Chapter 3: Use Cases
Now that we have looked at what cryptos are, what their underlying value is and how they work let’s discuss perhaps the most important part: What they can be used for.
Storage of Value
This is the most commonly associated use of Bitcoin. Many media outlets have referred to Bitcoin as “digital gold” and most of the hedge fund analyses I have seen rely on this concept for their valuations.
The idea is that because Bitcoin has a finite supply, just under 21,000,000 BTC, the value will go up as demand increases. Actually, the circulating supply of BTC is falling as people lose their private keys or BTC is “burnt”. However, these analyses are oversimplified.
Without getting too philosophical, every currency in existence is a social construct and entirely dependent on people’s faith in the federal reserve, a country’s economy or the simple belief that they and others perceive it to have value. On this front Bitcoin and other cryptos are no different to FIAT currencies except that they are the first truly global currency and therefore not dependent on any one country’s money supply or economic health. Whilst most cryptocurrencies are either very volatile or tethered to a FIAT currency (See TetherUSD) it is foreseeable that this volatility decreases as the market cap increases as the trading volume would be unlikely to increase proportionally if a large part is being used as a currency. This creates a feedback loop where less volatility creates a more viable currency, more people use it as a currency which further decreases volatility.
This is the most recent actual implementation of cryptos. If you have been paying any attention to the crypto space at all the past few months you will have heard the term ICO (Initial Coin Offering) being thrown around a lot. Whilst there are many legitimate ICOs which offer fair compensation to their investors and have a real chance of disrupting industries and huge ROI there are many more which mislead, overpromise and some which are simply pyramid schemes or rebranded Bitcoin clones with no real value. The attraction of running an ICO is easy and cheap access to crowdfunding but is not regulated and so the importance of doing due diligence cannot be understated.
Now come the really interesting use cases and where the future of cryptos lie, in my opinion. In much the same way AirBnb disrupted the accommodation industry by decentralising the industry away from a a small number of hotels and bnbs to a large number of individuals, blockchain looks to decentralise everything else. From leveraging spare computing power (See Golem) and hard drive space (See SiaCoin, Factom and NEO) to crowdsourcing I.P. addresses for VPNs (A very topical issue given the talks on Net neutrality and the Great Firewall of China, See Mysterium) and advertising (See BAT). The blockchain looks at simultaneously increasing security and productivity, reducing risk of monopoly, reducing costs and lowering or eliminating barriers to entry.
Internet of Value
You may assume that the industries that are up for disruption are online services but cryptos are now looking at bridging the gap between the physical and digital realm as discussed in the Dapps section. If they can pull this off then we will see them take over every aspect of our lives. If it becomes common practice to issue legally binding certificates of ownership of physical goods we can improve liquidity across all asset classes, vastly reduce legal disputes and costs, improve supply chain and logistics management, integrate systems across sectors and countries, allow partial ownership of previously indivisible assets, obtain and analyse Big Data on a scale not seen before and that is only the beginning (See NEO and Stratis)
IOTA’s unique selling point is the creation of a machine economy where autonomous machines can trade with each other. This idea may seem crazy but I’ll give you an example to illustrate what I mean:
Let’s imagine we have an electric self driving car being rented out for trips via Uber. The car parks itself in a parking lot as it waits for its next user. It communicates with the parking lot which charges it in IOTA for each minute it remains in the car park. When the car starts to run out of battery it can communicate with a local charging station, hook itself up automatically and get charged in IOTA for each Wh. Later on it is broken into by some thugs, it sends out a message to a local security drone to follow the thugs and record their faces and location. It pays the drone in IOTA. It arrives at an automated mechanic which replaces the damaged window. The insurance company is also on the blockchain. The footage from the security drone and the invoice from the automated mechanic are automatically sent to the insurance company and compensation is paid in IOTA. The automated mechanic notes its stock of window panes is running low and contracts a drone for delivery, it pays this in IOTA. This is all done without any human intervention. It is also interesting to point out that the legal industry is also slowly veering towards recognising cryptocurrencies. For example, a law jobs company in London is accepting cryptocurrencies from law firms and legal recruiters for advertising legal job vacancies.
This may all sounds like science fiction but the greatest businessmen and minds in the world are all convinced that robotics and AI will usher in a new industrial revolution. The missing piece for this automation to become truly ubiquitous is transactional.
Chapter 4: Most Popular Cryptos
In this section I’ve taken the largest cryptos in order of market cap at the time of writing and attempted to offer an overview of which problem they’re addressing and what differentiates them. I will be adding in depth guides to each one with details on their technological advantages, the quality of their development teams and communities, their financing, marketing, roadmaps, recent events, competitors, advantages, shortcomings, growth potential and if you’re interested, my personal take.
Note that I haven’t bothered to include the use of each crypto as a speculative investment as this is a given in the current market. Note also I have only classified those cryptocurrencies with long enough histories (5+ years) as stores of value.
I will be doing a deep dive and heavily researching all aspects of the listed cryptos and writing in depth analyses in the near future. In order to prioritise which guides I write first I’m going to use the number of donations to each address as a measure of interest(cheeky I know but I’m investing 100s of hours of my time into this)
The Father of cryptos, Bitcoin is considered the most secure of the cryptos, partly because it has been around the longest and therefore has the most commercial proof of security, and partly because the amount of computing power and number of nodes providing the protection is the largest. It has recently implemented a software update allowing something called SegWit2x which will increase the size of the blocks (the pages in the banking analogy) from 1 to 2MB and allows the creation of “side chains” which free up room on the main blockchain and can add extra functionality such as instant transactions, easy swapping between crypto currencies and even smart contracts.
