After bitcoin erupted to $20000 a few weeks ago, I decided I needed to learn what the hell was going on. I briefly peeked at Bitcoin a few years ago and brushed it off as inflated nonsense – I’ll regret this my entire life. I’ve learned a lot this past month and I think a quick guide might help some people out.
Firstly, we need to understand what Bitcoin itself is. Bitcoin is a digital item. It’s called a cryptocurrency. It’s similar to airline miles or credit card points. For gamers, it’s like gold in a game or whatever game currency exists for that specific game. It’s nothing, but, it’s important because people want it. Just like US Dollars, the value of the currency is determined by what people agree it is worth.
When I was younger I used to play online games like Final Fantasy 11 or World of Warcraft.
In those games you earn gold for various quests. During those quests you sometimes get special items. There are markets to sell those items, just like if you went to an open air market or farmers market in the real world. You run around for hours to collect these items, then you put them up on this market. People buy those items with in-game gold so that they don’t have to spend the time running around to collect them. It’s a mini economy. Some people don’t even want to spend the time to collect the in game gold – so, people sell it. In the real world. For real world dollars. I don’t know what it is today, but, $1USD used to get you like 7000 gold in World of Warcraft. The point of this being that things have a value because people decide that they do. In the same way that it cost me $1 USD to buy 7000 ‘useless’ digital Warcraft gold, it will cost me $15,000 USD to buy 1 ‘useless’ Bitcoin. People have decided that Bitcoin is valuable because it is able to be traded, and there is a limited supply of it (21 million coins). But, Bitcoin isn’t the only show in town. There are 1000’s of different crypto currencies.
Crypto currencies are various Bitcoin-like tokens that are generated according to a cryptographic algorithm of some type. Most of these currencies utilize a blockchain to determine who holds however much of the currency/token. A blockchain is basically just a database. If you’ve ever used Excel, which most of us have, you can imagine it just like that. Each entry into the blockchain is like one line of an Excel spreadsheet. If you don’t or never have used Excel, you can probably liken it to your personal checkbook or the transaction history on your bank account/credit card statement.
All of the items listed on your credit card statement are stored in what’s called a database, at whichever bank sponsors your credit card: Chase, US Bank, PNC, whatever. A blockchain is just another database type that stores transaction data. The difference is that instead of that data sitting on a computer at the Chase Bank headquarters – it resides on the PCs of 100’s or 1000’s of different people (this is what is meant by decentralized, rather than having the data in one place – it’s in many places). This means, there is not an easy way to manipulate the ledger. Your transactions are safer. To get into a little bit more detail, in the databases that store the data at banks they can read, write, edit, delete data from those databases. In the blockchain you can only read and add data. You cannot delete or edit data. Once a transaction is made, it’s made forever.
But, this isn’t a lesson on databases, or cryptography, I couldn’t even give a lesson on the latter if I wanted to. The main point here is that crypto currencies are just digital tokens that can be exchanged either for other digital tokens or used to execute some sort of action on some sort of program. Think of them similar to either:
- Exchanging US Dollars for European euros – if you want to buy things in Europe you need euros. You need to exchange your dollars for euros. These are just two different types of currency. Some places accept bitcoin or other crypto as currency to receive products or services, just like US Dollars and Euros. The future of value exchange will likely be some sort of crypto currency.
- You can think of some other tokens similar to putting gas in your car. Your car needs gas to operate. You buy gas to fill up your car so that it can get from point A to point B. Some crypto businesses built their platforms in a way that their specific token is required for their program to work. If you want to run their application, you need to use their token. In fact for one of these platforms, Ethereum (the third largest crypto as of this writing), they call one of their tokens GAS and you need it to make transactions within the Ethereum platform.
- The third way you can think of some tokens are as rewards. My best analogy is like chips at a casino. You go to the casino and you give them $100. They give you a $100 equivalent in their casino chips. Those casino chips are basically the same as a bunch of the crypto tokens out there. You can for simplicity just replace the word crypto with the word digital. It makes it seem less intimidating.
