Watching the documentary Banking on Bitcoin (2016), I was exposed to terms I had never heard before, like ‘blockchain’ and ‘cryptocurrency’. Even though I didn’t fully understand it at the time, I was convinced that this technology could have an even bigger impact on the world than the creation of the Internet. Yes, you read correctly, even bigger than the Internet. Blockchain may very well be the greatest socio-technological advancement that humanity as we know it will experience, and you should start getting familiar with it ASAP.
1. What is Blockchain?
|Blockchain is a digital technology that allows you to safely and reliably safeguard transaction information, kind of like an encrypted ledger, although it has its peculiarities.|
When compared to other accounting systems like those used by traditional banks, blockchain stores data in a new way. Blockchain is what is called a decentralized database, a database that is distributed among different computers (called nodes), instead of being stored in a single place and governed by a single person or entity. These nodes are computers that are equally connected to the blockchain network. In effect, all the data is distributed in real time updated copies among the nodes.
The key to blockchain is decentralization. With blockchain there is no need for intermediaries, like banks. Let’s take the example of a traditional money transfer. The first step is to order an operation to transfer money to another account. The bank confirms the operation and the money is transferred to its recipient. These transfers usually take up to a few hours or even days to clear, with international transfers, taking up to a week. And of course, the bank keeps a commission. Blockchain, allows peer-2-peer transactions (from person to person), making intermediaries obsolete. No banks, no governments, and no politics involved. Additionally, blockchain transactions only take a few minutes and are possible 24/7, no matter where the recipient is or what time the transfer takes place.
In order to process these transactions, blockchain uses the computing power of a network of interconnected nodes. In exchange for assigning these resources, the issuer of the transaction must pay a small commission (so it is not necessarily 100% free to use).
Although blockchain technology was created along with Bitcoin as an alternative to the traditional monetary system, it has potential for use in other functionalities in multiple industries, e.g: smart contracts.
2. What is a smart contract?
|A smart contract self-executes when the agreed conditions are met by all parties. Blockchain eliminates the need to sign a paper or have a third party, like a notary or judge ensure that the contract is fulfilled.|
Let’s say you buy a plane ticket along with an insurance that guarantees a full refund in the case that the flight leaves more than 2 hours later than scheduled. When you arrive at the airport and end up waiting more than two hours because of a delay, you will be automatically and instantaneously refunded. As soon as the official database recognizes that the conditions of the smart contract were fulfilled, the transaction is ordered virtually and the system executes the transfer to refund you your money. Instead of third parties, unnecessary paperwork, and possible client frustration, blockchain simplifies the entire process.
3. Other uses of Blockchain
|Another wonder of blockchain is that everything is traceable, from materials used to manufacture a product, the actual origin of a specific ingredient, to the exact destination of every penny donated to an NGO.|
NGOs are among the most audited organizations, and though it is great that they use part of their budgets to promote their own cause, transparency is important to the donors that contribute. When you donate to an NGO, you will be able to track your money from the moment you donate it until it reaches the project, a process that is already being tested by Givetrack.
Another example can be found in elections. Voting in blockchain elections will be safer, faster to count (live), and auditable by anyone. Journalists, governments, political parties, and individuals will be able to verify where and how votes were cast, by making a direct consultation to the database. Followmyvote is currently developing this, and Polys is already working.
With manufactured products, each part will be registered and tracked from start to finish. When buying a bike, the manufacturer will register it with a unique number during production. This allows tracking of the bicycle from the very beginning of production to the moment it is purchased by you and even after purchase. If the bike is stolen, blockchain can identify you as the owner via the unique registration number.
Whether it be a bike, a car, or a house, the use of blockchain will be highly beneficial for the collaborative economy. Imagine a world in which we could rent something without needing an intermediary platform like AirBNB, or BlaBlaCar or Cabify. If you wanted to rent out your bike, you could make a smart contract for a few hours. This is one example of how blockchain can revolutionize the world through its functionality of connecting and geolocating everything via computer databases.
