Your Ultimate Cryptocurrency and Investing Knowledge Pack — October Edition For Coinmonks
This is a living article meaning that it’s updated continuously. Last update: October 2018
PERHAPS YOU’VE ALREADY HEARD OF THE FIRST BITCOIN TRANSACTION EVER: ON 22 MAY 2010, LASZLO HANYECZ MADE THE FIRST REAL-WORLD TRANSACTION BY BUYING TWO PIZZAS IN JACKSONVILLE, FLORIDA FOR 10,000 BTC.
That would be worth around 65 million USD/ 60 Million Euros nowadays.
– Hope he at least had the cheesy crust. Giggle.
Not only did mainstream public touch Bitcoin for the first time in the 2017 bubble; The amount of Google Scholar articled relatable to Bitcoin, Blockchain (the ‘tech stack’ ) and Ethereum, one of the most successful projects to date, have been piling up rapidly in the last years with more than 75,000 articles to date.
This directly implies that Bitcoin is something worth knowing about for academia as the prologue to a monetary revolution. Bitcoin is also interesting in times of political instability as a hedging instrument, or rather just to show how much of an anarchist you are by possessing a fraction of it. In this article, we’ll be diving deeper into Bitcoin, other cryptocurrencies, why they are so successful and how an immature market is emerging- or stagnating.
Where at first, our financial newspapers were filled with news to feed speculation about mostly tech stocks now, cryptocurrencies, having a market capitalization higher than $ 200.000.000.000.000, are obviously too big to be ignored.
To help you paint a clearer picture: Nvidia, the computer and chip manufacturer, has a market capitalization of 165 billion USD whereas Facebook currently is capitalized at around 470 billion USD.
Time to grab a nice cuppa and be ready to dive into this financial disruptor. What are we, and all of our Idols, looking at?
Bitcoin’s Special Sauce
Now, the consideration is that bitcoin and (many) other cryptocurrencies are decentralized, meaning that in theory, the currencies themselves cannot be hacked, as multiple networks coexist simultaneously having the exact same copy /ledger of the transactional history of the network.
Took down our server in London? No problem, we have them all over the globe….. And that’s just the server part. There’s over 3,000 Bitcoin ATM’s as well.
Now, Bitcoin has already been called dead more than 300 times. It’s relatively easy to call a very volatile asset dead after it has been going down; common sense suggests after all, that when an asset is declining, so will it in the long term and so will the companies’ efforts to retain value. But not with bitcoin. After all, Bitcoin is not a business or an organization after all. It’s a very well thought out mathematical recreation of what some believe, might become very valuable over time.
Also, the distributed ledger technology is facilitating the transaction across multiple computers, cross-validating it in its essence. After the transaction being sent out in the network, peers compete to crack the code. The peer who cracks the code gets bitcoin (or insert currency) as a reward for their mining efforts. This legacy protocol, also referred to as Proof of Work (PoW) created an ecosystem which rewards parties facilitating the transaction, indirectly maintaining value in the ecosystem.
This also means that there is a considerable market for parties who wish to mine (facilitate transactions) Bitcoin or other currencies. This is done by the Graphics Processing Unit of the PC. Due to this, people were going crazy to get hands on the newest and best-performing GPU’s.
The Speculative Bubbles
So could we propose that every bubble is popped when bitcoin declines and that happened over 300 times? Possibly. you might remember late 2017 and early 2018 as a reference to help you with understanding why someone could call it dead. This, however, is not the only reason, as the decentralization of the cryptocurrency makes it impossible to die.
This ‘bubble’ was at its peak during January of 2018: A total market cap nearing 800 billion USD. That amount would parallel the top traded stocks on the Nasdaq Market: Apple or Amazon.
Let’s check a Bitcoin article from 5 years ago, just to put things into perspective. P.S this article was written by Vitalik Buterin, the frontman behind the second most successful cryptocurrency: Ethereum.
So why the hype?
Now, the goal of an innovative product or service is to outperform the previous one by either offering a better price for the solution or to build a better performing product.
