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Cryptocurrency 101

Ever since Nas Daily’s video came out about how I earned over $400,000 with less than $10,000 investing in Bitcoin and Ethereum, I’ve been getting hundreds of questions from people around the world about how to get started with cryptocurrency investment.

First: I’m super glad there’s so much interest in cryptocurrency right now. I firmly do believe that cryptocurrency and blockchain technology has the potential to fundamentally change much of the way our world currently operates for the better. It reminds me a lot of the internet in the 90s.


Third: All of the following words are entirely and solely my own opinion, and do not reflect any objective truth in the world or the opinions or perspective of any other individual or entity. I write them here merely so people can know how I personally approach cryptocurrency, and what I have personally found helpful in my foray into this realm.

I’m firmly of the opinion that one should never invest in something one doesn’t thoroughly understand, so I’m going to split this article into three parts.


Part I: What is Bitcoin? Why is it useful?

Great question. If you want the full story behind the advent of bitcoin, I highly recommend the book Digital Gold. It traces the entire history of bitcoin from its inception all the way up to 2015. It’s an engrossing read, and highly informative.



Subpart: The Background Context of Bitcoin

Bitcoin was invented in the aftermath of the 2008 financial crisis, and the crisis was a clear motivating factor for its creation.


Of particular note is fractional reserve banking. When you give a bank $1,000, the bank doesn’t actually keep all that money for you. It goes out and is legally allowed to spend up to $900 of your money, and keep just $100 in the off chance that you ask for your money back.

In the most simplistic case, if you are the only depositor at this bank, and you ask for more than $100 back at once, the bank won’t be able to give you your money, because it doesn’t have it any more.




This is what led in large part to the Great Depression, for instance. The whole system is fundamentally predicated on trust in the system, and the second that vanishes, everything can go south incredibly quickly.



After the Great Depression occurred, the government attempted to address this issue by creating the Federal Deposit Insurance Corporation (FDIC), which technically guarantees all customer deposits in participating banks up to $250,000 per account.


In fact, this has already happened. The FDIC used to have a sister corporation that insured savings and loan institutions, as it itself at the time only insured bank deposits, and not savings and loan institution deposits. This was known as the Federal Savings and Loan Insurance Corporation, or FSLIC.




Subpart: Fiat Currencies Compound the Dilemma

Mistrust in fiat currencies, or currencies created and backed solely by faith in a government, both because of the modern banking system and because of the inherent nature of fiat currency, has in large part been why gold has been used as such a reliable store of value over millennia.

Fiat currencies are the world’s predominant form of currency today. The US dollar or the British pound, for instance, are fiat currencies. These are currencies that are entirely controlled in their supply and creation by a national government, and are backed by nothing but faith in that government.


Lest we think this an isolated instance, Venezuela is experiencing incredibly similar hyperinflation in the present-day, right this moment. The Venezuelan Bolívar inflated over 800% in 2016, and shows no signs of stopping in 2017.




Naturally, you still had to believe that the government would actually keep enough gold to fulfill all these demands (déjà vu and foreshadowing, anyone? Any flashbacks to fractional reserve banking yet?), but it was certainly better than nothing.


No government, no matter how much they wanted to or needed to, could simply conjure up more gold on demand. Fiat currencies, on the other hand, can and often have been printed on demand by governments whenever they happened to be short on cash and needed a quick infusion.

This printing of more money generally leads to inflation, as the total value of all the money in existence rationally should stay the same, no matter how many dollars are printed. Hence, if more dollars are printed, each dollar is worth fractionally less of the total money supply.

In fact, governments design their currencies and monetary policies to inflate intentionally. This is why $100 US dollars in 1913 (when the government officially started tracking inflation rates) is equivalent to $2,470 dollars today, just over 100 years later.

In fact, the average inflation rate of the US dollar over that time period was about 3.22%. This seems low, but in reality means that prices double just every twenty years. In other words, your money becomes half as valuable if you keep it in US dollars every twenty years. Doesn’t seem ultra cool to me.


This makes gold, in many ways, a better store of value based on fundamental principles than fiat currencies over time. You don’t have to trust anyone to trust that your gold will retain its value relatively well across the sands of time.






