Crypto for the Older Generation

Part 1: What is Crypto?

Following the financial crash of 2008, an unidentified person (or persons), known forever as Satoshi Nakamoto produced a white paper (originally a government report giving information or proposals on an issue) outlining the creation of a digital currency called Bitcoin (BTC).

The idea was to take financial control away from the Central Banks and place that control into the hands of the holders. As Bitcoin is not controlled by any one entity ie decentralised, it could be transferred between holders anywhere in the world without permission and across borders.

The white paper set out the production of Bitcoin at a set rate. In order to produce Bitcoin, many high powered computers installed the necessary software to solve complex mathematical equations. The first ‘miner’ to solve the equation would be rewarded with a ‘block’ containing 50 Bitcoin. Each block is produced every 10 minutes.

Once a block is produced, it is relayed to all the computers on the network, to verify it’s production, which then confirm and store that block in a chain, known as the ‘blockchain’. Once verified the block cannot be altered or removed and therefore becomes immutable ie fixed forever. The network then sets about solving the next block and so on. Bitcoin’s security comes from the fact that all the computers on the network have to agree to every transaction. So when I buy 0.01 BTC that transaction becomes fixed on every computer holding the Bitcoin network together. Obviously the actual process is much more complex than this, but basically it’s like all the computers sharing the same spreadsheet and they all update together to confirm every entry. This in turn prevents any one computer trying to alter the blockchain as the others will not verify the transaction unless they all agree.

Bitcoin is deflationary, unlike currencies such as £ or $ which are inflationary by printing more cash. There will only ever be 21 million Bitcoin mined as per the white paper.

Every 210,000 blocks (roughly 4 years of mining) the Bitcoin reward is halved, known as the ‘halvening’. The first halvening was in 2012 and the reward reduced to 25 Bitcoin per block, again in 2016 down to 12.5 Bitcoin per block and this May 2020 to 6.25 per block. This will continue until the last Bitcoin is produced around the year 2140.

One Bitcoin is displayed with up to 8 decimal places ie 1.00000000. Therefore there are 100 million bits in a Bitcoin. Each bit is known as a Satoshi after it’s creator.

Bitcoin can be purchased in any amount right down to it’s 1 Satoshi level.

For example at the time of writing 1 million Satoshi would cost around $85.

Since the inception of Bitcoin there have been many thousands of alternative Cryptocurrencies known as ‘alts’. You can see a list of these at various online websites such as https://coinmarketcap.com/ or https://www.worldcoinindex.com/ and there are many others.

Some you may have heard of are Ethereum (ETH) Ripple (XRP) Litecoin (LTC) etc.

All of these ‘alts’ attempt to achieve slightly different functions to Bitcoin. Some are used for payments, some for increasing transaction speeds or providing a platform for developers to launch products on. All the alts have a value, usually shown in $. However it should be remembered that all alts, other than stable coins (Tether is one) are valued primarily in Satoshis. So if the Satoshi value of a coin remains at say 0.00050000 (50000 Satoshis) and Bitcoin's value in $ drops, so does the $ value of the alt coin. If 50000 Satoshis are worth say $4 today because Bitcoin is $8000 then if Bitcoin drops so does the alt. Therefore all alts are tied to the Bitcoin price but they can increase relative to Bitcoin if their Satoshi level increases. In other words they are valued as a fraction of 1 Bitcoin.

The crypto revolution is still in it’s infancy and the markets are extremely volatile. One hopes that in time this will settle down and reflect the more traditional stock markets. (Other than the last couple of days of course! 9th & 10th March 2020).

Should you buy Crypto?

This is a question only you can answer but I propose a few ideas to help you form your own opinion.

When Bitcoin was first mined it was considered ‘internet money’ and later used by computer nerds and mainly for illegal activities. By the way this is no different to any other currency! In fact cash is far harder to trace than Bitcoin.

At first it’s value was extremely low. Notoriously someone bought 2 pizzas for 10,000 Bitcoin. At todays value of $8000 those pizzas cost $80 million!!! (bearing in mind Bitcoin was $20,000 in late 2017)

What needs to be considered is if you believe that one day Bitcoin, and other alts, will replace or at least run alongside traditional money.

Let’s face it, a lot of financial transactions are already digital. Think of buying online, or online banking or eBay and Amazon. You never actually send cash, it’s all transferred from your account to the vendor digitally.

The difference is that if you hold Bitcoin, or any alts, you are your own bank. There is no middle man taking a cut and no one can stop you.

Think how huge that is for people in countries where some do not have access to banks. Or where inflation of the local currency runs out at extraordinary rates. Take Venezuela where the currency can lose 40% overnight. Bitcoin there is very popular.

Food for thought is that virtually EVERY currency that has ever existed has gone to zero value, usually lasting around 30 years. The best performing one is the English £. It has lasted since 1270 and has lost 93% of it’s value.

So should you buy Crypto?

Whilst currently very volatile and not for the faint hearted, there are some good reasons to invest a reasonable amount in cryptocurrencies. Personally I would steer away from some of the more speculative ones, unless you have a gambling instinct. Even if you do, remember the golden rule in all investing - never risk more than you can afford to lose. Certainly be wary of trading, ie buying hoping for a rise and then selling at a profit. Unless you are experienced you WILL lose money. Even the best traders only make around 10% overall, 91% of traders lose money.

Personally I am buying crypto for the long run. I am not trading. I buy and I hold.

If you consider that there can only ever be 21 million Bitcoin and that it is estimated that 6 million are lost forever (lost computers, forgotten passwords etc), then there are only 15 million left.

That means not everyone living in Delhi or Istanbul could ever hold just 1 Bitcoin each.

It is estimated that if you hold just 0.28 BTC you will be in the top 1% of Bitcoin holders. That’s around $2500 today. If you hold 1 BTC or more you will be in the top 0.1% of holders.

If you intend buying some Bitcoin or alts the best proven way is Dollar Cost Averaging (DCA). Say you decide that you believe that Bitcoin will be worth more in the future and will become a store of value and you want to invest $1000 for example. Instead of buying all at once and possibly seeing this volatile market reduce it by 30% overnight, using DCA will even out your overall purchase price.

By using DCA you would buy say $100 worth this week or month and repeat 10 times regardless of the price of Bitcoin. You would still have bought $1000 worth but you have averaged out the price and avoided the highs and lows of buying in one go.

See this link https://dcabtc.com?sd=2018-03-08&sda=2_years&f=monthly&d=2_years&ac=10000&c=false to see how $100 per month over 2 years would have increased in value by 51%.

2 years ago Bitcoin was $9400, so if you bought your $1000 then you would be down now. However by using DCA you’d be up 51%.

In Part 2 I’ll discuss buying, storing and transacting your shiny new Bitcoin (or alts).