In my last post I discussed my personal experience investing in Cryptocurrency. Today, I would like to step back and provide some more information about what Cryptocurrency is as well as provide some resources I have found to be helpful as I build my own understanding.
So, what is Cryptocurrency anyway? I am NOT an expert on the subject, and I am certainly NOT a financial advisory, but this is my understanding so far:
- Cryptocurrencies are built upon a technology called “blockchain.” Blockchain is basically a distributed ledger (book keeping) technology. Think of it this way: when you go to the bank and make a deposit, your bank credits your account the amount of your deposit. This information is stored on the bank’s servers so when you come to make a withdrawal they know how much is in your account. Importantly, banks CHARGE you fees to manage your accounts, make ATM withdrawls, etc. The blockchain distributes this information across multiple (thousands) of servers.
- There are multiple benefits of the blockchain as the data has built in redundancy (ie. losing data on one server will not affect other servers), the system is highly secure (ie. hackers cannot simultaneously attack every single server, etc.) and there is a high level of anonymity. The high level of anonymity is one reason that cryptocurrencies were initially adopted by Libertarians (who don’t trust government), personal privacy advocates (who don’t trust big businesses) and criminals (who don’t want to be caught by authorities).
- People or companies who support the blockchain book keeping are paid in crypto currency. For example, if you have a server that maintains the Bitcoin block chain you will be rewarded with small amounts of Bitcoin. If you maintain the Ripple block chain, you will get some Ripple. This process is commonly referred to as “mining.”
- Generally speaking, every cryptocurrency is designed for a specific purpose. For example, ZCash and Bitcoin Cash were created through “hard forks” (when a cryptocurrency splits) from Bitcoin to make it easier to use in day to day situations for payment clearing. There are literally HUNDREDS of different cryptocurrencies although 95% of media coverage is around Bitcoin and the “big three” currencies are Bitcoin, Ethereum and Litecoin.
I could go on and on but it just gets more complex from here. Rather than explain all of the nuances myself, I would rather refer you to some great resources below that describe how cryptocurrencies work in more detail:
- Bitcoin.org This is the official site for Bitcoin and provides a wealth of information on the “poster child” cryptocurrency Bitcoin.
- Cryptocurrency overview article from Motley Fool. This article provides a good overview of cryptocurrency in general with helpful, brief overviews of other major currencies including Etherium, Litecoin, and Ripple
- Article in Realclearmarkets by Mark A. Jamison and Palveshy Weber provide an overview as to some of the pros and cons of Bitcoin.
- The Future of Bitcoin by Daniel Jelski argues that cryptocurrencies have an actual, tangible value so the likelihood value will go to zero is negligible.
I strongly recommend that you spend some time researching the resource above if you have an interest in investing in cryptocurrency as this space is not well understood and, as such, investing in this space is extremely risky. For example, this morning nearly all cryptocurrencies plummeted in value between 30-50%. Although prices are recovering throughout the day, volatility is expected to be high especially as more professional money managers are entering the space trading futures.
In my next post I will discuss my own personal experience trading cryptocurrency over the last 6 months as we as some personal thoughts on the future of cryptocurrency in general.