WTF is Cryptocurrency?

I decided it’s time I really try to understand cryptocurrency instead of just telling everyone to stay away from it because it’s scary and volatile and basically gambling(and if you know my story, gambling is not something I should be doing.)

What I settled on was a controlled experiment.

THE EXPERIMENT

I read some of James Altucher’s stuff to educate myself in the basics and decided to buy a small enough amount that it wouldn’t affect me if I lost it all, but a big enough amount to keep me engaged in the process.

I decided to buy $250 Canadian Dollars (CAD) of Bitcoin and $250 CAD of Ether. And I set some ground rules:

  • No matter what, I would never buy anymore. It’s just an experiment.
  • I would leave it in there and see what happened. Maybe it would all go to zero and maybe not.
  • At some point I would transfer it and sell some so that I could figure out how all that works. But my maximum loss would be $500 CAD.

So WTF is cryptocurrency then?

Here’s the Wikipedia definition of cryptocurrency:

A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets.

Let’s break down this definition:

Digital Asset: This means that it exists only in digital form. There are no physical coins or bills, just long strings of numbers and letters that represent a certain number of cryptocurrency units.

Medium of Exchange: The whole idea is that you can use cryptocurrency to buy stuff. Right now we typically buy cryptocurrency with other currency but it is possible in the future that you could be paid in cryptocurrency and then use that to buy things.

Cryptography to secure the transactions: that’s when you send information from one place to the next and you secure it on one end so that no one can possibly read it until it gets to the other end, where they have the decoder or other means of understanding it. This is all done with a combination of math, computer science, electrical engineering, and other things I do not understand.

Control the creation of additional units: Using bitcoin as an example, there are bitcoin miners who run their computers 24/7 to slowly create bitcoins. I’m still trying to understand this. For now, just know that this is happening and that there is currently a future limit of 21 Million bitcoins and they will all be created by the year 2140.

Verify the transfer of assets: for cash and coin we currently rely on banks and governments to verify transactions and currencies and make sure everything is legit. Cryptocurrencies aren’t regulated by governments and there aren’t any banks. This is where the previously mentioned currency miners come in. As well as creating new currency, they also verify the transactions that are sent out into the blockchain network. More on this later.

Ok, so it’s a fancy futuristic type of money that doesn’t really exist except in the cloud and I can’t go and buy a pizza with it, so why should I care about cryptocurrency at all?

That’s a valid observation and maybe you don’t need to care right now.

As James Altucher likes to say: “98% of cryptocurrencies are scams.”

And the ones that aren’t scams are insanely volatile.

Here’s a graph of Bitcoin over two weeks – up and down by over $2,500 CAD in a two week period.

There’s obviously something strange going on here. Definitely not normal.

Everyone is talking about Bitcoin and why it’s going to be everything and why it’s going to be nothing.

And the same stories can be applied to all cryptocurrencies in general.

Which ones are going to come out on top?

Who knows!

This recent article from The Onion sums it all up nicely: Bitcoin Plunge Reveals Possible Vulnerabilities In Crazy Imaginary Internet Money

An interesting statistic that has come up recently is that nearly 97% of bitcoin investors are men. Some suggest that this is pretty good evidence that we’re in a cryptocurrency bubble.

Here are the main reasons why people are going bananas for cryptocurrencies:

  1. Global currency: What if you never had to exchange cash ever again? Flight to Paris, paid with Bitcoin, arrive in Paris, pay for taxi with Bitcoin, hotel, food, etc. etc. The cost of things might be higher or lower in different parts of the world but you wouldn’t have to figure it all out and do mad foreign exchange calculations in your head.
  2. Decentralization: Do you love banks? You might not hate banks but you don’t love them. Nobody does. Why? Because they control everything. They decide how much it costs to take your money, give your money back, lend you money, transfer money. What if there was no bank? You can send money to your friend and it doesn’t have to go through a bank. There might still be fees but they will probably end up being much lower because you’re not paying for a giant corporation to run.
  3. Security and anonymity: cash can be stolen, credit cards compromised. Banks have the security but then they also get to know everything that you’re doing. Not everyone wants to have a bank knowing their every move just because they are the only way to get money from point A to B. With the rise of cryptocurrency, online security is getting better and better. The blockchain is built in a way that you can’t mess with it.

OK, LET’S SAY I WANT SOME. WHERE DO I GET IT?

No, you don’t go to the Bitcoin mine.  I’ll sort of explain mining later.

You need to go to a cryptocurrency exchange.

My research led me to Coinbase as the most trusted exchange in North America.

