What’s that on your screen?” The curious voice of your mom cuts through your thoughts. Flashback — your teenage years, unlocked doors and embarrassing moments.
But then you realize: It’s the holidays, uncle Bob’s 70th birthday party or some other mundane family gathering. You don’t even live at home anymore. Someone will have already asked inappropriate questions like „How have you been?”, or „When are you finally settling down?”, or „Where is [ex-girlfriend’s name], I liked her so much…”
After fighting off more than one advance of a probing aunt or uncle and finally settling in on your phone, checking how your crypto portfolio is doing (shameless plug for Accointing), you find your mom looking over your shoulder and glancing at the graphs and numbers.
And with a bored expression on her face (she doesn’t like this gathering any more than you do), she asks: “What’s that on your screen?”
This article is for you, if…
“On my screen? I am just checking my crypto portfolio.” — Wouldn’t it be great if this was the end of the conversation? If what followed was just an “Ah, gotcha…”?
But that’s not how stuff like this usually turns out. But since you don’t have anything better to do anyway, you settle in your comfy chair and start taking questions.
A crypto portfolio is just the collection of all the different crypto assets that I own. Just like a bag that I’ve put all of the stuff in that I bought in a store. I can look at the bag in total (portfolio), see what I paid for it and how much it weighs, but I can also look at the individual items in the bag (crypto assets).
In simple terms, they work in a similar way that stocks do. You can buy and sell them at different prices on an exchange. The big difference is that this one is open 24/7 and not really located in New York or London or Frankfurt, but can be accessed from anywhere. There are many different crypto exchanges all over the world.
The graphs show the historical prices for the individual crypto assets over time. This means that you can look at this graph and see the price at which people bought and sold each asset at any time in the past. It therefore also shows the value of each asset that I own. It goes up and down because people are willing to pay more or less for an asset — just like in the real world.
Yes and no. Bitcoin is one cryptocurrency that I own a little bit of. It is definitely the most well-known cryptocurrency out there and as far as I know, it’s also the first. But there are many other assets out there.
While you’ve most likely read about Bitcoin and the value it does or doesn’t have, you might have paid little attention to what Bitcoin actually set out to do.
People have envisioned Bitcoin to be a digital currency that allows people to trade with each other with digital money that is independent of any form of bank.
This means that I could for example order some special product from Thailand and instead of making a bank transfer or going through PayPal or Western Union, I could just send this person some of my digital currency.
Just as you most likely have no idea exactly why or how your credit card works, or even how your car works, most people don’t really need to know the specifics of the underlying technology of Bitcoin. The important part is this: It works…
In Part 2 (maybe after Uncle Bob has said a few words), we are going to look further into my crypto portfolio. I am going to explain the difference between Currencies, Utility Tokens, and Security Tokens and give an overview of what the future might hold for us in terms of real-world application.
It’s still the holidays and you are spending the day with your family. You’ve been talking to your mom for quite a while now and two more bored family members have taken a seat on the couch across from you.
To catch them up, you give a short summary of the first part of this conversation:
The initial idea of Bitcoin was to create a form of money that can be used easily and independently from location or government.
This means that you can send large sums of money anywhere for next to no fees very quickly and without an intermediary. So you don’t need banks, companies, or governments. A computer or a smartphone and an internet connection is enough.
While the first cryptocurrency Bitcoin was set out to function just like money, there are many other tokens and currencies that you can do all kinds of things with. Currently, they are mostly used as an investment, not unlike stock (even though you usually don’t actually own equity) because the prices offer a lot of opportunities for large price changes and therefore large financial gains.
Your cousin Janice is taking in what you’ve just said. She holds a business degree and has obviously heard of Bitcoin before but is confused about the last thing you said.
“So it’s like owning equity but without actually owning it? How does this work? Are there different types of coins?”
“Great question, Janice”, you say. “In its basic function, there are three kinds of crypto tokens. For the sake of simplicity, we are not going to look at staking or mining yet, so if you’ve heard those terms before, ignore them for now. You can buy most coins on so-called exchanges.
To make the whole thing a little more tangible, we are going to look at different “types” of coins using an example that you all know well: Ball games and hot dogs.
Imagine you’re at a baseball game, bored out of your mind, and you are hungry for a hot dog. Of course, there is a stand inside the stadium that we will call ’Coin Dogs’.
In its basic function, an equity token is the same thing as stock. Through contracts, a company can define its shareholdings to be represented by their own crypto tokens. These tokens would be comparable to stock, just that the rights of ownership wouldn’t be written down on a piece of paper. Still, this means that by owning a certain coin, you gain certain investor rights and obligations.
For our Coin Dogs Equity Token, this would mean that the owners of Coin Dogs might decide to sell a part of their company. By purchasing some Coin Dogs Equity Tokens, you would become the proud owner of a piece of the business. You would be able to influence decisions and take part in shareholder meetings. In short, you would own a piece of the company. Winnings would be paid out to shareholders (you) or used to reinvest in the hot dog business.
