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E13 Introduction to Cryptocurrency
Episode Notes
This is a discussion and introduction to cryptocurrency and explains why it is becoming more important as time goes on.
Transcript:
Welcome to conversations with Kerry: a series of audio interactions with people and things in my world that I find interesting. If you have any comments, queries, questions, or feedback, you can find me as @khoath on Twitter, or email me, [email protected]. Thanks for listening, and I hope you enjoy the podcast.
Hello everybody, and welcome to this podcast, which is a podcast where I’m sitting at my desk with a cup of coffee, so I’ll edit out most of the coffee noises. However, I’m going to chat about an interesting topic. What topic is that, you are wondering, as I begin this podcast. Let me demystify you.
Kerry to Alexa: How much is a Bitcoin worth?
Alexa: One Bitcoin is about 38,600 Australian dollars.
Kerry to Alexa: How much is an Ethereum worth?
Alexa: One Ethereum is about 947 Australian dollars.
What is a Bitcoin? What is an Ethereum? What is cryptocurrency? If there is interest, I will do a series of podcasts on all of these topics, but I’m going to start off today with an introduction on cryptocurrency.
What is cryptocurrency? Back in the late 90’s (I believe it was 1998-1999) a programmer by the name of Satoshi Nakamoto began posting on a mailing list that I was a member of, by the name of Cipher Punks. And he was proposing the design for an electronic cash system: An electronic currency that would hold and store value, and allow anyone in the world with the correct equipment to mine, (which I’ll get to in a moment), store, spend, and transact in an electronic cryptocurrency. And he designed this system over a number of years, and I’m not going to be specific about when it was designed, because that’s what Wikipedia is for. Before I go on, I would like to disclaim that no information in this podcast should be considered investment advice, and you are expected to do due diligence when investigating any claims that may or may not be made in this podcast. And past performance isn’t a reliable indicator of future performance. More about that in a moment.
So Bitcoin was invented. There were some people who did some transactions with it. I believe Hal Finney ordered a pizza, which cost quite a number of Bitcoins. Now one of the problems with Bitcoin is that it’s volatility of value is extreme. That is to say that the price of Bitcoin fluctuates wildly with supply and demand, and we’ll get to that a little later as well.
But what is a cryptocurrency?
A cryptocurrency is a, an electronic, cryptographically secure, hopefully tamper-proof, method of storing perceived value. Why do I say perceived value? Well, one of the big questions that people often ask when they hear about Bitcoin, (because Bitcoin is in the news at the moment, given its price and its value, at the moment at least), is, “Is Bitcoin worth anything?”
Technically no. It’s the answer to some quite complicated mathematical problems that I won’t get into here, run through a difficulty algorithm, and computed with a lot of computing power, and time.
Now, when you hear about cryptocurrency, you’ll hear the term Blockchain mentioned. What is a blockchain? A blockchain is a special form of database designed for cryptographically storing various data that is applicable to financial transactions. And the reason I’m so general about this is because there are a number of blockchains. Bitcoin’s blockchain is probably the biggest and most well-known. Ethereum’s blockchain is the second biggest.
Now, once Bitcoin came out and once the proof of concept was run, and over the years as things have been ironed out of the network, people realized that Bitcoin was going to be successful, and it was going to hold value to a point. Now when I looked at Bitcoin in 2009, the coins were about $4.16 US a coin. In 2012, they were worth about 33 dollars a coin. In fact, I’ll get to mining in a moment. The value of Bitcoin has fluctuated wildly. Now with Bitcoin up around the 29,000 dollar US mark, possibly headed for 30,000 dollars, people are wondering where is the actual ceiling in the value of Bitcoin. In fact, there are some investors that are saying that if Bitcoin’s value continues to increase, it stands a chance of replacing the world’s wealth store, and will become more valuable than gold.
Now, basically the way cryptocurrencies work is that you solve a whole lot of series of mathematical problems. And in most cryptocurrencies (not all), you solve some complicated problems with a difficulty factor, (some very difficult cryptographic problems), and you mine a new block for the blockchain. And as a reward for mining that block, you are given a reward of currency. So the initial rewards for mining a block of Bitcoins used to be 55 Bitcoins. It then dropped down to 24 and a half Bitcoins. It is now down to 12 and a half Bitcoins. There is an artificial ceiling on the maximum number of Bitcoins that can be mined. You can only mine 21 million Bitcoins, and that should be mined by about 2023, 2024.
