Decentralized crypto currencies are here to stay and will revolutionize the way we live. The naysayers typically bring up topics such as quantum computers (solved with a fork), 51% attack problems (would be self-defeating as value would go to zero after spending on compute power) and government regulation (which was unsuccessful with BitTorrent for the music industry). Instead of exchanging value with middle-men (banks and money exchanges) we’ll be able to exchange value directly, quickly and without the need for expensive fees. While scalability is an issue, this is no different than scaling the internet back when it was difficult to near-impossible to send pictures. With enough developers solutions are found. Now that we’ve made a bunch of aggressive comments we’ll jump into the fun point of going through how to get involved. We have a personal finance book coming out in January of 2018 that will explain how we would invest in the space.
Why Does it Matter? In a sentence, the use of crypto currencies will allow us to communicate instantaneously without the use of middle men. No longer will you need to send $100 to a friend in London and pay a $5-30 transfer fee (this will be a mere penny in the future). The deletion of a middle man is profound as it allows you to trust anyone in the world. Imagine being able to buy and sell products online to people anywhere around the world with 1) minimal transaction fees, 2) knowing both the sender and receiver will not be burned and 3) the transaction being done instantly. That’s essentially the most common value proposition of crypto currencies.
The second part, which we won’t go into in detail allows you to offer the same value as a fill function. Meaning, if certain triggers are hit the “value” or crypto currency is released. If Floyd Mayweather wins a fight and you bet on him, the funds for your bet are then released (counter party risk is deleted as it is an automated escrow release). While a simple escrow release is an “if then” feature, there is nothing preventing a fill function from being performed on 1) cars with gasoline, 2) supply chains that need new product, 3) the medical industry to make sure all the right drugs are on deck… so on and so forth. Instead of an inefficient human making this decision, it will automatically signal the order to be “filled” releasing the funds for the transaction… Before people suggest that this is science fiction we would recommend googling around for examples of this (fill and auto send responses)… *They already exist*. Scale of course is still a major issue.
What is the Implication? Well for one, a lot of the value that Banks had goes away. Crypto currencies are a *dis-intermediation technology*. In our book, Efficiency, we specifically recommended avoiding certain parts of the investment banking food chain (ECM in particular will not be a good place to build a career). Take a step back and imagine all the intermediaries who simply accumulate fees for providing “trust”. Since trust will now be ubiquitous the value in those intermediaries go away. Don’t even think about investing in things such as Money Gram or a Western Union long-term!
Now before this sounds like it is simply “bad” and there will be no jobs… the good news is you’re now scalable! Forget about middle men taking chunks out of your value to society, the money will go directly to you. Any business that saw profit erosion due to transaction fees will now see margin expansion. You as an individual (yes everyone reading this!) now get to be *free*. You’re now free for your overlords which allows you to take full responsibility for all of your value (this includes your money, so if you lose your keys you have no one to blame but yourself). More responsibility, means more rewards.
Sovereign Individuals: The third most important topic is the idea of becoming a sovereign individual. If your money and worth is now tied to the Internet and you’re in charge of your money… the government will now need to compete for your residency. After all, if your worth or money is now seamless and portable around the globe, you’ll be free to live in any country of your choice. We doubt this level of freedom will be seen in our life time but it could certainly happen (need to be optimistic). Hint Hint: if you run an e-commerce site be smart and start accepting crypto. You can also read the book the Sovereign Individual from Amazon for a few bucks.
The Bad Parts: Now that we’ve given out the big highlights there are a *ton* of problems with the technology today. We don’t even know where to begin but we’ll go ahead and start: 1) the transaction fees need to come down to make it more scalable, 2) transactions cannot be reversed at this time making it difficult if a single error is made… your coins can also be stolen with no intermediary to help you, 3) the speed of the transactions need to be improved dramatically, 4) privacy is a long-term issue with no apparent solution, 5) an alarming number of scam companies are using ICOs to raise money which will eventually lead to a collapse and damage the built in trust and 6) there is significant debate amongst the development teams (on each blockchain) in terms of what the best solutions are for all of the problems listed above.
