1| An Introduction to Cryptocurrencies ₿
An Introduction to Cryptocurrencies. A brief overview and how to get started learning about crypto
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A little bit about me
Hi, I'm Rohan.
I'm a medical student from the UK with an interest in technology and business, particularly in cryptocurrencies and NFTs.
I've been investing in crypto for a while now and I'm writing this blog as an introduction to cryptocurrencies and a guide on how to do further research because I remember just how daunting this whole space was as a beginner.
We've all probably seen some sort of news article about Bitcoin, Dogecoin or any of the other countless cryptocurrencies and the crazy gains people are making. Maybe you're curious and want to learn more but have no idea where to start.
Hopefully, I can provide you with an introduction to this crazy new world by addressing three main questions?:
What is a cryptocurrency?
Why are they valuable?
And should I buy some or investing in some?
REMEMBER: Nothing in this blog is financial advice and always do your own research (DYOR)
What are Cryptocurrencies?
At a high level, Cryptocurrencies are simply decentralised digital money that are not controlled by any single government unlike $s,£s and €s. They can be sent and transferred like regular money, but also can have more use cases which I will get into later.
To fully appreciate cryptocurrencies, you have to understand blockchain technology itself:
Without going into too much detail, the blockchain is simply a record of transactions and is publically available. Think of an Excel document, but where anyone can get access to and see the information. Instead of the information being stored in a single place, the information is stored across a network of computers. Data is stored in “blocks” that not only contain the data but also have an ID for the transaction as well as the ID for previous transactions, which allows a block to be linked together to make a “chain”.
Cryptocurrencies like Bitcoin, use blockchain technology to create a track of all the times people send and receive bitcoin. Since anyone can see the list of transactions, it means that people have confidence in sending money without going through a third party to verify the transaction like a bank or money transfer service. Each transaction is secured with cryptography which means that it can not be counterfeited.
To verify all the transactions on the network, a lot of computing power is required. Any computer that successfully verifies a transaction gets rewarded with cryptocurrency e.g. In the example of Bitcoin, successfully verifying a new transaction to the blockchain would reward that computer with 1 BTC. This acts as an economic incentive to keep the network online rather than relying on the goodwill of people.
This is a very simplified and generalised view of how a blockchain and bitcoin works. If all of this is a bit overwhelming and confusing, I've linked below a great explanation video on how blockchain and Bitcoin works:
₿itcoin: What’s the hype and the what’s investment thesis?
Bitcoin is the OG. It is the first cryptocurrency ever made, dictates the entire cryptocurrency market and is the poster child for this new world. It has a fixed supply of 21 million (something that is important and I'll touch on later).
Due to blockchain technology, the Bitcoin network keeps a track of all the transactions and who holds how much Bitcoin. Since this network is decentralised it means that no one person, bank or government can freeze your assets or stop you from transferring money. Your Bitcoins (and also other cryptocurrencies) are stored in a “wallet” and as long as you have the password or “private key” to that wallet, no one can access your Bitcoin. Unlike normal banks, you don't need any ID to open a Bitcoin wallet. Your wallet address also does not contain any personal information such as your name or date of birth. It is simply a collection of random numbers and letters. Privacy and the ability to hide your wealth is another big reason why people are so excited about crypto. The fact that the government can't tell who is sending money where is, combined with the fact that they can't block transactions, is a big reason why cryptocurrencies and BTC are taking off in countries like Venezuela where aside from hyperinflation, governments impose tight controls on how much money you can send out of the country with very strict penalties for breaking these rules.
We often take it for granted in the UK and in the west how easy it is to open a bank account and with banks such as Starling and Monzo, you can open an account in less than 15 minutes, but this isn't the case for people in other parts of the world. In a lot of developing countries, opening a bank account to send and receive payments is a long and tedious process filled with countless layers of bureaucracy. But with Bitcoin, as long as they have an internet connection, anyone from anywhere in the world can open a bitcoin wallet and start to receive Bitcoin. There are no credit checks, no applications, nothing.
So what’s the investment thesis for bitcoin?
