Forward
What’s up fellow traders, I’m definitely Not Forrest and this post will give you the bare essentials in understanding what cryptocurrency actually is so that you can trade crypto stocks.
What are my qualifications? I’ve been in the crypto space for a looong time, I was originally mining Bitcoin back when it was worth pennies. Back then, Bitcoin was worthless and mining it was purely a science project. You had to configure your own mining pools and there were no centralized exchanges.
Nowadays, it’s impossible to mine without ASIC miners which makes it impossible for the layman - not to mention nearly unprofitable.
Anyways what I’ll cover and what I won’t.
Will:
DLT - ( distributed ledger technology) and why it’s important
Blockchains - an implementation of DLT
Crypto Currency - an implementation of blockchain technology
My thoughts on investing in crypto
Maybe some other shit
Won’t:
NFTs - not yet at least
DAOs
Which crypto you should or shouldn’t invest in
Weather crypto is good or bad - thats up to you to decide
Again, possibly some other shit
This first draft will be a non stop stream of consciousness , but I will definitely follow up with more details per other crypto heads feedback and all the other stuff I’ve missed - which is a lot because the list is short right now.
Ideally this provides enough information for you to understand how to invest not just in crypto currencies but companies that specially in providing crypto services such as Coinbase and companies that focus on mining cryptocurrencies such as Riot BlockChain.
DLT’s
You have $50,000 in at Chase Bank and you want to move $5000 of that to Ally for whatever reason. You typically initiate that transaction from Chase and give them the receiving account info for Ally. Ally gets a note from Chase saying, “ hey, do you have an account that looks like this? We want to put $5000 into it?” Ally verifies that that account exist by sending a confirmation back to Chase. After both banks have verified the money is then moved, which takes a few days.
What about the other banks? No one outside of Chase and Ally know this transaction actually occurred, additionally either bank could stop the transaction for really any reason.
Another important point is that at first Chase owns your money, and then Ally owns some of your money. It is completely up to those banks how and when you can access your money. Completely.
If we did this transaction with a distributed ledger, we first would notify a distributed authority about a transaction that needs to occur. This distributed authority is comprised of a bunch of nodes that all talk to each other. You are still providing the receiving account details but the difference is there is no owner outside of you for these accounts.
As the distributed authority works to verify that this transaction can take place, usually using some mathematically algorithm, it eventually arrives at consensus. Consensus is generally when most nodes on the network are aware of the transaction and agree that it can and thus did happen.
In this case, the transaction is actually immediate. The first node in the distributed authority that hears about the transaction has actually completed that transaction. It then notifies the next node or multiple other nodes who will then also verify the transaction. Once most nodes on the network agree or have finished processing the transaction, that is when we will actually see the funds in the receiving account.
Benefits
• Every node and thus every participant in this method can see every single transaction that has happened
• Due to the mathematical nature - versus simple acknowledgement of details, of how these transactions happens generally makes them non fungible. That is they cannot be reversed or modified.
• Anyone can run a node
• Anyone can see the entire ledger at all times, and thus see every transaction that has ever happened - ever
• It can be fully anonymous
• There is no central authority that manages transaction, again anyone can process transactions
Drawbacks
• Consensus can be fast, it can also be slow as fuck. Speed isn’t the primary purpose of a DLT
• There is no central authority that manages transactions. You own dealing with all of your transactions. There is no one to call
Finally
In this example I talked about moving money, but we can use a DLT to verify any transaction of any time or to simply modify and information model in a non fungible way that each node on the network needs to verify. This could include updating healthcare records, moving value, storing a receipt, changing the owner of the title of some thing, calling a contract executed, updating bits of a really big distributed math problem, etc.
Blockchain
Alright so unless you are really dumb you can probably understand how cryptocurrency is an implementation of DLT, but I’ll enumerate what it generally aims to achieve here.
In general most cryptocurrencies aspire to be a distributed store of value. A lot of people actually argue about this, saying that there is a difference between currency and a store of value. But money is literally valuable, which is why we can spend it. Where Bitcoin actually fails as a currency is that no one uses it to transact because it’s slow as fuck and expensive, but that’s okay. There are other crypto currencies that will achieve that goal.