An equity token could be a regular way of fundraising that is easier to deal with than going through a real stock exchange.
A security token is something that you invest money in to eventually realize a return without taking on an active role in the enterprise that you invest in.
Therefore, any token that you only buy to make money can, and probably will be, considered a security token. Different to an Equity Token, Security tokens don’t necessarily make you a shareholder of the enterprise that you invest in. Rather, the token promises a certain return. This could be through a revenue share model or some other privilege that you gain from buying the coin.
A Coin Dogs Security Token can take many shapes or forms. The owners of the hot dog stand could consider selling the coin at the beginning of the season to stack up on condiments and sausages. In return, they could promise to redistribute 5% of gross hot dog sales at the end of the season for token holders.
A security token offers more flexibility in the structure payouts but gives an investor less control over the company. There are no other rights or obligations attached. A security token could also be used as a fundraising mechanism for companies that don’t want to give up control but still need to raise money.
A Utility Token can be exchanged for the goods or services that the company issuing the token offer. While there are a lot of existing examples in “big” economies for “tokenized” equity and security, Utility Tokens work a little differently. To better understand how we can again look at the Coin Dogs example.
And this is where it gets really interesting. As we said before, Coin Dogs is located inside of a stadium. Because it is located inside of a stadium, you cannot pay your hot dogs in cash or via card. While very annoying, you will have to accept to buy hot dog tokens from the cashpoint that you can then exchange for sweet, sweet hot dogs.
There is only a limited supply of hot dog tokens available and if you want a hot dog, you need a token. This is exactly the way a utility token works.
This mechanism offers a lot of interesting opportunities. Imagine you wanted to make some extra cash at the stadium. You could buy all available tokens, effectively creating a “hot dog monopoly”. If people now want hot dogs, they have to buy tokens from you, because the “official seller” (the stadium in this scenario) is sold out. Unless the hot dog stand gave out more tokens, no one would be able to get any hot dogs without going through you as an intermediary.
In the crypto world, these tokens would obviously be digital and on a blockchain (don’t worry about what that is at the moment).
Back in the “real world”, you could create a utility token for anything, and there are a few projects that have tried. From cloud storage to advertising space, creative coders have come up with a few ways to make utility tokens work.
Janice sounds intrigued, but is not yet convinced. She tries to poke holes in your story:
“So, if Cryptocurrencies are like money, can you buy stuff with them?”
The supposedly first actual purchase done with Bitcoin was done in May 2010. Someone bought two large pizzas for the price of at the time around $30. You might have seen the oft-quoted story of the (in today’s Bitcoin price) $100 Mio. pizzas.
Since then, a lot has happened. There are cafés, restaurants and some shops that accept certain cryptocurrencies all over the world. It’s especially helpful to see ATMs in different countries. Due to the fact that Bitcoin is not bound by national banking restrictions, you can get cash anywhere without having to worry about banking fees.
The adoption of cryptocurrencies is slower than many would like it to be, but it is quite certain that it is moving forward.
Over the past few years, people have also started lending and borrowing through cryptocurrencies. As there are no intermediaries, interest rates can be lower and lending is possible across borders all around the world.
In the next part of this Crypto Dinner Party, we are going to look at the operations. After you have convinced your mom and Janice to get their feet wet in the world of crypto, we are looking at some tools to check out in order to make sure that they always know how their coins are doing.
After the holidays, your parents have invited you back to their house. Your mom pretends that she just wants to cook some nice dinner for you but one, you know that your dad will do the cooking anyways and two, you have long learned not to trust invitations out of the blue.
This will either be another Virginia Incident [which we do not talk about], or she has some “computer problems” because you “broke her internet” that last time you were at their house.
Imagine your surprise when your mom’s computer is working just fine and she just wants to talk more about cryptocurrencies and blockchain technology. You are happy that they are so interested in the topic and are looking to share your knowledge with them.
This article is for you if…
Your mom has obviously thought a lot about cryptocurrencies and is now eager to learn more. She welcomes you with a summary of the last time you two were talking.
If you would rather skip the summary, feel free to scroll down until you read “Dinner’s Ready”!
“So, let’s see if I got this right. The initial idea of Bitcoin was to create a form of money that can easily be used and is independent of location or government.
This means that you can send large sums of money anywhere basically for free and in a very short amount of time, only using a few computers, so there is no need for intermediaries such as companies, banks or governments.
Right now, there are many people working on solutions using this technology and it isn’t clear yet where it will be most successful.
The tokens that they work on can generally be classified as one of three kinds of tokens that are called security, equity, and utility tokens. They all have different characteristics. While securities are used to make money, equity tokens are most like stock and utility tokens are used to buy products or services.
