The Cryptocurrency FAQ
The answer to all your cryptocurrency questions whether you are searching on your own or tired of your friends asking you constantly. Will update as time goes on and I welcome any additions to this in the comments. The current version is from 2/4/2018.
Questions to ask yourself before you invest when researching a cryptocurrency.
- Does it provide meaningful utility to society?
- Will it exist in 5–10 years?
- Will the number of people on earth investing in crypto raise over the next 5–10 years?
- Is it a centralized crypto currency?
- Does it break financial laws such as securities laws?
Why ask these questions?
- Only useful things will gain true lasting adoption.
- If it’s short-term what’s the point? The shorter-lived the cryptocurrency is the more you will have to spend your time trying to keep up with when is the best time to exit your value from the ecosystem vs letting your wealth grow long term.
- Because of the verifiably limited supply of cryptocurrencies as demand increases there will be fewer coins available for everyone that wants them.
- Everything centralized can be arbitrarily regulated, censored, or devalued.
- If it breaks financial laws such as securities laws then adoption will be hindered and take significantly longer, it’s best to avoid this by investing in things that circumvent regulations or can’t be censored easily. As for new regulations try to assess how enforceable those rules actually are.
The only bets you need to make on a coin are
1) will they continue to exist?
2) will they continue to be in demand?
Now let’s apply these general rules to answer an FAQ based on the most frequent things people seem to ask about crypto.
Q: What is the biggest difference between keeping my wealth in stocks/government currency vs cryptocurrency?
The biggest difference between crypto and stocks/fiat currency is that supply can’t be diluted in crypto like it can and does get diluted with the others from the supply getting increased. Example If there is only ever going to be 21 million bitcoins the supply goes down as they are lost by individuals and corporations. That results in fewer and fewer bitcoins for all the people that want to use it as it becomes more successful. Even with bitcoin going to the 8th decimal there is never going to be enough for everyone on earth to own a large amount of them. The only people with large amounts of most cryptocurrencies today and in the future will be people who adopt early and people who are already rich which is becoming more or less the same thing.
Q: What about equity?
So you want equity? I did too but the more money I get into crypto it seems the less relevant equity becomes. Equity is tied to the laws of a nations jurisdiction and your rights to it can be diluted and impacted arbitrarily without your consent rather that is equity in a company, a plot of land, a government-backed currency, or other types of investments / stores of wealth including gold which can be physically taken from you whereas if you secure your crypto properly then access to it can die with you or be passed on based solely on your wishes. Crypto is true freedom from the will of anyone other than your own.
Q: How do you know if a coin will exist or not in the future?
No way to know for sure which is why you need to focus on utility and how it can benefit people as a whole.
Q: What if a government bans it?
If governments ban a coin, let’s say Bitcoin, for example, it’s highly unlikely that all governments will ban it. A ban impacts it’s accessibility for a localized group of people but banning what the people want is generally temporary or unenforceable. Look at weed, alcohol, and gold all of these things have been banned in the US in one way or another and all of them have been unbanned because the people wanted it, the people will always outnumber central authorities. As more government currencies fail or governments in general fail which I think history proves is largely inevitable, more people will wake up to the utility of separating money from state by way of holding and using decentralized currencies. The failure of a single government or centralized currency will not kill decentralized ones and as central currencies and governments collapse around the world we’ve seen the people in those economies start to understand this more and in turn, put their wealth into digital currency any way they can.
Q: Why shouldn’t you buy into centralized cryptocurrencies?
Think about credit card rewards for a moment. Let’s say you earn 1 airline point for every dollar you spend on your credit card and when you got the card they say 20,000 points gets you a flight. So you spend a year or so earning points saving up for the flight you want and the credit card company arbitrarily changes the point price for a flight to 25,000. They can do this because they get to be the gatekeepers of how and where your points have value and they get to continuously issue an unlimited amount of points to everyone at their whim. With a decentralized system for rewards that has a fixed supply, though it can fluctuate in value. As the coin becomes more widely used the demand for it drives up the value to be worth more instead of less since more people want to participate. Would you rather let the market decide based on supply and demand or a central entity?
Q: Why should I not store my digital currency with a central 3rd party?
Avoiding central points of failure is literally one of the major philosophical issues decentralization aims to solve. When you store your money in a bank that bank loans out a portion of your money to other people, make risky investments with another portion of it, and charges you for the privilege of them profiting off your wealth. What would happen if banks no longer had the capital we freely give them as a people to do these things? Even if you’re someone who doesn’t have any debt you still contribute to the enabling of others going into debt by putting your money in a bank. As for centralized digital currency exchanges them having your funds is dangerous because if they fail, get hacked, get fined by governments, expose users to a central authorities ability to seize user funds, or having them run away with your money and when these things happen they impact the entire ecosystem negatively by passing those losses and impact onto its users. Centralized exchanges are a necessary evil currently to onboard new users into the new system akin to AOL using phone lines to connect people to the internet. If you’re going to use a centralized exchange it’s not possible to store your money there long term without taking these risks much like storing your money in a bank allows the banks to perpetrate abuses on society. Now that the technology exists we need to rethink the ethics behind centralized entities being the custodian of our wealth and start being our own banks.
Q: What gives cryptocurrency value?
What gives anything value is its utility and the consensus hallucination where people merely say it has value. That applies to gold, oil, US dollars, bitcoins, Pokemon cards, pet rocks, diamonds, and anything else you can think of all of which can be devalued by the introduction of new supply. The utility of a medium of exchange or store of value is superior when it’s digital since its efficiency, security, settlement time, etc are all enhanced and because utility past merely being a medium of exchange can be programmed in like with ethereum smart contracts. The US dollar is backed by the faith in the US government and nothing else, as a people, we need to trade. So what ultimately makes decentralized money less valuable than a government-backed currency if not merely it’s current rate of adoption and peoples faith in its ability to survive? Considering the supply of most cryptocurrency can be verified to be rare and immune to the introduction of new supply I’d say it can have a more lasting value than most things perhaps excluding human life and time itself although both of those things seem to have a price we put on them as well.
Q: How does mining work?
Since the economics differ from each coin it’s best to look at this generally speaking. Mining is a means to verify transactions done on a decentralized network and introduce new coins into the ecosystem. When all the coins that will ever exist are all mined, mining will likely simply be for verifying transactions. With mining, a miner has a cost of electricity they have to spend to solve a “mathematical problem” that is checked by other participants in the network to see if it’s correct or not. If it’s found to be incorrect the work that miner has done is eventually considered invalid and they are given no reward for their work, if it’s found to be valid they are rewarded with newly minted coins and some of the transaction fees from the network. Since there is an economic cost to mining this is an incentive to have participants in the network be honest and without it they could get away with dishonest conduct such as double spending or minting an arbitrary amount of coins for their own profit without earning it.
Q: What is a smart contract?
A smart contract is a programmable agreement between parties that will execute as expected without one needing to worry about outside influence. Using an ethereum smart contract here is an example of what this can look like. John has 900 OMG tokens and wants to trade them with Morgan for her 1 ether. So they agree to terms and use a smart contract that gives them each a deposit address and asks them each for an address to receive the coins they’re expecting in return. For this example lets assume it’s programmed to give them each 10 minutes to deposit their agreed amount into the contract and if one of the parties doesn’t hold up their end of the bargain to the exact terms meaning the exact amount and within the exact time frame then the deposited coins are sent back to their original owner, but if both parties do in fact deposit the exact amount into the address then the contract would execute a trade and send John 1 ether and send Morgan 900 OMG tokens. This eliminates the need for John and Morgan to trust each other or a 3rd party which is referred to as eliminating counterparty risk.