Hellow Riters, Hope you are healthy, hope you are doing great! Today lets discuss about those Adas and Doges’, I mean Cryptocurrency. So, lets dive in.
Token to Freedom
Cryptocurrency is your token to freedom, You and only you are its owner. You have full control over where to spend it when & how, no Government or Bank can control it, no Govt. can block or freeze it. Demonetization, hyper-inflation and other risk factors due to the Central System are not present.
Probably the best reason to own a Cryptocurrency is the Cryptography behind it. It can’t be forged or attacked, also your identity is hidden, encrypted and safe. Blockachain technology ensures secure digital transactions through encryption and “smart contracts” that make the entity virtually unhackable and void of fraud.
Anybody with access to Internet can access the crypto, and use it. Even the people who don’t have rights to use to traditional exchange systems can access it.
Even though Cryptocurrency prices are volatile the returns has been way higher than the traditional Stock markets. Also several organizations like Blockfi provide you Interest over your Crypto assets. And the high liquidity of this asset makes it worth investing at least a little portion of your portfolio
With Blockchain, all you need is an internet connection and a smart device to instantly become your own bank making payments and money transfers. Also coins like Ripple (XRP) empower cross-border settlement and currency exchange in real-time by allowing banks & money-transfer institutions to join their distributed ledger network.
Bonus – The other unique reason to own a Cryptocurrency is the uniqueness it brings on the table. Each coin is separate in its functionality and usuability, like Ripple is used for cross-border settlement, Bitcoin can be used as Gold to store wealth, Ada (Cardano) can be used to build smart contracts and in turn create decentralized applications.
Born between 1997 to 2012, oldest Gen Z today would be 24 years old, read carefully, what we are going to tell you may decide your financial future in years to come.
If you have just started to earn or going to be soon, and you might have some plans for life, well, you may know by now, life doesn’t go as planned, always. Covid 19 and the stock market crash of 2020 is the most recent and vivid memory with many of us.
So, How should we take care of our Finances? What should we do to avoid black swan events like Covid from affecting our finances in future? How can we make sure that we are self sufficient!
Well the short answer is INVEST, Invest now!
Note- how early you invest matters more than the amount you Invest, because Compounding works best later down the time.
Lets discuss how to Invest when you are in your 20s:
Divide your Income into 3 Brackets, Save, Invest and Spend. A rule of thumb to start with is Save 20 bucks, Invest 30 bucks and Spend 50 bucks of your monthly income (more better approach would be 50, 20, 30; but consistency matter more than the amount you Invest)
Spend low, live below your means, or expand your means. Yes I get that you may be fresh out of college and in your prime youth, thinking to party like crazy. While no body is saying, don’t party at all, but limit it as much as you can, the earlier you get into saving and investing rather than spending the better your quality of life will be. so shush the Party Animal within or just tone it down a bit. I know its hard to digest, But think do you want to live like king as you grow or you want to cut on your expenses and go take some huge loan to maintain all that family expenses that are inevitable at an older age. Somewhere down the line, I assume you would like to have your own house, a car and what not, so better you start investing now & be frugal, for more peace later in life.
Do Invest in Stocks, own them as your own Business! Don’t stress too much on getting it right, everybody makes mistake and so will you.
Do you need to be conservative or do you need to go wild, all in?
I would suggest a balance approach, now that you have 30% of your Monthly Income to Invest, I would suggest you to divide it further into different assets like Crypto, Gold and Stocks (now if the money is very less to even divide you can alternate the asset class every month).
10% (of Investing Income) -> Cryptocurrency, where in further you should divide in Bitcoin & Etherum or at least a few coins to be safe and not miss the opportunity at the same time. What I would do would be to have 50% of my Money (of this 10%) in Bitcoin, 40% in Ethereum and 10% in Others (like Zcash, Dash, etc). You may like to read more about Cryptocurrency here.
5% (of Income) -> In Sovereign Gold Bond or some form of Gold at least, if the amount is too small you may consider something like ‘ICICIGOLD’ ETF which is currently priced at 44 rupees a share.
Left with 85% of your Investing Income, you can go into Stocks directly. (In case that 85% of your income is exceptional, you are richie rich, I am glad you came here, you can further divide the amount into real estate and stocks!)
10 – 50% in Broad Market ETF that tracks the index like ICICINIFTY, HDFC Sensex Plan for India or VTI, VOO for US Markets. You can make your portfolio 50% of this in case you not at all care about markets and don’t have time even look at your portfolio once a month. As a matter of fact, the legendary Investor Warren Buffet himself suggest a low cost ETF for all Passive Investor. Read more about Index fund here.
