Josh-D. S. Davis

Xaminmo / Omnimax / Max Omni / Mad Scientist / Midnight Shadow / Radiation Master

Cryptocurrency
Josh 201604 KWP
joshdavis

This is the Bitcoin write-up my BIL asked for. It's a bit wordy, but hopefully it has info useful to you.

 

First and foremost, Don't buy more than you are willing to lose outright.
Consider bitcoins to be the highest risk place to put money other than leaving gold coins on your front porch. This isn't just some "oh, usual disclaimer." This is a real warning. There is no protection in a crypto market. Zero. There is no such thing as insider trading. Theft of video-game money is not really theft at all.

 

Economy dynamics.
Value of anything comes from holding on to something when someone else wants it. The more you want to hold it, the more they have to pay to get it.

If no one wants something, then it has zero value. If only one person wants it, then it is only valuable to that person.

Currencies, real, fiat, and crypto, have value because people feel they represent something. In the past, it represented precious metals. Now, fiat currencies represent a share of the value of the country which issues them. Stocks are a share of the value of the company that issued them. Bonds are a share of the future debt payments of the company that issued them.

Usually, bonds track with the value of the payout, plus or minus a little based on the interest payments. Stocks track about 6x the value of the company. Currency exchange rates are a little more fuzzy, but similar to stocks, they track the relative value of the contributions of that country.

"Price" is just a way of quantifying an exchange rate. Deflation causes scarcity and economic collapse if unchecked. Basically, if you have 100 coins, and never more, but population and productivity grows, that means the value of goods would continually drop with relation to the value of money. You end up in a deflationary spiral, and people starve, economies collapse, etc. This is a risk for Bitcoin, because the currency is limited to 21m coins total. As more people try to get into crypto, it drives up the "price".

If GDP or equivalent falls, then the opposite happens, and rapid inflation happens, the exact opposite. You can see this in Zimbabwe, where wheelbarrows of dollars are used, and the million dollar banknote was issued years ago.

Also, you can decrease the value of your debts by inflation. Most promisory notes are say, 100 dollars, not "1% of your productivity". So, if you control the value of your currency, and the promisory notes are in that currency, you can just issue another 900 dollars. Suddenly, your debt is worth 10% of what it was before.

In the end, you want a slow inflation, steady, 2-4% per year, to ensure a stable economy.

 

What is Bitcoin?
Bitcoin is accepted for some real-world transactions. In the end though, it's still basically video-game money. People use it for money laundering and other sorts of illegal activities. Its value is based on the idea of privacy, or decentralization. All it would take to destroy it is for people to realize it has no value. There is on underlying premise where it has a real value of its own.

Bitcoin is the grand-daddy. It's 9 years old. It uses a blockchain to track transactions. The blockchain is literally that. Think of it as a database that is purely linear. You start at block zero, and go to block infinity. There are never random writes. Only appends. It's like a transaction log without a normal database on it.

The way it works is that every transaction is held by every other node in the network. After X number of megs, you pack it up and generate a cryptographic hash for that block, and issue it to the network. It's signed by your set of keys, so you get some credit for the computation. Your block gets passed around to everyone else, but so did a a bunch of competing blocks. Eventually, "the best block" is selected and added to the blockchain. Winners get payout, and some cryptos pay out to secondary, tertiary, etc. since they confirmed that transaction computed to the same as what everyone else thought. People who compute a different hash have their block thrown away. It's a majority rule type thing to ensure that no one person can insert a false transaction. The complexity of the hash increases with time (block number) so that new computers do not inflate the currency too fast.

Along with all of that, multiple people often issue the same block at the same time with slightly different transactions in it. This is called a fork. Basically the blockchain splits in two (or more). Forks are consolidated based on whomever has the most peers/votes. If your transaction was stuck on a fork, and did not propagate to all of the other forks, then if your fork is abandoned, your transaction rolls back. It's completely undone. This is why transactions require confirmations. If you accepted a transaction based on zero confirmations, you could keep reloading your wallet, sending the same coins over and over, getting your hamburger, and walking away, with the other party getting no payment once the forks consolidate. But, if you have 500 confirmations, you can be pretty sure that the whole network has accepted your transaction, even through there are tens of thousands of nodes online at any given time.

 

The wallet is just sets of keys.
The address is a hash of your public key. Every address has a set of keys to sign the messages you issue, proving you are you. The public key is usable by anyone, but the private key is only usable by you (hopefully). You can sign messages like with PGP, or you sign transaction on the coin network. "Yes, I promise I am giving away 0.00001 coin to address sdoyf3486t9f032h082h. Signed, w0ty982ty0t8yeiwf". The value of your wallet is just tallying up all of the transactions for your addresses.