Almost every nation quickly followed suit, and since then, fiat currencies have been allowed free reign to grow as they please with no accountability whatsoever in how much a government chooses to expand their money supply.




No solution to this tradeoff conundrum has heretofore been discovered, or even necessarily possible. Bitcoin, however, with the aid of recent technological advances (computers and the internet), solves all of these issues. It takes the best of both worlds, and puts it into one beautiful, elegant solution.

Subpart: Bitcoin to the Rescue

Holy long-windedness, batman! 2,700 words later, and we finally get to talking about bitcoin. I’m as relieved as you are. Remind me never to write again.

Bitcoin was designed, essentially, as a better ‘digital gold’. It incorporates all of the best elements of gold — its inherent scarcity and decentralized nature — and then solves all the shortcomings of gold, in allowing it to be globally transactable in precise denominations extremely quickly.

How does it do this? In short, by emulating gold’s production digitally. Gold is physically mined out of the ground. Bitcoin is also ‘mined’, but digitally. The production of bitcoin is controlled by code that dictates you must find a specific answer to a given problem in order to unlock new bitcoins.

In technical terms, bitcoin utilizes the same proof-of-work system that Hashcash devised in 1997. This system dictates that one must find an input that when hashed, creates an output with a specific number of preceding zeros, among a few other specific requirements.


Instead, one must essentially brute-force the solution, by trying every single possible input in order to find one that creates an output that satisfies the specified requirements.



The algorithm that dictates the mining of bitcoins, therefore, would ensure that on average, it would take 600,000 random tries of hashing values to find one that would fulfill the requirements of the specified output required to unlock the next block of bitcoins.

It can do this by making the problem more or less difficult, by requiring more or less zeros at the beginning of the output that solves the problem. The more zeros that are required at the beginning of the output, the more exponentially difficult the problem becomes to solve. To understand why this is, click herefor a reasonably good explanation.

In this case, it would require just the right amount of leading zeros and other characters to ensure that a solution is found on average every 600,000 or so tries.

However, imagine now that a new computer joins the network, and this one too can compute 1000 hashes a second. This effectively doubles the rate at which the problem can be solved, because now on average 600,000 hashes are tried every 5 minutes, not 10.

Bitcoin’s code elegantly solves this problem by ensuring that every 2,016 times new bitcoin is mined (roughly every 14 days at 10 minutes per block), the difficulty adjusts to become proportional to how much more or less hashing power is mining for bitcoin, such that on average new bitcoin continues to be found roughly every ten minutes or so.



This isn’t just theoretical — it’s the reality of gold production. This graphillustrates vividly the fact that gold production has been dramatically increasing over time, and is today over four times higher than just a hundred years ago.

In fact, more than half of all the gold that has ever been mined in the history of humankind has been mined in just the past 50 years. The difficulty of mining gold doesn’t proportionally increase with the number of people mining it, or with technological innovations that make it significantly easier to locate and mine gold over time.

Bitcoin, on the other hand, will always be mined on a carefully regulated schedule, because it can perfectly adapt no matter how many people begin to mine it or how technologically advanced bitcoin mining hardware becomes.

In fact, it’s already known for certain that there will only ever be a total of 21 million bitcoins in the world.

This is because the amount of bitcoin that is mined every time a hash problem is solved and a new block is created halves every 210,000 blocks, or roughly every 4 years.

The initial reward per block used to be 50 bitcoins back in 2009. After about four years, this dropped to 25 bitcoins in late 2012. The last halving occurred in July 2016, and dropped the reward per block mined to 12.5. In 2020, this should go down to 6.25, in 2024, 3.125, and so forth, all the way until the reward drops to essentially zero.


On top of this, bitcoin is trivially divisible to any arbitrary degree. Presently, the smallest unit of bitcoin is known as a satoshi, and is one hundred millionth of a single bitcoin (0.00000001 bitcoins = 1 satoshi).

This means that unlike gold, bitcoin is perfectly suited to not only being an inflation-proof store of value, but also a day-to-day transactable currency as well, as it is easily divisible to any arbitrary amount. You can buy a cup of coffee with it just as easily as you can buy a car.

Moreover, bitcoin can be sent incredibly quickly and remotely over the internet to anyone anywhere in the world. This is because when bitcoin is mined, the miners are actually providing a service in powering the bitcoin network.



