch and he asked me if there was anything he could do.
What he did was go on Robinhood and buy options that would short volatility (again … not for the inexperienced). His idea wasn’t bad, actually, but he made two crucial errors. First, he didn’t realize that he bought options that would expire in 4 days (these things are tricky). Second, he just bought them at market value rather than using a limit order.
The result? He waaaay overpaid because the bid-ask spread was huge. Unless everything went perfectly he was going to lose a ton and that’s what happened. There was a small market surprise two days later and his options never recovered. He lost about $5000 of his initial $6000.
That’s why I don’t think it’s smart to start with options. It’s also why you want to start out buying and selling small amounts. You’re very likely to mess things up the first few times.
This is a Lesson in the Absolute Beginner’s Guide.
I’ve gone over:
- Why you need a (1) stockbroker, (2) a wallet, and (3) a cryptocurrency exchange,
- Why you need to move your cryptos to your wallet to get forked coins (each site has videos on how to move coins using their software)
- Why you should use limit orders rather than market orders and what bid-ask spreads are.
I also explained why I like Robinhood and Coinbase for beginners especially in the US context. Believe it or not, they are the easiest to use and that matters a lot.
Taken all together, that should save you hundreds in trades, double your coins when they fork, and save you from disastrous losses.
Some of the commonest feedback I get is that I’m not doing a good job at communicating to my subscribers the value of the paid memberships. When Bitcoin recently dipped to about $48,000 I didn’t tell and I told my Daily Subscribers that I was buying more–a few days later, it’s up to around $57,000.
I told them specifically that I was also looking at leveraged buys on cryptocurrencies and I picked up $COIN, the stock for Coinbase, and $VYVGF, the stock for the Voyager exchange (which made 18% alone last Friday).
My initial Ethereum trades are up more than 14x and my late Uniswap buy is up more than 10x. And, of course, I told my Daily Subscribers before the opening bell that I was selling out of $TLRY because I thought the bubble was going to pop–netting 782% in about 90 days.
At the core of my strategy is a Basic Economic Cycle indicator. The data for that algorithm alone costs $200 a month. Then you have to build the thing and make sure it works. I’ve been running it live for several years and it even told me to sell out of the market before the COVID crash in March of 2020.
With a subscription, you get access to that kind of information. I can only teach principles in these weekly lessons, but if you want to get the experience you need to trade well, then the subscription does that.
Subscribers get weekly updates on every one of my bubble positions and the output of my algorithms. Thank you to those who have been asking questions on Discord. I use all of it to improve.
That’s it for this week! Happy trading!!
Notes & Disclosures
General financial disclaimer: I am not providing advice on financial investments and I am not a financial advisor. I am only explaining how I think about this process and imply no returns on your investments. As they say in the news industry, this is for entertainment purposes only. Please do your own due diligence before investing in anything.
Specific disclaimer: At the time of writing, I own a variety of cryptocurrencies, including Bitcoin and Ethereum. In general, I trade these, so by the time you read this, I may not still own them.