In my opinion, the investment thesis behind bitcoin comes down to two things:
Digital gold
Due to the fixed 21 million supply, bitcoin can act as a good store of value and inflation hedge. In a world with rapidly rising inflation, many people see bitcoin as a way to preserve their wealth. As the purchasing power of our $,£s etc falls, the price of BTC should go up respectively. This is particularly pronounced in countries in South America like Argentina and Venezuela where there is rapid inflation and even in some cases hyperinflation.
Traditionally gold was being used as a store of value, but now we have this new "digital gold".
To me and many others, it makes sense too. We now spend >50% of our time in the digital world, whether that be on social media apps or the internet, so why can’t we have a digital currency or digital gold?
Gold itself as a medium to store value is actually quite poor. It is very hard to transport as you need large shipping containers/trucks to transfer lots of gold from one site to another. You then need security/insurance to ensure that no one steals your gold and that it arrives at its destination safely. Furthermore, gold is not easily divisible. If 1 gold bar is worth $1000 and you need to give someone $100 you can’t easily do this. To get $100 worth of gold, you will need some metal cutting equipment and the skills to actually cut 1/10 of the gold bar. In contrast, you can send as small of a BTC as you want, for example, 0.0000001 BTC.
Currently, BTC roughly around 18.7 million BTC out of the total 21 million have been obtained through successfully verifying transactions on the network, or "mined". As we get close to the 21 million number, it gets harder and harder to mine a new bitcoin. This combined with a fixed supply, inherently makes BTC deflationary rather than an inflationary currency as many world currencies are. The Bank of England aims for an inflation rate of around 2% a year. This is to encourage people to spend as they know that in the future the value of their £ will be worth 2% less than as there is an extra 2% more £ in circulation. In contrast with BTC, you know it gets harder and harder to create a new BTC and therefore, you might think I should just keep a hold of my BTC rather than spend it as it will be worth more in the future. In our current, highly consumerist society, this idea of a deflationary currency is completely revolutionary and is another reason why many think of BTC as a "digital gold".
As a currency:
As I previously mentioned, we often don't appreciate in the West just how good our banking infrastructure truly is. In the UK we don't pay to send money from one bank account to another and with new fintech companies like Wise, we also no longer have to pay high fees to send money abroad. Now with banks like Monzo and Starling, we can even use our cards for free abroad, getting access to almost the same exchange rates as banks and avoiding expensive currency exchange services.
Unfortunately, this isn't the case in many other parts of the world. In a lot of developing countries with poor financial infrastructure, aside from the difficulties of opening a bank account as I previously mentioned, they also have to pay fees. For many countries that rely heavily on remittances such as the Philippines, India and Pakistan, these fees add up. They are usually only a few dollars, but in countries where people only make a few $100s a month, these are very expensive and IMO unfairly punish some of the poorest people in the world.
Bitcoin can help solve this. Instead of using banks and money transfer services like Western Union, overseas workers can now use the bitcoin network and send money for a fraction of the cost. BTC can also appear in the receivers wallet in minutes rather than days that traditional methods take.
Combine this with how poorly managed some countries money is in some countries, shops and businesses may decide that they would rather accept BTC for payment rather than their countries native currency that they believe is being mismanaged by a corrupt government.
These are some of the reasons why the country of El Salvador has recently made BTC legal tender, meaning all shops and services have to accept it as a form of payment.
To recap:
Cryptocurrencies are a decentralised form of digital money that is not in control of any single government, does not depend on traditional financial institutions and is anonymous
The investment thesis behind bitcoin can focus on two things:
Digital gold: due to its deflationary nature and fixed supply
A currency: as bitcoin network adoption grows and it becomes accepted as a payment for goods and services
Ethereum: What is it and what is the investment thesis?
