Cryptocurrency for Beginners

All right, let’s talk about crypto. Now, you’ve probably heard the word Bitcoin floating around. You might have seen the price has been skyrocketing recently. You might’ve seen that Tesla has bought $1.5 billion worth of Bitcoin and is gonna start accepting it as payment. And you might have heard of all these weird things called a Dogecoin which are apparently going to the moon.

As such, this post is my personal guide to the world of Bitcoin and cryptocurrencies. It’s the introduction that I wish I would have had when I started investing in crypto about four years ago. And it’s the video that I wanna be able to send to my friends whenever they ask me,

Hey are you investing in Bitcoin?
Why are you investing in Bitcoin?
How does it work?
Is it safe?
Are you gonna lose your money?
Isn’t it illegal?
All of this sort of stuff. So this post, which is for informational purposes only and should absolutely not be construed as financial advice. In the slightest, we’re gonna split it up into four parts.

Firstly, I’ll talk about what Bitcoin is and how cryptocurrencies in general work and why they work and why they’re legit. Secondly, we’ll talk about why Bitcoin and crypto is so controversial and I’ll share my hot takes about that.

Thirdly, we’ll talk about, why I personally do invest in Bitcoin and crypto and I will share my portfolio allocation and the reasons behind that. And fourthly, we’ll talk about how you can get started investing in crypto. If that’s the sort of thing you want to do with lots and lots of caveats and cautionary tales along the way. and how it works and be open about that sort of stuff.

Now, Bitcoin is a cryptocurrency. There are hundreds of other cryptocurrencies out there but Bitcoin is like the original, the OG. And it’s by far the biggest cryptocurrency around, which makes the question, what is a cryptocurrency? So here’s my definition of a cryptocurrency based on four central concepts. A cryptocurrency is a virtual currency based on a ledger which is decentralized and secured by cryptography.

All right, so firstly, Bitcoin is a virtual currency. Now what is a currency? A currency is just a medium of exchange. It’s what replaces the old school bartering system we used to have, when it would be like, I will give you this bushel of wheat in return for the shoe that you have kindly made me because you are a, I don’t know, leather worker.

Obviously, that system of bartering is quite inefficient because you have to store a lot of stuff that other people want and that’s just a bit of a pain. And so we invented currency in the form of coins usually as a system that everyone recognized to be able to exchange stuff without having the physical goods.

So I could sell my bushel of wheat for two copper coins and then I could save up my copper coins and I could buy your shoes for 10 copper coins, for example. Back in the day currency itself was tied to metals like gold and silver and copper, which had like different values. And so the actual metal of the coins was worth something because everyone agreed that these metals were somewhat precious but in modern times, most of our currency takes the form of paper notes and paper notes aren’t inherently worth anything because the paper is just worth paper but currency is worth something because everyone agrees that it’s worth something.

If I take $100 dollars almost anywhere in the world most people, I mean most places in the world will recognize that $100 is worth $100 and I’d be able to buy $100 worth of stuff from it. If hypothetically the whole world were to tomorrow decide that the U S dollar is a meaningless currency and they’re not gonna accept it for anything at all. Then the U S dollar would be worthless. So really when it comes to currency it doesn’t mean anything real. Currency is kind of just an abstract way that we’ve all agreed to value things in a certain way.

So coming back to Bitcoin, Bitcoin is virtual currency. It is a digital form of currency, i.e. a digital form of paying for goods and services and exchanging money over the internet.

Way back in 2009 when Bitcoin was first invented, most people didn’t believe that it would be a viable form of currency, but over the last decade plus, as Bitcoin has become more and more popular, people are starting to say that maybe Bitcoin could be the currency of the future. Maybe in the future, maybe a few years, few decades from now, we’ll be paying for goods and services using Bitcoin over the internet, rather than by using these old school, old fashioned centralized banking and government institutions to exchange U S dollars and our actual local currencies.

Okay, so that was the currency part of it. We can think of Bitcoin or crypto as like “Internet Money” or like “Virtual Money” or “Virtual Currency”. Let’s now talk about the ledger system that holds it all together. And the thing to understand here is that Bitcoin is effectively one giant huge spreadsheet. This spreadsheet is called a ledger and in the spreadsheet we’ve got a record of every single Bitcoin transaction that has ever happened since January, 2009, when Bitcoin was, was first invented. And the way that I think of it in my head, it’s like, let’s say you’re going on holiday with a group of friends and you don’t wanna kind of keep on splitting the bill and handing over cash because that’s a total nightmare. Therefore, someone makes a spreadsheet to keep track of who owes what. And so line one in the spreadsheet might be Ali owes Sheen 12 pounds, line two might be Jake owes Molly, 18 pounds. And the idea is that as our holiday goes on, we would keep on adding stuff to our spreadsheet or a ledger. And at the end of the holiday, we would all settle up and then actual money would exchange hands. Now, assuming you trust your friends, to be honest this spreadsheet actually works reasonably well. You can basically treat this whole spreadsheet as virtual money.