Those chips aren’t backed by the federal reserve similar to a physical US dollar. If you went in and bought that $100 and started playing, say you made $1000 worth of casino chips from your winnings. Then when you went up to cash out, the casino cashier said “We’re sorry but, this casino is now bankrupt, we can’t cash out any chips”. You’d be screwed, there would be no way of converting those casino chips back to US Dollars. They are now worthless because nobody in or around that casino would continue to assign a value to them at that point.
Crypto tokens serve different purposes and they aren’t all specifically intending to replicate the function of a US Dollar or any other type of standard currency. Right now, people are buying a lot of these tokens under the assumption that the businesses that created them will eventually take notable roles in the economy and the cost to acquire those tokens will be much higher at that point. It’s very speculative. Money is made by speculation. The same principles apply to the stock market. In regards to bitcoin, some people agreed back when it was created that it would be revolutionary. Those people spent a few hundred or even a few thousand dollars to acquire some bitcoins. Many of those people are millionaires now. There is still a ton of money to be made in the crypto world – it just takes a little more effort to learn the ropes and get involved. 2018 will be a big year and the earlier you get involved, the more likely you are to come out ahead. Just be careful and make sure you do your research before you buy. Here are things to consider:
- Who is on the team for this particular token (every token should have a team behind it that is supporting its success).
- What problem is token aiming to solve? Do you agree that the problem being solved represents a large market?
- What is the product roadmap? (This is just you understanding where this coin is today, in its development, and where the team intends to take it in the future)
- Has the team consistently reached milestones on this roadmap?
If you believe a coin has a great team, solving a great problem, and that they are competent; it might be a sound investment. Grab some of those coins and hold onto them for a few months. Day to day – things could swing wildly, up and down, but after a few months good companies should settle at higher prices compared to where you purchase today. If you notice your token spikes 200-300% and that’s enough for you, feel free to sell and take your profits. Great job, you just got some free money! I wish you all luck out in this new economy. It’s been around a while, but, I’d say most of us had no idea what to make of it.
Here’s a quick bit of bonus content to explain how I personally go about buying my crypto tokens – it can be really confusing at first.
- Set up a coinbase account: https://www.coinbase.com/
- Purchase some amount of litecoin or ethereum (I like to use these when possible because they charge lower fees when being transferred around).
- Determine which crypto you want to buy and search google for “How to buy XXX crypto”. In most cases you’ll end up at a site like https://getcrypto.info/bitcoin/ . They’ll walk you through what sites to use and how to get a wallet to hold your coins.
- Set up a wallet for that coin. You can store a ton of coins using the Coinomi app – its pretty solid. Many coins can be stored in whats called an ERC20 wallet. You can get one at https://www.metalpay.com/ or https://myetherwallet.com. I personally like the UI of metalpay, but, myetherwallet is a well established product. Full disclosure, I do own very little of the MTL token. I think they have a cool concept and future. Not all coins will work with either of these wallets and in some cases you will have to find a wallet specific to your token of choice. If you are doing the step by step on getcrypto they will advise you on what types of wallets to set up. Feel free to toss a comment on this article. I’ll give you a hand too, if I can be of any help.
- Transfer your Litecoin or Ethereum, that you bought from Coinbase – into the new token of your choice. You will either need to use some sort of exchange for this. The easiest way – if available for your token – is to use https://shapeshift.io/#/coins or https://changelly.com/. I use shapeshift regularly, I don’t often use changelly, but people like it. If those don’t have your token you will need to sign up on other exchanges such as kucoin, binance, kraken, or cryptopia. If you have to get into these other exchanges, things get a little more complicated and you’re best to just follow the steps detailed on the getcrypto page.
- If you used shapeshift or changelly you will have converted your tokens on coinbase to tokens in your wallet directly. If you did not, make sure to transfer your tokens from binance, kucoin, kraken, or cryptopia to the wallet you set up to store your token. Exchanges get hacked sometimes you don’t want your tokens sitting there when it happens. If you get them into your own wallet where you hold the private keys – it should be safer.
You’re now the proud owner of some sort of crypto. Good job. You’re involved now and you can brag to your friends and family about being on the cutting edge. As always, thanks for reading, follow, join, share, comment and just generally share some love.