Consensus Method PoW
Intended Use Currency
Current Uses Currency and Storage of Value
Future Uses Smart contracts (with the implementation of RootStock)
Disagreements between miners may cause instability
Currencies with superior technology may overtake it in the future as it has been very slow to adapt.
Government may enforce regulations to prevent the conversion of FIAT to bitcoin (although this may apply to all cryptocurrencies which don’t have compliance as a central aim)
The transaction backlog has been growing and it is yet to be seen whether Segwit will solve the issue.
possibility of a chain reaction occurring as miners switch between Bitcoin and other more profitable mined cryptos leading to longer block times, larger backlogs and uncertainty creeping in.
- First mover advantage
- Largest network effects
- Largest due diligence around changes due to the number of stakeholders and value in the currency
- Ethereum (ETH)
Ethereum’s meteoric rise came about due to the hype over Smart Contracts. It recently had a very large amount of ICOs on its platform and a lot of interest from the developer community. It is a Turing Complete language meaning that pretty much any kind of program can be written on it. It aims to be a platform on top of which Dapps and Smart Contracts can be written. It uses its own programming language, Solidity.
Consensus Method Currently PoW. Planned PoS
Intended/ Current Uses Smart contracts, Dapps, ICO platform
- A repeat of the DAO hack on other software developed on the platform due to the room for error and unfamiliar programming language
- Slower uptake due to unfamiliar programming language
- Superior tech may overtake it
- Uncertainty surrounding PoS shift
- Turing Complete allows a very broad range of Dapps to be programmed on the platform
- Largest following amongst blockchain developers
- Arguably the best developer tools
- Large corporate support through the Ethereum Enterprise Alliance (EEA)
- Concise programming language suitable for blockchain
The first crypto backed by the banks. It has a very specific use case: providing liquidity in Forex markets between banks. Note this does not mean they intend to replace the Forex markets but supplement them.
Consensus Method Ripple Consensus Protocol Algorithm (RCPA) consists of a few trusted nodes run by banks. Although it doesn’t provide the same level of trustlessness of other consensus methods it is suitable for its intended use case which solely deals with transactions between banks.
Intended/ Current Use Provide forex market liquidity between banks
- Entirely reliant on the banks
- Very centralized
- Clear use case
- Currently being used
- Legally compliant
- Strong links with banks
- Bitcoin Cash (BCH)
Bitcoin Cash is a hard fork created during the controversial scaling debate. It decided to tackle the scaling problem in a different and more immediate way to Bitcoin by increasing the size of its blocks (the pages in the banking analogy) from 1MB to 8MB which doesn’t do anything to speed up transactions but reduces backlogs while retaining security. In order to adapt itself to the large change in computing power experienced over the first few weeks it implemented an emergency difficulty adjustment which allows it to change the block difficulty much more quickly than Bitcoin.
Consensus Method PoW
Intended/ Current Use Storage of Value, Currency
- Lower popularity compared to Bitcoin
- Very China centric (centralized)
- Doesn’t allow any extra functionality and shows no willingness to change this
- The emergency difficulty adjustment may be open to abuse (we may see fluctuations of miners appearing briefly to take advantage of a lower difficulty and switching out when the difficulty changes only to switch back in when it readjusts leading to instability in block times and profitability)
All the benefits of bitcoin before the hard fork with an immediately improved transaction capacity
Seen as a backup to Bitcoin
Litecoin has been like Bitcoin’s younger brother, similar in most respects but due to lower expectations is able to change quicker than it’s larger counterpart, as in the case of Segwit implementation. Very popular in China.
Consensus Method PoW
Intended/ Current Uses Currency, Storage of Value
- May become obsolete as it doesn’t differ substantially from Bitcoin
- Confirmation time are 4 times faster than Bitcoin
- May be able to synergise with Bitcoin, often referred to as the silver to Bitcoin’s gold.
- Has a face to the company, Charlie Lee, which may allow it to decide its direction more decisively than Bitcoin. As was the case with Segwit implementation
- Large support in China
- For the past couple of months it has been the most stable cryptocurrency
NEM also has its own unique consensus algorithm, Proof of Importance (PoI) which inherently promotes network usage as a currency rather than a storage of value. A clever, if complex, method of retaining security and efficiency while promoting usage has been established and there are a lot of upcoming updates to the protocol in the works for added functionality. NEM allows multi-signature wallets which can serve as extra security or for things such as joint accounts or financial services.
Consensus Method PoI
Intended Use Currency with a focus on network usage
- Less straightforward to understand the underlying technology than other cryptocurrencies which may inhibit uptake
- Inherently encourages network usage
- Multi-signature wallets
- Consistent updates to the technology
- Has been active in establishing partnerships
Dash stands for Digital Cash and really aims at bringing cryptocurrencies to the consumer market by allowing very fast transactions required for industries such as retail. It has also implemented a “treasury system” where 10% of the transaction fees are pooled towards funding further development of the protocol in a self-governing system.
Consensus Method PoW with a second PoS tier of “Master nodes” which provide extra services such as instant payments and added privacy. These master nodes must stake some Dash (currently 1,000Dash).
Intended/ Current Uses Currency with a clear focus on fast payments.
