Cryptocurrency 101 / Blockchain 101 / Bitcoin 101 (part 2)

Do you want to understand blockchains? Learn about bitcoin in plain English? Navigate the basic concepts of the cryptocurrency world?CryptoIMage2

I have been trying those things too, for almost 2 years now.

In this part 2 of the post, I want to share some additional fonts of information, in case you want to dig deeper than just the surface.

FYI – Again, I have no interest (personal or commercial) in promoting the links on this post. This is just my honest sharing of the most useful things that I have bumped into.

1. Podcasts about cryptocurrencies and blockchains. It is impossible to hear them all. But from what I have seen, here is what I thought is worth sharing:

Screen Shot 2018-01-16 at 6.14.40 PMUnchained. A podcast by Forbes reporter Laura Shin. She has been able to interview some of the most relevant people in the crypto space and has fostered some interesting debate.

Screen Shot 2018-01-16 at 6.20.19 PMThe Tim Ferris Show. Episode 244. Interview with Nick Szabo. The Quiet Master of Cryptocurrency. It is a long interview with lots of useful information. Nick has a very relevant place in the crypto world.

2. Wired famous 2011 article. A lot of people first became aware of bitcoin in 2011 because of this Wired magazine article. It is mentioned very often and became part of the general reference on the subject.

Screen Shot 2018-01-17 at 11.10.58 AM3. Byzantines General Problem. If you have spent some reasonable time trying to understand what bitcoin and blockchain is, you have probably heard this expression. It was first used in 1982 (according to this wikipedia article) to describe a problem with trust in networked computers coordination. The Bitcoin white paper by Satoshi Nakamoto I referred to in part 1 of this post brought an elegant solution that generates trust in the network of people validating the ledger of transactions of a certain cryptocurrency. In summary, the software is built in such a way that it is too hard, too expensive and almost useless to try to defraud the ledger, because of the amount of computer work that has to be performed within a short period of time. It took me some time to find this excellent explanation by Doug Campbell. It is straight forward and easy to understand by someone that is not a techie.

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4. Crypto Wallets. If you ever decide to invest in bitcoin, ethereum or whatever other cryptocurrency, you should keep your assets in a digital wallet. For most of us, it is a counterintuitive suggestion. We always learned that we should keep our assets safe in the bank and not at home in our mattresses. Time to go back to the mattress.

Whenever you open an account with an exchange, the exchange will offer to hold your assets for free (like banks will keep your money), but you do not want to do that. Exchanges are (i) vulnerable to hacking (that was the case of MtGox – at the time it was the biggest exchange), and (ii) subject to government intervention, or the exchange may just decide to freeze your account until you are able to prove you are not that person with the same name that use bitcoin for online gambling (it happens). There are tons of options for digital wallets in the market today.

Screen Shot 2018-01-17 at 10.36.49 AMYou can choose between a digital wallet (based on software that is installed in your computer) or a physical one (looks like a pen drive). For the digital wallet, I would suggest the free wallet on www.blockchain.com.

Screen Shot 2018-01-17 at 10.36.20 AMFor a physical/hardware wallet, I would suggest the Trezor. It is still a referred as the gold standard in hardware wallets. It is the one I use and despite not being exactly user friendly, it is supposedly safe. It is obviously harder to move coins back and forth every time you sell, buy or transfer, but it is truly the safer option.

I hope this has been useful for some of you. I will come back on a later date to share some more info.

 

Cryptocurrency 101 / Blockchain 101 / Bitcoin 101 (part 1)

Image4Do you want to understand blockchains? Learn about bitcoin in plain English? Navigate the basic concepts of the cryptocurrency world? I have been trying those things too, for almost 2 years now.

There are so many sources, so many people trying to explain the concepts that it becomes a nightmare to sort through the haystack to get the needle.

So, I will not add to the pile of poor explanations. Instead I will share here the best sources of explanation I came across so far in order to ease the pain for those who are getting now into this crypto world.

FYI – I have no interest (personal or commercial) in promoting the links on this post. This is just my honest sharing of the most useful things that I bumped into.