The difficulty algorithm is responsible for controlling how fast blocks are mined. And the network is actually configured so that blocks are mined in such a way that they are mined at a specific rate. And the difficulty rate is adjusted over time periods to take into consideration the developments and improvements in computer hardware and software.
When I mined Bitcoins in 2012, much to the initial annoyance of my wife at the time, (with an NVIDIA graphics card), I was able to mine 36 Bitcoins. Because the difficulty was quite low, and you didn’t require a lot of computing power to actually mine coins. Well, the idea that people could get free money by mining Bitcoins was quite popular, and Bitcoins popularity surged. Merchants started accepting Bitcoin. Shops started accepting Bitcoin. There were actual Bitcoin ATM’s for a while. They may come back, given its popularity. And as Bitcoin has gone through various hype cycles and various investment cycles, it’s interesting to note that the actual value of the coin has fluctuated quite spectacularly. When I sold off my 36 Bitcoins at 33 dollars a coin, and made approximately 1,060 dollars on Bitcoin I made. My wife ate humble pie, and apologized, and said that my 140-dollar investment in a video card that paid back 1,060 dollars in Bitcoin was in fact a worthwhile investment, and hats off to me for doing something that made us some money when things were a bit tight at the time.
So I did some mining in 2012, and then I put the whole thing on the back burner because my graphics card wasn’t that powerful, and it was beginning to be a little bit slow as the difficulty increased, and I decided to leave mining for a while. But in 2016-2017, I noticed that the Bitcoin price was climbing quite high. It was 4,000 dollars, 5,000 dollars, 8,000 dollars, 10,000 dollars, topping out, I believe at about 17,000 US dollars at the Bitcoin boom at the end of, I think it was 2018, 2017, 2017. I invested money in a whole pile of graphics cards. I bought about three or four of them, some quite powerful ones, some 4-Gig graphics cards, some 2-Gig graphics cards. I set up with some mining pools, and I mined Bitcoin. And when I was mining Bitcoin, with all of the rigs running, and all of the power being chewed, (and Bitcoin mining uses a lot of power), so they say that Bitcoin mining uses as much energy as the country of Ireland. I was making .001 Bitcoins a day, approximately, and that was equating to about 22 dollars Australian.
So I was making 22 dollars Australian per day, for every day that I mined. I was not the only one that considered the profit in coin mining. And as more people learned that there was money in mining cryptocurrency, more people mined, more people bought specific hardware, more people built mining rigs. There were even custom designed chips called ASIX, specifically designed to mine various cryptocurrencies.
And the top two cryptocurrencies, as previously mentioned, are Bitcoin and Ethereum. And the interesting thing about Ethereum is that it has not only financial transactions on its blockchain, but it has executable code, which is called Smart Contracts. And you can write conditions into this executable code to make it behave in a certain way. And the reason this has been done is to support various financial systems, such as mortgages, loans, interest, borrowing, and lending.
And in fact there are two tokens that seem to be reasonably popular at the moment. (The cryptocurrency field changes all the time.) Compound, and maker/DAI, which are used for lending cryptocurrency, and earning interest. Now, the goal of cryptocurrency is to be able to move currency across borders, to be able to allow anyone in the world to hold on to wealth and value. And this is especially important in places like Nigeria, where inflation runs rampant. And also to allow people to transact in these currencies.
Now, the acceptance of Bitcoin has been reasonably slow. But when the price spiked to 17,000 dollars US at the end of 2017, (which we call a Bitcoin bubble), a lot of financial institutes and software companies started taking cryptocurrency seriously. This led to the mistaken belief that you could put anything on a blockchain. A blockchain is a specific type of database that we don’t need to get into here. But sufficed to say that a blockchain has blocks of data that are cryptographically related to the blocks that proceed them, and you have to solve problems to actually put another block into the blockchain.
There are a few hundred cryptocurrencies. Some of them like Bitcoin are worth, you know, 30,000 dollars a coin. Or in Ethereum’s case about 740 US dollars, 741 US dollars a coin. Other coins like Stellar Lumens are worth about 13 US cents. And you can go to various sites to look up prices of these coins: gecko.com, various sites, there’s even a Discord telegraph bot called tip.cc, that will allow you to look at the prices of these various cryptocurrencies. And the trick is to find the exchange that supports the cryptocurrency you’ve got, or to go to a site like changelly.org, and change your cryptocurrency from one type to another.