- As with the other currencies (as opposed to platforms, assets and tokens), it is a highly competitive space
- NOT anonymous despite its claims
- Very fast transactions
- Low fees
- A focus on user friendliness and consumer uptake
IOTA is unique among the cryptos as it doesn’t use blockchain technology but a “Tangle Network” which allows instant, free transactions with the intention of creating a “Machine Economy”. With the rise of the Internet of Things different machines will be able to communicate and pay each other for products or services that can supplement each other. In line with this IOTA is developing its own hardware and a terniary CPU especially for this. However, there are still many questions about the security of the network.
Consensus Tangle Network
Intended Uses Machine economy
- The creators have implemented a “training stage” until the network is large enough that security is not such a concern.
- Requires specialised hardware which may delay its intended use
- The market it’s aiming for doesn’t exist yet
- the nodes have nothing at stake for attempting to attack the network which is a red flag for security.
- Instant, free transactions
- Truly unique technology
- If the market takes off it will have positioned itself perfectly
- Very large potential market
- Several strong partnerships
Often touted as “The Ethereum of China”. While NEO uses Smart Contracts and provides a platform for the creation of Dapps it has an added clear focus on connecting the real world with the digital and supports many common programming languages such as C#, Java and Python. It aims to achieve this by combining legally binding digital certificates of assets with digital identities and smart contracts to create what they call “The Smart Economy”. NEO has a unique structure in that NEO are undivisible and intended to act as shares which give voting rights and pay dividends in the form of GAS which is used for transactions and extra services.
Current Use ICO platform
Intended Uses Asset digitization and trading (digital stock exchange and real estate market for example), business blockchain solutions
- It is yet to be seen how their unique consensus method will work in practice
- Low initial GAS supply and speculation may lead to very volatile GAS prices (bad for businesses who want to know how much a transaction will cost them)
- Poor communication from the development team (although this has been improving greatly since mid July)
- Great transaction throughput (1000 Tx/s)
- Low/no fees
- Addresses a need from a legally compliant approach
- Almost impossible to hard fork (Focus on consistency over liveness)
- Great community support with community developers (group known as City of Zion)
- Network effects
- easy access to the Chinese market
Monero’s main focus is on privacy and true decentralisation. The development team have prioritised the improvement of their privacy technology over marketing and user friendliness which allows it to focus on its niche. It can bundle transactions together in such a way that provides anonymity to the users. While the obvious implications are that Monero will be used for less than legal transactions many people do and will value privacy, especially in light of current developments around net neutrality etc. Monero has created a protocol where ordinary consumer computers can still remain competitive whilst mining, as opposed to Bitcoin which required specialised ASIC computers. It should also be noted that Monero transactions are 25 times larger than Bitcoin’s which may prove difficult to scale going forward. There will be no immediate issues with this as the block size scales dynamically but the main issue becomes bandwidth.
Intended/ Current Uses Currency for untraceable transactions
- Questionable market size (smaller room for growth)
- Not scalable currently
- Anonymous transactions
- Good decentralization
- If private transactions become increasingly important its market size will increase
- Strong developer community and technology
- OmiseGo (OMG)
OmiseGo is a DApp built on the Ethereum blockchain. It is part of the parent company Omise which is payment gateway provider aiming at the South East Asian market. If you know anything about payment systems in China you will have heard of WeChat pay and AliPay. The premise is that everyone has access to a smart phone and allowing you to pay everything from bills to street vendors with a swipe of your phone is not only convenient but has become the predominant form of payment in China. Omise aims at establishing this same system in South East Asia and OmiseGo is it’s attempt to incorporate cryptocurrencies into this system. The positioning is unique for a couple of reasons. Firstly it allows people access to secure funds without the need for a bank account. In South East Asia only 27% of the region’s 600 million inhabitants have a bank account. Secondly it is working towards facilitating payment in FIAT as well as cryptos and making the whole process easy to understand and set up which is crucial for vendor and customer adoption. Could this be the key to mainstream cryptocurrency usage?
Consensus Based on the Ethereum blockchain
Intended Uses Banking services and payment gateway
- Very early stages. No proven track record yet.
- The marketing has been very slick and as a consequence there has been a lot of hype. Most likely overvalued (Could be said about most cryptocurrencies to be fair)
- Many high profile advisors including Ethereum founder Vitalik, Lightning network co-author Joseph Poon and the founder of Golem, Julian Zawistowski.
- In talks with the Thai Government.
- uniquely positioned in East Asia with directed efforts towards accessing SEA, Korean and Japanese markets.
- Professional presentation and organisation
EOS aims to be the “operating system” on which other blockchains can more easily be built. You can think about it like a current computer program is written to talk to Windows OS or iOS instead of the actual hardware. The CEO Dan Larimer previously founded Steem and BitShares, two cryptos with market caps in the 100s of millions of dollars. Dan compares EOS to his previous two projects by saying that EOS allows these kind of Dapps to be made easily and interoperate, much like programs on an operating system. Unfortunately many of the technical details surrounding his products have been misleading and The ICO, which is ongoing, has aroused a lot of suspicion due to its structure and legal disclaimers. However due to the consensus method being PoS Dan claims it is necessary to avoid any one person owning too much of the total supply. Given that it doesn’t have a functional product yet it is fair to say the price is speculative.
Bitconnect claims to offer a guaranteed return on investment if you ‘stake’ your BCC for at least 15 days. There is no whitepaper and the way it functions is completely opaque. The obvious answer to how they’re able to continually offer guaranteed returns is that the whole thing is a pyramid scheme. As with any pyramid scheme, if you’re in early enough you can make money. Miss the boat and you will undoubtedly lose it all when it collapses. I can’t say how long this will take. It could be tomorrow, it could be years. If someone can point me in the direction of how BitConnect works then I’ll happily change my mind, until then I advise people to stay away.