As a reward for providing this valuable service, miners are allowed to add a single transaction to the beginning of the block they mined, called the ‘coinbase transaction’. This transaction contains the brand new bitcoin that was created when they mined the block, and allows the miner to claim this bitcoin for themselves.


The answer is no, because miners are not solely rewarded by the new bitcoin that is generated each time they mine a block. Users may also send a transaction fee along with their transactions, which is paid out to any miner who decides to include their transaction in a block they mine. Over time, as the bitcoin network becomes used for more and more transactions, it is expected that transaction fees will be more than sufficient for incentivizing enough miners to continue mining blocks to keep the bitcoin network safe, secure, and robust.


No one person or government can decide to conjure up more bitcoin on demand, or to take it away. The only way the rules that govern bitcoin can be changed is if the software bitcoin miners run to mine bitcoin is changed.



Everything up to the point of the software change remains the same in both blockchains, but after that change, the blockchains diverge. Once diverged, they can never be reconciled and remerged.


This does mean that in theory, bitcoin is vulnerable to what’s known as a 51% attack — an attack in which if a single entity was able to gain control of at least 51% of the total hashing power being directed at bitcoin mining, it could outpace a legitimate blockchain and temporarily take control of the network.







If one wants, rather, to keep the movement of their money less overt, one simply needs to ensure that the bitcoins they own are never tied to their identities, and that their transactions on the network are obfuscated. This can be accomplished with a variety of methods, such as using a tumbler, which allows one to send bitcoins to an intermediary service that will mix these bitcoins with bitcoins from numerous other sources, and then send bitcoins forward to the intended destination from sources entirely unrelated to the sender’s original bitcoins.



This is highly simplified, but effectively how a tumbler works, albeit at much larger scale, and with many more senders and receivers of all sorts of varying amounts.






Fraud is also inherently eliminated, as any transaction propagated and confirmed by the bitcoin network by 6 or more blocks is generally accepted to be impossible to ever revoke.






Ethereum, as will be noted later (hopefully in another article because my god I never want to write again), takes this concept to the next level and runs with it.


This, like systemic banking failures, is not something most people generally have to worry about 99% of the time. However, in the 1% of cases where this does become an issue, it becomes a very serious issue. Refugees and other victims of persecution and oppression are clear examples of this.

As a refugee, generally, if you hope to escape with your money, you have to carry it in physical form on you, either in gold or in paper currency. This is limiting for a few reasons: one, you can only take so much as you can carry or convert to physical form, and two, physical currencies are exceedingly simple to detect and confiscate.


Immediately thereafter, the US Treasury revalued all their gold at $35 per troy ounce for foreign transactions, and in the process reaped an enormous profit at the expense of all the citizens that were forced to give up their gold at fire sale prices.

It sounds incredible, but this is real life. The government threatened to fine anyone caught possessing gold in violation of this order $10,000 ($185,000 today) and throw them in jail for up to ten years. A famous case involved one Frederick Barber Campbell, who had on deposit at Chase Bank over 5,000 ounces of gold (worth over $6 million today), and attempted to withdraw the gold that he rightfully owned. Chase refused to allow him to do so, so he decided to sue Chase for depriving him of his assets.

In response to his lawsuit (this case demonstrates the value of basically everything about bitcoin, from the ability to store your own money to the ability to not rely on the legal system for recourse), Campbell was counterattacked and indicted by a federal prosecutor, and had to defend himself in court for not giving up his gold.

Ultimately, while Campbell didn’t end up going to jail, the government did decide to seize all his gold, and confiscated all $6 million worth of gold from him.

It took a full 40 years, or until 1974, before Gerald Ford signed a bill making it once again legal for private individuals and corporations to own gold within the United States.

This underscores the oft mercurial whims of governments, even well-regarded ones like that of the United States, that most citizens heretofore have been subject to without relief or alternative. Most of the time, things run well enough that we all get by without having to think about this fact too much. Sometimes, however, things do go really, really wrong.





It’s a good question, and one that underscores just how interesting the concept of money really is, and how rarely we actually think critically about it.

Sure, let’s say that you can’t compare bitcoin to gold and say it’s better because gold has tangible, real-world utility and bitcoin doesn’t.

