What is Bitcoin?
Bitcoin is digital cash for the Internet. A person can now send Bitcoin across the world to other people or to buy things. It’s relatively inexpensive to send and extremely secure.
I don’t understand, can you give me an example?
If I want to send money from the United States to India in fiat currency (eg. USD), I’ll be charged a fee plus a currency conversion fee. This will usually be in the range of anywhere from $10 – $50. It’ll also have to be picked up from a central location, typically a bank or the Western Union. With Bitcoin, it’ll be sent right to the person you want for $1-$2 (fees have recently been closer to $3-$4) and in a fraction of the time.
Are people actually using Bitcoin?
What’s really cool about Bitcoin is everything is public. On 5/29/17 almost $900MM in transactions occurred. You can see other cool stats about Bitcoin here: https://blockchain.info/charts.
Oh, I get it, but if this is digital, how do they make Bitcoin?
There is a large network of computers. These computers can be run by anyone from a 12-year-old kid in his parent’s basement to large companies, like Fidelity, with huge data centers. Anyone can join or leave the network at any time. Each computer acts as a bank teller. The miners make sure all the transactions are secure and that no one can spend more money than they have. The transaction fee gets split among the various miners. The tellers also spend a lot of time trying to solve a very hard math problem. Once they solve it, they can post their solution and a new block will be added to the chain and, the miner who solved the problem is rewarded with a bonus, further incentivizing miners for participating in the network. This is important because the more miners, the more secure the network is.
I get it, but do you have any other things that I can read?
Wall Street Journal: Bitcoin and the Digital-Currency Revolution
Wired: Bitcoin Will Never Be a Currency—It’s Something Way Weirder
Coindesk: How to Explain Bitcoin to a 5-Year Old
So what is this Blockchain stuff that people keep mentioning?
A blockchain is just a ledger or database. People use it to keep track of all transactions that occur on the network. This is a big deal because typically you need to trust a central authority, such as a bank, to track your financial transactions or a hospital to track your medical records. Now you don’t have to worry about hacks like the Target hack in 2013 where 40 million credit cards were compromised. All your data will be secured and validated in the blockchain. PWC has a great infographic to explain this:
Wait, so what is Ethereum?
Ethereum is programmable digital currency. In Bitcoin, you can send a transaction from one person to another. In Ethereum, you can add conditions to those transactions. An example is John sends one Ether to Ryan, but John programs the Ether so that it sends tomorrow at 7 PM. This becomes really useful when you introduce the concept of something called a smart contract. A smart contract takes a bunch of rules that you write into it and automatically enforces it.
Let’s think of an escrow service. Escrow typically charges 2-3% of a transaction fee until certain conditions are met. This protects the buyers and sellers to make sure both payments are delivered and the product. If you use Ethereum, you’ll pay a gas fee (less than $1) and create a smart contract that mimics the conditions of the escrow service.
Here’s a video that might explain it better:
So why would do we need Bitcoin? Ethereum seems great!
Comparing Ethereum to Bitcoin is like comparing apples to oranges. Bitcoin is a payment platform at its core while, Ethereum has a much wider range of applications. Bitcoin is probably the best way to send money from A to B, but when you need to add instructions to that transaction, Ethereum is the way to go.
Where can I read more about Ethereum?
Angelo Milan: Ethereum explained to my mom
Linda Xie: A Beginner’s Guide to Ethereum?
Bloomberg: Post-Bitcoin Technology Has Geeks, Giants, and Hackers Excited
Are there other cryptocurrencies and cryptoassets I can buy?
There are over 800+ cryptocurrencies and cryptoassets; I would recommend getting familiar with Ethereum or Bitcoin before you dive into buying these other tokens.
Why are there so many tokens?
I like to think I’m smart, but there are a lot smarter people than me who can explain the token model. Essentially, it’s a new way to monetize a product.