Ethereum is the number two crypto after Bitcoin, but unlike bitcoin, it wasn't created with the purpose of being digital money. Ethereum is used to power a brand new internet or “Web 3.0”. Aside from just keeping a record of transactions, decentralised applications or “dApps” can be built on top of the Ethereum network using “smart contracts”. These are like regular contracts, but instead of a 3rd party intermediary being needed to verify and ensure the contract is completed, computer code will automatically be executed instead. Coinbase has an amazing example of a smart contract within their education section:
Compare a smart contract to a vending machine. Imagine a machine that sells cans of soda for a quarter. If you put a dollar into the machine and select a soda, the machine is hardwired to either produce your drink and 75 cents in change or (if your choice is sold out) to prompt you to make another selection or get your dollar back. This is an example of a simple smart contract. Just like a soda machine can automate a sale without a human intermediary, smart contracts can automate virtually any kind of exchange.
For these transactions to occur, transaction fees (or “gas”) need to be paid and these are paid in Ethereum’s native currency, Ether (ETH).
A whole wide range of decentralised applications (dApps) are found on the Ethereum network. These range from decentralised finance (“DeFi”) applications that allow users to borrow and lend out money without the use of banks, digital artwork and NFTs on Opensea, to even video games like Axie Infinity. All of these are run on the Ethereum network and use ETH to pay for fees.
So what’s the investment thesis?
If you’re buying ETH you’re essentially betting on the decentralisation of everything and the ethereum network being the place for this.
Many people compare buying ETH to buying stock in early internet companies like Facebook, Amazon and Google or like buying oil.
If decentralised apps and games get popular, then the price of ETH should rise as the demand for ETH to pay transaction fees ("gas") rises
Justin Oh at A Couple of Cents, has an excellent video summary and explanation on Ethereum and the investment thesis behind it can be found here:
To recap:
Ethereum is the number 2 cryptocurrency behind bitcoin
It is used to power a decentralised web with decentralised applications ("dApp") that can be used in a range of applications including finance, art and gaming
By buying Ethereum, you are betting on decentralisation and the Ethereum network being the place for this Should you actually buy crypto?
What about other cryptocurrencies such as Cardano? Solana? Dogecoin?
Ethereum has a lot of problems that I won't get into fully in this blog post, but the main one being high transaction fees. These are a result of high network usage of the Ethereum network and the network not being able to keep up. At peak times, it can cost over $20 in gas to just send ETH from one wallet to another.
Other cryptocurrencies such as Cardano and Solana aim to solve these problems with Ethereum and claim that they are faster, cheaper to use and overall better. Unlike Ethereum, these are much newer cryptocurrency networks and don't have as much development and applications on them yet, but a lot of people are buying these cryptos as they believe in their future potential.
Other cryptocurrencies don't compete with Ethereum and either work in conjunction with it or are focused on an entirely different niche. For example, Chainlink is used to add real-world information e.g. weather forecasts to decentralised applications built on the Ethereum network. It works hand in hand with Ethereum. Other cryptocurrency networks such as Filecoin aim to create a decentralised file storage system that can compete with the likes of Microsoft's Onedrive, Google Drive and Dropbox.
DogeCoin is what I and the many in the community classify as a "meme coin" or to some a "shitcoin". It was the first meme coin and the investment thesis for a lot of this is essentially just betting on the meme ability of the internet. A lot of the gains you see are based on these meme coins. These can be fun due to the communities around them but it's more on the gambling side of the spectrum. A lot of these are pumps and dumps(where people with lots of money temporarily inflate the price of asset then sell as people FOMO in) and many people get left holding the bag or losing lots of money.
To recap:
Ethereum has a lot of problems and other smart contracts like Cardano and Solana aim to fix this.
Other cryptocurrencies work with other projects e.g. Chainlink and Ethereum or attempt to solve other problems e.g. Filecoin providing a decentralised form of cloud-based file storage
Memecoins such as Dogecoin are fun and have the potential to make crazy gains but also are highly speculative, borderline gambling and highly manipulated markets.
Should you buy crypto?
This is the question, that I routinely get asked and one that everyone wants to know. Should I buy crypto and how much can I make?
I love crypto and the potential of the technology and I'd love to tell everyone, yeah go for it, but unfortunately, it's not that simple.