Example of a Scaling Debate: Since the bad parts are broad will give an example. When Bitcoin forked into Bitcoin Cash and Bitcoin… the sides were split on the best way to scale Bitcoin. In short, Bitcoin is going to be scaled off chain through the lightning network (essentially creating a channel offchain to allow for micro transactions) while Bitcoin cash suggested that the block size was the major issue and by increasing the block size, everything can now remain “on chain”. Before the trolls jump in, the key items for Bitcoin Cash are: 1) larger block size, 2) replay attack protection and 3) changing rate of block reward which is why there are more BCH than BTC in circulation today. We’ll keep our predictions for the book, but as you can see scaling Bitcoin (improving transaction costs) is not an easy solution and the debate ended up splitting the Bitcoin community. (for fun… a hard fork is when you have two separate chains, versus soft forks which are software updates on the same chain without a split)
How To Get Involved
As stated we’ll keep most our predictions for the personal finance book, that said we’ll outline several ways to get involved if you’re interested in investing some money into crypto currencies today.
Buy on an Exchange: Most novices begin investing by logging into an exchange and purchasing crypto currencies with cash linked to their checking accounts. Examples of exchanges include Bittrex, Coinbase and Kraken. These coins are then stored on the exchange where they can be kept or sold back to the market at spot prices (+ a typical transaction fee).
Storing Your Coins: The individuals involved in crypto currencies for the long-term do not store their coins on an exchange. Look no further than Mount Gox which caused a collapse in the price of Bitcoin as the exchange was hacked. The *blockchain* was not hacked. The *exchange* was hacked. This would be equivalent to giving the pin for your ATM card to a random person (easy to steal at that point). Instead of leaving this potential risk on the table the two more common storage methods are a hardware wallet or a paper wallet. To cut to the chase if you’d like to use a hardware wallet you’re best off with a trezor or nano Ledger S. If you’re going to store on a paper wallet, be sure to keep the paper in pristine condition and store in a fire & water resistant safe.
Become a Miner: If you’re looking to remain entirely anonymous and never go through exchanges, you can also mine the crypto currencies. There are many different crypto currencies and if you find one that you’re interested in… go ahead and build or purchase a miner. Just remember, the electrical costs in a first world country make a lot of these ideas unprofitable.
Where to Do Research
In just a couple of pages we’ve outlined why people should care, why it will matter and how to store all of your *coins*. Now for fun we’ll give a peek into what we’ll cover when we come out with our investing book. Here are the coins the typical person should understand:
Bitcoin/Bitcoin Cash: To avoid the trolls, we’re putting them both into one paragraph. Understanding the coin(s), the scaling debate and how the software code works is the first step into crypto currencies. Think of it as the gateway drug. Without understanding the value of Bitcoin and understanding why decentralized, open source software code is valuable… the average person will be in a world of hurt.
Ethereum: The second most known crypto currency developed for smart contracts. Ethereum offers a significantly different value proposition, the code is run differently and the network is separate from Bitcoin. This is a Turing Complete virtual machine which allows for “smart contracts” (recall the fill and send application highlighted earlier in this post).
Litecoin: Essentially a similar coin to Bitcoin but with small technological differences.
Monero: Another coin similar to Bitcoin with more privacy. A “vanishing” coin that makes it impossible to track at this point (unclear if this will be the case for decades in the future). It doesn’t take long to understand the value of 100% anonymity given the illegal drug market.
NEO: Essentially an Ethereum competitor that allows for a variety of programs to be run, compared to Ethereum which is run with Solidity. Solidity is a contract-oriented, high-level language whose syntax is similar to that of JavaScript and it is designed to target the Ethereum Virtual Machine.
Hopefully we’ve already stirred the pot a bit and look forward to seeing how many people understand the space at this point. It should be incredibly clear as to why we left Wall Street at this point (disintermediation technology is not going to help banks).
Come for the content, refresh for the comments.
Very nice overview that shows that you know the topic for sure.
For people willing to take the “paper wallet” approche, I suggest you take a look at cryptosteel.com and store you private key that way, it’s way more secure than any paper.
For those going with the hardware wallet, I would suggest the same to store your 24 seeds words (only need the 4 first letters of each word), that’s also way more secure than paper.
For those with serious money in crypto, I would suggest you store those cryptosteel in a safe facility (not a bank, just a safes facility) in 2 differents countries.
That way, you can restore your coins no matter what happen.
For crypto travelers, please have a look at : https://blog.trezor.io/hide-your-trezor-wallets-with-multiple-passphrases-f2e0834026eb that’s a better way to secure your coins on the go.
Last but not least, I will suggest people to have a deep look into EOS, imo it’s going to be one of the massive run of 2018 as an Ethereum challenger. At least have a look at Dan Larimer interviews on youtube.