All of this is made possible thanks to cryptography, and here’s how it works:
Some may already know that an encrypted message needs to be decrypted in order to be read, and in order to send an encrypted message, the sender must know what is called the recipient’s “public key”. Once received, a “private key” is needed in order to decrypt the message. A basic example is if James sends a message to Mary, James only needs to know Mary’s public key and he can send it to her encrypted. Only Mary, with her private key, can decrypt it.
The public key is what allows public access to the information that a company has sold a bike, but only the buyer, with their private key, can see all of the data on their purchase’s invoice. Each link in the process chain (treasury, the bike store, its suppliers, the client, etc) will be able to access the part of the information that corresponds specifically to them. The rest of the information, like the name and data of the buyer, will remain encrypted to everyone else.
Having said that, experts defend the idea that blockchain is perfect for intangible assets. It is not so great for tangible ones.
In conclusion to blockchain:
Say goodbye to fraud; Blockchain replaces human trust with mathematical truth by making information visible, transparent and auditable by anyone in realtime. Blockchain is fully secure, through encrypted messages and asymmetric cryptography. As long as the asset is created and transacted in digital space.
4. What is a cryptocurrency?
|Cryptocurrencies are the main application of blockchain technology in the real world, and each cryptocurrency has a slightly different way of verifying transactions.|
Cryptocurrencies are digital assets. Real money, just digital. The difference between the money on your credit card and cryptocurrencies is that the money on your credit card doesn’t physically exist while cryptocurrencies on the other hand do. The value on your credit card is simply a number that tells you (and the bank) how much you can spend. That number refers to money that doesn’t physically exist, and it belongs to the bank, not you the cardholder. Cryptocurrencies exist even though you can’t see them (because they are digital) and they are YOURS, as long as you own and control your private keys.
When you buy a cryptocurrency, the money is yours and you keep it in a digital wallet that ONLY you control. When you send your cryptocurrency, you send it directly to another digital wallet controlled solely by its owner. There are no intermediaries or banks that can speculate with your money or benefit from knowing where you spend it.
All transactions that take place are encrypted, hence the term cryptocurrency.
—Watch this 2-minute video to better understand how cryptocurrencies work.
5. What is a digital wallet?
|A digital wallet is where you store your cryptocurrencies.|
The traditional way to store your money is using a bank account (or under your mattress). When you deposit money in a bank account you are actually giving your money to the bank, and the bank uses it to lend and grant credits to other people or entities. So the money is only yours when you withdraw or spend it. This doesn’t happen with cryptocurrencies, and there are 3 ways to store them.
An Exchange is a platform/website where you can open an account in order to buy and sell cryptocurrencies (is not a digital wallet, but can be used as one).
- Practical for buying and selling of cryptocurrencies
- Practical for making transactions regularly
- The least secure way to store your cryptocurrencies
A hot wallet is a software/app that you install on your smartphone or computer to store your cryptocurrencies.
- Not possible to buy or sell cryptocurrencies
- Practical for making transactions regularly
- A secure way to store your cryptocurrencies
A cold wallet is a hardware, similar to storing your money in a safe-vault. Money is stored on a removable USB drive that you can connect to a computer and access when you need it.
- Not possible to buy or sell cryptocurrencies
- Not very practical to make transactions regularly
- The most secure way to store your cryptocurrencies
6. What is Bitcoin?
|Bitcoin is the main cryptocurrency and most of the skepticism towards Bitcoin comes from not understanding it. Bitcoin first started trading from around $0.0008 to $0.08 (July 2010). After the release of the documentary ‘Banking on Bitcoin’ it came up to $900 (January 2017); Now is over $20,000 (December 2020).|
The creator of Bitcoin (and its technology, blockchain) is a mystery, although we do know that his/her nickname was (or is) Satoshi Nakamoto. At the end of 2008, a whitepaper was published explaining the entire project from top to bottom and the main goal was to develop a peer-to-peer digital payment system.