Now, when you transact in cryptocurrency, there are fees. And depending on the volume of transactions on the blockchain networks, the fees fluctuate to regulate the amount of transactions that are being sent. So in fact when Bitcoin’s chain was very very active a number of years ago, the fees were actually quite high. And Ethereum has a fee called Gas, that is the amount it takes to put transactions on the blockchain. And in fact the higher the fee per transaction, the more likely your transaction will be mined into the next block on the blockchain.
And the interesting thing is that, as well as the cryptocurrency rewards on most blockchains, (not all of them, because not all blockchains use mining in the same way.) You can also get the mining fees on top of the reward for a particular block. So all of the fees in a block add up, and they go to the person that mines a block. Now because mining a block has become incredibly difficult, there are now what is known as mining pools. And that’s where a whole lot of people get together with their computers, their graphics cards, their custom ASIX chips, they mine these cryptocurrency. The mining pool mines the block, and then splits the reward from that block, using various systems between all of the miners. And that is how the miners make money to theoretically pay for their equipment, or at least pay for the electricity that is being used.
Now with Bitcoin so high, mining is big bickies. There are whole farms of computer equipment that are dedicated to purely mining Bitcoin. And there are mining setups with solar panels, to collect sunlight and to harness energy to generate power because this mining is so intense.
Now other cryptocurrencies are working on a lower environmental footprint, so that they can have less of an impact on the environment. But it appears that Bitcoin is here to stay, and Ethereum is here to stay, and perhaps compound, and Maker/DAI, and other coins are also here to stay. There have been cryptocurrencies that have failed, and their chains have been abandoned because they weren’t popular. But other cryptocurrencies stick around, and are still considered valuable, and can still be exchanged.
Should you invest in cryptocurrency?
Well, that’s a very difficult question to answer. I sold off most of my cryptocurrency at the end of 2017, and didn’t hold some cryptocurrency for quite a while. But as the price has increased, and the cryptocurrency has become more valuable, it’s become a very popular investment target for a lot of people. And I think the advice I would give to people is, the value of any currency, (but especially cryptocurrency) is extremely volatile. It is theoretically possible for Bitcoin to be worth 29,000 US dollars a coin today, and be worth 100 dollars tomorrow, if there was some horrendous market event that caused that to happen. The odds are that the value isn’t going to crash that quickly in the short-term, but any prediction that is made on these algorithms is exactly that. It’s a prediction. It’s the best guess of a whole lot of analysts. It’s the best guess of particular market forces that are at play at the time, and it’s the best guess of people trying to figure out where the market is going to go next, and how the market is going to move. Many news outlets are reporting that Bitcoin could reach 50,000 US dollars per coin.
Now one of the questions you often get from people is “Well I don’t have 50,000 dollars. How could I even think about investing in Bitcoin?” Or, “I don’t have 700 dollars. How could I invest in Ethereum?” Two answers to the question. You could invest in a cheaper cryptocurrency, such as Litecoin, or stellar lumens, or any of the other cheaper currencies. Or you can actually buy fractions of a coin. The smallest currency unit of Bitcoin is a Satoshi, which I believe is .000000001 (point eight zeros and a one) of a Bitcoin. And you can trade in values like milliBitcoins, and things like that to get smaller amounts, and invest as much as you see fit. In fact if you play with a site such as Coinbase, you can decide whether you’re going to regularly buy Bitcoin to get around the fluctuation of the prices. So maybe you’ll buy, you know, 20 dollars’ worth of Bitcoin every week, and build your portfolio that way.
Should you store all of your Bitcoins on an exchange?
The answer is sadly no. Whilst storing your Bitcoins on an exchange for short-term storage is sensible if you’re going to invest and trade the currencies, long-term storage is a much more complicated proposition. And there are many methods and ways of storing the information that is required to store your Bitcoins: essentially the private keys that are attached to your Bitcoins. Now the problem is that storing Bitcoins is quite difficult. There have been cases of huge amounts of wealth stolen in cryptocurrencies. Bugs on the Ethereum chain have resulted in thousands of Ether being stolen. Hacking of exchanges and computers has resulted in hundreds and thousands of Bitcoins being stolen. In fact, Mt. Gox essentially went bankrupt a number of years ago, and many users lost their funds.
