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May 6, 2021

What you should know about blockchain and crypto: Crash course for non-crypto people

By Antti Saarnio

Is your taxi driver already talking about crypto? Hopefully not yet as this would be a sign that we are approaching peak, which would follow a crash. Cryptos are a great asset class with enormous ROI potential, but cryptos also characteristically form bubbles, which in time will burst.

At least many people in my network have started talking about crypto and how they have been making nice profits with their investments. But if you want to get into blockchain and crypto more, here is a list of 10 important things you should know about blockchain and crypto:

1. Bitcoin is the oldest crypto currency and about 50% of the trading volume is in Bitcoin. If Bitcoin goes up or down, the rest of the market follows. 

Bitcoin was launched in 2009 to make it possible to transfer money without middlemen like banks. This was achieved by creating a decentralized digital ownership registry, where thousands of computers continuously validate that the registry is correct. This computer validation is called “mining” and the decentralized database is called “blockchain.”

2. Bitcoin and other cryptocurrencies are operated in blockchain, which is a decentralized ledger maintained by about 14 000 independent computers or also known as nodes. The node's role is to continuously compute bitcoin transactions making sure that there is no double spending in the network, i.e. it prevents people from generating bitcoins from thin air. Bitcoin does not have a central banker who could decide to print more money into the network. 

3. On average about 900 new bitcoins are mined per day, with slowing speed and the total maximum amount of bitcoins is programmed to be  21 million. This is the main reason why Bitcoin’s price increases when more investors decide to buy bitcoin. As the amount is limited, the price has to go up with volume. 

For more information about bitcoin mining see:

4. However, Bitcoin is a very “bubbly” investment product. After every bull market, which typically lasts 12-16 months, follows a crash in price. Typically, prices can decrease by 50-70%. On the other hand, during the bull season, price can increase by hundreds of percent. This means that timing is very important for buying and selling crypto.

5. While bitcoin’s ledger is decentralized, we can’t say the same when it comes to the ownership of bitcoins. Some of the early bitcoin investors and miners hold about ⅓ of all bitcoins. These big holders are called whales. They used to control almost 50%, but the strong flow of small investors has decreased the share of whales. The centralized nature of bitcoin means that Bitcoin price can be manipulated to a certain extent. Especially large chinese investors “farm” the bitcoin price. They pull the price up with their massive purchases and hope others will join and once the price starts peaking, they sell their position. There is even a term in China for this: “Grow and cut”

For more information about Bitcoin supply distribution, see:

6. In case you decide to invest into crypto, keep in mind that crypto frequently has minor crashes. In crypto, minor crashes can be -20 to -30%. Last 13 months, there have been six crashes, price drop varying between -10 to -49%.

For more information about investing into Bitcoin see Lyn Alden's excellent post:

7. There are thousands of other crypto assets in exchanges. Most important ones are Ethereum, Binance coin, Cardano, Doge coin, and Ripple’s XRP. Many of the projects don’t have any real use case or activity, their only use case is speculation, but some are building the next internet world, like Ethereum, Cardano, and Uniswap.

8. Cryptos are traded in crypto exchanges. There are centralized crypto exchanges, which is managed by a company, and there are decentralized exchanges, which are just run by software protocol and developer community. Currently, large centralized exchanges have 95% of the market volume, but decentralized exchanges are growing fast, as users like their security. Centralized exchanges have a bad history of hacks, where customers have lost their funds. It is not recommended to keep a large amount of crypto in exchange.

For more information about decentralized and centralized exchanges see:

9. Crypto trading is just one side of the blockchain and not the most important side at all. The most important contribution of blockchain to the world is that people, businesses, and governments can use blockchain to do programmable and transparent payments. As an example, a startup in Europe could purchase software work from individual developers in India, without knowing this person. With blockchain, the startup could set up rules and milestones for the payment: Indian developer will get his first payment, once ⅓ of the code is done, a second payment when another ⅓ is done, and a final payment once 100% of the software has been delivered. The whole amount of the money sits in a crypto account which is programmed to release the payments once code is accepted. This increases trust with both buyer and seller and makes it possible for people to trade with each other without middlemen. 

10. Several governments are already implementing their own blockchain based digital currencies. One of the forerunners is China with its digital Yuan project. Within the next five years, I would expect that we see the world being changed by digital government currencies but also many businesses will create their own currencies. Also, we can expect that many investment product ownership like gold, silver, real estate, forest, will move into the blockchain. The benefit for the investors is liquidity: instead of a local limited market, they now can sell their assets in the global market. 

For more information about Digital Yuan see:

I hope this was useful. Be careful out there.

Note: this example is for informational and entertainment purposes only and should not be relied upon for any other use.

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