Great link thank you giviz
Well that EOS call wasn’t bad after all, making a Killing on it 😀
I even had one of your readers reaching to me on twitter to say thank you as he looked into the project and buy at the low.
As a side note, I’ll say that Korea has added EOS on their exchange bithumb and it start trading tomorrow. We all know what’s going to happen right ?
Thanks for this article, I don’t really understand Crypto currencies and, to be honest, I still don’t really understand how it all works.
But I can see why it can be a good thing, and why someone would buy into Crypto.
https://hbr.org/2017/01/the-truth-about-blockchain
Check this out from Harvard Business Review. It discusses some of the underlying principals of blockchain which many of the crypto-currencies are based on such as bitcoin.
Excellent article. Thank you guys.
Great post as usual. While the content is Crypto 101, beyond that I am thoroughly impressed by your ability to foresee the trends ahead and act accordingly. Thank you as always for sharing your insights!
Not knocking WSP – they have more hits than misses – but they’re not exactly what I’d call ahead of the trend here. If so, this article would’ve been written at least two years ago.
Ha we’ll let our writing do the talking when the book comes out.
Remember to lie down : )
Your recommendation on The Business Blockchain was great. Already listened to the audio book twice.
Another very informative resource I’ve been using is the free 12 week course through the University of Nicosia called Introduction to Digital Currency. It’s headed by Andreas Antonopoulos.
Blockchain for Beginners on Audible is also a nice, quick listen for newbies. Only like 80 minutes long.
thanks for this comment!
I am currently just mining with my main GPU at ~ $1.00 per day. I’ve been debating for a few months whether or not to scale up and pick up a dedicated mining machine. Total analysis paralysis as I find it about impossible to value Bitcoins with the volatility. Thank you for all of the excellent information!
Thanks for your post!
To begin with, I fully agree with you that the technology and blockchain per se is here to stay and take over. Nevertheless, currently I have some concerns, which restricts me from investing in crypto as of today:
1. Most people that invest in crypto say that their investment is mainly based on the power of blockchain, decentralization, and privacy (which, I agree, are the value drivers). However, what they do not say is that they do not have any fundamental value of BTC in mind, which leaves them vulnerable. By not having any fundamental value in mind, they are almost certain to dump their positions in crypto if it suddenly drops by 30-40% (which is quite likely) as they do not know whether BTC currently is worth $10 or $120K. Hence, they are actually noise traders which are just looking to speculate and not invest. They do not know the difference between speculating and investing.
2. Looking at crypto currencies in terms of market value. To my knowledge, market values are mainly used for equities, and we do not really look at market values of fiat currencies, such as USD, EUR, etc. I just perceive this as a flawed view to rank crypto currencies.
3. Crazy growth and return rates. For example, take a look at BitConnect. You can lend out your BTC to their volatility trading bot and get 1-2% DAILY. I did not make a mistake, as it really is DAILY. I just perceive it to be just unrealistic to continue like that in the future & things like BitConnect lending will simply go bust.
Therefore, everything I mentioned above makes me quite sceptic of any major investment in BTC whatsoever. I believe in the technology per se but not in the people & activities that currently surround the crypto world.
Looking forward to any comments or objections.
Keep up the good work with your tweets and posts.
-Ray
I haven’t looked into his work closely but I believe Chris Burniske is attempting to address the fundamental analysis gaps you identify. May be worth a look if you haven’t already.
Lending rates are stratospheric due to a lack of trust around exchanges. Which brings up another point which is that while the protocols are quite safe, the third-party applications and services built on top of crypto are not. But this is also not an exclusively crypto problem, see Equifax.
[[ Not sure if this was accepted before ]]
Your sentiments mirror mine.
The adoption of blockchain technology is the deal here. People have jumped on the BTC hype train because they are getting “easy money”. An “investment” is not trading and so buying a BTC only to flip it to someone else is speculative trading, not investing. Same deal with sub prime debt before the recession hit in 08. Just look at how Nintendo’s stock spiked (and then dropped) when people though they developed Pokemon Go… only to realize they had nothing to do with it.
I would be looking for one company to “glue” the blockchain stuff together. Bitcoin etc are the Lycos, Altavista and Excite of blockchain… what you’re looking for is the next Google, Microsoft, IBM or Facebook. Mass adoption (through killer functionality) and excellent team. Every one of the coins I’ve seen today are a “feature, not a product” (to paraphrase steve jobs).
