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Intro to Crypto: Cryptocurrency 101

by kirkcoburn
2 comments

While you are pouring that second bourbon and checking on that smoked turkey, take a read through this note on understanding crypto, it may just open your eyes to an important vehicle to “protect” your assets.

Money must be managed in good times and bad. If 2020 has taught us anything, it’s that the unimaginable can happen. The road of life is paved with the flat squirrels of indecision, and sometimes, the most dangerous decision one can make is no decision at all. Before the COVID-19 pandemic, many investors and organizations were reluctant to commit to cryptocurrency. As of 2018, only about 8% of all investors had interests in crypto. But 2020 has changed how we work, how we educate, and how we shop. Suddenly, an electronic currency used to buy goods and services online has become more relevant than we ever imagined! So the coronavirus is also teaching us new ways to invest.

If you’re still wary of crypto, I understand your concern. It all seems too fast, a bit shady, and a bit like snake oil — an electronic currency with nothing but sentiment to back it. But if you think about it, what supports every currency on the planet? Human sentiment. That’s why one US dollar is worth X — because human beings say so. It’s not like we can physically eat a dollar bill. It’s also what makes fiat currency fallible in the end. 

The concept of crypto is only 12 years old. It’s still an infant compared to traditional investments — like gold, which had been around for millennia. (If you’d like to learn more about investing in gold, check my previous article.)

If you’re the sort of person that was reluctant to join social media or who thought email was a fad, I’m here to urge you across the cryptocurrency road — and quickly. Because:

Today, I’m going to explain cryptocurrency for beginners — crypto 101. We’ll cover its history, give a high-level definition of how crypto and blockchain work, and provide you with a few links to various cryptocurrency options and research gateways. We’ll also point out some concerns and flaws — because nothing is perfect.

Intro to Crypto: Bitcoin and Blockchain

Two terms you’ll hear tossed around most in the crypto world are Bitcoin and blockchain.

What Is Bitcoin?

Bitcoin is a peer-to-peer electronic currency. It is a digital currency created in 2009 after the housing market crash of 2008. Here are the quick facts you need to know.

  • It follows the ideas set out in a whitepaper by the mysterious Satoshi Nakamoto — the pen name for an author who remains unidentified.
  • Bitcoin’s benefit is the promise of lower transaction fees than traditional online payment methods. 
  • It’s operated by a decentralized authority, unlike government-issued currencies. Let’s reiterate that — it’s not backed by any government authority. 
  • It’s great for international transactions.
  • There are no physical bitcoins, only balances maintained on a public ledger.
  • Everyone has transparent access to this ledger, which is verified by a massive amount of computing power and is known as blockchain.

What Is Blockchain?

Blockchain is a type of database. Think of it as a ledger. Crypto transactions are continually and permanently recorded and constantly audited.

Per Investopedia.com, “A blockchain collects information together in groups, also known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are chained onto the previously filled block, forming a chain of data known as the ‘blockchain.'” 

Every block of transactions is reported to multiple peer-to-peer computers around the globe. These servers are constantly checking and referencing one another. Also, while Bitcoin was the pioneer, there are thousands of different cryptocurrencies (aka “altcoins”) available. 

Bitcoin has over 100,000 nodes validating the ledger in real-time. Instead of trusting a centralized bank to validate transactions and your balance, Bitcoin has a large number of users (“nodes”) that are constantly connecting to other decentralized and distributed nodes to validate new transactions and keep an accurate record of previous transactions.

Among Thousands, Bitcoin Dominates the Crypto Market

Bitcoin has dominated the market since 2009. But it’s also been volatile. Bitcoin prices hit a high of nearly $20,000 in December 2017 and then collapsed in 2018, bottoming out at $3,234 by the end of the year. Since then — and I believe this is mostly due to COVID-19 and economic upheavals — Bitcoin investors have enjoyed a huge comeback.

Yesterday morning, Bitcoin hit $19,500. Today as I write this article, Bitcoin has fallen below $17,000. As the biggest name in crypto, Bitcoin gets worldwide recognition that lesser-known cryptocurrencies don’t have, perhaps making it the best choice for investors new to this asset class.

Other Popular Crypto “Altcoins”

At the time of writing, two examples of sought-after “altcoins” behind Bitcoin are Ether (or Etherium) and Ripple. But there are thousands to choose from. An excellent resource to watch is Coinmarketcap.com, which monitors the behaviors of crypto by market cap. 

Now, let’s answer the question that brought you to this article: is 2020 the right time to get into crypto?

Is It Time to Buy Crypto?