But I wanted to explore some Canadian options too. I heard about Coinsquare and QuadrigaCX as Canadian options but I settled on Coinbase to buy cryptocurrency because I could use my credit card and it was quick and easy to get started.

The funding options for the Canadian companies just seemed too complicated and expensive.

The fees are similar across the options but when I looked into the Canadian options further, I saw withholding periods of a day to a week. I couldn’t use the Interac Online option because I bank with Tangerine but even that option on Coinsquare cost 3.5% and had a withholding period. There just seemed to be a lot of rules.

Coinbase was “credit card easy”.

There were daily and weekly buy limits so it took about a week for me to be able to buy the full $500 but it was simple and I really liked the interface.

I found out, as I was signing up, that Coinbase didn’t have a CAD withdrawal option but I thought, that’s fine, because I’m going to transfer my cryptocurrency out of the Coinbase exchange eventually to see how that works. So I’ll just transfer to a Canadian exchange and deal with the fees as part of the experiment.

Overall I paid 4.21% in fees, which is not great, and mostly due to the fact that I had to make several purchases whenever my weekly limit would reset. So in hindsight if I would have just waited until I had a limit of $500 and made 2 purchases, my fees would have been lower.

But the whole point of the experiment was to not try and time the market and simply buy as soon as I was able.

SIDEBAR: WHERE DO I STORE MY CRYPTOCURRENCY?
I decided that because they are relatively small amounts, I would just leave them in the Coinbase “wallets” that were automatically created for me when I bought the ETH and BTC.
However, the general recommendation is that you find a more secure place for your cryptocurrency, especially if it’s worth a lot.
There are a bunch of different storage options that range from the easiest/least safe(keeping it on the exchange like I’m doing) or the hardest/safest (memorizing your private crypto-keys and storing them in your head).
The safest way without relying on your brain is to buy a sort of crypto USB drive and store your cryptocurrency in there. But even in that case, you still have to keep the drive safe.
I’m not going to get into all the different ways to store cryptocurrency in much detail, because you can Google that when you are ready, but the main thing to takeaway is that one of the main
advantages of cryptocurrency is that it is decentralized and there is no central place to store it.
So find a place, online or not, that you trust and don’t just leave it somewhere unless you understand the risks.

So I spent $250 CAD on each of Bitcoin and Ether, but because of the fees included in my purchases my true starting balances were:

Bitcoin $238.73 = 0.02789288 BTC (Average Price: $8,558.82)
Ether $240.22 = 0.59663185 ETH (Average Price: $402.62)
Total $478.95 CAD (+$21.05 in fees)

All purchases were made between November 8th and 15th, 2017.

AND THEN THE WORLD OF CRYPTOCURRENCY WENT INSANE

I’ve never seen such growth in a period of 2 weeks.

Between November 15th and 30th 2017, both Bitcoin and Ether hit their highest all-time values to date.

I would set Bitcoin price alarms on the Coinbase app so that I would know when it hit the next $1,000 CAD level.

My phone would tell me Bitcoin hit $10,000, so I set the alarm to $11,000, and it would hit that the next day, and so on.

Then Bitcoin went over $14,000 CAD. I didn’t even have a chance to set an alarm for that one. Of course, it didn’t stay there and came back down to around $12,500.

I set the alarms so that I would know when to go to the news and look for the source of the surge.

A lot of the time it would be that somebody important said something good about Bitcoin in the news. One of the times it was mobile payments company Square announcing they would start to accept Bitcoin on a trial basis.

But the primary reason it seems is that everyone got caught up in a positive feedback loop: Bitcoin is going up for whatever reason so more people buy and the price goes up so more people buy and the price goes up so more people buy…

Will it continue forever? Maybe.

But just in case, I saw this as an opportunity to still keep a small stake in the game while reducing my risk to zero.

HOW TO SEND/TRANSFER YOUR CRYPTOCURRENCY

I decided that since both Bitcoin and Ethereum went up so quickly and I need to know how someone actually turns their cryptocurrency back into CAD, I was going to cash out my original $500 investment and then leave the balance in there and see what happens with it.

Since Coinbase recently lost their ability to cash out in CAD, I knew I would have to transfer to a Canadian exchange before being able to turn my cryptocurrency into Canadian cash. I’ve heard good things about QuadrigaCX so I set up an account there, did the quickest verification via their instant Equifax option and my account was ready.

I went to the Bitcoin section of my dashboard and clicked on “Fund”.

