Disclaimer
I am just a blockchain and cryptocurrency enthusiast who believe in its future, not a professional trader or financial advisor. All info I provided is based on my experiences, knowledge and personal opinions. Do your own research and proceed at your own risk.
Part 1 - What are blockchain and cryptocurrencies and why should you start looking at it
Background
I heard about Bitcoin at the first time in 2013. At that time, all info I collected from news and article claimed that Bitcoin is some sort of virtual, not real currency which is easy to be hacked and stolen. It didn’t take me more than 10 minutes to actually learn what Bitcoin really is and I dropped it.
Opportunity knocked again in Dec, 2016 when one of my close friends talked to me about Bitcoin and asked if I want to invest in it with him. Bitcoin was nearly 1000 AUD this time and its “high” price actually pulled me back. However, I took another action this time. I did further researches, read articles and learned more about Bitcoin’s backbone technology. It is blockchain.
After one week researching, I and my friend ended up investing a small amount into Bitcoin just for us to convert it to Ethereum which I believed it has more potential than Bitcoin. I made some small profits down the track and I am currently investing that profits back to the cryptocurrency market.
The purpose of this note is to share with my friends and people in my network an investment opportunity which is still in-the-dark for most people. As early adopters of this new technology, you could find yourself in a better financial situation in the next couple of years. The more people know about this, the more people will invest and the quicker it can reach mass adoption stage. Hopefully, this can be an “opportunity knocks” for you this time.
Foundation
Blockchain Technology
Blockchain is a database which many distributed ledgers hold the same copy. These ledgers verify and write transaction into that database in chronological order with timestamps. All actions are running on the networks such as internet or private networks.
_ Come on, man. It sounds too complicated.
_ Ok, let me give it another shot.
Blockchain likes a shared record book that many computers (tens of hundreds of thousands) over the world have the same copy. When there is new transaction, these computers will verify it. If the transaction is valid, it will be written into this shared record book and get synced to all computers in the network. Nobody can edit or delete a record but they can add new record to fix issues. Is that simple enough?
This shared record book can record many kinds of things but let’s us talk about sending and receiving money first. When Peter wants to send money to Sara, a new line will be created with the details of the sender, the recipient and the amount. This line will be sent to hundreds of thousands of computers to verify. If the line is verified, it will be stored in the shared record book forever in all copies of all computers.
Goldman Sachs has a dedicated webpage to explain what blockchain is http://www.goldmansachs.com/our-thinking/pages/blockchain/
Purpose of Blockchain
1. Transparency
When a record is stored on the blockchain, it cannot be changed or deleted. If it contains wrong information, a new record needs to be created to amend the wrong one. Therefore, looking into a blockchain, we can know entire transaction history from the beginning of the blockchain until now. It makes auditing job much easier and pretty much nobody can cheat.
2. Security
Because every ledger (computer) stores the same copy of the blockchain, it is impossible to be compromised or hacked. If the transaction is compromised by the hacker, it will not match with the previous block in the chain. Hence, it will be rejected by the validators (computers).
Hackers cannot establish Denial of Service (DoS) attacks because they do not know which computer or system to attack. There are tens of thousands of computers are running as validators for a blockchain
That is why people call blockchain is an immune system
3. Fair and Trustworthy
Because your transaction needs to be validated by all ledgers to put into the blockchain and many computers hold the same copy so there is nobody or company can control the entire blockchain.
Imaging that you play game and find a very rare gaming item which is worth thousands of dollars, you put it in your storage and go to sleep. Tomorrow when you wake up, you don’t see that item anymore. You call the game company and they answer that it must be a glitch in the system and they do not have record that you acquired the rare item. What do you do? At the end of the day, the game company controls all of the data and their decision is pretty much final. You lose your item and your faith in that game. Now, if the event that you acquired the rare item is recorded in the blockchain. Can you see the difference now?
Blockchain Applications
The gaming issue above is just one of thousands examples that blockchain can help. Let’s think a little bit further in terms of payment, banking, voting, collect taxes and record expenses for the entire country. The sky is the limit.
If you have 10 mins, you can watch this video on YouTube to see which industries blockchain will disrupt. I would say it has been already disrupting many industries.
Cryptocurrency
What is cryptocurrency?
Cryptocurrency is all currencies and tokens which are built and developed on top of blockchain. Currencies are Bitcoin, Ethereum, Bitcoin Cash, Dash, Litecoin and etc. Tokens are Ripple, NEO, OmiseGO and etc.
Each currency has its own blockchain so we have Bitcoin blockchain, Ethereum blockchain, Dash blockchain and etc. They are completely separate and serve different purposes.
Tokens like shares of blockchain start-up companies or projects. They normally issue their own tokens as a crowdfunding model so they can get fund to build and develop blockchain products. Buying these tokens at this stage is similar to buying Apple, Yahoo, Google shares in the 90s. The catch is that which companies/projects will be Apple and Google in the blockchain era. Most tokens are based on Ethereum blockchain and get issued via smart contracts. We will talk more about smart contracts below. This smart contract concept makes me believe in Ethereum’s future rather than Bitcoin.
How are cryptocurrencies created?
Each cryptocurrency has different way to create new coin/token. Some are created through mining such as Bitcoin, Ethereum, Litecoin and etc. Some never create new coins such as Ripple and NEO.
Mining is simply the verification process which is done by the computers. Computers need to solve very complex algorithms (math problems) to verify the transactions in the block and put it into the blockchain. The first computer that successfully verify the transactions is rewarded with new coins as well as receives transaction fee. The more blocks are created, the more complex algorithms will be and the longer it takes to solve. This concept is called proof of work (PoW).
Some blockchains are working on proof of stake (PoS) concept. It works like this. If John wants to send 10 coins to Mary, he submits the request on the blockchain. Let’s assume the transaction fee is 0.1 coin so John needs to send 10.1 coins in total for his transaction. Any computer holding more than 10 coins can use its coins to send 10 to Mary first, then receive 10.1 coins from John. As the result, the computer makes 0.1 coin which is transaction fee. This concept does not create new coin and the number of supplied coins are fixed.
There are advantages and disadvantages of both concepts which I will not cover more detailed in the scope of this article because it should be another article itself. You can find many videos on YouTube that explain the differences if you are interested.
Why should we invest in cryptocurrency?
Blockchain is here to stay. It will disrupt many industries. It is just the early stage of its development right now. I can imagine that in about 5 – 10 years, everything will be running on blockchains ether public or commercial ones.
The first stage of blockchain already past and it made many early blockchain enthusiasts or Bitcoin holders become millionaires.
The second stage is happening right now when institutional investors put their “smart money” in as they can see the bright future in blockchain technology.
The last stage is mass adoption by the public. It is when everybody knows about cryptocurrency and invest in it as they are doing with stocks, gold, commodities and real estate. When this stage is reached, it could make people invested in the seconds stage decent profits. Gold market capitalization alone is more than $US 7 trillion dollars while cryptocurrency market cap is just about $US 120 billion dollars, only 1/58 compare to gold.
That's it for part 1, guys.
Part 2: How to get started and investment strategy is published.