This is a beginner's crash course into understanding cryptocurrency basics, so I won't be too technical in explanation. My pardon to the experts who feel I've left out the important and intricate details; I'm writing this in a way a five-year-old would understand best. :)
Background
Different governments own different currencies; the US Dollar ($), the Chinese Yuan (¥), British Pound (£), South African Rand (R), Indian Rupee (₹), Kenyan Shilling (KES), etc. Each government has its jurisdiction over its currency and plays with it however they like.
The world reserve currency is currently the US Dollar- used in global trade, economic comparison, etc. This has its drawbacks, though. Whatever happens in the US economy practically affects the world, if The Great Depression of 1929 and The 2008 Global Financial Crisis are anything to go by.
The 2008 crisis, especially, is more resentful for two reasons: it's the more recent of the two, and it adversely affected millennials' ability to make money to date. Their American Dreams were crushed to the ground, their bank accounts either frozen or liquidated. On the other hand, the government bailed the same banking institutions responsible for the crash in the first place while acquiring over 70 more insolvent ones.
It was a dark time in recent history. People had enough with the government and the then banking system. They wanted a way out but weren't sure how so.
The crash caused many effects worldwide but catalyzed one that completely revolutionized global finance. It initially started in tiny bits in 1983 in the formation of anonymous cryptographic electric money ecash, becoming Digicash twelve years later. Digicash was encrypted such that no government, bank, or third party could trace it.
1998 birthed "B-money," an anonymous electronic cash system, while bit gold, not too long after, came out demanding a "proof-of-work order" solution that one could cryptographically solve.
The nail on the coffin came in the post-crash era of 2009 when the fully automated foolproof cashless system came to play. This technology has since been decentralized and publicly available in yet another system unfathomable to human understanding (yet). It made silent moves in the early 10s, but headed into the 20s, has become a revolutionary technology of the past decade and the next to come, and because of it, finance is reimagined.
Enter Cryptocurrency.
What is Cryptocurrency?
Easy Answer: Cryptocurrency is some digital money that the world is talking about right now, but I don't really care much to know much about it. I just know it exists.
Cryptocurrency (short: Crypto) is a decentralized digital currency secured by cryptography to prevent counterfeiting and double-spending of a currency. By a decentralized cryptocurrency, no entity or intermediary exists between the sender and recipient of the currency.
A cryptocurrency is digital; it is coded from computers and has no physical attribute to it. This means that you will never see a physical cryptocurrency unless you consider some commemorative coins from Amazon.
Common cryptos examples include Bitcoin, Ethereum, Cardano, Litecoin, Dogecoin, Tether, and many more.
Who created cryptocurrency? Who made it?
Easy Answer: Satoshi Nakamoto, Vitalik Buterin, among others.
Different cryptos have different creators, so the number of crypto creators varies, but the blue-chip cryptos' inventors (Bitcoin and Ethereum) are relatively famous.
Bitcoin's creator is Satoshi Nakamoto. Satoshi, however, is anonymous; no one knows whether Satoshi is a syndicate or an individual. It gets even more interesting to learn that Satoshi disappeared in 2011, never to be heard of again. A 21st-century mystery, I believe.
Ethereum's creator is Vitalik Buterin, who imagined creating a platform that showcased more uses of blockchain other than creating Bitcoin. Unlike Bitcoin (and I agree), Vitalik wanted to incorporate blockchain with software development and connect tangible assets (properties, stocks, real estate, etc.), digitize them, and encrypt them into the blockchain. His bet is starting to pay off seven years later as more developers unleash new capabilities of the Ethereum blockchain.
When was crypto created? How long has it been around?
Easy Answer: 2009.
The first crypto, Bitcoin, came out in 2009. All else followed since; Dogecoin in 2013 and Ethereum in 2014. Another, like Polka Dot, came out last year (2020). All this proves that at any particular time, new crypto is evolving.
PS: From here, I'll exclude the technicals and narrate the basics for a novice's understanding. I might explain the technicals in a later post, but that's for another day.
Where does it come from? Where is it made?
Easy Answer: From computers.
Most supercomputers connected to the blockchain network are usable for mining cryptos. Unfortunately, the entire process is quite powerful and energy-consuming, to the dismay of environmentalists. The good news, though, is that more mining facilities are turning to green renewable energy, which should be good for legislation. It's just a matter of time until so.