Cryptocurrencies also allow people to store value outside of the financial system. Many people that do this aren’t doing it because they need to hide anything, they are doing it because the current financial system makes it difficult for them to move upwards. Imagine people in Venezuela that own bitcoin or any other crypto coin.
Things you can do with crypto really easily
• Access your money from anywhere in the world. As long as there is a currency pair you can withdraw your funds into local fiat without an intermediary( well, you need an exchange but let’s not talk about that for now)
• Move large sums of money very quickly
◦ I can and have moved hundreds of thousands of dollars in around 2 minutes versus needing wait on my bank to do some bullshit.
• Store your money on paper
Paper money!?^
That’s right, in the crypto world all of the nodes on the network store wallets as simple keys. These keys have secret phrases that the owners are aware of to access the wallet. So we can all see every single wallet that exist and how much money is in that wallet, but we don’t know who the owner of that wallet is nor can we access it without the secret phrase/key. Both the wallet address and key can be stored and written down on a sheet of paper.
Simple, powerful, and has worked so far!
Consensus Models in Crypto
This can get complicated pretty fast but it’s important from a value perspective. There are a few ways to verify a transaction on the network. A node typically will do some mathematical work to verify a transaction and that work takes real world resources in terms of CPU. In fact, just running a node takes a minimum amount of resources which means almost all cryptos have intrinsic value.
We can incentivize the people that run nodes as well. You could be a miner which rewards you with more of that crypto for solving problems or verifying transaction on the network, and we can make this increasingly harder to do over time. This increase in difficulty raises the intrinsic value or price floor of the asset. (Unless demand breaks and everyone just stops).
Before we talk about investing in crypto you should understand mining and solving transactions is huge part of how decentralized stores of value such as a cryptocurrency can be self sustaining in the first place. It has become it’s own financial system, non just a means of moving or storing money. There is a natural and consistent ,flow.
Decentralized Exchanges
This is a section I’ll walk about briefly but probably deserves a much bigger explanation.( I’m also on a plane and need something to do right now) A decentralized exchange solves the problem that services like Coinbase create - that being a centralized authority.
Problems with a centralized exchange
• KYC - it exist and removes all anonymity
• Lockup - exchanges need to provide liquidity, well every exchange does but Coinbase is a business which means they are responsible for their financial first and foremost at all times. Sometimes this means halting transactions due to low liquidity. This isn’t good.
A decentralized exchange provides a mechanism where essentially through smart contracts (Another vocabulary word I’ll discuss in an addition to this post) we can allow people to trade peer to peer without any central authority. This is fucking awesome.
This movement is often referred to as DeFi. Decentralized Finance.
DeFi includes the ability to trade between currencies, get loans, and even create your own crypto and create a liquidity pool for it. Think of DeFi as the end game for crypto currency - once Defi platforms and services exist in a proper form we will truly have crypto currencies which will unlock and provide buying and lending power to millions of people across the globe that are currently limited to their shitty failing government systems ( or just don’t like them).
Problems of a Decentralized exchange
• Again, there is no one to call. If something bad happens you are kind of just fucked. For this reason Coinbase and services like it will always exist and make a ton of money.
• Gas fees. (This exist on any exchange really). It is not uncommon for the fees to move money (called Gas) to be more than the transaction value itself for small transaction. Like no shit it could cost you $30 to move $8 dollars.
◦ This is a problem of the underlying blockchain implementation and many currencies don’t have this problem, unfortunately for you the most popular ones do.
‣ This is currently and very rapidly being solved but I did want to call out the very current state of things as of this writing( December 2021)
Investing in Cryptocurrency
Alright I’m running out of gas and I’ve touched on a few things already but hopefully the dots are starting to connect. You might have even began to think about where NFT’s fall into this entire space. People that buy crypto fall into 2 large categories
One
They want to participate in a decentralized financial system where they have full control over all of there money and who also utilize crypto for lending, etc.
Two
People that want to buy Crypto for $1 and then sell it for $30
In my mind, Group One creates the price floor, and group Two creates the sky. The first group will generally come out ahead in the long run, as they hardly ever sell and continue to invest into the system. Group 2 will mint many multi millionaires as shit coins and other projects take off. Many people are in both One and Two. (Like myself).