Fred Ehrsam: Blockchain Tokens and the dawn of the Decentralized Business Model
Nick Tomaino: Tokens, Tokens and More Tokens
Fred Ehrsam: Value of the Token Model
Max Mersch: The Rise of the Token Sale
Albert Wenger: Crypto Tokens and the Coming Age of Protocol Innovation
You are using the words cryptocurrencies, cryptoassets, and tokens; I’m confused are they the same thing.
No, a cryptocurrency is different than a cryptoasset. The word token is used to describe a cryptocurrency or cryptoasset. An example of cryptocurrency is Bitcoin. There are other cryptocurrencies like Monero, Z-Cash, and Litecoin. Cryptocurrencies are primarily used for transactions and different cryptocurrencies address different needs. For example, Z-Cash and Monero offer more privacy than Bitcoin, while Litecoin has bigger block sizes that makes it faster.
An example of a cryptoasset is Ethereum (Many will people argue this point and there isn’t a right answer. There is no universal definition for much of the vocabulary in the space.) Ethereum is a cryptoasset to me because Ether can be sold on an exchange, but also can be consumed on the platform for doing something like creating and executing a smart contract.
A token is just another word for cryptocurrency or cryptoasset.
How are new cryptocurrencies and cryptoassets created?
Most are created using a token sale or initial coin offering. (ICO) A token will be offered to the general public at a certain date and time. There are two types of sales, uncapped or capped. A capped sale means that only a certain amount is offered, while an uncapped sale means an unlimited amount of tokens is offered until a certain date. They are then typically listed on an exchange usually a few days after the sale.
This is really confusing. How do people track all this?
I totally agree with you. There are awesome sites like Smith + Crown which provide information to help explain what different tokens do. I’d also recommend following these people on Twitter who are super smart:
This sounds really cool. Almost too good to be true.
You’re right, this is really cool, but blockchain technology is still in its infancy. We don’t know if the technology works at scale, how the regulatory environment will play out, or even if people will fully adopt it.
So let’s get back to investing; this stuff sounds almost too good to be true. I read someone who invested $100 in Bitcoin in 2009 would be worth over $70MM.
Cryptocurrencies and cryptoassets are very promising, but still, have a lot of uncertainty. Cryptocurrencies like Bitcoin are being used, but the question is can it scale and will people adopt it?f Many of these tokens are ponzi-schemes or scams. Some of the tokens that are legitimate still only have speculative value and might never reach their potential. Protocols like Ethereum are still in the early stages and, another competitor might beat them or the technology might not be as good as people think it is. Even the token sales themselves might be subject to a lot of change because of future regulatory requirements. I don’t agree with a lot of the perspectives, but I think it’s important that they are shared so you can generate your own viewpoint:
- Paul Krugman: Bitcoin is Evil
- The Atlantic: The Rise of Cryptocurrency Ponzi Schemes
- Ben Thompson: Tulips Myths and Cryptocurrencies
I have a lot of research to do, but this sounds like it could be promising. I’m ready to start investing.
Before you start investing, read Ari Paul’s blog from the University of Chicago endowment on how to think about investing in cryptocurrency. Part 1 & Part 2.
Investing Philosophy for Casual Investors:
For casual investors, no more than 2% of their net worth should be invested in cryptocurrency. I also believe that you should only look into investing only in Ethereum or Bitcoin until you really understand the space. You can then begin to look at other cryptocurrencies such as Z-Cash or tokens such as Golem. Cryptocurrency will become an important part of every investor’s portfolio in the same way people invest in stocks and bonds.
How to Buy Bitcoin or Ethereum:
I recommend using Coinbase for purchasing Bitcoin or Ethereum. Coinbase is fairly easy to navigate and, you should be able to make a purchase with little to no hassle. Be prepared to give them a Driver’s License, Social Security #, and other ID verification sources.
This guide intentionally oversimplifies some concepts. This guide isn’t for people who are trying to understand the technology behind tokens or to provide specific investment advice.