What is the value of that real-world utility? Only about 12% of gold purchasedevery year is actually used for industrial and medical purposes. If this is truly where gold’s value is derived from, gold would be worth dramatically less than it actually is.



Even the $1 bill, which seems to be the best deal if one is valuing the worth of one’s currency based on its intrinsic ‘tangible’ value, has only ~5 cents worth of actual paper value behind it, or <5% of its actual denominated value. Where does the rest of that 95 cents of value come from?

It turns out these gaps in value between the worth of the ‘tangible’ thing itself and the actual value of the currency as it stands on the market today is just as much conjured up out of thin air as a mere concept as bitcoin’s perceived value is.






As a thought exercise, imagine a new fledgling nation called the United States came into formation and decided to create their own fiat currency today. At the same time, bitcoin is introduced as a currency.




Remember: just 13 years after its inception, the US currency had already suffered fatal runaway inflation and collapsed. Bitcoin, on the other hand, is worth more than ever just 9 years after its inception, and currently boasts a market cap of over $40 billion. Which would you trust?

The other common argument against bitcoin is that it is useless for any real world functions right now besides ransomware and illegal activities, and is therefore worthless because it has no good use cases.




The same growth trajectory is how I see bitcoin, cryptocurrency, and blockchain technology at large playing out. If all goes well — and there’s no guarantee it might, everything indeed might fail and all our hopes and dreams might gang aft agley — there’s no reason at all that bitcoin can’t one day surpass even our wildest imaginations today, just like the internet did before it, and fundamentally rewrite the script for how we interact with money and the world as a whole.

Yes, today, it is far from this goal, but even now, we make progress in pushing forward the utility of bitcoin in every day pragmatic life. Already, it has proved indispensable to myself and hundreds of thousands of people around the world. I pay many of my employees today in bitcoin, even, because several of them live in Eastern Europe where they’re subject to draconian capital controls.





Part II: Investment Philosophy

Okay — now that you hopefully have a good grasp of what cryptocurrency is and why it’s interesting, we can move on to dipping your fingers in getting some.

We can all be honest — the reason the vast majority of you are reading this is probably because you’ve heard a lot about just how much money people have made investing in cryptocurrency. Many, if not all of you, are wondering how you, too, can get on the gravy train and start making millions.






Here, I’ll try to cover the most common ‘mistakes’ people have made. Do keep in mind that this is all entirely my own opinion. Please come to your own conclusions here.


On the first mistake — I made this mistake myself when I first got into cryptocurrency. I first heard about bitcoin from a friend who was raving that we should all get into it just around the time the price of a single bitcoin reached $100. He had gotten in at $30, and was extremely pleased with his gains.

At the time, it was relatively big news that bitcoin had reached $100. I remember thinking to myself that it was clearly too late to get in, and promptly forgot all about bitcoin.













With investments, it’s the same deal. If we decide that Company X is presently worth $100,000 dollars, and that it has strong growth potential in the future, and the market is presently valuing Company X at $50,000, that would probably be a good buy.


In a third case, if we decide Company X is worth $100,000 today, and has extremely strong growth potential, and the market is valuing it at $100,000 today, it might still be a good buy to hold and capitalize on that future potential.






It’s important to note that the mere fact that something is speculative does not necessarily mean it can’t be a good investment, or that it is merely akin to blind gambling, dependent solely on the luck of the draw. Poker might be a suitable analogy. Poker can be played well or poorly, and skill and calculation lends an incredible degree of advantage to a player’s odds of success. However, the game still fundamentally deals with an immense degree of unavoidable variation and unknowns, and even the best poker player is guaranteed to lose many of their games, even if they play each one ‘perfectly’. The goal, simply, is to win more than you lose, and with the right amount of skill, knowledge, and preparation, this is a possible feat in poker.



In the case of bitcoin, my personal belief is that there is enough to justify the possibility of long term gain based on fundamentals and first mover advantage. If everything goes right, I do see a future in which it’s possible that bitcoin achieves a market cap similar to that of gold’s, given that so far as I can see, it provides all the benefits gold does, and a host of incredibly valuable advantages on top of those existing benefits. I even see a future where it justmight be possible that bitcoin goes even further, and becomes a dominant leading global currency. It’s also possible that bitcoin’s blockchain is used to power many future technological innovations, such as smart contracts and even DAOs, and thereby creates and imbues itself with even more value.



