Investing in bitcoin
When investing in bitcoin you will make mistakes. You need to experience the ups and downs & get to grips with volatility to become a good unemotional investor.
I am all for individuals gaining investor experience since nothing motivates you to learn the “rules” than by having actual “skin in the game”.
What concerns me is the size of the investments people are making! I hear of people taking money out of their bonds, investment portfolios etc to invest in cryptocurrency. This is very disturbing to hear, and it is very common now.
If you want to start investing, INVEST ONLY WHAT YOU CAN AFFORD TO LOSE.
No one starts out investing, able to tame their greed and fear. The 2 most destructive emotions to any investor. Learn these lessons with a small portion of your overall wealth first.
Only start increasing your stake once you are sure you have developed the self-discipline needed.
Becoming a more educated investor to start your journey of investing in bitcoin
“What is bitcoin?” is a question that has been doing the rounds for quite some time now and has gained some major popularity over the last year, but a more basic question to ask is “What is the Blockchain?”
The blockchain is the technology that bitcoin and all other crypto assets are built on. Simply blockchain is a way for 2 parties that don’t trust each other to engage in a transaction without using a middleman keeping transaction costs low.
When you get right down to it the whole financial industry exists to do one thing and one thing only. Facilitate transactions;
- Banks bring savers (depositors / lenders) and borrowers together and in the process, they take a nice little transaction / facilitation fee as the middleman.
- The stock exchange brings companies and investors together, and in the process…… take a transaction fee.
- The insurance industry brings risk takers (Insurers / Investors) and risk avoiders (the Insured) together and in the process…? You guessed they take a fee for making it all happen.
Simplifying the concept of Blockchain
The explanation that follows next is my own simplified concept of a Blockchain and is by no means an accurate technical definition. It is intended to be a simplified description of the concept. So here goes...
To understand a Blockchain imagine the following:
An auditorium filled with thousands of people each watching the others exchange gift vouchers with each other.
These gift vouchers can later be exchanged for cash or be used to buy real-world stuff at retailers that are willing to accept them.
In the auditorium scattered throughout the various people are certain people wearing a green hat. These people have decided to be “puzzle solving witnesses”. Anyone in the audience can choose to put on a green hat and also be a “puzzle solving witness”.
The job of the Green hatted puzzle solvers is to determine and confirm the transfer of gift vouchers between individuals in the hall. The way that they do so is by solving a mathematical puzzle. Once the puzzle is solved the following information is revealed;
- What the value of the gift card is that was exchanged
- At what time and date, the exchange happened
- Who the parties were that took part in the exchange.
The First Green hatted auditor to get the answer stands up and writes the information on the massive whiteboard in the front of the auditorium which is then seen by all and is public knowledge. Every Auditor thereafter that gets to the same answer stands up and puts a tick next to the first auditors answer thus confirming the validity of the answers.
This process then results in a continuous record of transactions that have been verified by separate and independent Green hatted auditors. If different answers for the same puzzle are found, then the answer that has the most confirmations (ticks) next to it is accepted as the truth.
What this means is that the person that gave the gift card is protected from a situation where the receiver makes a claim that they never received the gift card since there are multiple public witnesses to the transaction.
Even if the corrupt receiver would try to collude with one or a few of the green-hatted auditors he would not be successful since the corrupted receiver would have to “bribe” at least more than 50% of the auditors in the room. This is unlikely because it is generally accepted as being too “expensive” to be worth anyone’s while.
This environment enables transactions without a single trusted middleman.
Ok, but why would anyone volunteer to be a green-hatted auditor and put in all the effort and brain power to help random strangers make transactions safely?
Well simply because they get rewarded to do so.
Every time you are the first one to successfully and correctly confirm a transaction the vending machine next to the whiteboard in front spits out a new gift voucher for the “winner of the puzzle race”. This is how the gift voucher come into circulation in the first place.
So, let's convert my story above to real-world terminology for investing in bitcoin;
- The people in the auditorium are all the participants in any crypto asset system ie. Bitcoin users.
- The green-hatted auditors that confirm the transactions publically are the “Miners” on the Blockchain. They mine by running “servers” that do the calculations to confirm transactions.
- The whiteboard in the front of the auditorium is the “Blockchain” it is the public record of all transactions that have taken place.
- The gift vouchers are the tokens that are used on the particular network ie. Bitcoin. Litecoin, Ripple, Ethereum etc. These tokens have value because the users of the system believe and trust that there is someone else that will be willing to accept and exchange the voucher for cash or goods.
In summary, Blockchain technology enables transactions between individuals that do not have to trust each other without the use of a single middleman that can be controlled by one organisation, country or regulator.
This lack of a single point of “failure” where a government or company must be trusted by the user is one of the most appealing features of this type of technology. This is mostly due to the growing discontent and lack of trust the man on the street seems to feel towards governments and large corporations.