The title should have been “Cryptocurrencies for your grandmother” but that won’t be easy for her to find, so Bitcoin is a buzzword I must use.
The idea for this article came to me when a friend of mine told me, “the moment my grandmother would trade Bitcoin, the crash will be near” — as a daredevil, I am trying to see if this prophecy will come true!
I see this article as a collaborative effort (comment & share with as many grandmas as you can!) to educate people about cryptocurrencies and how to practically use them. I use Bitcoin in this article as a generic coin, but many of the principles apply to other cryptocurrencies as well.
Let’s get started!
What is Bitcoin?
This is the first question we should probably try to answer.
I see the Bitcoin phenomenon as probably the first time we as humans have been able to make a usable currency to store value without the need for a bank (central entity) on a global scale pretty much instantly.
It all was started by Satoshi Nakamoto, an anonymous figure somewhere around 2008, who wrote a paper outlining the idea for Bitcoin and shared it online; from there people began taking interest in the ideas presented there.
Once you buy Bitcoin you own a unique password (key) that represents your Bitcoins which can be seen as a kind of “digital gold”. You can send Bitcoins to other recipients without one entity (bank or any other third party) being in control of the transactions. Later on, we’ll see how this all works.
What it isn’t
Bitcoin is in its infancy right now, so we have to cut it some slack. Some of the drawbacks here are here to stay but some can be changed for the better.
- Currently, it doesn’t really qualify as a currency in my opinion, as the fee per transaction is too high, the transaction times are too long (which might get fixed someday) and not a lot of stores use it. If you can’t buy a pack of gum with it, it isn’t a viable currency. Others might say that it isn’t a currency because it doesn’t have any intrinsic value, but looks more like a commodity. (For alternative coins see, “I want to buy coins other than Bitcoin” section).
- Bitcoin isn’t really regulated at the moment, so no Mr. Bank or Mrs. Regulator can’t really help you out when you want a refund or to get some kind of insurance. In other words, the uncertainty around it makes it risky.
- It isn’t really easy for most people, you had to read this article, didn’t you?
Why is it better?
Do you like middlemen? I certainly don’t like them when they don’t provide a better end result. Why would we? A bank is a middleman*, taking a fee here and there. They can decide to use your money for loans and investments, and even crash, putting you in a situation where your only hope is your government. Governments can decide how much your money is worth, for better or worse. With Bitcoin this is not the case, as there is no central authority that can change prices or fees on a whim.
Take a look at Zimbabwe where the money the government printed out was doubled every day, meaning your 100 Zimbabwean dollars were worth half each passing day!
Bitcoin will never add more coins, it was designed to be constant, so it will never have more than 21 million coins — possibly increasing its value over time.
If there is something I’d like to emphasize in this article it is the bigger picture. Over time, with other technologies, we removed middlemen, like we did with the internet and cell phones. Now the next step is with the Blockchain (the infrastructure for Bitcoin) where money is back in our hands, but on a global scale.
With Bitcoin you can decide how much you want to pay for your fees, the only drawback would be the speed of your transactions: the higher the fee, the faster your transaction would be processed — a free market. If your fee is too low it can also not be processed at all.
The value of Bitcoin is determined by supply and demand, which is the essence of a more free and pure market. No single authority can decide to change the value of the coin by themselves (unless you are a whale**).
Hackers need to hack a large number of devices or have more power than the whole network vs hacking one bank entity, which is in most cases theoretically easier.
A quick reminder: I should probably note here, that if someone steals your Bitcoin password (keys) you won’t have a bank behind your or insurance. This is a disadvantage that I feel you should take note of.
* We have to note that banks (and regulation) do offer protection for your money and a somewhat stabilized value for your money in exchange for them taking fees and acting as a middleman. The only question here is if we need that specifically or are other solutions more suited for us. And do we really want to encourage the innovation to develop such problematic old solutions.
** A whale is a single person or entity that holds massive amounts of cryptocurrency, theoretically being able to shift tides in the prices.
