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Let's talk about the new kid on the block in the investment landscape. Cryptocurrency has only been around for about a decade and has made waves in recent years.
Is it something you should invest in?
Bitcoin? Crypto? Blockchain?
First, let's define some terms.
Bitcoin is the most popular cryptocurrency around right now. Bitcoin was the first cryptocurrency and it was launched in 2009. Since then, many other crypto projects have appeared on the market - some being competitors to Bitcoin as a currency and/or store of value, others being non-currecy projects based on the same type of technology.
Digital currencies or "coins" are called cryptocurrencies because they are built on a technology called blockchain.
Without getting into the technicalities, the genius of blockchain technology is that it can be fully decentralized, trustless and permissionless. Here's what that means:
- Decentralized: there is no CEO, no central authority, no company, nation or institution in charge. No one can change the rules or pull the plug on Bitcoin.
- Trustless: blockchain technology enables interactions that don't require trust. If you deposite your money in a bank, you have to trust that institution. And if things go awry, you have to trust that your countire's legal system will have your back. With blockchain, you can make large transactions and come to agreements with completely anonymous parties and no trust required.
- Premissionless: an estimated 2.5 billion people in the world don't have access to a bank account. This is largely because banking is a permissioned process. You have to get approval from central authorities and jump through various hoops, if you want to participate. Blockchain enables permissionless banking and has the potential to remove roadblocks from countless other applications, too.
Coins You Need to Know About
Bitcoin is one of many different "coins" in the cryptocurrency market. Here are the ones you should know about.
- Was created in response to the 2008 economic crisis and the lack of trust in banking and financial institutions that arose from it.
- Was originally proposed to be used as a currency, but recently has found more use as a store of value.
- The first example of digital, self-sovereign, decentralized money.
- Bitcoin supply is capped at 21 million BTC. No central bank or other authority can ever "print" more Bitcoin.
- Ethereum is a blockchain based, decentralized application platform.
- If Bitcoin is blockchain for money, Ethereum is blockchain for money and everything else you can think of.
- Currently, the main applications being built on Ethereum are financial applications that enable bankless banking (e.g. borrowing, lending, investing, insurance...).
- Ethereum has also found a lot of use in NFTs - Non-Fungible Tokens - a technology which enables unique ownership of digital assets.
- A stablecoin is a crypo asset that is pegged to the value of a fiat currency (fiat = latin for "let there be". Fiat currency = "let there be money", meaning a currency that can be printed at will by a central bank).
- Examples of stablecoins pegged to the USD include: DAI, USDC, TUSD, sUSD
- Examples of stablecoins pegged to other currencies include: sEUR, GBT, CHT
- Stablecoins could become the backbone of mainstream cryptocurrency adoption. They let people enjoy the many benefits of crypto without being exposed to highly volatile assets like BTC and ETH.
Dogecoin, Memecoins, Shitcoins
- Dogecoin is a copy of Bitcoin with a couple of minor parameters changed in the code.
- Also, it has a funny dog meme in the name and logo.
- Also, if you had put a significant amount into DOGE not too long ago, you'd be incredibly wealthy now... (this is not financial advice).
- Crypto can be pretty weird sometimes. Memecoins and "shitcoins" abound - most of them crash and burn, but some of them make eye-watering returns for investors. In part, this is because of the power of memes, in part it's market manipulation and scams.
What to Know About Crypto as an Investment Vehicle
Crypto assets (apart from stablecoins) are extremely volatile. Bitcoin is a prime example of this. Since its inception, it has appreciated at an average of almost 200% per year... but it has also dropped more than 80% in value, several times over.
Plus, because it is self sovereign money (think: you are your own bank), millions of Bitcoin have been unrecoverably lost. People have lost access to untold wealth just by forgetting a password and not being careful with heir backups.
In short: this is not for the faint of heart.
Crypto Assets Easy Mode
For most people, I recommend crypto in "easy mode". This is what I recommend if you aren't tech savvy and even if you are, it's a good place to start.
Here's what I recommend for easy mode:
- Spend a few hours researching, to decide if you're in or out.
- Sign up with an established, trusted exchange.
- DCA a set amount every week or month.
- Buy only BTC and ETH (ignore everything else).
If you buy crypto on an exchange and also keep it there (i.e. you don't transfer to a self-sovereign wallet), then you have to trust that exchange. Here are some I recommend looking into:
By following this easy mode, you join the price movements of BTC & ETH without the risks of being a "true" crypto user.
Crypto Assets Hard Mode
If you're not a tech native — if technology makes you even slightly uncomfortable — hard mode is not for you.
In hard mode, you become a "true" crypto user, with all it's advantages and drawbacks. In hard more, you are your own bank.
Here's how I'd approach hard mode:
Step 1: Start with Research
- Carve out a few hours a week to research & learn.
- Understand the basics of blockchain, self sovereignty, key pairs, etc.
- Understand currencies and non-currency projects/coins.
- Learn about BTC, ETH, Defi, L1s and L2s
Step 2: Personal Security & Data Privacy
- Get your personal security & data privacy practices (reasonably) air tight.
- No reused passwords, no easy passwords, no passwords that can be guessed based on your personal data or your preferences (birthdays, favorite foods etc.). Use a password manager.
- No unencrypted sensitive data or traffic. No passwords in a spreadsheet or written down somewhere. No logging into sites on unencrypted connections. No clicking on shady things and downloading shady apps.
- 2FA everything — not phone number based (also understand why that is). I recommend using Authy.
- Software minimalism — be highly aware of what you install and where it's from.
And important part of personal data security is understanding attack vectors. Learn about the most common hacks, phishing techinques and social engineering attacks, so you can avoid falling victing to them.
Step 3: Establish Multiple On and Off Ramps
- Sign up to muliple exchanges.
- Establish multiple fiat on- and off-ramps.
- Decide on allocation between BTC, ETH, Defi, and, if you're daring, memcoins.
- Self-custody a portion of your crypto.
- Fun part: participate in defi! (try not to lose everything)
Cryptocurrency uses digital wallets to store and transact. What digital wallet should you use?
The most important concept regarding wallets is the difference between custodial and non-custodial.
A custodial wallet is one where someone else has custody of your coins. Like a Coinbase wallet. Coinbase has custody of that wallet and you're trusting them to keep your coins for you and keep allowing you to access them. It's like money in a bank.
A non-custodial wallet is one where you have custody of your coins. This is true ownership of crypto. No one can interfere with your own wallet, no one can prevent you from transacting. But you also can't get help from anyone if you lose your password or make a mistake and lose your coins.
Examples of Non-Custodial Wallets
Mobile Wallets — Guarda, Zengo, Argent. Key questions: how are security and wallet recovery handled?
Browser Wallets — MetaMask and WalletConnect. These are very handy for interacting with Web3 applications and Defi. But I wouldn't store all my wealth here, unless connected via hardware wallet.