Currently, crypto is mostly used as an investment opportunity, but there are a few use cases for the real world — there are a lot of online and offline shops where you can pay with Bitcoin and other cryptocurrencies.” You reply with a nod, in shock while the mouth is open.
Your dad yells, standing in front of the oven. You get up to help set the table. “So I think I understand the basics of how this stuff works”, your mom says getting up from the sofa. “I would like to try it out. Will you help me buy a few of those currencies?”
You are a little cautious for a few reasons. One, your mom usually is a nightmare when it comes to technology. You helped her set up her iPad once and ever since she calls you whenever her favorite animal or candy game doesn’t work. Two, investing money for other people without a license is not really something you want to be doing — not only because you don’t want to mix money and family, but also because you’re not sure about the legalities of it.
But since your mom seems genuinely interested, and she just wants to use a few bucks to try it out, you decide to help her out.
Your mom is taking the silverware out of the drawer. “Since the holidays, I have read a lot of blog articles and crypto news and while I do get the gist of it, I do have a few questions left.”
“I keep hearing about wallets and coins all the time — didn’t you tell me that the money is digital? How does this fit together?” she asks with an accusing tone towards me.
Well, you try to explain:
Cryptocurrencies aren’t tangible. You can’t touch or see them. So the name “wallet” is a little misleading. You can think of a crypto wallet like a bank account for your digital currencies. It is used to store the coins and keep track of them. You can also send those coins to different wallets to pay for goods (like shoes for example). You can pretend that it is a currency for a world without cash. Because the only thing you can’t do with cryptocurrencies is withdrawing physical money — unless you convert it back to “FIAT” money.
Just like in a bank account, you can’t store different currencies in the same wallets. Since there are no banks in the crypto world, you need a different kind of wallet for each currency. So for example, you can have a Bitcoin wallet and a Lisk wallet.
There are a few wallets that can hold more than one kind of coin, Ethereum being the most well-known example. The Ethereum project has built a platform that can be used by developers to create currencies within that platform and store those coins in Ethereum wallets.
It is like a huge and open farm. Ethereum rents out the land to farmers (programmers) to grow their own plants or animals (projects) on it. They all live on the Ethereum farm even though the fruits of their labor (tokens) can be very different.
But to make it short, a crypto wallet is simply the place where you store your cryptocurrencies.
Got it so far?
“So if I understand you correctly, a “wallet” is just another term for my personal crypto checking account.”
Short and to the point — your mom might be more talented in learning about technology than you had anticipated. However, since she has now gotten her feet wet, she wants to know about more household items that have lent their name to the Crypto World.
Now if you want to, you can really start making things complex. Those innocent-sounding words have a whole armada of mathematicians, statisticians, cryptographers and programmers behind them who have been working on them for decades.
But of course, you don’t want to confuse your mom. And if you’re totally honest, you don’t quite understand all of this either. This is a rabbit hole you don’t want to dig up.
So let’s look at those two things from a conceptual angle.
Imagine you had an actual house with an actual address, an actual front door and an actual, high-security safe inside the living room.
Don’t hide your public key like this
Imagine that in that safe, you have stored all of your crypto. The key to your safe has your home address printed on it and also opens your front door. So if you lose that, you are — well… let’s say out of luck… Anyone who has the key to your safe (or “private key” as they are called in the crypto world) can access your home because it contains all of the information necessary to get there.
Your house key (“public key” in the crypto world) lets you access the living room. There, you can look at all of the transactions that have happened in your house and look at how much money is in the account.
Don’t ever hide your private key like this
The house key also has the address printed on it so if you ever find a house key, you can locate the address as well. The one thing you can’t do is steal anything, because you don’t have access to your actual coins inside the safe.
With the address, you can find the front door, but it’s locked.
So people can send you stuff (that magically appears in your safe), but they can’t come inside your house or access your safe.
You might have heard stories of people searching through junkyards looking for old hard drives with Bitcoins worth millions on them. This is because, without the private key, they are basically standing in the living room looking at the safe, but can’t open it.
If this is too theoretical for your mom, she doesn’t show it. What’s more, she tries to condense your far-fetched story and bring it a little closer to the Crypto world.
So if I understand correctly, a crypto wallet consists of a public and a private key, and your public address.
You have nothing more to add. A bit flustered, you only manage a surprised “yes, that’s actually one hundred percent correct…”
“Guys, let’s eat! The food is getting cold”, your dad says a little impatient while holding steaming hot plates of food in his gloved hands. “You can finish this conversation after dinner. I wanna hear about your week.” You head off to dinner and you stare into your mom’s eyes. She smiles at you and you just know…she fell into the rabbit hole.
In the next part, after finishing up this lovely dinner, we’ll go deeper into the different ways of buying coins (where, how, which ones and why), and about accounting and taxation.