Now, if I was storing Bitcoin, (and this is just my personal advice), I would look at using something like a Warp Wallet, and storing the coin in a brain wallet, where you have some way of storing away your pass phrase so that you can retrieve those coins at a later date. It’s always best to store your coins safely offline. In fact, be your own bank registered, according to blockchain.info, as you are trusting somebody else’s JavaScript, and somebody else’s coding if you are using web wallets. If you’re using a wallet on your mobile device, you need to make sure you back up the seed phrase if your wallet has one, and put it somewhere safe that nobody’s going to find it. Otherwise they have your Bitcoins. If you’re running a wallet on your PC, you need to safely back up and safely store your wallet.
Now, backing up a brain wallet is easier because you only need a pass phrase, and hopefully cryptic notes that nobody else will work out to say what your Bitcoins are. People have lost many, many, many Bitcoins over the years, and many many Ethereum over the years. Bad storage for cryptocurrency has resulted in people losing thousands of dollars’ worth of perceived value. There have actually been people who wanted to dig up rubbish dumps to retrieve hard drives, because the hard drive contains more value than the contents of the rubbish dump. I have no idea whether this person did in fact manage to convince the council to dig up the rubbish dump to retrieve his hard drive or not. Other people have had their coins stolen, malicious trojans, malicious programs to steal cryptocurrency. There are malware strains that actually use your CPU/GPU for mining coins for somebody else, so basically burning all of your spare computer time for somebody else’s profit. There are JavaScript attacks and various other attacks for stealing these private keys that have acquired an incredible amount of value. So, if anybody is interested in a podcast on how to safely store and hold cryptocurrency, I’d be happy to do one.
Has this introduction been useful? Has it been a bit all over the place? What are your comments? Click on the feedback link and tell me what you think, or get a hold of me. Khoath on Twitter, or [email protected] via email. Tell me what you thought of the podcast. What else would you like me to talk about? What else would you like to know about cryptocurrency, if anything?
I’ve been messing with cryptocurrency now for, I’d say around eight years, and I do not know it all. I’ll be the first one to say so. I have had a fair bit of experience, and I’ve done a fair bit of research on how cryptocurrency works, what it does, and how it’s likely to behave. If you’re getting started on cryptocurrency, do so at your own risk. But you may want to look at sites such as www.coinbase.com
Now for Australian users, you can’t sell using coinbase, so you might have to use Coin Jar. Also keep in mind that the tax departments of various countries would now like to know how much crypto you hold, because crypto is becoming so valuable.
And in fact the Australian tax office would like you to declare your Bitcoin earnings on your tax return. Spoiler ATO: I think a lot of people aren’t going to tell you. Now the problem with Bitcoin though is that the ATO can actually go through the blockchain because it is a public record, and extract a whole lot of transaction information, and potentially (if they want to spend the money) figure out how much Bitcoin you’ve got, and how much it’s worth. So be aware of your local currency laws. Only use computing power and electricity and resources that are yours. And consider whether dabbling in/investing in cryptocurrency is a sensible decision for you.
Everybody loves free money, but in my experience, money is never free. You either have to invest effort or time, or a combination of both, and this is absolutely true for cryptocurrency as well. These will be hours of research that I will never get back. So seriously consider if Bitcoin is for you, or if Ethereum is for you, or any of the other cryptocurrencies are for you. Consider whether this is an effective investment, as opposed to shares or bank bonds or whatever. Figure out how you’re going to store this wealth, (if you’re going to store it), and consider whether this is a sensible investment move for you.
I hope this has served as a good introduction to cryptocurrency. Please comment, send me feedback, tell me what you think. Is there anything else you’d specifically like me to talk about on future podcasts if I do more on cryptocurrency?
No, I do not have the secret to the Bitcoin or the Ethereum mining algorithms to be able to allow you to mint thousands of coins. Otherwise I would be living on some amazing tropical island with some nubile women to handle all of my needs and desires in a perfect world. But I do hope this has been informational, and thanks for listening, and I hope you’ll tune in for future episodes.
