Introductions: I’m joskye. A cryptocurrency investor and holder.
So my accountant who doesn’t know much about cryptocurrency emailed me recently asking about it. He had the following questions:
- Isn’t crypto currency actually more dangerous than fiat in that it has absolutely no intrinsic value and it is tied to electronic systems?
- Who are the major players, akin to banks today, the keepers of the money, who can be called upon by Sovereign bodies to provide information on transactions?
- Who guarantees the value of the currency?
- Are cryptocurrences convertible to sovereign currencies which still form the base of transactions and value exchange?
- What could happen when/if cryptocurrencies are the predominant means of exchange?
- How many crypto currencies do you think can co-exist?
I realized these were the most common questions mainstream people have of cryptocurrency and decided to answer them. Feel free to read, learn and share with any newcomers asking questions about this space.
This article effectively summarizes my thoughts on the future direction of Bitcoin, Ethereum and cryptocurrencies in general and should be understandable to anyone with moderate intelligence in explaining how it works (technologically and economically).
- I personally consider certain cryptocurrencies (not Bitcoin) to be a safer mid-long term investment than many stocks.
- Bitcoin is a cryptocurrency. Cryptocurrencies are a type of distributed ledger technology. Distributed ledger technology is basically a ledger of transactions and records that is stored on multiple computers worldwide. These computers have identical copies of the ledger and their purpose is to continuously verify the contents of the ledger. They all do this simultaneously and must agree on the same final copy of the ledger for it to exist (otherwise it will split into two different ledgers; a process called forking).
- There is an usual incentive mechanism in place to do this (and ensure consistency plus a singular ledger); often the computers process the ledger and are rewarded payouts in the form of that ledgers token.
- In Bitcoin’s case, Bitcoin is a ledger of send-receive transactions on the Bitcoin network conducted in the currency unit « Bitcoin » (BTC). There are computers which run specific software to verify the Bitcoin network and the probability of any computer processing the Bitcoin ledger receiving a payout in BTC is proportional to the effort that computer puts into verifying the network (relative to all other computers also processing the Bitcoin ledger). This process of generating and rewarding new Bitcoin is referred to as ‘mining’.
- Any computer globally can be setup to mine Bitcoin provided they download the software to do so and are willing to store a record of the Bitcoin ledger.
- As a result Bitcoin has no sovereign entity backing it. It’s distribution of mining is global (however there is a large concentration of computing power in China where large Bitcoin mining factories exist). Thus even though it has no sovereign backing, it can still represent a geopolitical interest. Bitcoin in this instance benefits China where it is mostly generated.
- Bitcoin is similar to gold in that the vast majority of it’s market cap is completely speculative. It is fair to say it has almost no intrinsic value. The appeal to it’s proponents is that it can act as a form of digital gold. The valuation of Bitcoin is mostly speculative (I’d say 99%).
- Because Bitcoin is a publicly viewable ledger, it is not anonymous or private (in spite of the misinformation out there). There are methods to obscure the transaction but these require third party solutions.
- It was these third party solutions which were used by black market services such as the Silk Road (a dark web market) back in 2012 and 2013 which brought fiat currency into Bitcoin’s ecosystem and raised it’s fiat valuation.
- As the value of Bitcoin rose, more companies started seeing the potential for speculative trading and non-speculative use of Bitcoin as a currency and took the plunge opening up websites and services which accepted fiat for conversion to Bitcoin (and increasingly now Ethereum and a handful of other cryptocurrencies). The increase in these fiat-gateways acted as the liquidity and value provider for cryptocurrencies. They do not hold any purchased cryptocurrency unless you store it on them. They are the closest thing to Banks.
- You can either store Bitcoin (or other cryptocurrencies) on a cryptocurrency website as described where it is held in their cryptocurrency wallet or you could transfer and store it in a private wallet.
