An introduction to Cryptocurrency

“Cryptocurrencies basically have no value… they don’t produce anything.”

Warren Buffett

“Cryptocurrencies are useless.”

Bruce Schneier

For something that has no value and is useless, Bitcoin–the most famous cryptocurrency–has managed to attract a lot of interest. The current market cap of Bitcoin is approximately $200 Billion–roughly between that of The Coca-Cola Company and Pfizer. There are now ETFs, institutional investors and dozens of exchange markets trading billions of dollars per day in cryptocurrencies.

This article will present an introduction to cryptocurrency and hopefully validate it as a part of any high-risk investment portfolio.

What is a cryptocurrency?

A technical schematic of a Bitcoin transaction

A cryptocurrency is a form of payment which:

  • Is entirely digital
  • Has no central or regulating authority
  • Records activity in a decentralized system
  • Relies on cryptography to prevent counterfeiting, fraudulent transactions and double-spending

Contrast this with the digital accounting of US dollars in your bank account. Those dollars are regulated and issued by the federal reserve and your corporate bank maintains a ledger accounting for the dollars which you control. Although cryptography is used to protect your data in digital banking, it is not an intrinsic component of the issuance or the transfer of the currency. If you want to do a ‘deep dive’ into the technical aspects, here is a good video discussing some of the concepts.

Why was this developed?

The S&P 500 during the 2008 recession

Developed shortly after the 2008 financial crisis, Bitcoin was the first successful attempt at a digital currency and was an answer to the faith lost in centralized banking institutions. Its groundbreaking design allowed it:

  • to transact quickly over the internet and not be dependent on a proprietary financial network
  • to not be subject to the political whims of state actors who could devalue or inflate their currency
  • to be safe from government seizure if stored properly
  • to be as secure as strong cryptography–unbreakable

The early applications were obvious for restricted activities such as tax avoidance, money laundering, black market sales, internet gambling, etc. However, the initial intent was more of a Libertarian ideal to have a currency which was free of the manipulation of governments.

Imagine if a government tried to seize your assets and you had them in digital format in a virtual wallet which could be retrieved anywhere in the world with an internet connection. This currency would also hold stable value regardless of a given country’s economic forecast. This was the idea anyway… but now it has become a LOT more.


Altcoins

As Bitcoin’s popularity exploded, it became too expensive to use in everyday transactions. For example, buying a cup of coffee could result in a transaction fee worth the same amount as the purchase itself! In addition, intrinsic problems with its design were improved and alternative coins were developed, so-called ‘altcoins.’ There have been literally thousands of altcoins developed, all of which purport to have specific utility. I’ll introduce a couple of the most interesting and largest by market cap and will introduce more in future articles:

Ethereum (ETH)

The 2nd largest cryptocurrency by market cap, Ethereum is an entirely different type of cryptocurrency and is more accurately described as a network on which decentralized applications can be built–like an internet of cryptocurrency.

Ethereum creates smart contracts which execute given specific conditions. It is literally a self-operating computer program which can be run exactly as written without possibility of fraud, censorship, or some 3rd party interference. The Ethereum network functions as the infrastructure for the many decentralized applications which have been built as independent cryptocurrency products. Ethereum has surged in popularity due to its use in decentralized finance (future article).

Monero (XMR)

Bitcoin is only pseudo anonymous and transaction amounts and addresses are public by design. Monero solves this problem by using things called ring signatures, ring confidential transactions and stealth addresses, which provide anonymity to the entire transaction.

Stable Coins

Alt coins can have incredible volatility and fluctuate by several percentage points or more each day. As markets and exchanges expanded, there needed to be coins which could be artificially pegged to certain fiat currencies to reduce volatility, these are called ‘stable coins.’ Two examples are US Dollar coin (USDC) issued by Coinbase and the Gemini US Dollar coin (GUSD) issued by Gemini. But basically they all work by balancing the liquidity between supply and demand in real-time to maintain a stable value roughly equivalent to the pegged fiat currency with micro fluctuations.


Equities NOT Currencies

Buying and holding cryptocurrency could be done for some of the same reasons you invest in anything such as diversification and appreciation. You can even own physical gold via crypto such as PAX Gold!

The crypto market is just beginning to realize its potential as countries accept its legal status and decide how to appropriately attempt to regulate it. Because the supply of coins is typically finite in number, the currency tends to appreciate rather than depreciate as its adoption becomes more widespread–unlike most fiat currency. The supply issue is complex actually and different for each coin but beyond the scope of this article.

Given the diverse offerings and the potential to appreciate, altcoins should be treated as equities rather than currencies. I’ll present one example of a business whose model is founded on an Ethereum network altcoin and will present other examples in future articles.

Crypto.com Coin (CRO)

CRO Debit Card

Crypto.com Coin is one example of a popular application on the Ethereum network. When you store your coin in their application, you can receive very high returns–14-18% on top of any underlying appreciation–like a very high-yield savings account. Take a look at how your investment in CRO would be doing if you bought about a year ago:

CRO to USD 1-year chart

A 301% return if you had decided to put some money in as an early adopter.

But it is a genuine financial product. This company issues debit and credit cards which have excellent benefits. Although they require the use of their CRO cryptocurrency for funding, the cards can be used anywhere Visa is accepted.

This is just one of the many actual financial products being developed in the crypto space. I am currently using this debit card and I love it. If you decide to try it out, please use my referral link and we will both get $50.

How do I buy cryptocurrency?

Coinbase Pro

There are several easy ways to buy cryptocurrency including through US companies such as Coinbase and Gemini or through the Crypto.com app.

Even larger, more diverse exchange markets exist such as Binance, where you can transact in hundreds of cryptocurrencies, using all the elements of a typical equities market such as futures contracts, margin, leverage, etc. You will need a VPN as US IPs are typically restricted.

Once you have some crypto, you can transfer it similar to how you perform digital bank transfers. However, transactions do have intrinsic cost–a token amount of the underlying asset is spent in the transfer as a kind of toll to fund the entire infrastructure.

You can move it between exchanges or you can store your crypto on a private wallet application such as Trust Wallet or MetaMask or even on a hardware wallet such as the Ledger or Trezor. The explanations of transfers and wallets are beyond the scope of this article. However, understanding them at a practical level should be straightforward and is an exercise left to the reader.

Fin

That’s a firehose of information if this is your first foray into crypto.

I encourage you to visit linked pages for more in-depth explanations. I would also highly recommend that you to experiment with small amounts of money if you are new to crypto before attempting large value transactions as mistakes can result in the loss of your entire transfer.

Shinkei Written by:

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