Cryptocurrency isn’t going anywhere and I predict Bitcoin will forever be in the number 1 spot. TIME has proven that all of it’s drawbacks in terms of performance are completely unimportant in terms of it’s value. Being an owner of 1 Bitcoin in 10 years will put you in a rare club of humans, simple as that.
Cryptocurrency in general has the power to completely revolutionize the financial system. Today, people keep small parts of there money invested in crypto. Imagine if 50% of the population withdrew all of there money and instead stored it in a crypto wallet? They could then use decentralized exchanges to move into different types of crypto, move money, pay people, buy fiat, etc.
In this world the roles of crypto and fiat are reversed, fiat is a means to buy local goods where crypto isn’t accepted and crypto is the defacto value store. Anyone with access to internet can create a wallet and even store their money without permanent access to a computer.
How to invest
Look for projects that think big and have rapid development. I have a background in software engineering so it’s easy for me to sniff out shit teams. A project should have many releases within a year.
Look for projects with a community, community drives this shit more than anything. If you are the only person that like your crypto because its better/faster/whatever, well then you are just wrong. There is a difference between being early and buying a crypto people just straight up don’t like.
Look long. I currently own around $100K of a coin called OMI that I think will blow up in around 2-5 years. It’s worth around $.005 at the moment or something. Even at $60K or whatever BTC’s price is, it will be small compared to 5 years from now. In terms of adoption we are SUUUUPER DUUUPEr early. Like super fucking early. Not owning crypto is irresponsible for any serious investor, so get some.
Crypto markets also never close, which means you can trade whenever the fuck you want to. No longer are you limited to blowing up your account during business hours, you can bankrupt your entire family on Sunday too!
Of course, we are focused on stocks/ETFS in this write up so let’s move on!
Investing/Trading in Crypto Based Companies
All of the aforementioned should be considered when investing in a company that dabbles in crypto currencies. The most understandable business model is mining - that is a company who’s P&L consist entirely of the profits of mining. The value of these companies, RIOT/MARA for example, tend to change with expected values of cryptos. It is not a 1 to 1 correlation though.
When evaluating how to trade a company like RIOT for example you should heavily consider sentiment of whatever they are mining. These companies are in my opinion sentiment swing plays almost entirely and there is a ton of money to be made there. You should also consider their liquidation schedule - how much of their mined crypto do they immediately sell, if at all, versus hold long term.
You must ALSO also understand the ecosystem and roadmap of the underlying crypto they mine. If the company is based purely on mining Ethereum, we know that Ethereum plans at some point to abandon mining entirely and move to a proof-of-stake algorithm,( Something we haven’t discussed yet). So trading LEAPS on this could be exceptionally risky.
Correlation to crypto prices
We need only momentarily glance at a chart to see that crypto stocks do not trade 1 to 1 with their underlying asset. Additionally a company like Coinbase has profits more directly link to crypto currency adoption and utilization of their service than the underlying prices of the assets themselves.
Their addition of Shiba Inu is a great example of where their focus is as a business. We can expect any popular coin to be traceable on their platform as they charge a fee on each trade/purchase.
Coinbase also provides lending services based on the value of your crypto assets. It could then benefit to due significant DD on the growth of the crypto lending sector as a long value play.
Crypto currencies also tend to have clear cycles(so far). Knowing that their are cycles, and company whose business is mining should then expect to experience this cycle.
So then, here is how we could frame many companies
ONE
A platform company, focused on providing services, thus a generally diversified business
TWO
A mining company who’s business is not diversified and faces greater risk. We haven’t discussed how mining works exactly but basically mining requires specially built machines nowadays called ASIC miners. There things have a short shelf life and profitability is also directly correlated to crypto prices. Mining also uses a shit ton of electricity and thus is capital and operationally intensive.
Mining companies are excellent swing plays in my opinion due to their naturally big -swings. Platform companies are too but since their P&L is far more diversified they generally can be treaded more tradionally.
Closing
I haven’t written this much in a hot minute so I’ll definitely come clean it up. Love and appreciate you guys, let me know what you want me to cover next. There is a ton of stuff here mentioned that I really didn’t dig into, but this is a crypto 101 after all.
Not Forrest Out!