Another crypto founded by Dan Larimer. Bitshares is a decentralised exchange which has the benefits of increased security and equality between market orders (No high frequency trading, front running, hidden orders or location bias). Digital tokens of common physical assets such as gold also exist on this platform, however, these are not actually backed by the real physical assets as other platforms intend to do. It has pegged fiat cryptocurrencies and zero fees so is an ideal platform for trading.
A platform which makes it easy to create your own crypto token in a very user friendly way and provides a decentralised exchange for these tokens.
ZCash uses a protocol called zk-SNARKS to provide anonymity. However, it is currently still possible for analysts to correlate enough information to deduce user identities.
Tether creates cryptocurrencies whose price are tethered to that of FIAT currencies. Currently supports USD and EUR and will soon add JPY. It therefore acts a safe haven for traders on crypto exchanges. Based on the Omni protocol which is built on top of the Bitcoin Blockchain. Every USD/EUR/JPY is backed with real currency in a reserve.
Chapter 5. Getting Started
How to buy and sell cryptos
Once you have done your due diligence and understand the premise of what you’re putting your money into how do you actually buy cryptos?
Currently the most popular method is via online exchanges. There are dozens of popular exchanges, you can see reviews for some of these HERE (Coming soon). You make an account as you would any other online service, most exchanges will require ID and address verification in order to deposit FIAT and take a few days to process your application. If you are deposting one type of crypto to exchange it for another you shouldn’t need any verification. Once you have made an account it is HIGHLY ADVISABLE to create a two-factor authentication method, which means having two layers of security. I personally use the Google Authenticator app from the Play Store. Hacks of personal exchange accounts are not uncommon so this step shouldn’t be skipped. Most exchanges will walk you through the steps of setting this up.
Once your account is set up and you have the 2FA (Two factor authentication) you can send FIAT money to your account, by credit card, bank transfer, Paypal… depending on what the exchange accepts.
Below is an example of crediting your account with crypto using Bittrex:
In the first picture is the home page you will see after logging in. To deposit funds click on “Wallet”. Most exchanges will have some variation of “Account”, “Deposit” or “Wallet”.
In Bittrex’s case you can deposit cryptos to your exchange wallet by clicking on the “+” button next to the corresponding crypto which will take you to the deposit window.
Here you can see the address and the corresponding QR code. If you have a wallet on your phone you can usually scan the QR code, otherwise you will have to manually input the address to send.
Shortly after depositing you should see the amount in the “pending” column.
Users have reported the time it takes for their accounts to be accredited from minutes to days (For FIAT) so be patient if it doesn’t immediately show up in the “available” column.
Once your account shows you have money in your wallet you can go to the relevant market. If you’re buying Bitcoin for example you can go to the BTC/USD exchange and you will see a chart of the prices, an order book and some other information.
The simplest way to buy is to place an order setting the price at the “Ask” price, selecting the amount of BTC you wish to purchase, checking the amount of USD it will cost you then placing your order. A confirmation should appear telling you the order has been processed and you should see the amount of BTC you bought in your wallet.
It is a good idea if you are buying like this to select “Immediate or cancel” in case your order isn’t filled immediately and you’re not familiar with how to cancel it or what that even means.
To sell BTC it is a similar process, there will be a different box for sell order, you can set the price at the “Bid” price and how much you want to sell and when the order has been confirmed you will have USD in your wallet.
Trading is a huge topic on its own which I may cover in another guide. For now this is all you need to know about buying and selling on exchanges. Please be aware that Exchanges charge transaction and withdrawal fees most of the time.
Changelly allows you to directly buy a number of different cryptocurrencies with your card or with other cryptocurrencies. Note that it charges a premium for their service.
Like Changelly Coinmama allows you to buy directly with your card.
Click here to go to Coinmama
There are some websites, the most well known of which is Localbitcoin.com, that match you with people who are buying or selling bitcoin in your country/area. There are options to purchase with bank transfer, deposit and in cash amongst others. This method is recommended if your bank doesn’t allow you to deposit to an online exchange. Please take the necessary precautions when using this method. There is a points system on the site that allows you to judge how trustworthy a buyer or seller is. If meeting in person, meet somewhere public and wait for at least 6 confirmations before you are sure the transaction has gone through.
You can check out this website for locations of Bitcoin ATMS near you, there are many different models but generally the process is the same and very straightforward. Press the screen to start. It will tell you to place the QR code of your wallet up against the scanner (wallets are explained HERE). Once it has read the QR code it will display your public address corresponding to the QR code. You can then insert cash into the ATM. Once you have inserted all the cash you wich to turn into BTC you can press confirm and the screen should tell you how much BTC has been sent to your wallet. Some ATMs also allow you to withdraw FIAT currency from BTC but beware that most ATMs will charge a premium for their services.
Peer to Peer
The good old fashioned way and how I started out buying BTC. Similar to Localbitcoins except you buy from friends, acquaintances, meetups, strangers. Obviously be aware of the risks, especially when dealing with strangers.
Storing your cryptocurrency
All cryptos are stored on “Wallets”. These can be on your computer, your phone, a specialized piece of hardware, a piece of paper or even only exist in your mind (yes, really). Even exchanges store your cryptos on their own wallets.
you can think of wallets in much the same way you would think of your traditional cash wallet or your bank account. It contains the amount of crypto that belongs to that “address”. Setting one up and using it to send and receive payments is very easy, but you need to be very careful with your security.