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By Kerry HoathEpisode Notes
This is a discussion and introduction to cryptocurrency and explains why it is becoming more important as time goes on.
Transcript:
Welcome to conversations with Kerry: a series of audio interactions with people and things in my world that I find interesting. If you have any comments, queries, questions, or feedback, you can find me as @khoath on Twitter, or email me, [email protected]. Thanks for listening, and I hope you enjoy the podcast.
Hello everybody, and welcome to this podcast, which is a podcast where I’m sitting at my desk with a cup of coffee, so I’ll edit out most of the coffee noises. However, I’m going to chat about an interesting topic. What topic is that, you are wondering, as I begin this podcast. Let me demystify you.
Kerry to Alexa: How much is a Bitcoin worth?
Alexa: One Bitcoin is about 38,600 Australian dollars.
Kerry to Alexa: How much is an Ethereum worth?
Alexa: One Ethereum is about 947 Australian dollars.
What is a Bitcoin? What is an Ethereum? What is cryptocurrency? If there is interest, I will do a series of podcasts on all of these topics, but I’m going to start off today with an introduction on cryptocurrency.
What is cryptocurrency? Back in the late 90’s (I believe it was 1998-1999) a programmer by the name of Satoshi Nakamoto began posting on a mailing list that I was a member of, by the name of Cipher Punks. And he was proposing the design for an electronic cash system: An electronic currency that would hold and store value, and allow anyone in the world with the correct equipment to mine, (which I’ll get to in a moment), store, spend, and transact in an electronic cryptocurrency. And he designed this system over a number of years, and I’m not going to be specific about when it was designed, because that’s what Wikipedia is for. Before I go on, I would like to disclaim that no information in this podcast should be considered investment advice, and you are expected to do due diligence when investigating any claims that may or may not be made in this podcast. And past performance isn’t a reliable indicator of future performance. More about that in a moment.
So Bitcoin was invented. There were some people who did some transactions with it. I believe Hal Finney ordered a pizza, which cost quite a number of Bitcoins. Now one of the problems with Bitcoin is that it’s volatility of value is extreme. That is to say that the price of Bitcoin fluctuates wildly with supply and demand, and we’ll get to that a little later as well.
But what is a cryptocurrency?
A cryptocurrency is a, an electronic, cryptographically secure, hopefully tamper-proof, method of storing perceived value. Why do I say perceived value? Well, one of the big questions that people often ask when they hear about Bitcoin, (because Bitcoin is in the news at the moment, given its price and its value, at the moment at least), is, “Is Bitcoin worth anything?”
Technically no. It’s the answer to some quite complicated mathematical problems that I won’t get into here, run through a difficulty algorithm, and computed with a lot of computing power, and time.
Now, when you hear about cryptocurrency, you’ll hear the term Blockchain mentioned. What is a blockchain? A blockchain is a special form of database designed for cryptographically storing various data that is applicable to financial transactions. And the reason I’m so general about this is because there are a number of blockchains. Bitcoin’s blockchain is probably the biggest and most well-known. Ethereum’s blockchain is the second biggest.
Now, once Bitcoin came out and once the proof of concept was run, and over the years as things have been ironed out of the network, people realized that Bitcoin was going to be successful, and it was going to hold value to a point. Now when I looked at Bitcoin in 2009, the coins were about $4.16 US a coin. In 2012, they were worth about 33 dollars a coin. In fact, I’ll get to mining in a moment. The value of Bitcoin has fluctuated wildly. Now with Bitcoin up around the 29,000 dollar US mark, possibly headed for 30,000 dollars, people are wondering where is the actual ceiling in the value of Bitcoin. In fact, there are some investors that are saying that if Bitcoin’s value continues to increase, it stands a chance of replacing the world’s wealth store, and will become more valuable than gold.
Now, basically the way cryptocurrencies work is that you solve a whole lot of series of mathematical problems. And in most cryptocurrencies (not all), you solve some complicated problems with a difficulty factor, (some very difficult cryptographic problems), and you mine a new block for the blockchain. And as a reward for mining that block, you are given a reward of currency. So the initial rewards for mining a block of Bitcoins used to be 55 Bitcoins. It then dropped down to 24 and a half Bitcoins. It is now down to 12 and a half Bitcoins. There is an artificial ceiling on the maximum number of Bitcoins that can be mined. You can only mine 21 million Bitcoins, and that should be mined by about 2023, 2024.