How the heck does it work?
Just a reminder to bear in mind that — as I said above — there are other coins, even if I use “Bitcoin” as an example everywhere.
If you don’t want to get into a more in-depth technical explanation of how Bitcoin/Blockchain works, you can skip this part, no hard feelings.
You are a participant in a conference called Blockchain Grannies! You even managed to get in! All of your friends are just crazy about this thing and you are amazed by the long line outside. There is a room called “Bitcoin IRL” (IRL=In real life), you decide to try it out.
You are told to put a mask before entering the room (so no one knows who you are). In the room, there are a bunch of transparent piggy banks. You can only use money in your piggy bank for making transactions.
Each person in the room can open their piggy bank with a key they only have (private key). Now, let’s say you want to buy some cookies and your friend Barbra wants to sell some. You ask Barbra which piggy bank is hers (address/public key, read more about it later) then you enter the room with a mask on. Other people can see that you entered, took money from your piggy bank and then put it in Barbra’s piggy bank. This is how everyone knows the history of all the money flowing in the room — this ensures that no one can fake their own money.
For the full metaphor read here.
The takeaway is that Blockchain coins work without a third party entity because the banking aspect is distributed across the entire network (validating transactions is done by multiple users in the network).
As with most metaphors, it is incomplete and has some deviations from reality. I found some more resources that explain the blockchain, here you go:
Or if you prefer video:
What are public and private keys?
In short, to receive funds you send your address.
As for your private key, you don’t really use your private key, it is used internally when you want to send funds (to prove ownership).
You want to send 0.4 BTC (Bitcoin) to your friend Ana. In your wallet you enter Ana’s address, so the wallet knows where to send the funds to. Then you enter an amount and decide on the fee you are willing to give for that transaction (giving more means a faster transaction) and then you send it.
What happens now behind the scenes is that the wallet crafts a message to the network saying that your address is sending 0.4 BTC to Ana’s address and 0.0005BTC as a fee. Now, the wallet signs the message with your private key, which has a special mathematical relationship with your address. This enables the network to verify you indeed sent the funds, as no one is supposed to know your private key except for you (and therefore also your wallet, which is installed locally on your computer).
Pretty simple if you don’t want to get into the math and how it works.
Now that we have understood what the blockchain is, let’s dive into more day to day, practical information.
5 Biggest Myths
Again I’ll use Bitcoin, but this can apply to many other coins as well.
- Bitcoin can be a physical coin - it can be printed out to be physical, at least a number that corresponds to a wallet. But usually it is stored digitally, so don’t buy it from shady people on the street. Or at least, if you do, please verify the amount. Any golden coin you see is probably more of a memorabilia rather than a real coin.
- Bitcoins don’t have any value - the moment there is a buyer for something, it has value, which seems more like a commodity. The ideas behind Bitcoin also hold value. The idea of removing the middleman, safer and faster transactions without relying on governments or banks are also part of its value.
- Bitcoin can theoretically be turned off - well, if you turn off all of the computers using Bitcoin then yeah, but it is not really likely. Although it might make the risk more likely as it might restrict the usage through regulation in some way.
- Bitcoin is used only for illegal activity - yes, some of the transactions are indeed illegal, but many aren’t as you can read here.
- Bitcoin is a safer way to transmit money - well it depends on how you define “safer”. Hacking your bank is said to be easier as it is a centralized entity, but if you don’t know how to handle your own cryptocurrency (ie Bitcoin) then it can be pretty easy to steal it and there won’t be any insurance helping you out, and very little recourse.
Yes, you can buy less than 1 Bitcoin (!)
Surprise surprise! Don’t let the high value deter you. You don’t need to spend $20k to buy Bitcoins! You could buy 0.01 Bitcoin if you wanted, it all depends on where you buy it, see the “how can I buy some” section for more details. The smallest amount you can send is called Satoshi, which is one hundred millionth of a bitcoin (1⁄100,000,000 BTC).