Who is this person and why did they decide not to reveal their identity? Because the purpose of Bitcoin is to eliminate dependence on any one entity and this would have been difficult to achieve if there were an individual or single entity behind the project. Why? Because that would make it a bank, and governments could apply restrictions or ban it.
The second ranking cryptocurrency right now is Ethereum. Its creator Vitalik Buterin is well known. Now, imagine if he suddenly decides to kill his entire family. Without a doubt, the value of Ethereum will decrease and the cryptocurrency will lose credibility. This is something that cannot happen with Bitcoin since there is no known creator behind it. The mysterious Satoshi undoubtedly had it all figured out, and to this day has not left any ends untied.
In conclusion to Bitcoin:
- There is no hierarchy
- All are equal, both the miners (those who “discover Bitcoins”) and the nodes (each computer that connects to the Bitcoin network)
- It is transparent (open software) in which all can see what’s being done
- It cannot be hacked or banned
- The Bitcoin money is yours, and you have total control over it
I personally believe that Bitcoin is a great solution to the current dysfunctional monetary system.
7. What makes today’s monetary system dysfunctional?
|It is estimated that less than 3% of the money currently in circulation, exists physically in the form of bills or coins!|
Governments all over the world are accumulating debts that are impossible to pay off. Since money is no longer backed by gold, the only value the bills we use have is the value we decide to give them.
The current monetary system is unsustainable because central banks can print money whenever they want. The problem is that when there is more money in circulation, the prices of goods and services don’t correlate.
If you take all your savings and put them under your mattress, the value of your savings could be eliminated by inflation in 30 years. For example, 30 years ago you could buy a downtown apartment for 20,000€. Today, this amount doesn’t even buy you a garage space. Remember how much was a cinema ticket 30 years ago? And a candy gum? Ask your grandparents they’ll say “Back in my day, a case of snuff only cost ye a penny and 3 chicken eggs!”
Bitcoin is a good way to save and preserve your money because of its deflationary nature. There is a maximum of 21 million Bitcoins that can exist, and the fact that Bitcoin has a finite supply of coins ensures that its value increases as long as the demand is stable or expanding. We cannot see its value decrease due to natural factors (such as finding large amounts of gold or crude) or the printing of more currency (which is what is being done now by central banks).
Traditional currencies are eroded by the continued printing of new bills and coins by governments. Did I say governments? Well, technically from central banks, but we already knew that banks and governments work hand in hand.
On repeated occasions in history, we’ve seen governments devalue their currency in their own interests, seriously harming the population. Cryptocurrencies, however, can never be manipulated since their value is self-regulated by offer and supply demand.
—Watch this 1-minute video to easily understand how inflation works.
People all over the world are buying Bitcoin to protect themselves from the devaluation of their national currency. In Asia in particular, there is a very active cryptocurrency market. It is also in high demand in countries dealing with armed conflicts, such as Pakistan, or with political problems, such as Venezuela or Argentina.
Due to the manipulation of the current monetary system by central banks and improper management by governments, I believe it is a good idea to invest in Bitcoin because blockchain technology can bring improvements to society. If you want to have control and responsibility over your own money, investing in Bitcoin (a deflationary asset with high probability of increasing in value in the future) could be for you.
8. My approach to buying Bitcoin for the long-term
|In 2017 I began buying Bitcoin every week. I’ve never had the intention to sell, but instead to keep my Bitcoins in my wallet as a savings account. Over the past 3 years of investing, my money has doubled!|
I’m not trying to sell you the idea that you will become rich by buying Bitcoin, this couldn’t be further from the truth. Bitcoin is a highly volatile asset and you should only buy as much as you are willing to lose. Yes, you could lose it all (although this is highly unlikely).
The mainstay of long-term investing is diversification. A diverse portfolio should theoretically include all existing types of assets to ensure profitability during different economic climates. In times of prosperity: stocks will rise, during inflation periods: gold will, and in a recession: cash is king.
Due to the volatility of Bitcoin, the percentage you buy should be directly proportional to the risk that you are willing to assume as an investor. In my opinion, cryptocurrencies are here to stay, and I’m sure that as time progresses there will be a reduction in Bitcoin’s volatility.
