Crypto Investing for Beginners #1 – What is crypto currency

In August 2008, a website named ‘www.bitcoin.org’ was quietly registered online by an unknown person. A couple of months later, the paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ was circulated in the cryptography community. The world didn’t know it at this point (and maybe it still doesn’t) but this concept would in less than a decade rise to become the most disruptive, important and largest stores of value in the world. Bitcoin has since spawned more than 4000 imitations and today, a single bitcoin is worth more than £40,000.

Unless you’ve been living under a rock, you’ve likely heard of bitcoin and cryptocurrencies. And if you’re a visitor to cheapskate investing, you are likely a person who is interested in investing and increasing their wealth. So naturally you’re wondering – “should I be investing in cryptocurrency as part of my portfolio?”. After all, the news portrays Bitcoin as ‘the future of money’. This guide aims to answer that question and more, breaking down investing in crypto currency into easy to understand and execute steps so that you can be safe in the knowledge that your future self is learned up. Today’s guide covers the background of crypto currency, what it is and why it is seen as so important. We are firm believers in only investing in stuff you understand, so without further ado, lets get into it.

As always, the following is not financial advice, read our disclaimer

 “Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital.”

– Warren Buffett

Background to Crypto

After Satoshi Nakamoto published his paper, the first lines of code for the bitcoin blockchain (more on that later) were published on Jan 3rd 2009 and 10 bitcoin were sent to Hal Finney, a cryptography enthusiast. Bitcoin was born. In the beginning, Bitcoins were sent between enthusiasts online, however the first ‘real world’ transaction was made by Laszlo Hanyecz, who bought 2 Pizzas for 10,000 bitcoin (today, the bitcoin used to buy those pizzas would be worth £400M!) and this essentially assigned a ‘monetary value’ to bitcoin, legitimising it as a currency. Shortly after in 2010, other cryptocurrencies started to emerge to try and improve on the Bitcoin model. Litecoin, which is still one of the major crypto currencies today, was one of the first imitators.

In the years that followed, Bitcoin and other crypto currencies experienced rises and falls of relatively negligible value, until in 2017, cryptocurrency news reached a fever pitch and bitcoin hit a peak of over £13,000 per coin and other crypto currencies like Ethereum and Litecoin had similar gains. Crypto had now become relatively mainstream, people who had never invested before had heard about them and people started to wonder, could crypto be a long term investment for the future?

Today, a single bitcoin is worth more than £40,000 and is expected to endure for the long term. We at cheapskate have been investing in crypto over the past few years and we think now is the time to let our readers know what we’ve learned, how we invest and what we think the future holds!

What is a cryptocurrency?

In a nutshell, a crypto currency is a digital asset or form of money that is secured by a form of cryptography, meaning it is impossible to counterfeit. Think of it like the money in your online bank account, except it is decentralised, meaning the supply isn’t controlled by a government or a central body and doesn’t require ‘middlemen’ or any third party to verify transactions. This is made possible by a network of p2p computers (peer to peer, i.e. the users and account holders and miners of bitcoin) across the world that verify and complete the transaction by adding a new block to the blockchain. The blockchain is a ledger that is a permanent record of transactions that uses cryptography to ensure transactions are secure and can’t be duplicated. Complicated stuff, but the takeaway here is that it is a form of ‘money’ that uses new, secure technology to carry out transactions without the need for banks or governments.

You may be thinking – “so what, I can already send money digitally, plus I can use it to buy stuff in shops, so what’s the need for cryptocurrency?”

That’s a valid question, and right now, that’s why FIAT currency (normal money like GBP) is still very much more mainstream. However, it’s the technology behind crypto that sets it apart. Current methods for transferring money includes many many middlemen. When you use your credit card to buy something online, payment merchants, banks, KYC checking and a whole host of other moving parts get involved, all taking their cut. Crypto currencies can get around this by ensuring that your transaction is between you and the merchant, using technology to carry out the purchase instead of companies.

Not only that, many cryptocurrencies are ‘deflationary’, meaning that they have a limited supply and the nature of their technology means that once all of the coins have been ‘mined’ (we will only be covering investing this article, more on mining in a separate post), there can be no more. In this regard, people view these currencies kind of like gold, where there is a limited supply. This also solves the problem of quantitative easing, where governments print more money when they need to get out of debt or stimulate the economy, in turn devaluing the currency.

So it’s the future of money then?

Maybe. The problem here is, in order for something to be considered money, it needs to have a few things:

  • Enough people must have access to it – Coins like bitcoin now have a far reach and is basically accessible to anyone with a mobile phone. The problem is, many people still don’t quite understand it, so this point is a tick, but more people will need to have it in order for it to be used as true money.
  • Everyone needs to agree that it has value and will continue to be valuable – This is where we run into the first real problem. I think it’s safe to say that everyone agrees that bitcoin and other cryptocurrencies have value. The question is – how much value? Nobody can quite agree what that value is. If you were to wake up tomorrow and 100 British pounds now couldn’t even buy a loaf of bread, you would start to question whether the whole pound model was even worth using. This is the problem with crypto, as we’re still in the early years, the price can be quite volatile – a drop of 15% in the space of 24hrs isn’t unheard of.
  • Merchants need to accept it for goods – And here’s the second big problem. Linked to the issue above, merchants are reluctant to accept bitcoin as a form of payment right now (though some shops like Starbucks do) because of its volatility. Businesses cant afford for their values to swing so hard overnight, so until the price stabilises, we’re unlikely to see widespread adoption.

Digital Gold

That doesn’t mean there isn’t opportunity here though. In fact, it’s precisely because the price is so volatile that we think it’s worth anyone who wants a well rounded portfolio holding some form of crypto currency. With volatility comes risk and with risk comes reward. Because of the reasons above, we like to think of cryptocurrencies like gold – great stores of value but come with way more potential risk / reward.

Another great comparison we like – and should be a word of warning to anyone thinking of investing in cryptocurrencies – is the internet. Back in the late 90’s, there was an investing frenzy into internet based businesses because the internet was going to ‘change the world’. The prophecy came true and the internet did change the world – eventually, but not before hundreds of internet based companies were wiped from existence when the dot com bubble crashed at the turn of the millennium. The investing frenzy had grossly overestimated the value of the market and when investors realised, the house of cards came tumblin’. That doesn’t mean the same thing will happen here, however the signs are there. The are now over 4000 crypto currencies. do you think all of them will make it? if there is one thing we could bet on is that most of them wont, so when you’re investing in crypto, go in with your eyes open and your brain filled.

Next Up…

Thanks for reading! Click on ‘NEXT POST’ below to move onto our next article in the guide all about when, how much and which crypto currencies we invest in!

Are you investing in crypto? Let us know your thoughts by leaving a comment below!

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