Nice one
Not much time, so a quick one:
1. Most people who buy crypto will be young millennial-types, who are unlikely to carry a lot of cash on them or keep some in a suitcase. That they’re interested in digital cash makes that even more likely. If we ever experience more bank closures like in Cyprus (likely), the price might take a medium to big hit as all the “young money” gets out to be able to afford basic groceries (most grocers won’t accept bitcoin). On the other hand, if the entire financial system gets frozen (Jim Rickards hypothesis), price is likely to go up since people will just use crypto instead.
2. Safe storage of bitcoins is easy if you know what you’re doing, but most people will never take the time/effort to do it properly. This (+ fees) prevents adoption for transactions in places with weak institutions where crypto would be perfect, since people there can’t afford a safe or hardware wallet. No solution in sight for now.
CS student working with Ethereum here.
If you are new to Ethereum and curious, skip most video tutorials and blog posts and start with the Whitepaper. You will save yourself a lot of time and headache.
Pretty solid article. Smart contracts are indeed the *killer* dis-intermediation technology. Imagine enforcing a financial obligation, running a bookmaker, or even an Organisation, without *any* human agent, middlemen, or law enforcement !
Needs time to go mainstream though. Too complicated right now for the average Internet user to comprehend.
Maybe it’s a good thing that it is not mainstream yet, time to get into Ether.
Would like to learn more about Ethereum and these “smart contracts”. Youtube videos help and watching Vitalik Buterin interviews will give you a decent understanding.
Any other resources you can recommend?
Chris Dannen’s book Introducing Ethereum and Solidity covers the concepts pretty comprehensively.
Consult Software Docs, Ethereum StackExchange, subreddits for specific questions.
Thanks for the recommendation – don’t know much about the topic but white paper seems solid so far compared to the 500 word blog posts/ 10 min youtube videos that are flooding the space.
When governments intervene and central banks create their own crypto currencies, all of the current ones will get busted. The technology is great, but the governments will need taxes and regulations in place. You did the calculations without them, but the big bosses are there and will empty regulations. If you can you can use the current crypto currencies for winning out of speculation, but it is not for longterm investment. If you can bet on anything, you can bet on the failure of the current currencies after new laws are implied. Watch MMM and see how it was made in Russia in the 90s. It is the same thing, just had that great technology as a bonus. Marketing the new pseudo currencies as a “revolution” and all of the paid press releases and other pseudo tricks that made sheep buy more into the false dream is part of the plan. Be smarter than that!
Strongly disagree. Government currencies would be centralized by definition. Seems to be a fundamental misunderstanding of what type of disintermediation we are looking at. But we’ll see!
MMM you’re crazy if you think that governments don’t have a piece of the bitcoin already. A lot of big time players in Silicon Vally have come out publicly and said they have invested in bitcoin. CEO of google is amazed at the blockchain tech and says its going to revolutionize basically everything!
https://www.youtube.com/watch?v=EppRJrTTKgM
But like the playboys said “We’ll see!” lol
So bet on it MMM!
Short Bitcoin!
Prove us all wrong and become a millionaire overnight!
Great intro post. You guys probably should’ve taken bitcoin when releasing efficiency.
They do indeed take Bitcoin. There’s a Coinbase link on the page.
What are your thoughts on the tax implications? Similar to capital gains? I can’t see the IRS allowing individuals to accumulate wealth without interference. That type of freedom is a serious threat to the system.
As opposed to multi-national corporations and tax shelters?
I’m certain that already occurred the day corporations went from temporary entities with a defined purpose and ending (corporation formed to build a bridge in four years and then dissolve), to immortal entities with all the rights of a person and none of the responsibilities.
Excited to see the next in explosion in BTC value when SEC grants ETF approval. https://www.google.com/amp/s/www.cnbc.com/amp/2017/09/28/proshares-files-for-bitcoin-etf-and-one-to-bet-against-it.html
After your recommendation I found and read the blog of Nick Szabo, one of the pioneers in the sphere whom many people accused of being Satoshi Nakamoto for a number of years (also did a podcast with Naval I believe).
http://unenumerated.blogspot.com/
In it I’ve learned a lot about the fundamentals of human exchange such as tribal people trading in shell money, exchanges with various precious metals in different forms as well as things like “Social Scalability” i.e.
“…the secret to Bitcoin’s success is that its prolific resource consumption and poor computational scalability is buying something even more valuable: social scalability.