The benefit of buying in small amounts on a regular basis is that it is less risky than making a large lump sum investment. Diluting the amount you buy through small weekly investments gives you two big advantages: dollar-cost averaging (DCA) your purchase price, and flexibility to quit the investment strategy if you are not convinced with how it is going.
If the price of Bitcoin increases, your profit margin increases and your investment grows. If price decreases, even though your investment will be losing value temporarily, then you have the opportunity to buy Bitcoin at a lower price, which means making a less costly investment and lowering your average-purchase price.
|My approach to Bitcoin investment is to continue buying small amounts on a regular basis. For example, if I can save up to 200€ per month, I’ll use 20% of that amount (40€) to buy 10€ of Bitcoin every week, and the remaining 80% will be invested or saved elsewhere.|
Personally, I do not have the time nor interest in trading Bitcoin on a daily basis. I’m what is considered a “foolish investor”. My objective is to keep my investment strategy consistent and as simple as possible, looking for a long-term reward while using the short term risks to my advantage. Buying for the long-term allows you to disregard news drama and short term volatility.
9. Where to buy and store Bitcoin
I use the platform Kraken to buy Bitcoins. It is a completely legitimate cryptocurrency exchange with low fees, suitable for both beginners and advanced traders.
Based in San Francisco, USA, Kraken is a fully regulated exchange platform, meaning you will have to pass a KYC (Know Your Customer) verification to operate.
Kraken is currently unavailable to residents in: Afghanistan, Congo-Brazzaville, Congo-Kinshasa, Cuba, Iran, Iraq, Libya, North Korea, Syria, and Tajikistan. Although Kraken is a fully regulated exchange accessible to US citizens and residents, it is not available to residents in the States of New York and Washington.
Hot Wallet: Exodus
The Exodus wallet is the hot wallet I use to store part of my cryptocurrencies. It was designed as a user-friendly, multi-cryptocurrency wallet. It is great for people who are new to the cryptocurrency experience because of its easy-to-use format.
Exodus is a relatively-safe cryptocurrency wallet for daily use and for saving small amounts of cryptocurrencies. Since it is a software, it will never be as secure as storing digital currency in cold storage (hardware).
Cold Wallet: Ledger Nano S
If you want to store your cryptocurrency for a long period of time, paper or hardware wallets are the best option.
I bought Ledger Nano S, because it had the best reviews at the time, and they were holding a sales promotion.
As an alternative you also have the Trezor Hardware wallet.
10. Understanding the risks
“With great power comes great responsibility”. –Voltaire
When you buy Bitcoin (or any other cryptocurrency) you are fully responsible for them, so you definitely want to make sure you don’t lose your password!
- Make sure that you are well informed of what you are doing. Do your own research on which investment strategy best suits you.
- Invest money that you don’t absolutely need to survive and that won’t be a major problem in case you lose it.
- Never invest based solely on the recommendation of another person. There are many people looking out for their own interests and their recommendations may be malicious. (I have no affiliation with the links in this article and will not benefit in any way if you click on them).
- To avoid possible scams, it is essential to acquire virtual currencies on verified and highly extended platforms (such as Kraken).
Bitcoin itself is NOT a pyramid scheme, and there is no one superior entity that benefits from those buying this cryptocurrency. But it is true that pyramid scams are created using Bitcoin or other cryptocurrencies as a payment system. Is that Bitcoin’s fault? Not at all! Pyramid schemes have existed since long before the invention of cryptos.
Nevertheless, it is true that people take advantage of the ignorance of others. For this reason we see platforms that act as “banks”, promising stratospheric profits in which you have to invite others, Forsage is one of them. But regulators are gradually implementing laws and guidelines to help protect consumers against fraud.
May you have any questions, you can reach out to me and I’ll be happy to assist you. If you enjoyed reading my article and feel like you’ve learned something valuable from it, give me a 5 stars rating and share it!
*Special thanks to Fred Antunes (Board President at Portuguese Blockchain Association) for his inputs.