1.  What is Bitcoin? It all begins with the Satoshi White Paper.

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Although we still do not know who Satoshi Nakamoto is (man, woman, group of people), we know that on October, 31, 2008, Satoshi has shared with the world a proposal for a decentralized electronic peer-to-peer payment system. The white paper is just 8 pages – and you probably will not understand bitcoin by reading it (I did not). But it is worthy reference. If you get deeper into the crypto rabbit hole, it might be interesting to come back to it and apply what you already know into trying to understand it.

Now for the easier part:

(a) Bitcoin and Blockchain Explained (6 min video)Screen Shot 2018-01-10 at 5.42.56 PM

(b) Blockchain Expert Explains One Concept in 5 Levels Of Difficulty (17 min);

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2. What is Blockchain? To be honest, bitcoin is not that hard of a concept. It is a digital coin. You can get some from whoever has some, and then send some to anyone. It is like any other asset, like gold for instance. A harder question is: what exactly is the blockchain? I have spent a long time accepting the fact a blockchain is the “network” behind the bitcoin (or whatever other currency) and that transactions are recorded there, without having a clear idea of how it worked. I still wanted to see it, visualize the recording of transactions and more than anything understand why it was supposedly sooo If (like me) you are a visual person and want to understand how the blockchain works, invest 18 minutes paying attention to this video below. It is also the step stone to understand other important concepts. I wish I had seen it before.

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And, while you are on it, you can also watch the sequel on public/private keys, another “key” concept when dealing with cryptocurrencies.

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Still on Blockchain, if you want a broader (deeper) overview:Screen Shot 2018-01-10 at 7.07.40 PM.png

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  1. Documentaries. Here are some documentaries that helped me a lot into understanding the cryptocurrency concepts.

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There are certainly more, but these are the ones I have seen and found really useful.

The follow-up posts will deal with other references I found useful.

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Experts predict that by the end of 2018 Bitcoin’s value might reach… whatever

CryptoIMage3Anyone following the financial market or news about cryptocurrencies is faced on a daily basis with predictions by “experts” on the future price of a certain cryptocurrency.

It is a natural human trait: our uncontrollable desire to foresee the future. And we continue to believe we can.

Since cryptocurrencies began to make the headlines, there was a vast number of reputable people predicting their crash and extinction. There still is. Warren Buffet still insists bitcoin is a bad investment. And it may as well be a really bad investment. Or not.

There is an equal number of experts that predicted a rise in value, although few (if any) predicted such an increase as we have seen in 2017.

My point is: nobody knows. Nobody knows if bitcoin or ethereum or ripple will triple in value or be worth nothing by the end of this year. As much as nobody knows if any stock will rise or fall in the coming days, weeks and months. But we still insist on trying to guess.

There was one particularly famous study on the matter by CXO advisory that tracked the performance of financial market experts predicting future prices and trends over a long period of time (1998 to 2012). The result? On average, this group of 68 gurus was right about 47% of the time. In other words, it would be more efficient to just flip a coin.

This phenomenon was described in detail by Nassim Taleb in his much celebrated Fooled by Randomness. The book does a great job at describing how randomness plays a central role in the outcomes of financial markets and yet we are constantly dissuading ourselves of this logic and placing a great deal of value on predictions that will ultimately prove to be right – usually ignoring the predictions that failed.

Some will refer to this discussion using the image of a blindfolded monkey selecting stocks that would be worth investing in, making the case that the monkey would do a better job than market experts.

This is not to say that all the hard work done by financial market professionals is worthless, or that studies about market trends should be ignored. However, as much as there is a lot to be learnt from these studies, it has been proven again and again that there are so many factors that will influence the performance of stocks (or the value of currencies) that it is actually worthless to rely on the prediction of future market results. Maybe we should just accept that nobody knows and learn how to live with such an uncontrollable environment.

But, as this decade old article on the Economist puts it, “humans are bad at factoring in the possibility of randomness and uncertainty”.

The future of bitcoin and other cryptocurrencies is in fact wildly unpredictable.