Is Bitcoin completely anonymous?
Well, not really. All of the transactions are seen by everyone, so if for example, you tie yourself to an address (by posting your address for tips online, next to your name), then people can see how much money you had, and where you’ve sent it. If you are smart or use a specialized coin, then yeah, it can be pretty anonymous.
Why would I want to buy Bitcoin when there are so many other coins out there?
Well, Bitcoin is the most recognizable. And even if you want to buy a different coin, you would probably have to use Bitcoin first to exchange for that “other” currency.
How can I buy some?
After my last post I got several messages from people asking me how to buy coins, well it usually goes like this:
I tried to search for a good simple youtube video explaining this process but I couldn’t find anything — any suggestion will be welcomed.
- You need to download a Bitcoin wallet that will hold your coins. Google it. We will be using Bitcoin as it is currently considered as the “entry coin”. You can find a few reasonably reputable wallets here, here and here (use at your own risk though).
- You need to find a seller of Bitcoins. This can be your friend from bridge sessions, an online service or even a physical ATM (!) Google it. We will stick with the online service for now. If you want an explanation about the other means of buying, ask in the comments and I’ll respond!
- Usually, online services that sell Bitcoin accept a bank transfer or sometimes (like in the case of cex.io or Coinbase) credit cards**. You will probably be asked for identity verification like a passport to verify it is really you. Make sure you are using a known service, ask a friend or down below in the comments. Don’t use only one source to validate the legitimacy of the service.
- After you bought some, it is desirable*** to move your newly bought funds from the online service to your wallet. You will need to find the “withdrawal” section, there you will need to enter your wallet’s address, and click send, the address will look something like this:
5. After some time the funds will appear in your wallet, this depends on the network, the fee you paid and the service you bought from. It takes between several minutes to a couple of hours typically.
For a more in-depth explanation of how to use wallets, try this guide.
** Some credit cards are blocked from buying cryptocurrencies, usually changing to a different card provider or a different country issuing the card can solve this. Remember that credit cards usually get higher fees as they are more problematic for the service (you can create problems for them by asking for refunds).
- ** It is desirable because online services can be hacked.
How do you “cash out” ?
Many people asked me this: “Agam, let’s say I made some good returns and now I want to cash out to some fiat currency (ie USD), how can I do that?”. I usually reply with: “I really believe in this space, so I am not looking at short term gains, I’d probably leave it as it is less of a hassle. It might be (way) more interesting in the years to come. But, if i’d make more than, I don’t know, 10000000% I’d probably start reading about how to cash out.”
Basically, if you believe in the technology, and you are not out there to make short term gains, just leave it in your wallet.
But, if you want to cashout on some sweet gains, you just need to follow the “buy” guide here, but on the opposite side. There are some guides out there, like this one: How to Cash Out Bitcoin & Other Cryptocurrencies to Fiat, Just make sure you read the “Fees, Taxes & Regulation” I wrote down below.
I want to buy coins other than Bitcoin
So maybe you read my last post or you heard from a friend about an interesting coin, but you only have BTC (Bitcoin), what a bummer!
You’re in luck! There is a solution and it is called an exchange. This is typically a website that lets you buy and sell different kinds of coins. They usually charge a fee for providing this service.
What happens is that you open an account in an exchange, like you’d register to any other website. Typically you won’t need extra verification for small amounts (like you'd need from the Bitcoin/Fiat service from earlier) and especially not if you only transact with other cryptocurrencies (e.g. not USD).
After registering, you will have a page where you can deposit funds (like Bitcoin). You send the funds you want to exchange from your wallet to the address the exchange provides and wait until it gets there.
After that, you have funds in the exchange that you can trade in for other currencies. For example, you can trade BTC/IOTA (Bitcoin to IOTA) in Bitfinex.
To check which exchanges are trading your desired coins you can go to coinmarketcap.com click on your desired coin, and on the coin’s page go to the “markets” tab.