The XBT(Bitcoin) Account Funding page came up with a warning:

IMPORTANT: Send only Bitcoin to this funding address. BCC or BCH are NOT accepted. Sending any coin or token other than Bitcoin will result in the loss of your funding.

Of course, I can’t help wondering how much cryptocurrency is lost by sending the wrong type and now I’m a little bit nervous.

It says to fund my QuadrigaCX account with Bitcoin I need to send a payment to this bitcoin wallet address(I changed a few numbers and letters so please DO NOT send any bitcoin to this fake address!):

3RWTix7aC8ANuVjyJxdArz68ASenPVyKtj

So I go back to my Coinbase bitcoin wallet, click on Send, copy and paste the QuadrigaCX wallet address into the field in the Coinbase wallet, click “Send Max” and find out there is a $4.50 CAD charge for sending(of course).

The fee comes out of my total and I click continue and then confirm the transaction. Also I had to use the Google Authenticator app and type in a secure code from the app on my phone. I recommend that you set this up especially if you’re moving a bit more cash than I did. Extra layer of security doesn’t hurt.

Then I wait….

Seemed like forever, but it could have been just seconds because I didn’t know where to look for the pending bitcoin funding. I went back to the XBT Account Funding page and there it was.

11/30/2017 16:42(GMT time for some reason)
0.02752404 XBT
3RWTix7aC8ANuVjyJxdArz68ASenPVyKtj
# of Confirmations: 0

WHAT IS A CONFIRMATION?

The funding page said:

”Bitcoin fundings are automatically completed after 4 confirmations, but that it would appear in Pending as soon as the transaction appears on the blockchain”.

I was like huh?

Ok, I could start talking about mining and the blockchain, digital ledgers and decentralized currency but I barely understand it myself so I’m sure I can’t explain it to you.

The best way to understand this is with an analogy. The best one I’ve read is this one: Explain Bitcoin Like I’m Five (so definitely read that if my analogy below doesn’t help.)

I’ll use another analogy that you may be able to follow: digital concert tickets

When I buy a pair of concert tickets online, I get a PDF attachment with a barcode on it. It says “treat this PDF like cash”.

If you drop it on the street and someone picks it up, they can just walk over to the concert venue and scan the ticket like their own. (This is assuming the venue doesn’t have a requirement to check your ID at the door)

Scenario: You find out you can’t go to the concert anymore and you decide to sell your pair of tickets.

You have a few options – reach out on Facebook to friends, post them online in classifieds or on a ticket re-seller site.

You eventually find someone and you send them the digital tickets. They send you cash. Transaction complete.

But how do they really know you aren’t just going to show up on the day of the concert, before they do, and scan your PDF ticket first?

You could do this.

What’s stopping you?

Well, if it was through friends or family, that would be stupid because they would know it was you.

Online re-sellers have a way to track your account and they would probably be able to find out what happened and ban you.

If you sold them in the classifieds or on the street on the day of the concert, the person would be taking a chance that you are trustworthy – they would at least have the option to look into your eyes and deep into your soul to see if evil lurks within you.

The point is, for the transfer of concert tickets, there is a system in place that the buyer and the seller trust, and there are consequences if you try to take advantage of someone.

HOW THE BLOCKCHAIN IS LIKE RESELLING CONCERT TICKETS

How does this ticket example relate to blockchain and cryptocurrency?

Cryptocurrencies need a system in place that they can trust so that they know that you aren’t sending two people the same money at the same time.

If you had the concert tickets printed at the box office and they were your only copy, people wouldn’t need to trust that you didn’t make copies of a PDF. Because there is no PDF, just the physical tickets.

But with both online tickets AND cryptocurrency there is a risk of double-spending.

Obviously there is much more at stake with a $10,000+ bitcoin than a $200 concert ticket so the cryptocurrency system has to be as secure as possible.

So you have checkers(miners) who check every transaction(block) that is sent through the cryptocurrency network(blockchain) from one person or business to another.

The transactions have all the necessary information attached to them so that the checkers can check that they are real and unique and that they are going to the place they are supposed to go, and that no one else is receiving the same transaction from that original place.

It is anonymous in that my name doesn’t show up on the transaction, but through a complex system of cryptography, the checkers are able to make sure that it is legit without having to know my name.

I can look up my own transaction on sites like tradeblock.com, blockchain.info and blockcypher.com and see where it is in the chain and whether it has been confirmed yet.

But I only know that because I have a link with the transaction code. The code would look something like this(again, I changed it a bit):

cada90ac73227207bded575e30ac167bb38eb3b888530f133def214c47c9c305

And in my transaction(block), when I look it up on one of those sites, I can see my 0.02752404 in Bitcoin and one more transaction, which is not mine, of 2.44488982 Bitcoin(which is worth around $30,000 CAD as of November 30, 2017).