I am giving my friend virtual 10 pounds in exchange for them paying for dinner. Other friend is giving me virtual 20 pounds in exchange for me paying for the boat ride. Now that’s fine for a group of a few people on holiday but imagine hypothetically, if the whole world were to run on a similar spreadsheet, where instead of money ever exchanging hands like physically it would just be a line item in the spreadsheet. Now imagine a world in which everyone trusted the spreadsheet and everyone was being honest and good and nice and friendly, and only adding legitimate things to the spreadsheet that everyone agreed on.

That’s basically what Bitcoin is. It’s this giant spreadsheet that keeps track of absolutely every single transaction that’s ever happened regarding Bitcoin since the start of Bitcoin. And so that means that this spreadsheet has a record of everyone in the world who has ever bought and sold Bitcoin and it tells you how much Bitcoin they’ve bought and sold, so you can work out how much Bitcoin each person has in their account. Now let’s say I have two Bitcoins in my account which is quite a lot of money these days. And I were to give one Bitcoin a friend we could add to this spreadsheet.

Ali gives one Bitcoin to Jake. And because it’s all in one spreadsheet the spreadsheet knows that my Bitcoin account has now one Bitcoin and Jake’s Bitcoin account now has one Bitcoin in it as well.Now, fundamentally, this is all Bitcoin really is. It’s just a giant spreadsheet but it’s got some other fancy features that make it really really clever, and that make it a potential candidate for the currency of the future.

See, the problem with our ledger system is that if it’s on a spreadsheet usually it’s one person who’s maintaining the spreadsheet. So let’s say I’m on holiday with friends and everyone trusts me to do this, to be the spreadsheet guy because I’m a massive nerd. And therefore, anytime they want to post a transaction they would say, Hey, Ali, Catherine has given Lucia 10 pounds and therefore I will add it to the spreadsheet.

This is fine because my friends trust me and I’m a massive nerd, but we don’t want a entire system of financial stuff based on this centralized model because that’s kind of what we have already. Like every bank financial institution, government in the world is some sort of centralized authority that handles money. And so the us dollar is tied to the federal reserve and the U S government, the UK pound is tied to the bank of England and then it’s all somewhat related to like the international monetary fund.

And then like the government has something to do with it. But essentially it’s a small group of actors like governments and banks that manage the financial system for basically every country in the world. And so the third part of our definition of a cryptocurrency is that it needs to be decentralized and the way that Bitcoin and all these other cryptocurrencies work is that there is no central person in charge of them. There is no one person or one company saying, Hey, i have got the master spreadsheet. Instead, what happens is that every single person in the world can have a copy of that master spreadsheet if they want. And so with Bitcoin, for example, there are millions of people around the world on their computers who each have a copy of the master spreadsheet. And each of those computers are running software that’s constantly checking to make sure that master spreadsheet is legit. And it’s the same as every other copy of the master spreadsheet on the network. And that means that if you wanna hack a Bitcoin it’s quite hard to do because there’s like millions of people all around the world who are helping to maintain it.

And it means that if you want to unduly influence stuff like if you’re a bank or a governmentor some other evil person, it’s quite hard to do because again, it’s decentralized. It means that it’s being maintained and managed by millions of people all around the world, from their computers. And now we get to the final part of our definition which is that this whole system is built and secured using cryptography. So cryptography is a branch of maths and computer science that’s associated whether with like code making and code breaking and cryptography is how all of our communications are encrypted.

So for example, when you send a WhatsApp message there is no way that WhatsApp or Facebook can read the message because it’s encrypted by cryptography on either end. And so only the sender and the recipient can see what the message is no one in the middle can see what the messages is, it’s become encrypted, it’s just like a bunch of numbers that no one can interpret. And the really clever thing about Bitcoin and these other cryptocurrencies is that they use cryptography to solve the problem of trust and to solve the problem of centralization.

Leave a Reply

Your email address will not be published.

This site uses cookies to offer you a better browsing experience. By browsing this website, you agree to our use of cookies.