Which coins should I look into?
This is a question most of us have. Here are some coins I find interesting right now, please read more about them, and invest at your own risk. I am not invested in all these coins — I only want you to be familiar with some coins that have an impact currently.
- Ethereum — Programming on the Blockchain
- IOTA — An alternative to the Blockchain, focusing on IOT
- Cardano — An academic approach to building a Blockchain coin
- Ripple — A more “Enterprise” approach to a coin
- Monero — A privacy-focused coin
- Tether — A coin bearing the value of the US Dollar constantly
Market caps, market caps, market caps…
If I’d like to make you remember one thing from this post it is that market caps are really fricking important. Market caps (Market capitalization) are defined as:
Market Capitalization = (Current Coin Price) x (Number of coins tradable) *
For example, if I created a coin that is currently traded at $1.2 per coin and there are 1M coins, then the market cap = $1.2 x 1,000,000 = $1,200,000
Why is it important you might ask? it basically states how much a coin is currently valued at. If we are choosing between “investing” in Monero ($348) and Zcash ($587), those two coins are competing for the privacy market, they both provide privacy centered coins. One might think that Zcash is less lucrative because of the higher price. But, if you take into consideration the market caps then you might reach the opposite conclusion.
At the time of writing, Monero has a $5,412,003,596 market cap. Zcash has $1,742,376,902 (3.1 times lower).
You are comparing two coins that are trying to solve the same problems. In addition, both are using (somewhat) similar technologies. Therefore, investing in a coin with a lower market cap has a better potential to grow rather than the higher market cap, because the higher one already achieved some of that potential.
If we are looking for a 1000% growth rate, it would be harder for Monero to achieve financially, as it has to get to $50B instead of Zcash that has to get only to $10B, which is easier.
When buying a coin, always look at their market cap. I like to look at Bitcoin and use it as a rough estimator, as the markets have already shown what is a possible market cap for a cryptocurrency.
* The formal definition is not exactly this one, but it is kind of the same thing. Here is the formal definition.
I’d like to note that market caps are sometimes misleading, but they are way better than just using coin prices and that is the main point I wanted to pass on.
How do you secure your coins?
The most important things you need to know is not to tell anyone your private key unless you want them to steal all of your money. With your private key people can send your funds.
Good rules of thumb:
- Try to avoid leaving funds in online services (such as exchanges) as they can be hacked, as seen before in history.
- Use strong passwords (like, really strong passwords, I’m serious this time grandma) to protect your wallets and online users and passwords (more than 12 characters, numbers, capital and lowercase letters, symbols etc… and preferably randomly generated) Also use different passwords for different services, if one gets hacked you don’t want the others to be compromised too.
- Always back up your wallet keys, 12-word passphrase (which you get when you open a wallet), print them out. Do not lose the piece of paper in the dry-cleaning.
- When logging into online crypto related services, check that the site is the authentic site. You can check by clicking on the top navigation bar:
How can I stay updated on all of this?
Great question, I suggest following people/groups and pages related to cryptocurrencies on Facebook, Twitter, and even Instagram, just to be updated.
If you want more info, you can check coinmarketcap.com which is a great resource for the current state of the markets (also has past data). Try using an app that tracks coin values.
I’d also suggest looking into Reddit, you can subscribe to a crypto page or to your coin of choice, it usually has very good up to date information on the coin’s pages, just be aware that people there most likely have an interest in seeing the value of the coin to go up.
Also, keep in mind that there is a lot of noise and fake news, so try to validate news from several sources before making a financial decision. And in general, don’t invest too much. This is still risky business.
Dangers & Annoyances
You may have heard about ICOs, basically, they are investment tools that let companies raise capital via cryptocurrencies.
ICO — Like IPO (Initial Public Offering), Initial Coin Offering.
