Tag Archives: bitcoin

STOCK MARKET BASICS FOR NEWBIES – 9

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AN INTRODUCTION TO CRYPTOCURRENCY

Cryptocurrency, Bitcoin, Elon Musk, digital currencies, Etherium, Mark Cuban, fiat currency, NFT’s and the list goes on. Following the world of investing is a challenge today, with everyone being obsessed with these new and confusing terms and concepts. You are forgiven if you have thrown your hands in the air and said, “I have no idea what is going on so I will simply bury my head in the sand and hope it all goes away!” Understanding cryptocurrencies may be difficult for newbies but that has not eliminated the world of opinions being expressed by famous and infamous voices alike. On the one hand, the world is being brought to an end with digital currencies and we will all return to the stone age while others tell us this is the dawning of a new age. Yes, I have my opinion but that is not the point of this session. We are here to understand this world and let you form YOUR own opinion.

We promised a shallow dive into this world and consequently; we leave a lot of the more detailed information for further research. We will include several links for those of you who are interested in more information. According to Investopedia, these are the keys to understanding cryptocurrencies:

“KEY TAKEAWAYS

  • A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
  • The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
  • Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies.
  • Many experts believe that blockchain and related technology will disrupt many industries, including finance and law. 
  • Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.”

What does that mean in plain language? Let’s use Bitcoin as the leading cryptocurrency for explanation purposes. In an excellent article in MoneyWeek, March 1, 2021 Dominic Frisby wrote, “Bitcoin is a new system of money designed for the internet. Let’s shorten that to: bitcoin is money for the internet. The internet is, essentially, a borderless medium. I’m in the UK. I can communicate with someone in the US, Australia, South America, Asia or Africa as instantly as though they were in my own country. I can send them messages, photos, videos, any kind of content, and they receive it instantly. Yet, until bitcoin, I couldn’t send them money with the same ease. I would have to go through Paypal, or a bank or a credit card company. There would be foreign exchange costs, money transfer costs, regulatory processes.

With bitcoin I can send money across the net, direct from person A to person B, just as I send messages. It might be tiny sums, but it could also be billions. (For example, only recently, I saw that somebody had transferred 14,892 bitcoins. That’s over half a billion dollars in value. I know that that value was transacted – the transaction was broadcast on the blockchain. But I have no idea who sent the money, or to which location it was sent. I rather suspect it was Elon Musk – but who knows? I also know that the cost of the transfer was a few dollars, and that the transfer was almost instantaneous).”

Another point that is important to understand about digital currencies and Bitcoin in particular is that there is a finite number of Bitcoins available, which is why we see the value fluctuating so much. With conventional currencies, there is no finite number. Central banks and governments simply crank up the printing presses and increase the number of dollars, euros, etc. with no restraints or controls. We have seen this happen during the pandemic as countries around the world tried to prop up businesses and individuals by simply passing out more money to help them survive. While it may not be polite to ask, you might wonder where the money came from?

Let’s look at this in everyday terms. Suppose you have 10 apples and there are no other apples in the entire world. The value of your apples is determined by the demand of the market. In other words, the more people who want to have an apple, the higher the value of the 10 apples you hold. Now suppose that someone else comes along and they have also got 10 apples. What happens to the value of your 10 apples now that there are twice as many? It would make sense that the value of your apples will drop in half. In simplistic terms, the same happens with money. If you double the money supply (the number of dollars in existence), what is the real value of the money you currently hold?

Simply put, crypto, or digital currencies, are an alternative to existing currencies, like dollars and euros. The biggest difference is that governments or central banks do not control digital currencies and for those institutions, this represents an enormous challenge and risk to their control over our financial lives.

Many articles and opinion pieces talk much about the technology that creates digital currency and we will look at that in the next section. We will also look at some investing possibilities if you are interested in how you can take part in this new world. In the meantime, I encourage you to take a look at the links provided above to become more familiar with something that does not seem to go away – no matter how much some people wish it would.

CRYPTO-CURRENCY PROMISE

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CRYPTO-CURRENCY INTRO

I am breaking my promise. Last week I told you I would create a basic explanation of what crypto-currencies are, but I am not going to. At least, I am not going to this week. I have been very busy assembling and studying a great deal of research and realize that explaining crypto-currencies is a much bigger job, especially when I want to put it into a plain language that we can all understand..

Here is what I am doing: next week I will create a post on mutual funds, and then the following week, we will look at Exchange Traded Funds. After that, I will produce a review of digital or crypto-currencies. This includes some popular terms that you have read about like Bitcoin, Etherium, Dogecoin and so on. For your information, there are currently over 4,000 digital currencies in existence – that’s not a typo – 4,000!

Let me offer an opinion about the origins of digital currencies. I think it is a reaction to the overwhelming control forced upon you and I by the central banks and governments who decide our fate through the use of fiat currencies. Fiat currencies are the currency you and I are, or have been, forced to use like the U.S. dollar, the Euro and the Canadian dollar, etc. These currencies are tightly controlled by a tiny group of people and some would argue, not to the benefit of the average person.

So, putting on my tinfoil hat to ward off incoming conspiracy theories, they based Fiat currencies on the “gold standard.” That changed long ago – fiat currencies are no longer based on anything other than the whim of a government body (Federal Reserve Bank) and governments can print money at will. There is nothing to back up the value of our dollar. Currencies are simply a means of exchanging paper for something else of value. The value is artificially created and controlled, as long as people continue to accept it.

Bitcoin, the first and largest digital currency, was created in 2009 and its value, based on US dollars, has ridden a rollercoaster ever since. Some very smart people have warned us against buying or using digital currencies because of the volatility of its value and because it is based on nothing of value. Others would argue that this does not differ from any other currency, and the digital version of currency provides some other interesting advantages.

In considering the feasibility and legitimacy of crypto-currencies, we should wonder why organizations like Visa and Paypal along with many banks and countries are spending so much time and effort considering how they can create and use digital currencies. All of that being said, I have assembled an enormous amount of research and will share it with you keeners. If you are a subscriber to this blog, send me a contact form with your request and an email address that I can send my “cheat sheet” to. If you are not a subscriber – why the heck not? By the way, most of this information will find its way into a book soon that I will happily provide in exchange for your hard-earned dollars or bitcoins.