Your wallet uses something called a “private key” to sign any transaction you make. This also acts as the ID of your wallet. If you lose access to your wallet your private key is the only thing that will reliably let you get access to your funds back. When a wallet is created it will display your private key and sometimes a 12 word phrase. You should write both of these down as backups and store them somewhere safe.
Your “Public Address” is what other people use to send you funds. DO NOT GET THE PUBLIC ADDRESS AND THE PRIVATE KEY MIXED UP.
It is impossible for someone to guess your private key, even with a supercomputer, but if someone knows your private key they will have access to your account so be extremely careful if you decide to share that information with anybody. If someone finds your private key they can send your funds to their own wallet and there is no way to reverse this.
There are three important points to know about storing cryptocurrencies:
When your cryptos are on an exchange you are placing your trust in that exchange. You DO NOT have 100% assurance they will not be hacked
When controlling your own wallet access to the private key gives you access to your funds. DO NOT reveal your private key to anyone.
BACK UP your private key somewhere, preferably offline, on a piece of paper or a hard drive disconnected from the internet. Ideally you should have more than one backup. If you lose access to your wallet and don’t have a back up your funds become irretrievable forever.
Getting Scammed. Things to know.
The crypto space is often referred to as ‘The Wild West’ due to the potential of being scammed and little to no customer service or guarantees. The complexity and unfamiliarity with the technology means there are a lot of people out there who are ready to take advantage of people’s ignorance. Don’t be a victim, inform yourself. Use this guide to understand what to look out for and what the red flags are.
Due Diligence Even after reading this guide I highly recommend doing your own due diligence, hopefully this will equip you with the knowledge and set you off in the right direction. Unless you understand the code underneath the hood you can never be 100% sure something is safe. However, there are other indicators which will allow you to be 99% sure. They are as follows:
Github Repository Any crypto worth anything should have a link to their github repository (Where they upload updates to their code). You don’t need to understand what the updates mean, only that there are updates being pushed on a regular basis. If there hasn’t been an update in 3 years that’s a red flag, if there is only one person pushing updates infrequently that’s a red flag.
Chaincoin is an example of a clear scam, the only code updates in the past 3 years were to change the name and logo of an obvious Bitcoin clone.
Guaranteed Returns If any crypto GUARANTEES a minimum return on your investment or offers incentives for signing other users up it is most likely a pyramid scheme. Whilst it may grow very fast it will inevitably crash at some point, no exceptions.
Team Check out their team, what previous experience do they have? If they’re developers check out their Github profile. A quick Google search of the main members might reveal information that might question their legitimacy or convince you this is a project with a bright future.
ICOs if you’re a bit more advanced and looking into ICOs then how are they structuring it? Is it open ended? Are the tokens you receive in return actually of value? Read the terms and conditions and you might find yourself alarmed. EOS is a good example of an extremely suspicious ICO structure and throws up several red flags. There has been a case of the website of an ICO being hacked and the address changed to the scammers address. while blockchains generally have very good security, websites are still vulnerable to this kind of attack. How can you be sure you’re sending to the right address?
Exchange Fees Not strictly a scam but check out the Exchanges terms and fees. One example is NEO being indivisible so anything withdrawn after the decimal point will be claimed by the exchange. (Bittrex has now changed this) Determine if fees are included in the amount you want to withdraw or not.
6 confirmations It is recommended that you can’t be certain a transaction has gone through until you have received 6 confirmations, something to keep in mind if buying cryptos peer to peer.
All Style, No Substance A nice looking website and social media prescence does not mean a good project. Many projects spend a lot of money on appearances and without the proper due diligene people fall for it. Always examine the underlying tech and the points outlined below. You may argue that you don’t understand the underlying tech but that’s why you I wrote this for understanding how cryptos work and this for comparisons with the other major cryptos. This guide gives you no excuse.
How to Identify Good Investments
I am by no means a professional so please take these points as guiding points.
Community involvement community involvement is a good sign, if there is an active slack channel, subreddit or similar which actually contribute to the project (as opposed to solely talk about price movements) that is a good indicator that other people who understand the code have deemed it of value and are willing to contribute their time to the platform.
Roadmap The team has a clear plan of what they’re working on and estimated time of completion
Clear direction The project has a clear direction or niche it’s attempting to tackle. Compare this with pre-existing projects and determine whether another projects already covers this niche or not. For example, Platforms such as Ethereum or NEO allow for a wide range of uses and may make a specific project redundant.
Addresses a Real Issue This one is a bit harder to assess. This is down to whether it’s solving a large enough problem that people are willing to abandon legacy technology. Does it simultaneously reduce costs and offer an easy to understand and adopt interface? What is the actual industry size? Do users really see an advantage to using the new system? For example, LBRY Credits looks at allowing online content creators to charge whatever they want for their content but there is a reason current industry giants are moving away from this: As much as people hate advertisements they still prefer to watch them if they get free content. Take for example people lining up for an hour to get a chocolate bar from a promotional stand. Is it worth their time? Almost certainly not, but it’s free. The same can be said for watching a video, the vast majority would prefer to watch a 5 second advert than pay even $0.10 for a video.
Room for growth Even if a project has identified a niche for itself, has a strong team and all the other positives you must ask yourself if the market it is aiming for large enough. Bitcoin aims to be a global currency. We could compare it to the amount of money in circulation, or the total value of gold and see that it has the potential to grow into the trillions of USD. Can we say the same about a currency for purchases of items within online games? No. The entire gaming industry was estimated to be worth $99.6 billion in 2016, the niche such a currency would be addressing is a subset of that so is obviously smaller. While this is still a lot of money placing your money in something with a market that is 10 or 100 times larger will offer you much greater potential returns.
