Crypto - What is crypto, what does it mean, how does it work, and can I be a millionaire too?

We cover the definition, how the blockchain works, how to invest and what it is being used for. In my opinion crypto assets should be a part of any investor’s portfolio, and you should be able to make up your mind about whether it is for you too! 

For the lazy ones

• Cryptocurrencies allow money systems to be created and run by the people who use them and a whole bunch more

• Each currency belongs to a blockchain. The technology is complex but promising.

• The blockchain has a HUGE amount of potential with smart contracts

• There is a lot of money to be made (as well as a lot to be lost)

• Cryptocurrencies are riveting; I would definitely recommend reading into them

For the nerds - What is Crypto?

Investopedia defines cryptocurrency (Crypto for short) as a digital or virtual currency that is secured by cryptography. So, a secure and digital currency. Pretty bland, right? So what is the hype about? 

Well, each cryptocurrency is enabled by, run on, and belongs to a blockchain. The blockchain is a relatively new technology that decentralises an entire network. This is VERY exciting (at least for nerds like me). This means that the cryptocurrency you hold is not regulated, backed or guaranteed by any government or organisation. They are instead secured and regulated by the people who own and use them. There is no need for banks or insurance brokers, only maths and code. This is excellent for a world losing faith in its governments and institutions.

It is important to note that different blockchains provide different utilities and specialities. This is why many blockchains and cryptocurrencies exist. From an investment perspective, buying a Cryptocurrency or a token is a way of investing in the blockchain it belongs to. If the network is successful, the demand for the token will go up, so the price will too. If the network is unsuccessful, the demand for the token will decrease, so it will lose value.

How I feel rn

So what actually is the blockchain? 

The blockchain is a decentralised, open book, append-only (and often) transaction-based ledger. Open book ledger means that it is a compilation of data, where everyone can see everything recorded. Append-only means anyone can add data to the chain, but no one can edit previously written data. And transaction-based means it records transactions instead of account totals like banks.

It works by storing all data in many nodes (computers). Each time anyone wants to transact on the blockchain and send someone tokens, they send their transaction data (and a small fee as an incentive) to all the miner nodes. The miners then collect lots of these transactions into a packet, called a block, and solve a puzzle to add this block to the network. The first miner to solve the puzzle and add the block to the network receives all of the incentive fees.

All of the transactions within a block are processed once it is in the network. Once the transactions are processed, the tokens transferred will appear in the account they are being sent to. This is how money is sent person to person (P2P) through a blockchain. The transaction data is now on the blockchain forever, for everyone to see.

A miner cannot change transaction data in the block he adds to the network, as all miners have a copy of every transaction. If they detect an alteration has been made, they will change the direction of the chain to avoid adding this altered block. The resulting chain will look as shown above. To determine which direction the chain takes, more than 50% of the users must reach a consensus (agree). This is one reason the blockchain is secure: to alter any transaction data needs more than 50% of the miners. This is also why a blockchain belongs to its community: the majority decides on community development.

However, the idea that the community always decides can be abused. In theory, if a group takes over 51% of the mining power on the network, they can control everything that happens on it. This is very difficult, however, for large networks, where there are already a lot of miners, and would require a large amount of power. 

There is a new (not really new, but kinda) way of processing transactions that seeks to avoid some of the problems of Proof-of-Work (everything discussed above). This is called Proof-of-Stake (PoS). PoS, however, is a whole new kettle of fish, so I am not going to go into it here.

So, what is the point of all this and why are Crypto and the blockchain useful?

Firstly, Crypto is decentralised, so, by nature, it takes power away from banks and governments. If this is your cup of tea, that is a big pro! For me, less power to banks is always a good thing.

Moreover, the blockchain is almost instant (at least on PoS networks) and has low processing fees. You will never have to worry about a pending transaction over the weekend or banks charging you up to 5% currency conversion fees. Your transactions will always be executed cheaply, efficiently and accurately, whatever the day, week or year.

This brings us to the next pro: the blockchain is very secure. The blockchain is an open ledger secured by cryptography, as previously discussed. This means it is almost impossible to alter any data, whether already or not yet accepted into the chain. All transactions sent are therefore secure. 