Crypto is the wild west 🤠
One of the reasons we see such crazy gains and price volatility is because people don't know how to value (and therefore price) this new technology and asset class. In traditional finance, there are a few financial metrics that are a standard on Wall Street and taught in every business school as ways to evaluate businesses e.g. EBITA, Discounted Free Cash Flow etc. None of these models works well in crypto, if at all. This information asymmetry is one of the reasons you see these high returns but also a problem. Although the blockchain is transparent and all the information is publically available, the market can still be very easily manipulated, particularly by those with large amounts of crypto or "whales".
Another reason for such high returns is the large amount of risk you take in purchasing any crypto, even Bitcoin. Crypto prices are highly volatile with prices moving up and down 10%s a day. If you can't handle a 50% drop in the value of your crypto assets, then this market is not for you. This is partly due to how new the technology is, as I mentioned before, but also because any return on investments is usually based on the level of risk you take e.g. A 5 year US government bond currently only pays around a 1% return because everyone has confidence in the US to repay its debts.
The reason I mention this is to taper expectations. Yes, you can 3x or 5x your money but it's not without a significant amount of risk.
The fast-paced development in cryptocurrencies and blockchain technology means that it can be really hard to keep up with everything that's going on in the market as well as all the new projects and updates to projects. A week in crypto can feel like a month in the real world. The crypto market never sleeps. It is 24/7, 365 and you can go away for a weekend and find that your favourite coin has lost 30% of its value or a coin you wished you bought has gone up 50%. People see people doubling their money in a few weeks or even days with cryptos but these are very much the exception and not the rule. In the traditional stock market, people are happy to get a 10% return on their investment in a year and a lot of stock market investors, invest in companies with a 3-5 year horizon. To get these 3x-5x returns in even a year is fucking insane.
Most of the price appreciation and gains have taken months to even years to occur, as evident by the BTC and ETH price charts.
The amount of hype and FOMO in this space is absurd. It can be very tempting to buy this crypto that has just gone up 20% in a day, but it's important to understand this side of market psychology and not to FOMO in. There are countless clickbait videos on Youtube of BTC hitting $300-500k by the end of 2021, but I want to be quite clear, this is very unrealistic. A more likely price target, this market cycle would be $120-$150k. As someone that does believe that BTC will be worth that much, it will take much longer, maybe 5-10 years and it's OK sometimes to do nothing. Patience is an important skill in being a good investor and is something I struggle with.
To quote, the Stanford computer-scientist Roy Amara "we overestimate the impact of technology in the short-term and underestimate the effect in the long run"
What about trading?
I don't do much trading at all and I would never recommend it to people that are just starting. If this is what you wanted, sorry for wasting your time. It is very hard to read the charts consistently and it's even harder to predict short term price movements. Most crypto traders lose money and a lot of stuff you see on social media is just rented cars and 10,000 photos from a 3 day weekend to Dubai.
Instead, I try to form a fundamental understanding of the underlying technology and create an investment hypothesis for why I think this crypto project will do well and I wait for the market to realise what I realise.
To recap:
Crypto is the wild west. There are a lot of scams, pump and dumps but also the potential to make lots of money
You need to be able to handle a >50% loss if you want to make a 300-500% gain.
There is a lot of false hype, FOMO and greed in this market. Don't go chasing that 100x. It is important to control your emotions. It's ok sometimes to just do nothing
Be realistic with how much money you can/aim to make
The market is constantly changing and the technology rapidly evolving
Most people lose money trading cryptocurrencies. For most, it is a better idea to invest behind a solid project and invest with a long-term mindset
How I Would Recommend Getting Started and Where To Go For Further Research
Despite everything, I've said, I don't want to dissuade anyone from learning about or buying any cryptocurrencies. I simply wanted people to know the risks of getting involved in this space and just how much effort it takes to be successful. It took me many months to understand the technology, terminology, how the crypto market works and even now I'd say I am barely more than a beginner. But the reason, I do it, is because I deeply enjoy learning about this crazy new world. To me, they are revolutionary, have the potential to create massive amounts of wealth and also make the world a much fairer place.