But do I know anything else about this $30,000 transaction except that it exists?

No.

I don’t know where it came from, and I don’t know where it’s going. I can see it because it shares a block with me, similar to sharing an Uber with someone. You can see them because they are in the same car as you, but you don’t know their name because it’s none of your business.

But I do know that there is a system in place that is verifying(confirming) this $30,000 transaction along with mine and once they are both verified, by 4 to 6 miners out there, my transaction becomes real and I can continue with my selling process.

I turned on email notifications for funding so as soon as the 4 confirmations were complete, I got an email.

It took 2 hours to get to the minimum of 4 confirmations I needed for the transaction to be marked as real.

I have to say, I had this impression that cryptocurrency was supposed to be really fast but apparently the blockchain is slow due to the fact that it has to be verified. Here’s a great post explaining why the blockchain is so slow and that one of the ways to speed it up is by creating something called “payment channels” between you and people you already trust(100%) so that you don’t have to go through the confirmation process every time. It’s like a NEXUS border pass for cryptocurrency.

OK SO THE MINING, OR WHATEVER, IS DONE. HOW DO I TURN THIS MAGICAL CURRENCY BACK INTO PHYSICAL CURRENCY BEFORE I LOSE IT ALL?

Selling was a breeze. I just picked the amount I wanted to sell and clicked “sell”. It took 5 seconds.

I paid $1.25 in selling fees and that came out of my existing Bitcoin balance.

After withdrawing my original $250 investment I still have .00779404 XBT in my QuadrigaCX wallet, which is around $100 CAD as of November 30, 2017.

Then I picked the cheapest option to transfer my $250 CAD to my bank. It was a regular bank transfer that takes 3-7 days and is FREE. I got my money in 4 days.

Then I repeated the whole process with my Ether – a few notes on that process:

  1. QuadrigaCX Ether page has a detailed warning that Ether is new and unpredictable. Use at your own risk. Also make sure that the symbol on both sides is ETH.
  2. Ether is funded after 12 Confirmations but it took only 2 minutes(120 seconds) for those 12 confirmations to happen. Quickest transfer ever.
  3. The Ether transfer charge was only $0.23 CAD. Way cheaper than Bitcoin.
  4. The Ether sale to CAD also cost $1.25
  5. There must have been a split-second price change when I clicked sell because my $250 became $249.99. Close enough.
  6. After recouping my original investment(less one penny) I still have 0.16166185 ETH which is worth around $95 CAD as of November 30, 2017.

Coinbase wallets are now empty, QuadrigaCX wallets are holding the balance of XBT and ETH.

CRYPTOCURRENCY EXPERIMENT TAKEAWAYS

 

First I want to say that I don’t recommend doing what I did as a way to make some quick money. Things worked out the way they did and I got my original investment back, but the whole thing could have easily gone to zero.  I was prepared to accept that as part of my experiment.

I only decided to withdraw my original investment after 2 weeks because each cryptocurrency had gained around $100 each and that seemed like it was enough for me to continue the experiment while also removing 100% of my risk. Now I have nothing to lose but money that I never had in the first place.

Cryptocurrency is insanely complicated and volatile. I spent a bunch of time doing research and I still don’t really understand how one might be better than the other and which ones could take over the world. So be careful with ICOs and tokens and all the other stuff that I don’t understand and am not interested in learning about.

Finally, if you decide to speculate in cryptocurrency – ONLY INVEST MONEY YOU CAN AFFORD TO LOSE. As many angel investors would say when they take a chance on startups, just look at that money as already gone, and then maybe in a year or 5 or 10, you’ll see something from it, or it will be actually gone.

Cryptocurrency may be the future or it may be a bubble but the main point is that it should be a very small part of a diversified portfolio, and even then, only if you are the kind of person who is ok with risk.

I’ve never seen anything change in value so much in one day, let alone a week, month or year.

If you invested $100 in Bitcoin in January of 2011, you would have over $4 million dollars as of November 30, 2017.

My experiment has generated around $100 each of Ether and Bitcoin for me as of November 30, 2017. Periodically I will come back to this post and update the value of my tiny bits of cryptocurrency and we’ll see what the future holds.

1 thought on “WTF is Cryptocurrency?

  1. hello, the information you shared is a tale for me “my expedition in crypto world”. wonderfully explained. I am curious to know that was your experiment still continues?

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