Currencies VS. Platforms VS. Assets VS. Tokens
I think it is important to distinguish between the different roles a crypto can take on, the associated market cap and utility.
Currencies have the potential to have the largest market cap as they’re not restricted to any one industry or application but face stiff competition and will have to overcome legislation if they start to threaten FIAT currencies. However, it is very possible for many currencies to coexist.
Platforms such as Ethereum and NEO offer the second largest potential market caps as tokens and digital assets will likely be built upon them. They also face stiff competition between each other and in the long term it is more likely one or two will dominate the market.
Digital assets are digital representations of physical assets. In the near term they may have value by themselves but I believe it highly likely that they will be purchased with cryptocurrencies and traded on crypto platforms in the medium to long term.
Tokens are companies looking to solve a particular problem and fill a particular niche. Currently there are many which are built on their own blockchain but these are likely to lose out to those which are built on one of the major platforms. The potential market size for these tokens is as variable as it is for any other company.
In the short term I believe platforms and currencies will offer the least risk and stellar returns. In the long term as they reach maturity their risk will be minimal and their returns will shrink. Tokens will act in a similar way to stocks except with the potential for greater returns due to the creation of whole new industries and automation.
This is a big unknown. so far, many governments have shown support for Bitcoin (Japan being a big one) but it is unsure how this will play out as the space grows. I personally think it’s highly unlikely governments will sit idly by if cryptos start displacing traditional FIAT currencies. There is room for cryptos which aim for anonymity in the black markets (Monero, Zcash…), Bitcoin as a regulated storage of value and cryptos which look at being compliant with regulations (Ethereum, NEO…). Outside of those I think the rest will face extreme resistance by governments.
The most likely place to face regulation is the online exchanges. Unless they operate purely in cryptos (such as Bittrex) banks can block transfers to their bank accounts if they refuse to comply. This is perhaps the biggest issue that has to be resolved: how to allow easier access from FIAT currencies.
A counterpoint to government regulation is that there will always be a country which welcomes the new business opportunities. Countries that over regulate face a potential flight of innovation away to the more welcoming countries and may end up losing out on the industry of the future. For the moment I think governments are mostly content to observe and see how the industry develops.
For those more familiar with traditional securities or those with no previous investing experience the volatility in the market is likely to shock you. It is common for 30%+ fluctuations on a daily basis. If you can’t stomach this then I don’t recommend you put any serious money into cryptos.
Volatility will likely go down as market cap and volume increases. Currently it is still possible for individuals to influence prices by dumping or buying large amounts of currency. As the volume increases it will requires more and more money to be committed to sway markets which obviously increases risk.
It should be mentioned that if you want to wait for volatility to decrease you will have likely missed out on most of the gains.
Time to Market
Something people don’t seem to realize is how premature the industry is. The huge market caps give the impression that the cryptos are well developed but for the majority they are still years away from being commercially adopted. Expectations of immediate returns may lead to a short term lack of confidence when they fail to deliver but in the medium term the future is very bright.
Chapter 6: A Brief History of Cryptos
Understanding the story which has led to the current adoption of cryptos is essential to understand the present state and future direction that they may be taking. In this chapter I will outline all the most important milestones since the precursor to Bitcoin entered the scene, BitGold.
While there were other projects which developed some of the requisite technologies for the blockchain, BitGold was the first to practically resemble a cryptocurrency. BitGold is the brain child of Nick Szabo, who outlined the benefits of a decentralized blockchain over current currencies, suggesting the combination of PoW consensus methods, one way algorithms and ledgers spread out over many servers, all of which are shared characteristics with Bitcoin. Nick was even talking about the implementation of Smart Contracts and “smart properties”, referred to as digital assets nowadays, since 1995. The creation of a “trustless” currency free from manipulation of governments is an ideological one and the basis upon which BitGold and BitCoin were founded. This is an important point as we try and predict governmental reactions to the growth in cryptocurrencies. We must consider whether governments consider this an ideological or economic threat and whether it is more pragmatic to adopt and adapt or to ban and regulate.
Nick is perhaps the most knowledgeable person to talk to about cryptos. You can contact him on Twitter @NickSzabo4 or read up on his blog Unenumerated where he talks about everything under the sun, not just cryptos.
Come 2008 A person under the pseudonym of Satoshi Nakamoto released their Whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” and in January 2009 the Bitcoin client came online and available to download. Satoshi Nakamoto mined the first block to be created “The Genesis Block”. Hal Finney was the first person to download the client and was the recipient of the first transaction made on the network from Nakamoto. Nick Szabo and Wei Dai (creator of b-money, a precursor alongside BitGold) were among the first supporters.
Nakamoto is estimated to have mined around 1 million Bitcoins making him the largest shareholder and one of the richest people in the world. Nobody knows the real identity of Nakamoto who has disappeared and has had no role in Bitcoin for years, at least not under their original pseudonym.
Gavin Andreson became the lead developer at the Bitcoin Foundation and is the closest thing to a public figurehead amongst the developers working on Bitcoin’s code.
Early in its life an indirect purchase of two pizzas for 10,000 BTC has become a thing of legend given how much that would be worth now.
On 6 August 2010 a major vulnerability in the protocol was detected and 184 billion additional bitcoins were created. The transactions were spotted and erased and the bug fixed resulting in a “forked” version of the blockchain. To date this is the only hack that has ever occurred on the network.