 

What are altcoins?
Every other crypto uses some of the Bitcoin source code. Most of them are literally a fork of Bircoin. As discussed above, forks can happen naturally, like cancer, and usually are eradicated by the protocol as it merges transactions. Forks can also happen if the protocol changes. If not everyone accepts the new protocol, they cannot join that network. Or, if the merge protocol is broken. As time went on, there were forks of forks. Some forked at block zero on purpose, before being issued. Some forked at a live block due to political issues (BCH and ETC are both political forks). When forks happen later in the chain, everyone who had coins at the time of the fork has coins on both networks.  Some are great, and some are scams.

 

How secure is it?
It's not. The blockchains themselves could be secure, but from time to time, some defect happens, and everyone downloads a snapshot of the blockchain to merge the forks. You're taking on faith that this one source has not tampered with the blockchain. There is no SEC regulation, because it's not real currency. The IRS does consider it an asset, so you have to pay capital gains (or losses), so keep track of your purchases, earnings, mining, etc.

Also, many coins have foundation wallets. Basically, before the currency was issued, someone computed the first million hashes, and got the starting 10% of the possible coins. Someone holds that, and can spend it, for free. Some do good things, such as pay for developers to keep working on the source code, but there is no restriction (and no confiscating funds) if they decide to go all hedonistic about it. Of the 1800 coins out there, 90% of them are scams. Literally pump-and-dump schemes where a handful of people convince unknowning people to give up valuable currency for junk currency. It's the same as if you convinced people to give you Euros for Monopoly money.

Some people consider it a speculation market. We saw this last year, with a huge peak in December. If you look at the long-term value of each crypto currency, you can see how this happens from time to time. Often, it's one person manipulating the market, buying, making insider trades, etc, then cashing out. Some people ride the wave, and time the market, to make good money. Some people do not.

Then there are the "hacks". A major exchange accumulates a bunch of crypto, and once they run low on cash, they are "hacked". All of their coins are drained off. There is no insurance, so everyone is just SOL. (Mt. Gox is a major example.) Most people recommend keeping your coins in your own wallet, but if you lose that, your coins are also gone. If someone gets access to it, then they can steal all of your coins. Beyond that, Bitcoin's blockchain is already 150GB. Lightning and SegWit promise to help, but only going forward. You can also run a partial wallet, but then you are assuming all of the old blocks are true.

 

Fees, exchange rates, etc.
In the end, you'll find price tracks relative to Bitcoin. Bitcoin is THE currency, but it's long in the tooth, and takes too much CPU to continue. Eventually, all of the tech advances of the top coins will fold into a new altcoin, and the old coins will fall out of favor. Maybe it will be a fork like BCH (BCH is bitcoin 1.0, BTC is 2.0. 1.0 was supposed to die, but some people didn't jump over.)

Lastly, most ccards are treating it as cash, so if you buy starting this month, they many of them will put it at the highest interest rate, add transaction fees, etc. YMMV, but pulling from debit or from bank transfer may be the best option going forward. OR, you can trade services and stuff privately for crypto. There are forums that let you buy and sell crypto without going through your bank. Usually it involves meeting someone in person. There are also a few ATMs here and there which can do BTC transactions, but not a whole lot of them BTC to USD.

My thought is, if buying in, go for something you can actually purchase directly. BTC, ETH and LTC are all low-drama and directly accessible. Wait for the bottom to hit, and wait for the next bubble before selling out. But assume that the money you put in might completely evaporate while waiting. As with all investing, diversify. I have about $200 in crypto, including the electricity to fold proteins and get paid for it, plus a mutual fund with 5% bitcoin exposure. I would never want more than 5% of my holdings in crypto, and getting it in a mutual fund maybe is not as much gain, but also not as much risk. Also, so much easier to sell a mutual fund for cash (though harder to evade taxes, etc.)

 

So then, why do crypto at all?
Some people, it's just for fun. It's a videogame with points. Bitcoin has name recognition. Litecoin is basically all the things they should have done to Bitcoin. Etherium has contracts. Gridcoin has scientific research. IOTA has microtransactions for small electronics. Ripple has interbank trading support. Some people just believe in the value of holding the currency, and supporting the network. (Just HODL it!)  Whatever you do, research the history, vision, and mission of the currency.  Look into the community, developers, etc.  If you don't get the warm fuzzies, move along.

 

END OF LINE
So much ramble, and not as organized as I'd like. Hopefully there is some value in this braindump for you.
 

REF: http://omnitech.net/reference/2018/02/02/cryptocurrency/ This entry was originally posted at https://xaminmo.dreamwidth.org/1504093.html. Please comment there using OpenID.

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