This can be for a variety of reasons for a corporate/tech firm: whether you need to cut costs, expand or maintain market share, access new target groups or create new leadership.
As all cryptocurrencies are being backed up by blockchain technology, a profound change is being made in the way that information is being processed, stored, and accessed.
When talking about blockchain, one also refers to it as Distributed Ledger Technology, or DLT just short. Distributed services is also another commonly used word.
Now, since every institution, organization or business has documentation about parties they’re dealing with, imagine a system in which there is no authorizer from the bank who will have to check if the details you entered are either up to date -or indeed yours. These parties obviously have their reasons to halt sketchy transactions to unstable economies, but there are also people who want to do good without going through extreme bureaucracy or high transaction costs.
You can transfer bitcoin to anyone who has a bitcoin address, to be recognised by a very random string of number and letters. This means that you’re also cutting out any payment provider or facilitator, also known as your bank. Basically, you’re your own bank when owning cryptocurrencies. This brings along some user experience issues.
Behind Bitcoin: Cryptocurrencies, fundraising and ICO’s
First, cryptocurrencies, crypto assets, altcoins, or just crypto’s, being new ways to invest in startups by buying their distributed coins, utilities, securities or ‘tokens’, have created a completely new sound in the world of finance and fundraising in general.
Whereas stock listed companies have already proven value by having an extensive track record and green light from the regulators, cryptocurrencies and especially, initial coin offerings (ICO’s, made possible by Ethereum) have yet to prove their real value, which makes their new market of assets volatile and unpredictable. This creates fantastic opportunities for businesses since advising the right coins, tokens and initial coin offerings have become and will remain extremely time-consuming, whilst on the other hand, your ambassadors — assuming that you are a project- are patiently waiting for the milestones on the roadmap to be achieved.
An Initial Coin offering is a companies’ public exercise to gather funds for a blockchain related project. This can be for a decentralized application on a platform, like Ethereum, referred to as Dapp. Other platforms include Neo and Eos, but there are many protocols which allow ICO’s through so-called smart contracts. Smart contracts fulfil certain conditions when they are met. Mostly payment upon the token distribution from a project, making sure that you’ll get your promised tokens.
Indulge in the video below to see the explosion of Token offerings. Most of them were ERC-20 tokens meaning that Ethereum was required to participate in the sale. In order to create these tokens, ETH needs to be bought by the initiating companies, meaning that there is a whole economic mechanism behind it causing the price of ETH to go up and down.
New economic models — beyond Proof of Work
As Bitcoin is having the Proof of Work protocol, problems arise. This is because of the considerable energy consumption costs that parallel the usage of the bitcoin network. The higher the network costs, the higher the power consumption.
To combat this, there’s also Proof of Stake (PoS) which incentives users who hold a certain amount of a currency locked in order to facilitate a masternode. Proof of Stake is also the upgraded legacy of the PoW system; meaning that miners no longer need to compete on hashing power (aka electricity costs to acquire max hashes) , but rather on a certain amount of coins required to stake; by doing this, the protocol makes sure to award a random payout based on certain metrics, including, but not limited to: age and stake amount.
A masternode is a node which stays active when participants pool enough resources to run one. For example, at the time of updating, running masternodes on the following coins require the following amounts:
Masternodes are definitely not cheap, and they project a monthly or yearly ROI ( Taking currency deflation into account, as it occurs that projects burn coins to limit supply)
Speculating further on Bitcoin
Bitcoin is referred to a digital store of value since there is an economic reasoning behind competing for hashing power and having high electricity bills by doing so, the community puts trust into the currency, it stores value, and has a limited supply.
The market cap of gold is 8 trillion. Since we approach cryptocurrencies by the assumption that they are ‘limited’, it is possibly likely that cryptocurrencies will follow the pattern of gold. This means that the market cap of let’s say bitcoin or the most stable assets have much potential to grow in the long run. This is also representative for the market as Bitcoin most of the time has between 40–60% of the cryptocurrency market cap, and most exchange rates are pegged to it.