In 2011 other cryptos started to appear although Bitcoin retained the majority of the market share.
RipplePay was started in 2004 but it wasn’t until 2011 that the creators saw the potential of the blockchain technology and designed a different consensus method which didn’t rely on PoW. This was to make it much more efficient. However, it didn’t adhere to the ideology of decentralisation and still relied entirely on the trust between banks. It established its own niche as a legally compliant tool directed towards banks and took second place behind Bitcoin by market cap.
In September 2011Vitalik Buterin co-founded Bitcoin Magazine. Whereas Bitcoin’s original intention was solely based on its use as a currency, Vitalik saw the opportunity to implement a crypto with a much wider range of uses. In late 2013 he created Ethereum, a crypto that looked to implement more utility through smart contracts. Ethereum saw a meteoric rise in the first half of 2017 and displaced Ripple to take second place behind Bitcoin according to market cap.
Many other competing cryptos have been created over the past couple of years, each of which looks to establish dominance over its particular niche. Ultimately the market dominator will be determined by its usefulness, technology, network effects and community involvement. It is yet to be seen if any of these new cryptos can establish themselves as the new market leader.
Real world transactions
In October 2012 BitPay reported having over 1,000 merchants who accepted Bitcoin as payment and in November WordPress started accepting Bitcoin.
In 2013 things started to pickup. Coinbase reported selling over USD 1,000,000 worth of Bitcoin in a single month.
Mt. Gox and Other Exchange Hacks
Wild price swings occurred during a brief split in the blockchain (when two sets of ledgers disagree with each other), during which time the exchange Mt. Gox halted trading causing a sharp sell off. US Government regulators started to take notice when Financial Crimes Enforcement Network (FinCEN) declared miners were Money Service Businesses (MSBs) and therefore liable to the same regulations. In April, 2013 Mt. Gox had trouble processing the transaction volumes causing delays and more wild price swings. Only a month later FinCEN seized accounts associated with Mt. Gox as it hadn’t registered as a money transmitter.
Things finally imploded in February, 2014 when Mt. Gox filed for bankruptcy protection after 744,000 Bitcoins were stolen.
Bitstamp, the largest European exchange was feared to have been hacked in 2015 when the exchange went offline amid fears of security issues. Fortunately trading resumed as normal after their security measures were upgraded.
In August 2016 Bitfinex was subject to a hack and around $60m (120,000 BTC) were stolen.
This should be a warning not to keep your funds on exchanges unless you’re planning on trading frequently. See How to Store Your Cryptos.
Governments Start Taking Notice
In July, 2013 Thailand banned Bitcoin on the premise that it had no legal backing. Other governments started voicing their opinions with a mixed response although it seems that more and more governments are taking a favorable approach towards cryptos. Singapore, Japan and UAE have been very positive towards the technology and even Thailand has changed its mind. Although it is illegal in China to purchase any real world goods with cryptos and financial institutions are banned from using them a strong developer community is developing around the use of blockchain technology in other areas (as I’ve mentioned, cryptos don’t necessarily have to be currencies). It seems then that access to the Chinese market will largely depend on being compliant and creating cryptos that can synergize with FIAT currencies.
Bitcoin ATMs and More Merchants
At the end of 2013 the first Bitcoin ATMs rolled off the production line in Vancouver, Canada. By September 2016 there were 771 ATMs worldwide. In November 2016 the Swiss Railway operator SBB upgraded their ticket machines to become Bitcoin ATMs
The university of Nicosia started accepting Bitcoin as payment for their tuition fees and Overstock announced it would accept Bitcoin as well.
At the start of 2014 Zynga, the gaming giant, started trialling Bitcoin for in-game purchases. That same month, The D Las Vegas Casino Hotel and Golden Gate Hotel & Casino properties in downtown Las Vegas announced they would also begin accepting bitcoin
In the same year Microsoft started accepting Bitcoin as payment for its Xbox games and Windows apps.
As of August 2015 there were an estimated 160,000 merchants accepting Bitcoin payments and Barclays announced they would be the first UK high street bank to accept Bitcoin.
In April 2016 Steam, the largest online pc game retailer, started accepting Bitcoin. In July Uber switched to Bitcoin in Argentina after the government blocked credit cards from dealing with the company.
The Appearance of Smart Contracts
Although Nick Szabo discussed the idea of Smart Contracts back in 1996 it wasn’t until Vitalik Buterin created Ethereum in 2015 that they were implemented successfully. This marked an important milestone in the crypto world. Cryptos went from being an obscure currency to a currency with revolutionary utility. In very little time other cryptos appeared on the scene with competing visions of how to implement these smart contracts. It is still very early days in its development and so there are likely to be many speed bumps along the way. Who will win out nobody knows but there is one case which we can learn from:
The DAO hack
One of the first Dapps built on the Ethereum blockchain was a Decentralized Autonomous Organisation or the DAO. It raised $150 million in a crowdfunding campaign but in June 2016 $50 million was stolen by an anonymouse hacker. It was suggested that the community agree to reverse the transactions and create what is known as a hard fork (when two sets of ledgers disagree with each other and instead of overwriting each other decide to continue on as separate groups). This was extremely controversial as it went against one of the central tenants of “immutability”. The Ethereum team went ahead and reversed the transactions causing a split into Ethereum and Ethereum classic which continues to hold substantial value today. A further two hard forks were required at the end of the year due to more hacking attempts.