The difficulty algorithm is responsible for controlling how fast blocks are mined. And the network is actually configured so that blocks are mined in such a way that they are mined at a specific rate. And the difficulty rate is adjusted over time periods to take into consideration the developments and improvements in computer hardware and software.
When I mined Bitcoins in 2012, much to the initial annoyance of my wife at the time, (with an NVIDIA graphics card), I was able to mine 36 Bitcoins. Because the difficulty was quite low, and you didn’t require a lot of computing power to actually mine coins. Well, the idea that people could get free money by mining Bitcoins was quite popular, and Bitcoins popularity surged. Merchants started accepting Bitcoin. Shops started accepting Bitcoin. There were actual Bitcoin ATM’s for a while. They may come back, given its popularity. And as Bitcoin has gone through various hype cycles and various investment cycles, it’s interesting to note that the actual value of the coin has fluctuated quite spectacularly. When I sold off my 36 Bitcoins at 33 dollars a coin, and made approximately 1,060 dollars on Bitcoin I made. My wife ate humble pie, and apologized, and said that my 140-dollar investment in a video card that paid back 1,060 dollars in Bitcoin was in fact a worthwhile investment, and hats off to me for doing something that made us some money when things were a bit tight at the time.
So I did some mining in 2012, and then I put the whole thing on the back burner because my graphics card wasn’t that powerful, and it was beginning to be a little bit slow as the difficulty increased, and I decided to leave mining for a while. But in 2016-2017, I noticed that the Bitcoin price was climbing quite high. It was 4,000 dollars, 5,000 dollars, 8,000 dollars, 10,000 dollars, topping out, I believe at about 17,000 US dollars at the Bitcoin boom at the end of, I think it was 2018, 2017, 2017. I invested money in a whole pile of graphics cards. I bought about three or four of them, some quite powerful ones, some 4-Gig graphics cards, some 2-Gig graphics cards. I set up with some mining pools, and I mined Bitcoin. And when I was mining Bitcoin, with all of the rigs running, and all of the power being chewed, (and Bitcoin mining uses a lot of power), so they say that Bitcoin mining uses as much energy as the country of Ireland. I was making .001 Bitcoins a day, approximately, and that was equating to about 22 dollars Australian.
So I was making 22 dollars Australian per day, for every day that I mined. I was not the only one that considered the profit in coin mining. And as more people learned that there was money in mining cryptocurrency, more people mined, more people bought specific hardware, more people built mining rigs. There were even custom designed chips called ASIX, specifically designed to mine various cryptocurrencies.
And the top two cryptocurrencies, as previously mentioned, are Bitcoin and Ethereum. And the interesting thing about Ethereum is that it has not only financial transactions on its blockchain, but it has executable code, which is called Smart Contracts. And you can write conditions into this executable code to make it behave in a certain way. And the reason this has been done is to support various financial systems, such as mortgages, loans, interest, borrowing, and lending.
And in fact there are two tokens that seem to be reasonably popular at the moment. (The cryptocurrency field changes all the time.) Compound, and maker/DAI, which are used for lending cryptocurrency, and earning interest. Now, the goal of cryptocurrency is to be able to move currency across borders, to be able to allow anyone in the world to hold on to wealth and value. And this is especially important in places like Nigeria, where inflation runs rampant. And also to allow people to transact in these currencies.
Now, the acceptance of Bitcoin has been reasonably slow. But when the price spiked to 17,000 dollars US at the end of 2017, (which we call a Bitcoin bubble), a lot of financial institutes and software companies started taking cryptocurrency seriously. This led to the mistaken belief that you could put anything on a blockchain. A blockchain is a specific type of database that we don’t need to get into here. But sufficed to say that a blockchain has blocks of data that are cryptographically related to the blocks that proceed them, and you have to solve problems to actually put another block into the blockchain.
There are a few hundred cryptocurrencies. Some of them like Bitcoin are worth, you know, 30,000 dollars a coin. Or in Ethereum’s case about 740 US dollars, 741 US dollars a coin. Other coins like Stellar Lumens are worth about 13 US cents. And you can go to various sites to look up prices of these coins: gecko.com, various sites, there’s even a Discord telegraph bot called tip.cc, that will allow you to look at the prices of these various cryptocurrencies. And the trick is to find the exchange that supports the cryptocurrency you’ve got, or to go to a site like changelly.org, and change your cryptocurrency from one type to another.