Similar problems like this are virtually guaranteed to occur in the future as well, and it’s simply impossible to predict right now how the bitcoin community might respond to and handle those problems, and if they’ll be successful in doing so.


On the flip side, if the world suffers a global financial meltdown on the scale of the Great Depression or something similar again, and fiat currencies start to crater, it very well may be such that governments are forced to resort to accepting bitcoin and other cryptocurrencies, if enough people simply flat out refuse to put their stock in fiat. This was exactly what the US government was forced to do just 13 years into their original experiment with Continental currency, when they agreed to promise to back all the currency they issued with hard gold and silver.



Dogecoin is the most pure example of this. Dogecoin offers just about no fundamental innovations over bitcoin, and is in fact a self-deprecating cryptocurrency premised (initially, at least) entirely on poking fun at itself. The name itself is a reference to the doge meme, and offers little to no further justification for its existence.

Despite this fact, Dogecoin’s market cap is presently valued at over $300 million. Come to your own conclusions here.



Litecoin would then have to deal with exactly the same issues bitcoin has faced at scale, and it’s not clear at all that litecoin would fare any better at resolving such conflicts if ever reaches the same scale as bitcoin presently has.




Conversely, if you bet at even odds that a six sided dice roll would come up 3 or higher, your expected value would be positive, as you would be correct 2/3 times. Hence, if you repeated this bet an infinite number of times, you would be guaranteed to be earning more money than you lost.




That said, it’s extremely important to keep in mind that one doesn’t get infinite opportunities to keep playing this bet out over and over again. There is only one bitcoin in the world, and we only have one opportunity to play out this exact bet. Given this fact, it’s important to realize that if this were somehow to actually be a perfectly EV neutral bet, with a possibility of a 150X upside and a 0.66% chance of realizing that upside, it would still mean that we have a 99.33% chance of losing all our money that we place on this bet. It would be extremely foolish, therefore, to invest all our money into such a wildly speculative investment, even if it is technically EV neutral or even slightly EV positive. What might make sense, is to set aside a responsibly proportionate amount of money specifically earmarked for such wildly speculative investments as a part of a holistic investment portfolio, that one is fully willing and able to lose without significant impact to one’s well-being or quality of life, and to invest that amount of money in a +EV bet like this.


If you see bitcoin as most useful for its blockchain, you might calculate hence the value you think can be created through applications, contracts, and other technological innovations run on the blockchain, and use that to guide your estimation of bitcoin’s value.

If you think bitcoin will be used to primarily enable black market transactions, same deal. And so on.





More recently, the approval or rejection of a bitcoin ETF was widely touted as being the contributing factor to a bitcoin bull run from under $1000 to over $1200. It was speculated that if the ETF were to be rejected, that naturally the price would fall to where it was before the bull run began. Indeed, the moment the ETF was announced as rejected, the price did momentarily fall to almost $1000. However, it just as quickly recovered, and began an inexorable climb all the way up to over $2700, where it stands to this day.

Consequently, with the short term price movements of bitcoin and other cryptocurrencies being incredibly volatile and oftentimes nothing short of inexplicable, I highly caution anyone against making decisions such as selling their bitcoins on the way down in anticipation of a market crash, so as to either avoid the crash or to buy their coins back at a cheaper price at the bottom of the crash.

This goes hand in hand with mistake number four I mentioned above: day trading. This is absolutely number one the reason I see people who have gotten into bitcoin and cryptocurrency lose their money. If you at almost any point in the history of bitcoin (earlier than say, this month of June), merely bought bitcoin and held it to the present day, you would have made money. However, countless people have actually lost money in bitcoin, and this is because they ended up trading their bitcoin somewhere along the way.












The crash proved to be the best thing that could have happened, however, because it gave me time to actually do my research and learn about bitcoin, and have real reasons for believing in it long term, at a point in time where the price was unusually deflated. As a consequence, I was able to buy more bitcoin at the very bottom of the market, around $230 or so, when I became truly convinced of bitcoin’s long term potential. I was also lucky enough to decide not to sell the bitcoins I had originally purchased for $1000 or so, and ultimately saw even those return 250%+ in profit.




