3. Cryptocurrency Mythbusting
3.1 Cryptocurrencies are only used for illegal things
It is true cryptocurrencies, primarily Bitcoin, have been used for illegal trade online. Silk Road dominated the market for illegal drugs online and used bitcoin as a means of payment.
But simply because criminals use a currency doesn’t mean that the currency itself should be illegal. The majority of all drug trade in the world uses $U.S Dollars. No one claims that the U.S Government enables drug trafficking by printing the dollar, right?
Okay, but you might think:
“Anonymous cryptocurrencies makes illegal activity a lot easier for criminals”
Yes, this is also true.
I argue that just because something has a partially negative effect, doesn’t mean that we should make it illegal. Imagine if someone made the same claims about the internet. It makes things a lot easier for a lot of criminals, but the benefits for our whole society far outweigh the negatives. A lot of people die in car accidents every year. We don’t ban cars, right?
The first people to adopt new technology are always criminals. Andreas Antonopoulos makes a very good argument in his book, Bitcoin – The Internet of Money.
He tells us that robbers were the first to use cars, as get-away vehicles. The first people to use the phone used it to conspire against current leadership. Cryptocurrencies were adopted early by criminals, but this should be seen a sign of its potential, and not defer us from using it.
Wouldn’t we be foolish to not use all of the potential of the cryptocurrencies?
3.2 Cryptocurrencies are just a bubble
This is a common argument, especially popular in traditional financial media.
- “Bitcoin is just a bubble”,
- “It’s the tulip mania all over again”
- “Cryptocurrencies aren’t backed by anything, it doesn’t have a real value”
So, are cryptocurrencies just a huge bubble?
Are the doomsayers right?
Will Bitcoin be worth 0 once the bubble pops?
Well, I will set things straight.
In any growing industry, bubbles are unavoidable. Many people view bubbles as something inherently bad, but it is a natural part of economic growth and human psychology.
Saying “you shouldn’t buy any cryptocurrency because it’s a bubble” is the same as saying
“the housing market is just a bubble, so you should never buy a house” or
“the stock market is in a bubble, so you should never buy a stock”.
Even if prices were to drastically drop, the underlying technology is always there. The blockchain technology that was invented with the Bitcoin protocol, that is about to change the way we think about money forever, isn’t a bubble.
Certainly there are overvalued assets and currencies within the cryptocurrency market, just as in any other market. There will be price corrections, recessions, just as in any other market. Critics are especially fond of comparing cryptocurrencies to the tulip mania during the 1600’s. The tulip comparison that critics commonly use is flawed for 2 reasons:
- Tulips are a terrible store of value. They don’t live very long and are very fragile.
- Tulips are difficult to trade and transfer. They require a lot of space and it takes a lot of time to count them for larger trades.
Cryptocurrencies are the exact opposite.
- They last as long as one computer still runs the code and they can not be destroyed.
- Cryptocurrencies are very easy and cheap to transfer and trade.
Every single weakness of the tulip, gold or any other old store of value, is a strength of the cryptocurrency.
3.3 Cryptocurrencies aren’t backed by anything
That’s right, cryptocurrencies aren’t backed by anything.
The US dollar isn’t backed by anything either.
So if a global currency like the US dollar isn’t backed by anything then how can it be worth something?
Well, we have gone through this in depth earlier in this post, but basically: Forex traders on exchange markets decide the value of the US dollar.
And they take the following into account:
- The current supply and demand for that currency
- Expectations for the future of that currency
So rather than being paralyzed by the fact that a currency like Bitcoin or the USD isn’t backed by anything you should ask yourself this instead:
- Is the supply for this currency increasing? If yes by how much per year?
- Is the demand for this currency increasing? Roughly how many % of the global population is using it today? Is there room for more adoption?
- What expectations do I have for this currency in the future? Is it fully utilised today?
Depending on the answers of these questions you can decide whether or not that specific currency is an interesting investment opportunity or not.
3.4 Risks associated with cryptocurrencies
So now you understand what cryptocurrencies are, how they work and see the advantages over fiat currencies.
But remember this:
Wise investors should always be aware of what risks are associated with their investments. Now even though Cryptocurrencies are used as money to make purchases of various kinds it’s also considered to be a commodity like gold and silver. That means that it’s just as vulnerable to market volatility like other commodities and stocks.
Cryptocurrencies are a very young active commodity. This makes the market more volatile than other investments.
Meaning it will swing more wildly up and down than most other investments out there.
The cryptomarkets are unregulated meaning there is no government entity monitoring whats going on. This is the point with a decentralised system. In theory if a government would try to ban or impose laws against cryptocurrencies the market could see a sudden drop.