- Whilst it is true that Bitcoin and many cryptocurrencies carry no significant intrinsic value, since 2015 we have seen the emergence of distributed ledger technology beyond cryptocurrencies are really platforms with specific purposes that whilst still currently mainly speculative will likely evolve to carry real significant intrinsic value.
- I’ve written two entire series of articles on the subject. Of relevance are these articles:
- I’m currently a big believer in Ethereum (ETH) and Particl (PART) which satisfy my criteria for admittedly high risk:high reward investment grade cryptocurrencies. Ethereum has already proved to be profitable.
- The broader impact of distributed ledger technology will be increased independence from fiat currency; I believe weaker fiat currencies will give way to strong cryptocurrencies and this will force weaker governments to react; they will either pursue an isolationist agenda to their own longer term detriment or embrace it to improve local governance and thus economy.
Given the nature and ability to built governance and voting mechanisms (including many other things) into the distributed ledger technology itself, I believe the longer term impact of distributed ledger technology will be a blurring of national and international borders, treaties and laws. From a governance and auditing viewpoint, distributed ledger technology if correctly utilized will increase government/corporate transparency and reduce corruption.
- There are currently 1300+ cryptocurrencies listed (source coinmarketcap: https://coinmarketcap.com/all/views/all/). I believe approximately 20-50 have long term viability and the majority share will converge on 5 maximum.
- Unless Bitcoin (BTC) solves issues with it’s geographical mining centralisation (mostly localized to China), governance (no on-ledger voting mechanisms, decisions are governed by a small cartel; an oligarchy) and scaling (the number of transactions per second it handles is very poor and is unlikely to increase), then I do not see it becoming the dominant cryptocurrency in the long run. It will lose out to solutions which implement transaction scalability, on-ledger governance and achieve true geopolitical decentralization.
- You should research proof of stake. It is a means of verifying a distributed ledger where likelihood of receiving payouts is proportional to how many of the ledgers tokens you already hold (these tokens act like virtual processing power). Certain distributed ledger technologies e.g. Particl (PART) already utilize this which means anyone holding their PART tokens on a private wallet receives the equivalent of interest (currently 5% PA) for leaving their computer switched on. Ethereum (ETH) is switching to proof of stake in 2018 which means I’ll be able to hopefully earn interest on that too.
- When the larger public understands proof of stake (and distributed ledger technology is better understood, more mainstream), I think we will see a shift from institutional investors and mainstream savers from traditional savings accounts into the most successful and largest proof of stake currencies since they will provide a safe, reliable, regular return and the earliest adopters will see significant long term appreciation in the token price. Ethereum is currently priming to be the proof of stake solution.
- You can always follow my comment history on reddit at https://np.reddit.com/user/joskye/comments/. I have a good reputation in this community and I’ve made some astute observations and good calls. For reference, as of writing (23rd Nov 2017) I’m overall up 2100% on principle since I started in July 2016. That’s not as great as some of the experienced traders (I’ve admittedly made mistakes along the way) but overall I know what I’m doing and I have a good understanding of this area so if you need any advice or want anyone to talk to on the subject, I’m happy to offer informal advice with the understanding that losses are possible, due diligence is advised and seeking multiple independent reputable sources.
- If you develop an interest in trading and investing in cryptocurrencies, gateways websites like coinbase and [Bittrex] (www.bittrex.com). Coinbase allows you to purchase the top cryptocurrencies (Bitcoin and Ethereum) directly with USD, GBP or Euro. Bittrex is a large exchange where the majority of altcoins (a term for any cryptocurrency which isn’t Bitcoin) can be bought or sold. You will need both currently to truly trade cryptocurrency. There are many alternative platforms internationally offering similar trading services but I do not have sufficient experience with them to comment and my selection should not be seen as a preferential endorsement in anyway.
I hope this helps. With the exception of my disclosure on profits, I don’t mind you sharing this analysis with any interested parties. You should read the guides linked, they pretty much outline the future of commerce for me.