Due to the novelty of the technology and humans being characterized as (fascinating and complex) beings of risk avoidance, the most valuable characteristic of investing in cryptocurrencies is trust — as multiple economies seem to collapse, and the economic value of one dollar has collapsed drastically over time.
The purchasing power of a currency is stagnating over time as a US dollar from 1913 ( The launch of the Feral reserve) would be able to purchase a value of just 5 cents. That’s a 95% loss assuming you’d hold that dollar until now! As only central banks have rights to print money and they do so continuously, more money is being pumped into the economy on a consistent basis, and there is no one to blame as this is integral to the monetary system.
With most cryptocurrencies having a limited and ultimate supply, Bitcoin, with 21,000,000 mineable units, has proven how a monetary system can be maintained by a very large community.
Trust is and will remain the key factor of cryptocurrencies and the uphold of their value, after all, the blockchain and its blocks are a string of completed transactions on the chain. The longer the chain, the more trustworthy it theoretically gets.
The hype of the craze at the beginning of the year was fuelled by very engaging discussions on social media platforms like Facebook (and its groups), Twitter and Reddit. I’d like to stipulate something which is somewhat inherent to cryptocurrencies/altcoins :
Scammers!
Scammers impersonate, sometimes even going as far as getting a verified profile to get gullible investors to send over Ethereum…. which won’t be sent back.
Now as this problem is omnipresent and incumbent to the cryptocurrency space since people like to take advantage of each other and stimulates the engagement on Twitter as the platform gets more traffic, the question wouldn’t be when, but rather if Twitter decides to do something with the impersonators and tons of scammers. It also did not go unnoticed for one of our favourite futuristic entrepreneurs, Elon Musk. And Vitalik Buterin, the front-runner of Ethereum consequently is calling to action.
Also, given the fact that innovation and adoption always take a significant amount of time, especially if disruptive which is the case with DLT and cryptocurrencies, We’re finding ourselves in a relatively early stage.
If you’d like to get in
Cryptocurrencies can be acquired by exchanging either existing cryptocurrencies or fiat money through trading platforms such as Binance, Coinbase, Kucoin, HitBTC or Bittrex.
Well-known trading platforms adapting and offering the most popular cryptos, them being Bitcoin, Ethereum, Ripple, and Litecoin come as no surprise, do they?
First of all, compliments to those companies as they are also attracting different types of investors and improve their demographic heterogeneity in their customer database. Millennials and the younger generations, in general, are more open to learning and getting cryptocurrency because of their idealistic and risk-taking behaviour. We’re also very familiar with mobile device usage as we’ve lived along them since they were introduced.
Consequently, many traders managed to profit big time from the volatility of the market. In the crypto world, a 10% daily rise is definitely not unusual. This gives more risk, but also more reward when doing it well. Indicating that getting a six-figure reward starting from as low as 100 USD/euros, is theoretically feasible.
2018 So Far
2018 has been dramatic for crypto and the HODL (individuals who only hold an asset, and are not actively trading it) gang. This is due to the fact that investor expectations are not met and most of the currencies are highly overvalued. At the end of the day, many experts also say that the value of these tokens will go to zero and will only serve speculative purposes. This means that trading crypto is very risky and should be engaged with caution.
Conclusion
The problems which are being solved by blockchain and cryptocurrencies stipulate some of our most cumbersome and bureaucratic processes, including foremost financial and technological ones as the shift towards customer focused ( you won’t get good customers without a good working product) and seamless integration (As soon as the projects will scale, they will be used) is becoming more and more crucial.
Foremost the more ‘stable’ cryptocurrencies furthermore could be considered as a great hedging instrument in politically unstable situations in which the denominal currency seems to plunge hard. Think about Venezuela, Argentina and Zimbabwe.
With crypto having stepped into the door of adoption in a very slight manner and for now solely for investor and speculative purposes, me, and all of us, can’t wait for the projects to really come to live and take the world by storm.
More takes
Here’s an excellent excerpt from a nice Bloomberg op-ed:
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