When you try and explain cryptocurrencies to most people, it tends to go over their heads. In reality, they are not far removed from regular currencies. Did you know that more than 90 percent of traditional money (also known as fiat money) does not existing physical form). It exists in digital form and appears to you as numbers on a bank account. Sweden is a country that is almost cashless - only 13 percent of transactions are done with cash. Even physical cash is not far removed from cryptocurrencies. Cryptos are represented by a series of numbers and letters. Almost every physical money bill has a unique serial number that is made up of numbers and letters. Those numbers and letters tell you a lot about the bill such as where it was printed when it was printed etc. The information about all the bills that have been printed is kept with the central bank of each country and shared with the government of that country and certain banks. When you deposit a money bill into your account, that transaction is reported to the central bank and the government as bill number XYZ going into account number 123.
That is almost exactly the same as what happens with a crypto transaction. Each Bitcoin is like a physical bill without the actual physical bill. Similar to physical bills, bitcoins can also be broken down into smaller denominations. Each Bitcoin is made up of 100 million Satoshis which makes the crypto infinitely divisible.
The crypto wallet address is similar to a bank account although there is no physical card that goes along with the account. Also, you are not required to provide your identity when you open a crypto wallet, which means that at this point the similarities cease. Provided you are not storing your crypto on an exchange, you have complete control over your wallet. No one is able to block or shut down your wallet as can be done with a bank account or a credit card. Also, in the event you lose access to your wallet or fail to remember the recovery phrase to retrieve your wallet, there is no one you can phone to recover those assets. Another difference is that all the transactions are public and can be seen on the blockchain. When you send bitcoin from your wallet the wallet will generate a transaction ID. This ID is also known as a transaction hash and is the unique address of a transaction in a blockchain that serves as proof that your transaction took place. You are able to go to Blockchain.com, click on the Explorer tab, paste the transaction ID or hash into the search bar and see your transaction.
This blockchain ledger is not saved in a centralized location - it is spread across nodes that make up the network. The network was created in a way that people are paid to confirm and verify transactions. The transaction is verified by a mining node and included in a block of transactions that are recorded on the blockchain. Once recorded on the blockchain and confirmed by sufficient subsequent blocks, the transaction is a permanent part of the bitcoin open distributed ledger and is accepted as valid by all participants. It is this lack of centralization that is the biggest departure from traditional finance which is strongly centralized in the hands of the banks and governments.
There are thousands of cryptocurrencies and all are different. Also, there are coins and there are tokens. Coins are bound from the ground up. They create their own networks and they build everything from scratch. There can be only one native coin on a network but there can be many tokens of that same network. For example, ETH is the coin that is native to the Ethereum Blockchain and there are numerous tokens that work off this Ethereum Blockchain. Bitcoin is the only coin on the Bitcoin blockchain. NFTs are tokens and they are quick and easy to create. Bitcoins are coins and they are difficult to create because they need to be mined. The most famous token on the Ethereum blockchain is Tether or USDT. This is a stablecoin. If you give them $100,000, they will use that money and turn it into a token with a monetary value of $100,000 and under normal circumstances, it will hold its value because it is similar to a digital deposit.
How secure are cryptocurrencies? Not all cryptos were created equally. Bitcoin has been around for more than a decade and it has been battle tested. It has been built in a way that it is virtually impossible to hack the blockchain which means the integrity of the underlying ledger is almost perfect. Does that mean that it is impossible for hackers to steal the bitcoins in your digital wallet? Not at all - and neither is the money in your bank account necessarily safe from hackers. If you wanted to hack into the Bitcoin network, you would need to successfully hack into half of all the computers that make up the nodes of this network at the same time! That is impossible bearing in mind there are millions of computers that make up the network. On smaller networks, it is easier to launch a 51% attack. It is far easier to hack into an exchange and therefore better to store your crypto in a cold wallet - shy would hackers try and crack the security of your small wallet when they could focus on an entire exchange.
The biggest risk of crypto is arguably price volatility. Bitcoin has been subject to massive volatility since its inception and in order to answer the most common question: why crypto in general and Bitcoin specifically is so volatile?" you need to address the issue of intrinsic value. What is Bitcoin, Ethereum, or any crypto worth? What is any currency worth? Before 1971, most of the world's currencies were pegged to the US dollar which was pegged to gold. After the US moved off the gold standard in 1971, this backing was removed. Currencies are now backed by the full faith and credit of the issuing country and if you want to know how that is working out for some people, ask anyone from Venezuela or Argentina - two countries with strongly devaluing currencies. But this is not only an issue in troubled emerging economies - developed economies have been debasing their currencies for decades. This debasement has accelerated over the past few years as governments have printed unprecedented volumes of money to address crises such as the collapse of Lehman Brothers in 2008 and more recently COVID. When people are given money, they tend to spend it and this is starting to trickle through into inflation and this erodes the buying power of money. The value of any crypto depends on its use. Bitcoin has been dubbed digital gold on account of its limited supply and the difficulty in mining it. The term mining is not used in a literal sense but as a reference to the way precious metals are gathered. Bitcoin miners solve mathematical problems and confirm the legitimacy of a transaction. They then add these transactions to a block and create chains of these blocks of transactions, forming the blockchain. When a block is filled up with transactions, the miners that processed and confirmed the transactions within the block are rewarded with bitcoins. Transactions of greater monetary value require more confirmations to ensure security. On average, 144 blocks of Bitcoin are mined every day and as of now, there are 6.25 Bitcoins per block which means that approximately 900 Bitcoins are mined every day. In 2009, the reward for each block in the chain mined was 50 bitcoins. After the first halving in 2012, it was 25, and then 12.5 in 2016, and then it became 6.25 bitcoins per block as of May 11, 2020. To put this in another context, imagine if the amount of gold mined out of the Earth was cut in half every four years. If gold's value is based on its scarcity, then a "halving" of gold output every four years would theoretically drive its price higher. This is simple supply and demand economics - as supply decreases and demand increases, prices need to go up. Ethereum has a different use case than Bitcoin. Its value is linked more to the utility of its underlying blockchain. It can be used to issue tokens, and create apps and websites that cannot be censored or shut down. The European Central bank has even issued a bond on the Ethereum blockchain. The Bitcoin blockchain on the other hand is less useful to outside applications. The volatility of cryptos is directly linked to the newness of their technology - they have the potential to change the world and with this potential, price movements are amplified on the upside and the downside. When the stakes are high, so too is the uncertainty.
Cryptocurrencies allow people to lend, borrow and save without an identity, credit score, or bank. It enables people to do business without a middleman taking a cut. This will threaten the existence of powerful intermediaries such as banks, pension funds, and insurance companies. They also allow for the creation of a decentralized autonomous organization (DAO), which is an organization constructed by rules encoded as a computer program that is often transparent, controlled by the organization's members, and not influenced by a central government. In general terms, DAOs are member-owned communities without centralized leadership. A DAO's financial transaction records and program rules are maintained on a blockchain. What is certain is that crypto threatens existing power structures and could be the most disruptive technology we have ever seen. This means whenever events happen that may derail or delay their full development, prices plunge.
The final question is what crypto is right for you? That is a difficult one to answer because it depends on your risk appetite. All cryptos are risky, but if you are looking for the least risky of these risky assets, you want to focus your attention on cryptocurrencies with higher market capitalization. The market cap is calculated by multiplying the price of the crypto by the circulating supply. For example, there are approximately 19.2 million Bitcoins in circulation. The market cap would be the price multiplied by 19.2 million. In my opinion, the best crypto strategy is a long-term buy and hold - in other words buy and never sell.