The final point to make, then, are a few thoughts on how to correctly invest in bitcoin and other cryptocurrencies. I have no truly great pieces of wisdom to offer here, but do have a few ideas that primarily aid in being psychologically being resilient to the short term vicissitudes of cryptocurrency investment.


The mere fact that the future potential is still huge doesn’t necessarily preclude the fact that cryptocurrency may be in a short term bubble, and that prices might crater any day by 30%, 50%, 80%, or even more.


I think that this is a great strategy, and personally practice it with a few modifications. While I’ll never sell at any price essentially (unlike other investments, bitcoin and cryptocurrencies are unique in that they arecurrencies, and consequently if they succeed, you won’t have to sell them to gain value from them. You can just use them directly, just as you might US dollars or any other form of currency. In the manner that I use the word sell here however, I mean that I likely won’t sell at any price under $100,000, as that’s where I personally see the moonshot value of bitcoin going towards, in the slight chance that it does succeed), no matter how high the price rises in the short term, if and when the price becomes particularly low as a result of a cratering market, I will look to buy more than I normally would, to double down on my investment here — all the while keeping in mind never to invest more than I’m perfectly willing to lose entirely.



That about sums up my thoughts on cryptocurrency investment at large. There are some nuances, but I figure 8000+ words worth of a brain dump is a good enough place to start. If you’re still here, please feel free to read on to Part III if your constitution allows for further word consumption.

Part III: How to Buy and Store Your Cryptocurrency


Note: The following bit about exchanges to use holds true for those in the United States. For those based elsewhere, you’ll need to do your own research on the best exchanges to use in your country. The rest of this post should hold the same for everyone in the world, however.

The easiest way to invest is to sign up at Coinbase.com. If you sign up with a referral code, you get $10 when you purchase $100 in bitcoin or ether. I’ve linked my mom’s referral code here if anyone is interested. Straight to her retirement fund! (In the interest of having zero monetary gain from my fiduciary advice, however, just email me if you use this link and buy over $100 of bitcoin, and I’ll send you the whole $10 my mom receives on her end as a referrer — so you get $20 for investing $100. Not bad! →SORRY NEVER MIND I’VE BEEN OVERWHELMED WITH THESE MESSAGES AND CAN’T KEEP MANUALLY DOING THIS, but you’re still welcome to use the code and get a free $10 and give my mom a free $10 too!)

However, this is not the cheapest way to invest. That’s GDAX.com (no referral bonus with this, though). Thankfully, GDAX.com is the same company as Coinbase, and utilizes the same login. Once you make your Coinbase account, you can just login with it to GDAX.com.




You can even use a credit card to buy straight from Coinbase.com, but fees here are very hefty. Use as a last resort.




From there, if you’d like to buy any alternative currencies, you can use your bitcoin or ethereum on Shapeshift.io without any account to instantly transfer your bitcoin or ethereum to any other cryptocurrency under the sun, essentially.





A Trezor also allows you to set multiple passwords that open secret vaults to different wallets on your device, such that even if in some crazy scenario someone just kidnaps you and threatens to beat you with a wrench until you give them your coins (not too crazy actually — I’ve been abducted before and had to ransom myself for thousands of dollars in Africa), you can just give them a second password to another wallet that holds say $500 in cryptocurrency instead of $10 million, and there’s no way for them to know that that’s not all the money you had on your Trezor.

If someone steals your Trezor, they won’t be able to find your coins either, as they’re protected by a PIN that only you know (plus a password if you want to use that feature I mentioned above). You can also recover the coins yourself with the recovery seed the Trezor will give you the first time you use it, which you should store in a super safe location like a safe deposit box somewhere. If you don’t use utilize the password feature, however, keep in mind that anyone who discovers this recovery seed instantly has access to all your coins, and all your other forms of security are for naught. If you enable the password feature, however, they will need your password as well as the recovery seed in able to access your cryptocurrency, which makes it significantly more secure.

A Trezor will give you your own personal wallets for bitcoin, ethereum, dash, zcash, and litecoin, as well as any ERC20 token built on top of ethereum.







Congratulations, you’ve made it to the end. That’s it. Good luck!

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