Social scalability is the ability of an institution –- a relationship or shared endeavor, in which multiple people repeatedly participate, and featuring customs, rules, or other features which constrain or motivate participants’ behaviors — to overcome shortcomings in human minds and in the motivating or constraining aspects of said institution that limit who or how many can successfully participate.”
One of the benefits being institutions can’t limit who can or cannot participate (attn. MMM lol).
Anyway, I’m glad this discussion is happening. I’m reading these links and continuing to educate myself (thank you everyone for your comments). And I especially appreciate some of the nuts and bolts of how to store them, potential issues etc. Once I believe I’m up to speed, I’ll definitely be jumping in!
I believe RE Guy is referring to the podcast between Naval, Nick Szabo, and Tim Ferriss. It’s worth the listen. I found myself pulling off to the side of the road to write down every one of Naval’s book recommendations.
Tim Ferriss podcast episode #244 on Spotify.
I get the sense that WSPs don’t care much for Tim Ferriss, but it’s ok cus he doesn’t talk much in that episode 😉
Good news… 2 thousand year old books said the whole world would adopt cryptocurrencies. Get rich on easy mode.
Bad news… world ends. : /
Bitcoin is a ponzi scheme.
Gold is money.
Ha!
Can anyone speak on the legitimacy of the Tangle network with IOTA?
It seems like an interesting alternative to Blockchain and provides a solution to scaling problems like high transaction fees and long wait times.
However, I realize the crypto world is full of big promises and without cryptography experience it’s hard to tell true potential from pure science fiction.
What happens if/when governments illegalize acceptance of cryptocurrencies?
Speaking as someone who spent 18 bitcoins on mining equipment (two BFL Jalapenos), and another few bitcoins on more mining equipment (two Coincraft Desks), I can definitively say that you will not make any money by purchasing mining equipment.
Bitcoin mining equipment will be obsolete by the time you get it, and these days you’ll be lucky to even break even. Mining contracts are a better deal, since they’re cheaper, but they still aren’t a great deal.
The one possible exception would be mining Ethereum, which uses standard PC hardware. In that case, you can at the very least sell your old equipment when you upgrade.
Correct Alt Coins not Bitcoin. Unless you have a data center in China!
Scrypt miners for Litecoin are very energy efficient. Half the energy and almost the same revenue as Bitcoin miners.
at 10 cents per kWh, electricity will cost 10% of revenue.
https://www.nicehash.com/profitability-calculator/bitmain-antminer-l3?e=0.1¤cy=USD
We will have a cashless society thanks to crypto.
Good overview, but if you’re not technical no need to go deep in the code behind any of these because it will only further confuse you. Understand the Blockchain because it’s the simplest data structure around and look at the _business_ services it enables not the tech.
Personally think non-technical people get enamored by ‘code’ very easily and waste time trying to understand when most of it is very very plain and not important if you’re in the know.
Re: Bitcoin mining.
I understand why people think it is unprofitable. Costs are high relative to coins mined.
My question is this, is there a point at which it could pay off long term? In other words, you’re losing money over the next couple years, but if all you do is hold, won’t the coins appreciate in value?
Sorry if this question seems to basic.
yes, but you’re usually better off just buying/holding the coin.
if you mine, you first have to mine enough to just to cover costs of equipment (depreciates over time) and electricity costs.
Crypto prices are very volatile due to the immaturity of the market, compared to say ETFs. But by the time the market is mature and Joe Smoe invests in 2020 prices will be 10x higher.
Most coins won’t make it, but all you need is a few to and your sitting on some fat $$.
Opportunity.
Read the Bitcoin section at https://aediot.github.io/ for how to securely store your coins.
Another thing: If bitcoin goes mainstream, government becomes extinct. They can’t collect taxes anymore!
When is the book with the crypto info coming out?
January 1
WSPs, thank you for the post.
Over the past 6 months, since taking the step into the crypto arena the balance of my liquid investment portfolio ($2.0m) has evolved to be 75/25 stocks/crypto.
What are your thoughts on crypto hedge funds? How much, if any of your crypto portfolio would you allocate towards a fund(s) that specializes in day-trading and also plays the ICO shake-n-bake?
Maybe the answer to this ? will be unveiled January 1. Thanks!
This isn’t a q&a our book will cover crypto
As always manage your own investments
You are wrong, companies like western union need to survive. They will find a way to integrate with crypto’s. My speculation is bullish on Western Union. Your research should have accounted for that.
That doesn’t make any sense.