Once mined and bought, users store their cryptos in a wallet. A crypto wallet can be either digital (.i.e., an app) or physical, A.K.A, a cold wallet, which resembles a flash drive. To access a wallet, one has their own individualized key for personalized security of their wallet and coins.
How is it made?
Easy Answer: By mining.
Crypto is obtained through mining. Not the literal mining like coal, gold, oil, etc.., but rather, 'digital mining.'
Cryptocurrency digital mining is done by verifying crypto transactions and solving complex algorithmic mathematical code in computers. Bitcoin is mostly mined this way; the more verifications and solutions a miner creates, the more Bitcoin earned. That way, Bitcoin is the miners' salary- the same Bitcoin being mined. After retaining some of it, the miners will sell the rest to fund their expenses- buying better mining equipment, maintenance costs, rents, etc., and the entire process recurs.
Interesting to note is that, unlike any normal currency, Bitcoin has a fixed supply of 21 million- there will be at most 21 million Bitcoins in existence in the world one day, and this could be as early as 2021- this year- or as late as 2140- in 119 years. Basic economics from the law of supply and demand teaches us that with less supply and constant (if not more) demand, the price will increase, which will be Bitcoin's case. Thus, the scarcer Bitcoin gets, the more precious it becomes, and so does its cost.
At the time of this writing (August 14th, 2021), Bitcoin's price is $46,719.03. I want a $500,000/coin by 2025.
Some prominent mining companies include Marathon Holdings, Riot Blockchain, and SoS Limited.
Why was it made?
Easy Answer: Read below.
Cryptocurrency is revolutionizing finance as more people seek alternatives from fiat currency- government-backed currency or just normal money. Thanks to blockchain technology, people want crypto for its decentralized nature- not tied to any central authority like a government or a bank. Because of no central entity, you have reduced transaction costs and heightened security within the blockchain network. Furthermore, the masses want a public transparent currency whose transactions all can see on a blockchain.
Not to mention, scarce crypto like Bitcoin will serve as an inflationary hedge- people want their money to retain its buying power during inflation. For example, inflation rises at 3% annually, and Bitcoin returns (at least) 10%. Investors will then stash their money into Bitcoin for the net 7% growth (10-3), which would deflate an inflating economy and thus optimally reduce commodity prices, and the cycle continues. So, in a way, Bitcoin is helping the economy.
The social movement wants Dogecoin to be a real currency for probably two reasons. One, it shows people's healthy, childish, and fun side, that no one is ever too mature to joke with a meme currency. This leads to two, in a case where Elon Musk prospects, "Fate loves irony." Dogecoin, started as a joke to mock cryptocurrency, is on path to becoming a real currency, 180ing its purpose. It reminds me of the famous analogy of the stone, which the builders rejected, becoming the cornerstone.
Will Dogecoin become a real currency? I don't know yet, but it would be fun seeing so, especially since Mark Cuban's Mavericks do take Doge as ticket payments. What I do know is that it will hit $1 at some point. Question is, when exactly? Only time will tell.
What are the pros and cons?
The pros and cons- probably my favorite segment in analysis.
Pros
Still a relatively new space. It's fun holding a relatively new and high-performing asset class in your hands. People are still trying to understand it and perhaps criticize it, which is acceptable. After all, people didn't quite make of the internet during its inception. Also, compared to other asset classes (stocks, real estate, bonds, crude oil, etc.), which have been around for decades, crypto has been around for only twelve years, making it still relatively young.
It is high-performing. Bitcoin alone stood out as the best performing asset class of the 2010 decade with an over 17,000% growth. Of course, returns aren't guaranteed and are always atypical- everyone will get different results, so it pays to invest properly. Still, the serial proven winners of the space are Bitcoin and Ethereum, closely followed by the likes of Cardano and NEO, and they're continuing to win big.
It is decentralized. Crypto's decentralization is arguably its best attribute for a couple of reasons. First, you don't have to worry about a government, banks, or any intermediary interfering with your holdings. Two, eliminating the middleman reduces transaction costs that would have otherwise gone to bank-processing fees, brokers, or legal teams (e.g., lawyers verifying a transaction's legitimacy.) Third, it is swift. Bank transactions can take days, if not weeks, to clear; crypto does so in minutes. Cryptos will disrupt the entire financial services industry, and it's up to the latter to blend innovatively into the space before obsoletion.