Many (myself included) believe that cryptocurrencies and blockchains came to stay and will indeed have a significant impact on the world in many aspects. This does not mean that one or the other cryptocurrency will be more successful. In the past two years, we have seen how easy it is to create a brand-new cryptocurrency (there are more than 1,000 different cryptocurrencies today) and even how easy it is to raise significant start-up capital to fund its development. So, the leading cryptocurrency in five years might well be a copycat version of bitcoin that has not even been created yet.

And, in addition to that, being successful does not mean being expensive. Even if a cryptocurrency becomes incredibly important in our daily lives and we rely on it for a variety of activities, it does not mean its value (as compared to the USD for example) should be necessarily high. Valuations of cryptocurrencies are today – and will continue to be – completely subjective, as is the case with artwork, gold or other assets.

Again, nobody knows. And I, for one, am ok with it.

In closing, and for full disclosure, I am an investor in a number of cryptocurrencies. As a result, I sincerely hope they will rise in value. But I truly believe it is impossible to predict. Time will tell.

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The blockchain revolution is inescapable

You may want nothing to do with it right now but know that it will soon affect your life.

You don’t need to take my word for it. Just step back and look at the past. We have seen this before. Several times. Every major cultural or industry disruption starts the same way: with pirates defying social norm – and many times the law – for a reason, for an ideal (For a truly interesting reading on the topic: The Pirate’s Dilemma, a book by Matt Mason).

We have seen Napster bring P2P file sharing to the masses. It was eventually forced to shut down as a result of numerous lawsuits but it changed the music industry forever. We have seen this with Uber, who fought (and still is fighting) its way country by country, state by state, city by city, and ultimately was able to change a century old transportation industry. The same with Airbnb, who still faces numerous restrictions, criticism and roadblocks, but has nonetheless changed the hospitality business forever. Or Netflix, who reinvented itself and in the process, revolutionized TV and the movies industry.  Or we can go as far as back to the beginning of the last century and use the example of a pirate named William that defied social norm and intellectual property laws by fleeing to the west coast of the United States to continue using filmmaking equipment without respecting patent rights owned by Thomas Edison. In the (still) wild west of the early 1900’s, William thrived and among others, helped develop the movie industry as we know it today. William’s last name was Fox.

These pirates force the rest of society to look at the world through their lenses or to experiment with something in a novel fashion. An initial negative reaction is slowly replaced by resigned acceptance, and soon followed by a race to embrace the new movement before the masses.

We are at this second stage with the blockchain already.

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Several countries and many of the major financial institutions have already either fully embraced the concept of the blockchain or have at least a small team assessing its potential and keeping an eye on the market.

The easiest parallel to draw here is with the internet. In the early days of widespread use of the internet, it was still a ‘cool thing’ you could do stuff with, like search for information or reconnect with a high school lost friend. But that was it. In the early 90’s, the internet was something promising but no one was really sure in what way. We are living that moment with blockchain.

Needless to say that bitcoin is the most prominent celebrity of this revolution. The bitcoin blockchain was the responsible for getting the blockchain concept from the realm of ultra-geek ideas and making it mainstream. However, no one knows for how long it will survive. Some believe bitcoin might be the first one through the door – and the first one through the door always gets shot.

Bitcoin’s demise may look unlikely at this point but let us not forget, in the early days of the internet, how amazingly important were Altavista (the search engine), Myspace (social network), Netscape (browser), Yahoo (internet services provider) and later Napster (P2P file sharing). All of them were pioneers and responsible for bringing internet’s usage to the masses, but for one reason or another, are not around anymore. On the other hand, IBM, Apple, Microsoft, Amazon are still around and have resisted well throughout several winters.

In the end, it is irrelevant if bitcoin will ultimately continue to thrive. The most important contribution brought by bitcoin – the concept of the blockchain – is already understood and has a life of its own now.

The blockchain concept is still unknown for many – and will probably continue to be. In reality, one does not need to understand the intricacies of blockchain, mining, double spending, byzantine general’s problem, proof of work or proof of stake. As an example, the majority of people does not know what hypertext transfer protocol means even if it the foundation of data communication over the internet – the HTTP letters of almost every internet page in a browser.