0 – 40% in Direct Stock picks, now seriously I want you to take some risk, look around buy stocks of brands you own, you consume like that ITC cookies you eat, or Hindustan Uniliver Soap you use orBajaj Bike you Vroom vroom… (Disclaimer – we are not suggesting / advising any pick). Now this can be most volatile part of whole portfolio, but it can be most rewarding if the research is done right, also with time you get better in this. Always always avoid buying on someone’s advice do your own due diligence. If you are someone who believes more in the promise of blockchain & cryptocurrency than you may like to flip the percentages 10% here and 40% there 😉
To Recap, put numbers in to perspective, lets say you have 30,000 as the salary than 30% would be 9000, Put 900 of it in Crypto (450 BTC, 360 ETH, 90 other Coins), 450 in Gold, 7650 in Stocks!
Remember– If you can’t achieve the percentages listed above, let it be, a bit up or down here and there won’t matter.
The Idea is to Diversify, Invest Early and Be consistent. Time is your best friend.
Human evolved and adopted Barter system naturally where in one can exchange their good for others goods (for example – 10 sheep for 1 cow). With time Barter evolved into a system of using Metals like Gold, Silver to trade easily even across International Borders. Later it evolved with time into Currency System, paper money whose value is symbolic but trusted and agreed upon.
Currency is a form of payment,
it is something (usually paper and coins) you exchange for goods & services. The conventional currency relies on network of mints, central banks and governments. Currently every transaction around the world involves exchange of currency of some kind. And the piece of paper, ‘fiat currency’ you have holds value because your government says so. if you take a note and read it you will see “I PROMISE TO PAY THE BEARER THE SUM OF XXXX RUPEES” written on it, that said its a promise by the Bank backed by the Central Government that the note holds XXXX Value.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency secured by Cryptography (a method of protecting the information).
The Underlying Technology
Underneath Cryptocurrency is a technology whose aim is to make it possible for two individuals to send and receive payment without revealing their identities and maintaining security of transaction with no involvement of a third party.
Blockchain is a major technology behind Cryptocurrencies (except a few like IOTA – a currency built on Tangle, read more here) Blockchain is essentially a list of blocks connected together and secured using Cryptography. Each Block stores data (transaction), a unique hash (mathematical code to identify the block), and the previous block hash. Blockchain can be thought of as a distributed public ledger with all transactional data.
Attributes of Blockchain
Immutable – Blockchain can’t be modified. Every time the data is modified the hash associated with the block is recalculated, and since every block contains the hash of previous block it causes the following blocks to become invalid making it obvious that the data is modified (here computational power is the limit, as long as you don’t have enough computational power to recalculate all the hashes).
Consensus – Blockchain uses a peer-to-peer network, allowing peer to peer interactions. Each participant in the peer-to-peer network is known as node. And each time someone adds a block to the blockchain, that block is sent to every node and is verified by every node to establish consensus (to read more refer).
Decentralized & Distributed Structure – Block chain is decentralized meaning the information is distributed to everyone on the network. Each peer has a copy of blockchain but no one can manipulate it.
How is a Cryptocurrency like Bitcoin issued?
Currencies like Dollar & Rupee are issued by Central Banks, backed by government. The central bank more or less can issue new units of currency anytime they think so. With Bitcoin this is not the case (for those of you who don’t know Bitcoin is the first and most prominent cryptocurrency), Bitcoin is usually mined with the help of specialized computers in warehouses, which work to solve a cryptographic puzzle. Mining is not just about creating new money but also validating transaction. With Bitcoin miners are awarded new bitcoins every 10 minutes. The issuance rate is set, so miners cannot create bitcoins out of thin air by cheating the system. Miners have to use tools i.e. their computing power to generate the new coins. Imagine it like the Gold, instead of mining physically they are mined digitally.
Crypto vs Fiat
With Fiat Money the very nature of the system is its flaw, the ability of Central Bank and Government to be able to manipulate its value by changing the supply & demand, and causing inflation / deflation. Since the system is Centralized not everybody has a say in it. That is where Cryptocurrency (Crypto) comes into picture. Cryptocurrencies challenge the orthodoxy of Fiat Currency. Cryptocurrency is decentralized, distributed, and works in a peer-to-peer network which is difficult to cheat and manipulate.
Types of Crypto and differences
Bitcoin (BTC) – Launched in 2008, The gold standard within the Cryptocurrency space. It is the first and most prominent cryptocurrency. It has a coin limit of 21 million and uses ‘SHA-256’ algorithm for hashing.
Litecoin (LTC)- Launched in 2011, It is referred to as Silver standard and is believed to feature faster transaction times. Litecoin like other currencies is an open source, global payment network that is completely decentralized. It has a coin limit of 84 million and uses ‘scrypt’ algorithm as proof of work.
Ether (ETH)- Ether is the cryptocurrency built on top of the open source Ethereum blockchain, which runs smart contracts. Launched in 2015, it is currently the second-largest digital currency by market cap, 1/10 the size of bitcoin. Ether supply is not capped like Bitcoin and its supply schedule is determined by members of Ethereum community.