Now, when you transact in cryptocurrency, there are fees. And depending on the volume of transactions on the blockchain networks, the fees fluctuate to regulate the amount of transactions that are being sent. So in fact when Bitcoin’s chain was very very active a number of years ago, the fees were actually quite high. And Ethereum has a fee called Gas, that is the amount it takes to put transactions on the blockchain. And in fact the higher the fee per transaction, the more likely your transaction will be mined into the next block on the blockchain.
And the interesting thing is that, as well as the cryptocurrency rewards on most blockchains, (not all of them, because not all blockchains use mining in the same way.) You can also get the mining fees on top of the reward for a particular block. So all of the fees in a block add up, and they go to the person that mines a block. Now because mining a block has become incredibly difficult, there are now what is known as mining pools. And that’s where a whole lot of people get together with their computers, their graphics cards, their custom ASIX chips, they mine these cryptocurrency. The mining pool mines the block, and then splits the reward from that block, using various systems between all of the miners. And that is how the miners make money to theoretically pay for their equipment, or at least pay for the electricity that is being used.
Now with Bitcoin so high, mining is big bickies. There are whole farms of computer equipment that are dedicated to purely mining Bitcoin. And there are mining setups with solar panels, to collect sunlight and to harness energy to generate power because this mining is so intense.
Now other cryptocurrencies are working on a lower environmental footprint, so that they can have less of an impact on the environment. But it appears that Bitcoin is here to stay, and Ethereum is here to stay, and perhaps compound, and Maker/DAI, and other coins are also here to stay. There have been cryptocurrencies that have failed, and their chains have been abandoned because they weren’t popular. But other cryptocurrencies stick around, and are still considered valuable, and can still be exchanged.
Should you invest in cryptocurrency?
Well, that’s a very difficult question to answer. I sold off most of my cryptocurrency at the end of 2017, and didn’t hold some cryptocurrency for quite a while. But as the price has increased, and the cryptocurrency has become more valuable, it’s become a very popular investment target for a lot of people. And I think the advice I would give to people is, the value of any currency, (but especially cryptocurrency) is extremely volatile. It is theoretically possible for Bitcoin to be worth 29,000 US dollars a coin today, and be worth 100 dollars tomorrow, if there was some horrendous market event that caused that to happen. The odds are that the value isn’t going to crash that quickly in the short-term, but any prediction that is made on these algorithms is exactly that. It’s a prediction. It’s the best guess of a whole lot of analysts. It’s the best guess of particular market forces that are at play at the time, and it’s the best guess of people trying to figure out where the market is going to go next, and how the market is going to move. Many news outlets are reporting that Bitcoin could reach 50,000 US dollars per coin.
Now one of the questions you often get from people is “Well I don’t have 50,000 dollars. How could I even think about investing in Bitcoin?” Or, “I don’t have 700 dollars. How could I invest in Ethereum?” Two answers to the question. You could invest in a cheaper cryptocurrency, such as Litecoin, or stellar lumens, or any of the other cheaper currencies. Or you can actually buy fractions of a coin. The smallest currency unit of Bitcoin is a Satoshi, which I believe is .000000001 (point eight zeros and a one) of a Bitcoin. And you can trade in values like milliBitcoins, and things like that to get smaller amounts, and invest as much as you see fit. In fact if you play with a site such as Coinbase, you can decide whether you’re going to regularly buy Bitcoin to get around the fluctuation of the prices. So maybe you’ll buy, you know, 20 dollars’ worth of Bitcoin every week, and build your portfolio that way.
Should you store all of your Bitcoins on an exchange?
The answer is sadly no. Whilst storing your Bitcoins on an exchange for short-term storage is sensible if you’re going to invest and trade the currencies, long-term storage is a much more complicated proposition. And there are many methods and ways of storing the information that is required to store your Bitcoins: essentially the private keys that are attached to your Bitcoins. Now the problem is that storing Bitcoins is quite difficult. There have been cases of huge amounts of wealth stolen in cryptocurrencies. Bugs on the Ethereum chain have resulted in thousands of Ether being stolen. Hacking of exchanges and computers has resulted in hundreds and thousands of Bitcoins being stolen. In fact, Mt. Gox essentially went bankrupt a number of years ago, and many users lost their funds.
