Crypto Currency Investing Chapter 1 Summary: What is Crypto?

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You may think you can just put your money in bitcoin and watch it grow into millions.

While we’ve all heard stories of this, the chances of it happening to you are like winning the lottery.

I’m willing to bet that more speculators have lost money in crypto than have gained it.

That’s because they didn’t take the time to understand it. Crypto is the same as any asset class. You must understand it to be able to reliably profit from it. Otherwise you are just gambling.

The amazing thing about crypto is that it is next to impossible to counterfeit.

This is because, as the name suggests, it is secured by cryptography.

The other great thing about cryptocurrencies is that they are decentralized. This means that they have no central governing institution, such as a bank or government.

In theory, this means that governments and banks can’t mess with it like they constantly do with fiat currencies.

Satoshi Nakamoto created bitcoin in 2008. His/her/their true identity has never been confirmed.

In 2011, enthusiasts started seeing holes in it. In an attempt to improve it, they started developing alternative coins (alt coins) such as Ethereum and Solana.

These days there are tens of thousands of cryptocurrencies and the number continues to increase.

Although new cryptocurrencies are released all the time, Bitcoin is still the leader.

Blockchain is the technology that crypto is built on.

It is a shared database which maintains all transactions made with cryptocurrency, i.e., an electronic ledger.

Once data (such as a transaction) is entered into the blockchain, it can never be changed.

Each block has a finite storage capacity. Once it is full it closes and is linked to other blocks of data, like a chain.

Any new information will get stored on a new block.

Unlike when a bank controls everything in the system, the data from blockchain is distributed across several nodes in different locations.

There is no one central entity controlling it, hence, it is decentralized.

If anyone (such as a bank) tries to tamper with the information, the blockchain will cross-reference between the nodes and find the one that has the incorrect information.

This means there is complete transparency and no possibility of forgery.

Blockchain has many other uses besides just cryptocurrencies.

Since all the data is encrypted, you can use it for legal contracts, employment contracts, inventory management, auditing software, and more.

Digital signatures are used to verify all transactions.

There are two types of cryptography.

With symmetric cryptography, there is one key that is used to encrypt and decrypt the data. Both the sender and receiver have the same key which is used to lock (encrypt) and unlock (decrypt) the data.

Asymmetric cryptography has two keys. One encrypts it (the public key) and the other decrypts it (the private key).

The public key is like a username. Everyone can access it. The private key is like a password. It is not to be shared.

Blockchain makes use of asymmetric cryptography which is more secure. The public key contains the information about the addresses of the cryptocurrencies. The private key gives access to the transactions within each address..

When buying and storing cryptocurrencies, it is very important to always own your own private key

Since crypto is not a physical currency, it can not be printed by the government or central bank.

Instead, it is created by a mathematical process known as mining.

Every cryptocurrency is slightly different, but here is a basic rundown of how it works for bitcoin.

Every transaction in the blockchain needs to be validated. In order to connect the block to the chain, miners need to find the digital key to the block, known as a hash.

This is done by using a lot of computer processing power to solve complex mathematical algorithms.

Once a miner solves the hash, they get a Bitcoin as a reward.

It is not a worthwhile endeavor to mine bitcoin. The cost of electricity alone renders it unprofitable.

Since there is no single regulatory body in control, a consensus mechanism is used to ensure security and trust across the blockchain.

There are several ways to achieve this consensus mechanism.

Proof-of-Work (PoW) requires that every node proves that their work is eligible to be added to the blockchain.

Proof-of-Stake (PoS) is when nodes are chosen to create and validate new blocks based on the amount of cryptocurrency they hold and are willing to "stake" as collateral. PoS is more energy efficient than Pow.

Any currency needs to meet five criteria to achieve legitimacy.

1. Scarcity

Scarcity ensures the monetary value of individual units isn’t diluted. Bitcoin, for example, has a capped supply built into its codebase. Once it is all mined, that’s all there is.

When central banks and governments print more fiat currencies it can lead to inflation. However, not just anyone can print money, so fiat currencies still have scarcity.

2. Divisibility

Divisibility is the ability to divide the currency into smaller units without losing value. This allows for precise transactions of varying amounts.

For example, 1 dollar is 100 cents, so you don’t have to buy things at multiples of $1.

Every bitcoin can be broken down to 100,000,000 Satoshis.

3. Portability

It’s easy to carry around paper money in comparison to lumps of gold. fiat money is very portable.

Cryptocurrency is digital so it is even more portable than paper.

4. Durability

When your dollar bill gets torn, burnt, stolen, or lost, it is no longer worth anything to you. Coins are more durable.

Crypto is not physical so there is no chance of it being torn. It’s also very tough to steal it. In order for that to happen the thief needs to get access to your private key.

However, if you lose or forget your private key, it means you can’t access your crypto.

5. Recognizability

This is the most important factor in the legitimacy of a currency and there are two characteristics that a currency must have to be recognizable.

The currency must be identifiable and verifiable.

Bitcoin, for example, can be easily identified inside a wallet which has a specific address. And as we have discussed, it is verified.

The only issue with crypto is widespread adoption. It is nowhere near as popular as fiat currencies, but the number of users is growing.

A crypto wallet allows you to transfer from one account to another, similar to transferring money between bank accounts.

When you buy something with crypto, your transaction will only be complete when you provide your private key.

You choose what you want to buy, put in your private key, and then the crypto gets sent from your wallet to the vendors.

Read the next chapter here.

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