Ripple (XRP)– Launched in 2012, it enables banks to settle cross-border payments in real time, offering instant low cost international payment with end-to-end transparency. Ripple doesn’t require mining like Bitcoin reducing the usage of computation power & minimizing network latency. All of Ripple Tokens are pre-mined before launch, only the introduction & removal of XRP from the market supply happens according to the network’s guideline.
Bitcoin Cash (BCH)– Introduced in August 2017, as fork of Bitcoin Classic. It is created for the purpose of bigger transaction blocks of ~8MB compared to original Bitcoin block size of ~1MB. Advantage? Faster processing speed for the users.
IOTA(MIOTA)– A cryptocurrency without blockchain Instead of a blockchain, IOTA uses “tangle,” which is based on a mathematical concept called a directed acyclic graph, as it is a cheaper alternative compared to blockchain. It is referred to as the Oil Tanker in the Cryptocurrency world, to read more click here.
Dash – Dash whose name comes from Digital cash, launched in Jan, 2014 as a fork of Litecoin. The cool thing about Dash is it keeps 10% of its mining profits to upgrade its own network in a democratic voting process, which means it can literally fund it’s operations without being bought by corporate interest. Read more here.
ZCash (ZEC) – Unlike Bitcoin which is Pseudonymous, Zcash is a decentralized cryptocurrency focused on anonymity & privacy. It uses the zk-SNARK zero-knowledge proof technology that allows nodes on the network to verify transactions without revealing any sensitive information about the transactions. Read more here.
Monero (XMR) – In Cryptos like Bitcoin because blockchains are transparent It’s easy to trace payments back to their original source. Here comes XMR, designed to obscure senders and recipients through the use of something called ring signatures.Read more about Monero here.
Above are some major Cryptocurrencies, the number of Cryptocurrencies available today is 1000+ with a overall value close to ~$250 Billion.Check out more here.
Promise of Crypto
Cryptocurrency is currently in its infancy and early adoption phase, nevertheless crypto has potential to revolutionize the FinTech space. The Banking system is old, and nothing much has changed since its inception. Cryptocurrency can help change the face of banking, it can take the power from a few elite and distribute it back to many. Also the technology behind Cryptocurrency has far reaching potential in Finance & other fields, It can help transform the payment ecosystem making it more secure, efficient and affordable. An interesting read on the applications of Cryptocurrency is the article here.
How to purchase?
Now in case you are wondering where and how to buy/invest in Cryptocurrency then Binance, Coinbase, Huobi Global, Zebpay (available in India), WazirX (available in India) are a few exchanges where you can change your Money for Crypto (Disclaimer – do your own due diligence before investing).
Based on your country some may or may not be available to you. To read more on how to buy Cryptocurrency in India, you may like to read the article here.
Issues with Cryptocurrency
As the saying goes ‘All that glitters is not Gold’, the Cryptocurrency also has its drawbacks. Let us understand some of these –
Volatility – Cryptocurrencies are very volatile and the price may fluctuate a lot in few hours. For example in just 2 weeks in December 2017, Bitcoin lost 25% of its value.
As a method of Payment– Cryptocurrency still lack the infrastructure and mechanism to be viable for acceptance in exchange of goods and services. Couple this with world price fluctuations, it becomes almost impractical to use.
Difficult to Understand – The underlying technology behind Bitcoin that makes it secure also makes it difficult to understand for a non-techie, making it confusing and less widely accepted for the consumers.
Easy to be used as means of illegal trades – The fact that Cryptocurrency is not fully legal or regularized everywhere it becomes an easy tool for people performing illegal trades like sex offenders, drug dealers etc. According to a data, around $70 Billion in Bitcoin are spend in illegal activities.
Storage Security – Yes, the very thing that make Cryptocurrency safe can be a problem for the user. A Cryptocurrency is stored in a digital wallet and if a user forgets his wallet password, it is near impossible to recover the lost data due to strict integration and encrypted blockchain.
Opinion Alert – All said, given the potential of Cryptocurrency for future it seems like fair but a riskier investment to make. You should not hold more than 10% of your wealth in digital asset like Cryptocurrency and use it as a hedge against our own Economy, Govt., Policies and Fiat paper money that can cause Inflation and decrease its value. Also other thing to note is diversification, a little bit of diversification can help you prevent the unsystematic risk and volatility thereof in Crypto world. (you can ignore this section, as it is just an Opinion).
Fun Fact –Dogecoin (DOGE) emerged in December, 2013 as a joke to satirize the growth of Altcoins via meme. It has immensely grown in popularity since and is now among top 25 Crypto assets. It is a derivative of LuckyCoin which is forged from Litecoin (LTC) and uses Scrypt Algorithm. It can be considered as a penny stock of Crypto world, currently valued at $0.0031 i.e. ~20 paisa in Indian Currency.
Thank you for reading, let us know in comments below what is your favorite Cryptocurrency. #KeepLearning