Now, if I was storing Bitcoin, (and this is just my personal advice), I would look at using something like a Warp Wallet, and storing the coin in a brain wallet, where you have some way of storing away your pass phrase so that you can retrieve those coins at a later date. It’s always best to store your coins safely offline. In fact, be your own bank registered, according to blockchain.info, as you are trusting somebody else’s JavaScript, and somebody else’s coding if you are using web wallets. If you’re using a wallet on your mobile device, you need to make sure you back up the seed phrase if your wallet has one, and put it somewhere safe that nobody’s going to find it. Otherwise they have your Bitcoins. If you’re running a wallet on your PC, you need to safely back up and safely store your wallet.
Now, backing up a brain wallet is easier because you only need a pass phrase, and hopefully cryptic notes that nobody else will work out to say what your Bitcoins are. People have lost many, many, many Bitcoins over the years, and many many Ethereum over the years. Bad storage for cryptocurrency has resulted in people losing thousands of dollars’ worth of perceived value. There have actually been people who wanted to dig up rubbish dumps to retrieve hard drives, because the hard drive contains more value than the contents of the rubbish dump. I have no idea whether this person did in fact manage to convince the council to dig up the rubbish dump to retrieve his hard drive or not. Other people have had their coins stolen, malicious trojans, malicious programs to steal cryptocurrency. There are malware strains that actually use your CPU/GPU for mining coins for somebody else, so basically burning all of your spare computer time for somebody else’s profit. There are JavaScript attacks and various other attacks for stealing these private keys that have acquired an incredible amount of value. So, if anybody is interested in a podcast on how to safely store and hold cryptocurrency, I’d be happy to do one.
Has this introduction been useful? Has it been a bit all over the place? What are your comments? Click on the feedback link and tell me what you think, or get a hold of me. Khoath on Twitter, or [email protected] via email. Tell me what you thought of the podcast. What else would you like me to talk about? What else would you like to know about cryptocurrency, if anything?
I’ve been messing with cryptocurrency now for, I’d say around eight years, and I do not know it all. I’ll be the first one to say so. I have had a fair bit of experience, and I’ve done a fair bit of research on how cryptocurrency works, what it does, and how it’s likely to behave. If you’re getting started on cryptocurrency, do so at your own risk. But you may want to look at sites such as www.coinbase.com
Now for Australian users, you can’t sell using coinbase, so you might have to use Coin Jar. Also keep in mind that the tax departments of various countries would now like to know how much crypto you hold, because crypto is becoming so valuable.
And in fact the Australian tax office would like you to declare your Bitcoin earnings on your tax return. Spoiler ATO: I think a lot of people aren’t going to tell you. Now the problem with Bitcoin though is that the ATO can actually go through the blockchain because it is a public record, and extract a whole lot of transaction information, and potentially (if they want to spend the money) figure out how much Bitcoin you’ve got, and how much it’s worth. So be aware of your local currency laws. Only use computing power and electricity and resources that are yours. And consider whether dabbling in/investing in cryptocurrency is a sensible decision for you.
Everybody loves free money, but in my experience, money is never free. You either have to invest effort or time, or a combination of both, and this is absolutely true for cryptocurrency as well. These will be hours of research that I will never get back. So seriously consider if Bitcoin is for you, or if Ethereum is for you, or any of the other cryptocurrencies are for you. Consider whether this is an effective investment, as opposed to shares or bank bonds or whatever. Figure out how you’re going to store this wealth, (if you’re going to store it), and consider whether this is a sensible investment move for you.
I hope this has served as a good introduction to cryptocurrency. Please comment, send me feedback, tell me what you think. Is there anything else you’d specifically like me to talk about on future podcasts if I do more on cryptocurrency?
No, I do not have the secret to the Bitcoin or the Ethereum mining algorithms to be able to allow you to mint thousands of coins. Otherwise I would be living on some amazing tropical island with some nubile women to handle all of my needs and desires in a perfect world. But I do hope this has been informational, and thanks for listening, and I hope you’ll tune in for future episodes.
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