Let’s say I have a brilliant idea, and I want to raise money in order to start a company, pay workers and a facility etc… Traditionally I would go to venture capital firms and ask for their money. But now, I can raise money without them, by creating a website and asking people to send me money, and in return I issue them with a coin that I’ve created which will be their stake in my company, similar to shares, but without many of the legal work and the hassle from VCs.
Recently this method of raising money has become a tool for scam artists to “pump & dump” scam people, where they sell an idea, raise funds via an ICO, then disappear with the money.
So, before rushing into a lucrative ICO, I suggest you really work on your due-diligence and only then gamble on it. There are some legitimate ICOs out there, just not most of them.
Other dangers may be services like Hexabot, which told investors that they had an algorithmic trading strategy that returns profit consistently, they were even registered as a company in London. After several months, they just disappeared with all the money people deposited with them.
Just be wary of scammers, ask yourself if something is too good to be true before investing money. And always invest amounts you can afford to lose. Remember that no one will protect you here, it is currently like the wild west. You lose and that is it, no refunds, no insurance.
Fees, Taxes & Regulation
People often see the gains some coins have made but seldom remember that there are fees and taxes that need to be taken into consideration.
“…but in this world nothing can be said to be certain, except death and taxes.” — Benjamin Franklin
If you are using an exchange it is smart to read what their Makers and Takers fees are. Makers are adding new orders (adding liquidity) and Takers take an already created order (removing liquidity). In addition to those, there are probably withdrawal fees, and even minimum amounts for withdrawal (Like Bitfinex recently added).
Tax is something your government can apply to your Bitcoin investments. It is highly advised to see what your country decided regarding taxation on cryptocurrency investments (or trading if they view it more as a currency exchange). Preferably ask a lawyer or an accountant that are knowledgeable about this new emerging market. You can also search online specifically for your country’s laws and taxes. Here is an article about the US.
You have to take those into account if you are going to join this trading ecosystem. Don’t just say, “Yay! I earned $10,000”, you probably earned $10,000 - (withdrawal fee + taxes).
Another point is that Bitcoin can be heavily regulated or banned altogether in certain countries, so you might want to check your country's view on digital coins.
Read more about taxes here: https://en.bitcoin.it/wiki/Tax_compliance
More Questions & Answers
- What is this “mining”, people are talking about? Miners are basically the replacement of banks. They verify the transactions and get paid to do that (with a cryptocurrency). So they are essentially mining Bitcoin, ie, competing with each other by using the labor of their computers (energy, bandwidth, memory) for a Bitcoin “prize” for work, thus adding more Bitcoin to the system.
- Is Bitcoin legal in my country? You can check on Wikipedia.
- If I receive Bitcoins when my computer is turned off, will it work? Yep, it will work. The entire Bitcoin network will know about your transaction, so it doesn’t matter if your computer is on or not (you might need to check this for other coins).
Some freebies for you entrepreneurs:
- If someone will be able to make an exchange where the buying and storing of crypto (also altcoins) is easy, explained and simplified, I am sure they would make a shit TON of money and help people getting into this new ecosystem. Extra points if you are localized. Added bonus if you are somehow decentralized. I’ll even note you here if you’re good ;)
- Making an insurance company for crypto could be a cool idea.
Some cool links I collected along the way:
- What is a good way to concisely explain Bitcoin?
- Blockchain Expert Explains One Concept in 5 Levels of Difficulty
- Bitcoin Q&A
- Crypto Terminology Guide
- A great video from John Oliver about Cryptocurrencies: https://www.youtube.com/watch?v=g6iDZspbRMg
Disclaimer: I wasn’t paid to write this, this was done purely to educate grandmothers around the world. Please be careful using cryptocurrencies. I am not advising on buying or using services or investing in anything, it is at your own risk.
Update #1: Just to make sure, the title and the “grandma” references were made with humor in mind. I just wanted to simplify a complex subject, which was considered silly for grandmothers to know about ;)
I wanted to thank Iddan Halevy for editing and everyone else who helped with this article.
Update #2: Fixed some confusions with public keys and addresses.
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