At the moment:
Bitcoin also faces scaling issues.
The Bitcoin blockchain can process roughly 7 transactions per second. In comparison, Visa can do thousands of transactions per second. The Bitcoin community is split over how to solve this scaling issue. A new method of computation has been proposed by some and the community is currently holding its breath while this issue unravels. For those who want to read about it in depth you can do that here.
All in all:
This is not meant to discourage anyone from investing in cryptocurrencies. However you should be aware of potential risks when you enter this world, and see your investment as a long placement. Don’t let short term drops put you in a state of panic, it’s something you will have to deal with.
Can you handle it?
4. How to buy and store your Bitcoin and Ethereum
Buying and storing cryptocurrencies may seem intimidating to a new user, but there is no need to worry.
I will guide you through and explain every step of:
- Buying your Ethereum and Bitcoin with various methods of payment
- Storing it securely
- Transferring and buying services and goods with Ethereum or Bitcoin
Before we get into the details of buying your first cryptocurrency, there are some things you have to learn.
4.1 What is a wallet?
Cryptocurrencies are stored in a personal wallet. Your wallet has an address connected to it, the same address we talked about in part 1 – What is a Cryptocurrency. In order to receive cryptocurrency, you provide the sender with your address. It is important your address is correct, as transfers to other wallets are impossible to restore.
An Ethereum address always starts with 0x.
There are different kinds of wallets, some more secure than other. I will rank them by security, with #1 being the most secure. I recommend using the most secure method possible to store your cryptocurrencies.
4.1.1. Hardware Wallet
A hardware wallet is the most secure way to store your cryptocurrencies. Remember what I told you about your encryption key in the beginning of the article? Strong encryption protects your wallet, and in order to access it you need your private encryption key. The thing is, when you create any other kind of wallet than a hardware wallet, your keys will be exposed for a brief moment when you write it off your computer screen. If there is malware on your computer, a potential hacker could see your private key and access your funds. A hardware wallet never displays your private key. It is securely stored within the hardware, out of reach for hackers. The hardware wallet is accessible both online and offline.
Only you have access to the wallet as no third party holds your keys. They are exclusively yours. Some of the weaker ways of storing your cryptocurrencies means you trust a third party to keep your keys safe.
This is why I recommend the hardware above anything else.
There are a few different options to choose from. Trezor and Ledger both make excellent hardware wallets. They are both easy to set up and use but have some minor differences.
4.1.2. Paper Wallet
In my opinion, this is the second safest way to store your cryptocurrency.
A paper wallet means you do not store your personal encryption key anywhere digitally.
You simply write the encryption keys down on a piece of paper, and those keys allow you to access your wallet anywhere.In order to create a paper wallet, you need to generate a new wallet address on the Ethereum network.
4.1.3. Online wallet
In my opinion, this is by far the least secure way to store your cryptocurrencies. Third parties are security holes as mentioned earlier. They can either be hacked or act unethical and steal your funds. However, they are the easiest to use and many new users prefer them for this reason. Exchanges often provide their own online wallets, where your funds are initially transferred after purchase. If you want to use an online wallet, I recommend using Coinbase. Coinbase offers a more secure way to store your cryptocurrencies than most other online wallets.
4.2 Buying your first cryptocurrency
Okay, so you have set up your wallet and you have a wallet address that you can send your funds to. There are a few different ways to buy cryptocurrencies, some easier than other. Usually, the easiest ways to buy cryptocurrencies are the most expensive. I will cover the most common ways to buy your ethereum. Credit card and bank wire.
4.2.1 Credit card
Buying ethereum with a credit card is the most expensive but also the easiest way. Many exchanges offer simple solutions to use your credit card. Usually there is a limit to how much you can purchase with a credit card which makes it impractical if you are looking to buy larger amounts. Fees usually range anywhere from 5-15% for purchasing with a credit card. Most exchanges work the same, but for new users looking to use a credit card I always recommend using Coinbase.
4.2.2 Bank wire
A slightly less practical but cheaper way to buy your cryptocurrency is depositing FIAT from your bank account to an exchange. Using an exchange like Kraken, GDAX or Gemini allows you to trade cryptocurrencies at market price, paying only a 0.2% – 0.5% fee + any potential bank wire fee, depending on your location.
For users within the European Union, SWIFT transfers are free and quick.
4.3 How to Transfer
Okay, now we have our wallet set up and funded with cryptocurrencies. It is a very simple process if we wish to transfer funds ourself.
In order to recieve payments yourself, simply provide the sender with your wallet address.
Thank you guys from Coinworld for sharing!