How I dabbled into world of crypto currency

Like every other person, I wanted to save money hence I spoke to people around me who were working in banks, investment management firms and realised they gave me a next to nothing return of around 1% or at most 3%. Observing the pound depreciate it would put me at a loss if anything consequently, I started reading books on financial interest and came across a quote from Warren Buffet. ‘Never underestimate the value of compound interest.’. Although I agreed with every word I realised that in current times there are very few if any investment opportunities where you can get good value for saving a couple of hundred pounds a month. As most of it is designed for the big investors.

For those of you who are new, everyone has their own definition on how to best explain it the most commonly used term is ‘decentralised ledger’ to understand it we need to think of early days of banks when they weren’t connected they used to be incoming and outgoing transactions logged in a book which is still known as their ‘general ledger books’. The reason, you would trust that as it’s not manipulated with because it’s securely stored with the banker whom we trust to do the right thing. In modern days this is all interconnected with huge IT systems managing the same thing but digitally. The problem lies with the bureaucracy and red tape with this environment where banks hold the keys to this ledger and they decide how much they should charge you for a certain service (which might not cost them the same).

This bureaucracy also slows down transactions between banks hence inter country transfer often take days and weeks (Euro transfer of SEPA is around 4–7 days). As the transaction i.e. the ledger goes through countless mediums to get to the end user with each part taking its time and charging for the transaction even though there is no physical transfer of any amount. This works the same way in our daily work life where we work on spread sheets and only one person usually has the latest source of the truth. So if the spread sheet is being worked on by 9 different team members it will pretty quickly become outdated and slow down the whole process. To keep all in sync each individual would have to update the spread sheet and share it across so everyone updates the most recent spread sheet. Now imagine google drive compared to it where everyone has one source of truth which is the single document that can be accessed anywhere by everyone in real time while keeping track of every change that has been made in real time.

Now this ledger spread sheet or often known as blockchain in the crypto currency world that are stored in tens or hundreds of computers so even deletion of one file or even few won’t affect the chain.

Most importantly each of these spread sheets is heavily encrypted so nobody can actually view, understand or manipulate the information. As this is encrypted and decentralised this can be stored on anyone’s computer as on its own they can’t-do much with it.

This whole technology is open source so anyone can download a piece of software that will allow them to help with storing it and helping match the transactions for blockchain, as the individual is using their electricity and computing power with this process often known as ‘mining’, they get a small reward in form of crypto currency. So, the people who say crypto currency is generated out of nothing is not actually correct, quantitative easing and taking a national debt is the money generated out of nothing hence a piece of bread which costed 50p 10 years ago is costing you a £1 as the value of your currency has halved in that amount of time. If value of that 50p was increasing by the day you would have been able to buy more out of that not less.

The final part of this is transaction from A to Z. Currently, we work in confines of a bank where if somebody wants us to send money we need to create a bank account and that’s the only way we can send or receive money or through money transfer service which has their own network. However, in world of crypto currency, there is no single owner or entity anyone can create their own crypto wallet (a.k.a bank account) for free which is a unique id like your bank account/debit card number which is public key that you can give out to everyone and private key which is like your password or pin that you keep it to yourself. Once both are verified you are allowed to spend the money. So now we have a system which can verify the individual’s identity without needing a bank in between.

As you can open your crypto wallet on your own (bank account) send receive money using an open network securely (using open secure network) and ledger is maintained/matched automatically using blockchain technology. This significantly shifts the power that traditionally stayed with banks, which is now been de-centralised taking the control away from them.

The government could penalise banks if certain taxes aren’t being paid by the individual or they are sending money to a sanctioned country as it happened within confines of bank however with crypto currency it is an independent network controlled by no one and money transactions happen directly between two parties, who would mostly be anonymous. This can be viewed both as a good bad thing like in case of government surveillance. In summary, this creates an alternate financial system which is fully autonomous and out of reach for big banks, companies or countries cutting all the bureaucracy and red tape raising the barrier to entry into investments.

Crypto world is like the wild west right now where rules aren’t set people are still discovering new lands and trying to understand the value they can create out of this new piece of technology. There are Initial coin offering (ICOs) instead of Initial Public Offering (IPO) which aren’t regulated and anyone can do it.

A recent parallel could also be looked in a way of internet when Tim Berners-Lee help created world wide web where everyone knew this was going to be huge but it took 5–7 years for people to figure out something meaningful to do with it. It roughly took 10 years for everyone to get on the bandwagon of internet bubble (1997–2001) before it crashed in the early 2000s and people started looking at actual value companies provided behind this internet businesses.

If we look at the interesting parallels crypto currency was first came into the picture during the height of financial crisis in 2008, it started making headlines by 2011 and currently, it definitely is in a bubble. It has bursted a couple of times in past and even in this year but like the internet, the technology is too good to ignore in spite of these minor setbacks.

As for the future of Bitcoin compared to other currency I see it as gold. As in the past people used to trade in gold coins but slowly it just became a stored value based on which you can trade. So no matter what kind of currencies are built on top/around it the value of gold a.k.a Bitcoin will always hold or rise. In terms of the speed of Bitcoin and its limitations with amount/speed of transaction which is limited to 7 per second, similar to internet with time we would move in it fibre optic from dial up internet. However the block chain technology on its own even if you take the currency out of it is the real technology like internet whose benefits are still to be realised.

I am also thinking of writing further about getting started into investing and recently I have also started looking in to crypto mining, I might talk about in a follow-up blog.

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