Always open. Unlike the stock and equity markets that are open for limited times (NYSE operates from 9:30 am to 4:00 pm EST), crypto markets are open 24/7, so there's always a price movement to track at any moment.
Sweet interest on coins. You can earn interest on your coins. Block-Fi allows you to earn 5% interest on Bitcoin and on average 10-15% on altcoins, significantly much better than savings accounts today. An average savings account grants a 0.04% annual return on your money (not taking into account lowered interest rates), while inflation creeps in at 2-3% annually. Thus, in the best-case scenario, your money grows by (0.04 - 2% =) -1.96% per year, meaning if you had $10,000 in January 2021, it would be worth $9804 by January 2022.
There is a social movement behind crypto. Crypto, at this point, is like the 'currency of the masses,' free of any legal authority and detached from fiat. Retail investors right now are on a mission to take Dogecoin to a dollar and create a mainstream usage behind it, despite it adding zero value to the blockchain. People love seeing an innocent dog on a yellow coin, I guess. I think it's funny seeing how over 18 million human beings want a coin with a dog on it to go to the moon...metaphorically and literally.
Cons
It is heavily volatile. Crypto is insanely volatile; if not monitored properly, cryptocurrencies can cause heart-attack levels of fluctuation, no exaggerations. Bitcoin, for example, dropped as low as 93% in 2018 and 50% in 2021, despite both years seeing different prices of the coin. While I believe that it (and the whole space) will still appreciate, so will it still be volatile along the way. The volatility can be gut-wrenching but can also build character, I believe, as one learns the painstaking lessons of investing in practically anything. Otherwise, crypto is not for the fainthearted. A few tips on surviving volatility: do not buy a coin at its all-time highs (ATH), do not FOMO in (Fear Of Missing Out), only invest an amount you are willing to lose, dollar-cost-average in, HODL (Hold On for Dear Life), don't sell, lower your expectations, and don't invest emotionally.
It's susceptible to scams and money laundering. Scammers are on the prowl to scam innocent, unaware investors of their hard-earned money, and an easy way to do so is to manipulate the ongoing crypto hype. These scammers appear in different forms; unknown street brokers, phishing emails, YouTube comments, and even creating questionable cryptos for their pump-and-dump schemes. An example of the last scam is what part of the FaZe Clan did with their presumptuous Save-The-Kids token. Tip here: trust your gut. If you don't trust someone or something with your investment, most likely you're right, and always protect your capital.
It's a victim of public influence. The crypto space suffers massive influence from famous personalities who toy with it however they want. In recent times, Elon Musk has been a market mover for the crypto market through his funny but weirdly cryptic tweets. For instance, he regularly tweeted about Dogecoin, and the coin would explode up to 30% intraday. Elon is also the main instigant of Bitcoin's price action this year when he first tweeted in mid-February that Tesla would begin accepting Bitcoin payments, only for him to revert his stance three months later, citing environmental reasons.
Furthermore, Bitcoin (and all cryptos) suffered a huge crackdown in China days after Elon's tweet. Before then, China was responsible for over 60% of the total Bitcoin mining, after which all the miners escaped the country to resettle abroad. While this was a blessing in disguise, it still hurt millions of investors in the process.
Unregulation has its flipside too. Just as there is the good in crypto being decentralized and authority-free, there is also the bad in that. Cybercriminals and hackers can hack an open and vulnerable blockchain and steal as much as they want. It gets more interesting because most authorities cannot interfere with something outside their bounds. The worst-case scenario: the hacker might end up Scott-free. Tip: secure your holdings onto a secure exchange. Block-Fi, Kraken, or Gemini are good examples of that.
The uncertainty still rules the space. While crypto is still new and many are learning it, it doesn't take away the uncertainty, or FUD (pronounced 'fahd' as Fear, Uncertainty, and Doubt), from the entire prospect. Understandably, most stakeholders are retail investors, and no one has a crystal ball to predict the next price movement. So it makes sense that this uncertainty brings about skepticism of all sorts by media personalities, long-term investors, and governments. Unless we travel a few years to see the crypto prices, the little man can do to shake off the ongoing uncertainty. Tip: again, not only invest an amount you are willing to lose, but also invest in something you massively believe in. A normal investor might know something about some coin that some prominent hedge fund might not, and that could be the difference in succeeding in a trade. Don't go by other's feelings, but by your own instincts.
