Here is your weekly dose of financial wisdom. This edition is dedicated to blockchain and cryptocurrency: the what, why and wow.
Before we talk about cryptocurrency, we need to discuss blockchain.
Blockchain is a database shared across a network of computers where information is continuously added and secured. To visualize this, click here.
No central authority: instead of one place storing all data, everyone in the network of computers owns the information collectively.
High transparency as every transaction is recorded permanently on the blockchain and is open for everyone in the network to see. The identity of the transaction remains unknown.
No transaction cost since passing information from X to Y on the Blockchain does not require paying a third party.
Fraud is next to impossible since transactions are encrypted and tracked in a decentralized manner. Stealing candy in a small closet (a bank) is much easier than in a room full of people staring at you (blockchain).
Cuts out the middleman by allowing things (music, money, books, etc..) to be passed along from person X to person Y with no transaction cost.
Protects intellectual property through ‘smart contracts” which automatically execute upon certain conditions.
Enables efficient financial instrument trading by removing the need for clearing houses, auditors and custodians.
Blockchain is to cryptocurrency what the Internet is to e-mail.
Cryptocurrency is a medium of exchange (like ordinary money) that exists in the digital world and uses encryption that ensures the security of transactions.
Cryptocurrencies are either built on top of a pre-existing blockchain, or they are their own blockchain, like Bitcoin which was the first established cryptocurrency.
Bitcoin and other cryptocurrencies have a limited supply of coins unlike traditional cash which can be printed at the whim of central banks.
Thousands of cryptocurrencies exist today, each trying to improve on the other and implement new features.
If blockchain is the Internet, then Bitcoin is Paypal.
If blockchain is the Internet, then Ethereum is HTML.
If blockchain is the Internet, then Monero is a VPN.
The difficulty for all is to scale to world-wide usage. The main obstacle is high switching costs as people are used to the current system.
Cryptocurrencies are meant to be used, like ordinary currencies, and an increasing number of people do.
However, many just buy them as speculative bets which explains why prices fluctuate so much. The resulting high volatility in crypto prices is also an obstacle to scalability as it undermines a central function of money which is to store value.
Others, like me, invest.
When it comes to investing, I have fixed myself the following rule: never tell someone what to invest in, only say what you have in your portfolio.
I hold 10% of my personal portfolio in Bitcoin and I’m up 233% on this position.
To new ways,