Probably! As 2020 comes to a close, the value and stability of the US dollar become questionable. The transition of power from a capitalist-thinking Republican Party to a more progressive and socially concerned Democratic Party in 2021 will undoubtedly affect the stock market and the US dollar.

I’m not the only one who thinks this way. Per CNBC, 93% of experienced investors agree. And I believe that’s why we’ve seen such substantial gains in the realms of both cryptocurrency and precious metals. Savvy investors are battening down the hatches to weather the storm of an uneasy market. It’s a good time to diversify. You don’t want all your eggs in one basket!

Also, COVID-19 is ongoing. There will continue to be market upheavals. For instance, earlier this week, California Governor Gavin Newsom announced a rollback into lockdown for 41 counties in California. Again, America’s largest state economy will grind to a halt during the usually-bustling months of November and December.

For crypto investors, this puts even more value on electronic currency in the short-term. Through the end of 2020, ecommerce will continue to balloon, high unemployment will rear its ugly head again, and cash will get tight. 

But, that doesn’t mean you should rush right out and swap all your investments for crypto. It’s wise to watch the crypto market for a week and look for patterns first. 

When to Buy and Sell Crypto — Learn to See the Patterns

Cryptocurrencies aren’t like other investments — the prices have predictable peaks and plunges you can learn to foresee.

There are several historic — yet simple — patterns to look for when considering a purchase of crypto during an ordinary year. The easiest to explain is the “head and shoulders” pattern. It’s a bearish reversal pattern that signals to traders there’s been a change in the current trend.

Identified by its three peaks (two shoulders and a head), the pattern also features a “neckline” drawn between the two shoulders at the top of their peaks, showing the critical support level you should watch for. When prices pass below the neckline, the pattern is complete.

Yukun Liu and Aleh Tsyvinski of Yale published research in the National Bureau of Economic Research (NBER) that unlike traditional investments, the best time to buy crypto is when it’s making considerable (20% or more) price gains and highly active. When it’s hot, it’s hot! This is unlike our traditional investment strategy of buy low, sell high.

Interestingly, Liu and Tsyvinski found these special moments seem to happen most on Saturday nights and often on Mondays — which leads savvy investors and critical thinkers to the concern of pump and dump scams.

Pump and Dump — And Other Crypto Concerns

A pump and dump scheme is the illegal act of an investor or group of investors promoting an investment they hold, then selling once the price has risen after a surge in interest. Back in the 1990s, telemarketers in boiler rooms sold penny stocks at artificially inflated prices this way. If you’ve seen the movies Boiler Room or The Wolf of Wall Street, you know what I mean.

Today, scammers use social media. 

(I must digress from crypto for one moment. In a COVID-19 world, it’s important to remember the pump and dump concept as it could relate to stock market changes related to medical advances and vaccines. I wrote that in bold, but I want to reiterate four words: VACCINE PUMP AND DUMP. Remember this as you watch the news over the next few months.)

Now, back to crypto. Pump and dump scams attempt to boost cryptocurrency prices based on false, misleading, or exaggerated hype online.

How Pump and Dump Works

The favorite media for traders involved in these scams are social media platforms and messaging apps. Huge groups of promoters begin to coordinate rumors and hype to increase interest in crypto, driving up its price artificially. Once the price increases sufficiently because of unsuspecting investors, promoters sell the stock.

Let’s think back on Liu and Tyvinsky’s research that showed crypto experiences significant gains on a Saturday night and again on Monday. Can we imagine hundreds of co-workers at a cube-farm working together to boost their crypto value all week long, having a LAN-party on Saturday, and then selling crypto on Sunday for huge gains? Yes, we can. Would they re-buy crypto Monday morning and start the process over? Absolutely. 

The danger here is that cryptocurrency is NOT REGULATED by any federal government. Therefore, crypto pump and dump scams are not illegal. In an ordinary year, I would suggest you watch these patterns closely before dipping your toes in the waters of cryptocurrency. 

What About Electricity and Internet Concerns?

The other concern associated with crypto is relevant to almost all investments in 2020. What happens if the internet were to break down wholly? Aside from a very few assets (like precious metals, fresh water, and fuel), an electricity crisis could, in theory, wipe out most investments. Thankfully, the work from home movement of 2020 has taught us that, yes, the internet can handle everything we throw at it, aside from local bandwidth or electricity issues. 

But a genuine crisis like nuclear war or some apocalyptic magnetic asteroid from space could, theoretically, erase crypto. But at that point, all of our bank-held funds and investments are gone, as well. Heck, most of our computer-dependent cars wouldn’t even start. So there’s no point in overly stressing about it. Barring utter Armageddon, the internet and cryptocurrency are here to stay.

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