There is sometimes too much effort being put on trying to explain the blockchain and trying to understand it. More important than that seems to be a discussion on what are the possible applications. Human beings tend to be more comfortable accepting something with examples rather than with its functionality.

The possible uses for blockchain are numerous, several of which are currently already operating while others are being tested. The main characteristics sought after in blockchains are the trustworthiness of the information resting on it, as well as its (almost) immutability.

Those aspects lead to several ideas related to the removal of the middleman – and when one thinks hard about it, there is a middleman everywhere. Easy examples are real estate registrar’s office, financial institutions being used for payment or transfer of value, identity confirming authority / business, energy utility company between power producers and consumers. The blockchain is even being used to improve farming, as described in this Article by Bennett Garner originally published at coincentral.com.

Another extremely interesting use for blockchains is the feature known as smart contract, which is essentially a more automated and less human dependent way of establishing action/reaction in a business setting, or in other words, an if/then relationship will not depend on a trusted third party to execute the second part of the sequence. For instance, a payment that is dependent on an upcoming event will happen automatically upon the occurrence of that event, instead of depending on a party first acknowledging the event and then taking steps to process payment.

And there is the dream of providing banking for the unbanked. There is still today a relevant portion of population without access to banking services, for a number of reasons. The promise of the blockchain as a means to correct this has been widely publicized but still has to prove itself viable. Blockchains and blockchain services providers also have costs associated with them and, in order to survive, will need to adhere by the same standards of KYC and AML that banks use. That combination of costs and KYC/AML by itself will undoubtedly be a hurdle to this imagined easy access of anyone to banking services associated with a blockchain.

This is at least part of a heated debate between some original pioneers, aka crypto evangelists, and on the other side, the traditional business establishment. The pioneers are mostly libertarians, who view the beauty of the blockchain in its complete isolation from the regulated industry or governments, and who despise any effort of widening adoption through regulation or adherence to existing systems. The other side, the current establishment, is eager to feast on the advantages of the blockchain but is still wary of its unregulated nature and somehow beat up reputation.

Odds seem to be on the ‘the suits’ side. At this point, there is already too much investment, interest and effort focused on working with the blockchain concept and making it successful. There is no turning back. At the same time, governments everywhere are either proactively pursuing regulation or being forced to do something about it.

Today, bad reputation still haunts any crypto related startup. The famous Wired article of 2011 about bitcoin brought the cryptocurrency to light and also forever associated its use with the silk road, the then underworld website for sale of anything illegal, from drugs to non-authorized guns. Since then, the silk road has been long dismantled, many people today understand that there are many more uses for cryptocurrencies than just illegal activity and furthermore, even criminals are more and more realizing that it is a bad idea to use cryptocurrencies for their illegal activities since the aspect of anonymity of the digital tokens is hugely overrated and they are finding – the hard way – that bitcoin-like ransom payments are very much traceable and thus a very bad idea.

Cryptocurrency businesses today are facing a path similar to that of the marijuana business. They are both legal (under certain circumstances, with certain limitations and, for marijuana, only in certain states) but face an overall lack of trust and are seen as a gray area business. Many banks are still refusing to do business with either marijuana or cryptocurrency related companies, or will sometimes close down accounts without much of an explanation.

But the current obstacles are necessary. It is at a minimum expected that a concept as disruptive as the blockchain will have to go through this rite of passage. Especially since one of the most affected industries is the most powerful of them – the banking sector. They will ultimately adhere, adjust and accommodate, but it will be on their own terms and on their own timing. And it is known that the financial sector infrastructure is one of the least updated around. The outer shell sometimes looks brand new but the spine is still pretty much 50 years old.

No one can truthfully predict – although many try –  where will this blockchain revolution lead us or even what will the price for Bitcoin be in 6 months. It is nonetheless interesting to have the opportunity to witness the unfolding of the many derivatives of this brilliant concept.

Keep an open eye.

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