The final and most important feature of the blockchain is that it enables the usage of smart contracts. These are coded contracts recorded on the blockchain. They are like usual contracts, except they are code. This means there is no room for judgement; if predetermined conditions are met, the contract is executed. There is no legal leeway and no intimidating lawyers. It is a contract as it is supposed to be (again, a whole new kettle of fish, so I will keep it brief).

They open up many new avenues in the Crypto space:

• Art:

  • If a piece of art's history is stored in an NFT, there cannot be any doubts about its history, who it belongs to or who created it.

• Tickets:

  • If an NFT was given as a ticket, it would be impossible to forge or get into an event pretending to be someone else.

• Insurance:

  • There would be no battling for 50 quid in insurance payouts as the code would execute automatically.

• Lending:

  • The Blockchain and smart contracts can really help develop lending, by creating complete transparency, making lending more efficient and making it cheaper. The blockchain is innately transparent, so there can be no hidden fees or alterations to a contract, documents are confirmed peer to peer, so there is no need to wait weeks for banks to confirm things, and without the middleman wasting weeks with bureaucracy the interest rates can come down too. 

So now we know what Crypto is. How do you get involved?

An excellent place to start is investing! Cryptos are particularly interesting for investment purposes as they are very volatile. Moreover, once you own the tokens it is easy to grow into using the blockchain for transactions and services or even development itself. 

So, how do you start investing?

1. Research. Always know what you are buying. This is the same as with a classical investment. It may be boring, but research is integral to any investment decision.

2. Beware of scammers. Whilst a lot of the crypto space is filled with developers creating revolutionary content, there are also people in Crypto who just want to make a quick buck. So before investing in a token, remember to do your research!

3. Get started. The best way to learn is to do! 

So, I’ve convinced you, you want to invest. What should you invest in?

This is a very difficult question to answer. It is the responsibility of every person to decide on their own investment preferences but here at UMushroom we try to make this process as easy as possible for every user! Some good things to think about when investing in crypto are:

1. Useful networks. As I explained earlier, each token belongs to a chain and each chain provides a different utility. It is useful to think about what you think crypto will be used for in the future, and therefore which chains you think will be successful.

2. Market cap. It is also worth thinking about the market cap of the crypto you wish to invest in. High market cap assets are often safer, less volatile and easier to research, whereas low market cap assets offer higher return opportunities (but also higher risk of rug-pulls and never actually taking off).

3. Liquidity. Liquidity is important for any investment. What good is having $1 million worth of something if you can’t sell it. This is why it is important to look at the traded volume of each asset before purchase.

4. Tokenomics (economics but for tokens). Buying a token is investing in the future of a network. If a network’s tokenomics aren’t well thought through, then the token isn’t going to perform well! Think how the token is distributed, and what utility it provides within the network.

On UMushroom we present all of the information you will need to follow the above in an easy to read and digestible way. This makes it easy for you to learn and hone your investing skills in a safe environment, so you will be ready to crush the market when the time comes to invest for real!

Conclusion

To summarise, I love Crypto. It could be revolutionary and open up many new avenues and promising business ventures (I cannot promise anything, though). Moreover, it brings power back to everyone through decentralisation. This includes people being able to own their own data again (@ meta and alphabet). 

As you can probably tell, I am very bullish on Crypto (I think that Crypto will do very well), so I actively invest in the Crypto space. Investors who are not so bullish on Crypto can still buy it nonetheless. They often do so to diversify their portfolio or as a high risk, high potential asset. These strategies work as Crypto is often seen as a hedge to centralised finance and fiat currency, and is very volatile and seen to have a high potential.

There are, of course, people who dislike Crypto altogether. It often faces the criticisms that:

• It is not backed by anything.

• We do not know who created it.

• It is just numbers on a computer.

• And, there is an infinite supply, so it can’t have any value.

These however don’t take into account that:

• Fiat money is also backed by nothing. 

• Does anyone actually know the rules behind  paper money? And besides, that is the WHOLE POINT of DeFi - it belongs to everyone.

• Their bank account is also just a number on a computer and an I OWE U from a bank.

• Fiat money also has an infinite supply; private banks can create money as they see fit.

So look into it, do your research and become a crypto pro (using UMushroom - Crypto coming soon)!

I hope you enjoyed reading my post! If you have any thoughts or opinions you would like to share, please let me know in the comments below. You can download an infographic summary of this post at the top to help you on your investment journey!

Oliver Moon, 25 August  2022.