My crypto story

I first got involved with Cryptocurrencies in 2017 hype cycle. Bitcoin had just gone to $10,000 and it seemed like a crazy bubble you had to get in on. At that time it felt like it would collapse soon and a lot of people will get hurt. It did and a lot of people who bought at 10K or 20K were left holding their bags for a long time. It seemed the best of bitcoin’s days were behind it.

While I read up on cryptocurrency technology back then, I felt like the 2nd most popular one, Ethereum, had a better technology product. It was not just a blockchain but one on which you could do more complex things except record transactions. I bought some around $300 and then some around $1200. My investment philosophy was to use risk capital, or the money I wouldn’t mind going to 0, to have some skin in the game in case this tech becomes big. For the next 3 years, I just left those Ether be because they were almost worthless for me. Until last year I was down more than 80%.

And yet, COVID and money printing and real value proposition of crypto ecosystems have started making them more mainstream in last 9 months or so (especially in last 2-3 months). I personally invested more last year and even after the 30% crash, am sitting on some good gains. I still am holding mostly Ethereum because I believe in the technology’s potential and how it will evolve to become a bigger player in the crypto ecosystem over next 2 years. The philosophy is still that if I lose all this money, it won’t impact my life but if I don’t invest and this thing goes up 100x, I would forever regret not doing so. A lot of people compare Crypto ecosystem to internet back in 90s. I do feel that investing 2-3% of your savings is a good hedge just in case crypto ecosystem becomes 100x or 1000x in 20 years.

Now that the markets are taking another breather of 30% drop, let me try to explain some key elements of crypto technology.

What is crypto?

There are 2 parts of the crypto world: the blockchain technology and the token issued as reward for mining a block on the blockchain technology.

In software terminology, blockchain is a linked-list with a hash value of the last node. In real world terms, think of it as a page in a book containing the reference of where to find the unique id of next page to read. Because the blockchain is open (generally), anyone can see what is the sequence of information changes that happen. Also because each block contains reference to signature of last block, if you change any block in the node then you will have to go back and change every single node in the blockchain’s history. This makes it cost prohibitive to tamper with the blockchain. Hence it can be called secure without having a single company or person vouching for the security.

The token is what we generally refer to as cryptocurrency. Most crypto products have their own tokens which serve specific use cases but very few have their own blockchain. Most leverage Ethereum blockchain for their use and are called ERC20 tokens. This includes BAT, DOT, EOS etc. But in more realistic terms Ether (token) is a commodity that is used to pay fees for any action on ethereum blockchain. There are many types of tokens nowadays and they together form the crypto universe. A lot of the tokens are traded on exchanges.

What is an exchange?

Exchanges are centralized (generally) marketplaces where you can buy and sell different tokens. This helps solve the liquidity and marketplace problem. Let’s say you own some Ether(ETH) and want some Bitcoin(BTC). You can go to an exchange like Coinbase, Binance, Kraken etc and trade ETH for BTC.

Lately we have started seeing DEX (Decentralized exchanges) which are not owned by any company but run as an decentralized application (Dapp) on top of a blockchain. Examples include Sushiswap, Uniswap, PancakeSwap etc. They perform the function of providing a market to trade tokens while not being owned by a centralized entity.

What is a DAPP?

Decentralized applications (DAPP)s are application that are not owned by any particular entity. It’s hosted on a P2P network like blockchain and not on any centralized servers. Their existence is completely dependent on decentralized blockchains and no person or company can stop particular trades or functions. Example of DAPPs include: DEXs like Uniswap etc, games like CryptoKitties, NFT marketplaces like Rarible.

What is NFT?

NFT stands for Non-Fungible Tokens. They are tokens issued on a blockchain network like Ethereum which represent a digital commodity like artworks. They have really taken off lately and everyone from NBA to Mark Cuban has been issuing licensed digital artworks as NFTs. They allow people to monetize digital work directly by selling to customers. For example: a recent music album was sold as NFT for more than $3 million.

What is a wallet?

Wallet has a similar meaning to what you might understand. In the crypto world, wallet refers to a unique address where your cryptocurrency resides. For example: 0x34355345skfgdfkb4654 could be an address on ethereum blockchain where the ETH or BAT or BUSD that you hold resides. There are digital wallets like apps that act as a custodian and hold your funds. This include Coinbase or BlockFi etc. Then there are physical wallets – real world products that can connect to your computer via USB ports and the actual address resides on that physical media. This leads to cases you might have read about: how someone forgot the password of their USB key and has $3 million of BTC sitting in there. Finally you can also have a personal wallet like Metamask that is not controlled by another entity but is rather a browser extension or mobile app that lives on your machine.

What is DeFi?

DeFi is an upcoming segment of crypto products that are building on the idea of decentralized financial products. These are essentially used to refer a financial product that lives on decentralized blockchain and uses smart contracts and algorithms to power the product. For example Celsius, Alpha finance etc are all DeFi products that provide various financial solutions without a human or bank being involved. You can go to Celsius for example and use collateral like your existing crypto assets to take out a loan for eg: 25% of the value of those assets within minutes. The fees and rates charged by these protocols can be significantly lower than real world financial fees. This is one of the key areas that I think will generate tremendous value and bring cheaper and efficient financial products to the masses.

Another similar example for this is how Celsius or BlockFi can offer 8% APY on USD stablecoin deposits. Just imagine that you can take all your USD, convert to stablecoins like BUSD, GUSD, USDT, USDC etc and get 8% interest rates on them (at least right now). It is bonkers but it works and I am using the same.

Misc

Referral links: Celsius , BlockFi , Binance, Coinbase
Next Blog: Why is 2021 different than 2017 for Crypto? (Coming soon)
Disclaimer: Crypto is still very volatile. If you invest, be prepared for 80% loss of capital in very short times. Hence, invest cautiously and for the long term