Bonus con: There is the whole legitimacy of Tether that makes the whole space questionable. It's a 'bonus con' because I'm still trying to understand the controversy and will probably sketch up a new post about it. If you do know what it's all about, don't hesitate to contact me or leave a comment down below.
"What's in it for me? How will it benefit me? Why should I care that cryptos exist?"
People have varying opinions on cryptocurrency, and that's fair. Still, I could think of some reasons why anyone and everyone should get even the slightest taste of this realm.
It gives a sense of ownership. It's fun holding a coin, or even a piece of it. It instills in you a sense of pride of how early you are in it because the rest of the world is cranking out its code on what it is. Then again, it's one of the easiest asset classes to purchase and own other than stocks. For instance, compare buying crypto to real estate, gold, bonds, etc- crypto is quite accessible even to newbies. Furthermore, Bitcoin is termed as 'the digital gold,' and investors are flocking to it as an inflationary hedge as they are to gold. Depending on the country you're in, different brokerages exist to extend crypto services to you.
It's the evolution of something new. Crypto (especially blockchain) is analogous to the continuation of the internet. Blockchain, which bore crypto, has a unique way of storing and sharing information that is decentralized, publicly transparent, and secure, much like an 'Internet 2.0." Personally, blockchain has me reminiscing on how I wish I were around during the 90s internet boom, but I wasn't even born yet. Crypto gives me that opportunity to do so.
Crypto is here to stay. We might as well acquaint with crypto especially as financial institutions are noticing the scene. If anyone wanted to kill crypto, they should have done so during its inception, or in 2018. 2018 was the worst that could have ever happened but Bitcoin still hit ATHs this year. Plus, people want a free currency to avert financial crises such as inflation or a repeat of the 2008 economic crash, proving that crypto is here to stay.
What are my thoughts about it?
Easy Answer: I like it.
I think the above article is pretty obvious about my stance on cryptocurrencies: I am a big bull. (I want it to go up in value.)
I quite think it is the future of monetization as we know it, and it gives people more freedom with their money. Of course, there are thousands of coins out there that everyone is looking to as the next winner, and it gets tedious at times conducting countless research. Hence, my shortlist is as follows: Bitcoin, Ethereum, Maker, Cardano, Dogecoin, Litecoin, Uniswap, Matic, Polkadot, Binance Coin, Algorand, Neo, Monero, and Pancakeswap. If you're looking for a winner, you can start from this list; I've done the homework for you.
It's also interesting that companies are creating their own coins, not necessarily cryptos, to reorganize their financial structures; companies like Facebook and its Diem, and major US banks creating their own stablecoins for business transactions. We'll wait and see what happens moving forward.
I'm also looking into stablecoins such as the USD Coin, Fed Coin, and Tether. While I'm yet to understand their value to the blockchain at this point other than been pegged to an asset or a natural currency, I'm a bit wary of Tether.
I agree that some massive flaws in the crypto field still exist and need amendments. The pump-and-dump schemes, counterfeit coins, tax evasion attempts, exchanges hackings, illicit dark-web transactions, and terrorist financing- such activities are tarnishing the entire crypto space's legitimacy, contrary to its intended purpose. If some executive non-governmental crypto council met to deal with these kinds of activities, then that would be a plus.
All in all, I believe that cryptocurrency is transforming global finance, giving the average joe some more financial leverage in the 21st century. It should be easier to transact and transfer money without worrying about an intermediary in between. It's a new dawn of innovation that we are waking upon, and let's see how things emanate five years from now.
All the best,
~Carerra, 2k21.
What do you think? Do you think crypto is here to stay or not? Why do you say so? Let me know in the comments below.
{NOTE: THE ABOVE CONTENT IS STRICTLY FOR INFORMATIONAL PURPOSES ONLY AND NOT FINANCIAL ADVICE. INVESTORS SHOULD BE AWARE OF THE RISK ENGAGED IN TRADING SECURITIES AND ASSETS. PLEASE CONDUCT YOUR OWN RESEARCH AND CONSULT YOUR FINANCIAL ADVISOR BEFORE MAKING ANY INVESTMENT DECISION.}
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