Whenever I want to learn about a new crypto project, I always put a bit of money into it e.g. £10, to encourage myself to learn. This might be something that you want to do as well. I'd recommend starting with learning about Bitcoin and Ethereum first before moving on to learning about other projects. In the meantime, if you want to have some exposure to this asset, you could buy a small amount of them every week/month e.g. £5 a week until you feel confident that you understand the technology and have your own investment thesis. At this point, I would put more money towards it. This will help you avoid panic selling or FOMO buying. Even then, for most people that don't have the time or effort to keep up with this space, I would only allocate 1-5% of your total investment portfolio. 10% if you're feeling very ballsy until you get a really good understanding of this space.
The easiest and perhaps best app to purchase crypto for beginners is Coinbase. Coinbase has most of the major cryptocurrencies and has a really simple user interface. You can even earn free crypto by learning about the project.
I've attached my referral link here. Feel free to use it or don’t. I won’t be offended.
PRO TIP: The fees on Coinbase can be quite high at around 1.5% per transaction (higher if buying by card). If you want to reduce these you can use Coinbase Pro to reduce fees by >50%. It's a bit more complicated of a user interface but is still straightforward to use. Here's a video on how to use Coinbase Pro using your Coinbase account.
If you're still interested and want to do some further research, I've got some of my favourite resources that I personally use below:
My favourite resources
Not only does the host, Guy provide a weekly update on all the crypto news which is super helpful in this rapidly evolving space, but he also has IMO the best crypto videos on Youtube.
Guy provides an in-depth overview of coins and projects and helps explain the underlying technology, use cases, tokenenomics and everything else you'd need to get a fundamental understanding of that coin. This is my go-to resource when I'm researching if I want to invest in a coin or not
The best source for how to read the charts or "technical analysis" on Youtube. Unlike most YouTubers, Ben doesn't go in with crazy price targets and always gives a realistic expectation of what we can expect in the market. If you're a beginner and want to learn TA, he's the guy to go to.
Coinbase, the biggest crypto exchange in the world and the only publically traded one, has a great website with lots of information on cryptocurrencies, blockchain technology, decentralised finance and even NFTs. They have really simple, clear explanations with lots of videos and amazing graphics.
Books - Digital Gold, The Infinite Machine
Tells the story of bitcoin. If I'm done a bad job of explaining Bitcoin and you want a better explanation, want to learn the history or philosophy behind cryptocurrencies and Bitcoin this is for you. It tells the story of how Bitcoin was created, the philosophy behind decentralised and digital money, explores the early days and adoption of Bitcoin, including the dark web website, the Silk Road. It has a similar vibe to the Social Network, the book/movie behind the creation of Facebook, and even if you don't want to learn about Bitcoin it is a genuinely fascinating story.
The Infinite Machine by Camilla Russo:
This is similar to Digital Gold but explores the creation of Ethereum. You learn about Vitalik Buterin, the creator of Ethereum, why decentralisation is so important and his dream of a new decentralised web. It also goes into the stories of other big personalities and authority figures in the crypto world such as Gavin Woods and Charles Hodkinson who ended up leaving the Ethereum foundation and working on their own projects. A bit more technical and a harder read, so I would recommend reading this after Digital Gold but I highly recommend it explains the potential of Ethereum which you need to know before exploring other currencies
🧠Closing Thoughts 🧠
Blockchain technology and the potential of cryptocurrencies is nothing less than revolutionary. With the amount of money being made in the cryptocurrency world and the amount of funding new crypto startups are getting, it's clear to me that crypto is here to stay. Big tech companies, banks and even governments know this and have started to explore the possibilities. Companies like Paypal are adding the ability to buy and spend with crypto and the UK government is even working on creating a "digital £". Everything mentioned in this article is only a fraction of what you could potentially do with cryptocurrencies. What form this new world takes is unknown and there's no guarantee that the top 10 cryptos of today will be the same in the next 10 years. Even if you believe in cryptocurrencies as nothing but silly internet money, it's something that I think everyone should try to at least have a basic understanding of.
Hopefully, this blog helped you. If it has given it a share and a like. Too long? Too many topics covered or anything else that you think could be improved, please leave a comment below.
Great post! Was super easy to follow and I learnt a fair bit despite already having some exposure to cryptos. Look forward to reading your next piece!
Awesome read!