The lesson to be learnt from this is that it is very difficult to write Dapps and Smart Contracts as even a small bug in the code might be exploited to steal a large amount of money and destroy trust. Ethereum continues trying to improve security and prevent this from happening in the future. Other cryptos attempt to solve this problem by limiting what Dapps and Smart Contracts are able to do. There is a compromise to be had between flexibility and security. One thing for sure is that we can expect more issues down the road but this goes hand in hand with cutting edge technology.
The Scaling Debate
As popularity of Bitcoin has grown so have the number of transactions. However, the “block size” of each block (think the size of each page in the ledger) has remained the same. This has led to more and more transactions being backlogged and having to wait to be confirmed on one of the blocks. Priority is given to transactions which have agreed to pay higher transaction fees. Overall this has had the effect of increasing transaction fees and wait times.
There are two main suggestions for solving this scaling issue. One is simply increasing the blocksize which would have an immediate effect. The other is something called Segwit (Segregated Witness) which would allow “side chains” which you can think of as having notebooks which accompany the ledgers where you write down all the smaller transactions.
Both options have their pros and cons. I won’t get too technical here but increasing blocksize has the benefit of immediately solving the issue but also increase the storage space needed which may prevent the average person from setting up their own node and centralize the power in the hands of a few large miners. Segwit relies on further technological advancements such as “The Lightning Network” to move transactions onto these sidechains and allow more functionality such as “atomic swapping” which involves being able to swap different cryptocurrencies directly on the blockchain.
These two solutions have produced a lot of contention and a whole lot of in fighting between developers and miners. This was the reason behind the recent “hard fork” between Bitcoin and Bitcoin Cash which I will explain below.
If we relate back to the banking analogy you can think of a hard fork as being equivalent to a group of the branches breaking off and forming their own bank with a slightly different set of rules but who hold the exact same records up until the time of the split. This means customers of the original bank are automatically customers of the second bank and have the same amount of funds on both accounts. In the case of cryptos the value of those funds fluctuate on the free market and so people were worried that the uncertainty surrounding the split might affect the overall value of their funds across both chains.
At the end of July 2017 over 80% of miners signalled to activate Segwit, as a response a couple of the larger mining pools initiated a hard fork on August 1st 2017 creating BCH (Bitcoin Cash) which increased the blocksize from 1Mb to 8Mb.
Immediately following the hard fork the price of Bitcoin went up to over $4000 and Bitcoin Cash settled around $200-$300 suggesting the large majority maintained their confidence in Bitcoin as opposed to Bitcoin Cash.
Their is still a lot of contention between the two and the debate has still not been fully settled. The majority of miners, who signalled for Segwit, will be further increasing the block size to 2Mb as a combined solution to the side chains but the effects of these has yet to be seen.
Most recently the price of Bitcoin Cash has been increasing and the political atmosphere within the Bitcoin development community is still contentious about implementing the “2x” part of Segwit2x. Further hard forks may occur in the near future.
With the appearance of smart contracts and the popularity of Ethereum a wave of ICOs appeared around June 2017. A lot of money could be made by selecting and investing in the right ones. However it was very risky due to a complete lack of any regulation and zero accountability. Initially a fixed number of tokens were offered at a fixed price. The mania around these ICOs created much more demand than there was supply so people could expect an immediate return after the ICO ended. However many companies started getting greedy and offered open ended ICOs with no hard limit on the amount of investment. Coupled with the failure of a few high profile ICOs people became disillusioned with ICOs which has calmed down the space a bit.
The SEC and other governing bodies are looking to regulate ICOs. Some cryptos are taking the initiative, such as NEM through COMSA, by self regulating ICOs to increase trust in the system and ensure high quality projects.
The Current State and Rapid Rate of Growth
Crypto usage, not only as a storage of value but as a legitimate currency, has increased exponentially and looks set to continue that way. The number of online stores accepting Bitcoin in Japan has increased 4.6 times over the past year, Bitpay reports a 3 fold increase in transactions from January 2016 to February 2017
As of time of writing the daily transaction volume across exchanges has increased from 82 million USD a year ago to 6.5 billion USD. An 80 fold increase in just one year. It is hard to argue against the idea that cryptos are not only here to stay, but set to disrupt industry and the financial system very soon.
However, the current growth trend cannot continue indefinitely. Bitcoin has increased 50,000 times over since 2011. Given its current market cap if it were to continue to increase at the same rate it would reach the entire value of the world’s money supply in 4-5 years. of course, this will not happen barring a complete collapse of our current system and shouldn’t be expected. However, we can continue expecting exponential growth for the industry as a whole for the next 2-5 years after which growth will have to slow as we reach market saturation. This is not to say that the opportunity for exponential growth for individual platforms or tokens will disappear.
Chapter 7: Exchange and Wallet reviews
you can think of wallets in much the same way you would think of your traditional cash wallet or your bank account. It contains the amount of crypto that belongs to that “address”. Setting one up and using it to send and recieve payments is very easy, however, you need to be very careful with your security.
Your wallet uses something called a “private key” to sign any transaction you make. This also acts as the ID of your wallet. In you lose access to your wallet your private key is the only thing that will reliably let you get access to your funds back. When a wallet is created it will display your private key and, depending on the wallet, a 12 word phrase. You should write both of these down as backups and store them somewhere safe.
If someone knows your private key they will have access to your account so be extremely careful if you decide to share that information with anybody. If someone finds your private key they can send your funds to their own wallet and there is nothing you can do about it.
This guide was written by Tony Coombes who is the head of business development at https://latestlawjobs.com