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Blockchain? Bitcoin? How to Invest?- A Dummy’s Guide

So naïve of you to think that blogchatter’s #BlogchatterA2Z can be completed without touching upon the hottest trend of current times. Yes, we are talking about cryptocurrency. Today, we shall learn a few basics about cryptocurrency in a humanish language (No jargons, promise). Apart from that, we would address the star of this blogpost, WazirX. That is how I personally invest in Crypto.

So, what are we waiting for? I am so excited, and you should be too!

What is Blockchain?

First thing’s first. Blockchain is NOT BITCOIN. We use these terms interchangeably, which is absolutely wrong. Blockchain is a technology. Think of it as something as big and fundamental as the internet. Internet has so many use cases: Emails, Social Media, E-Commerce etc. right? Similarly, the technology- Blockchain has it’s own uses too. If you say that Bitcoin is blockchain, that would be equivalent to saying that Internet is Emails.

Example of a Ledger

Whatever field of work you are in, you must have come across a ledger. A basic register that has entries of all transactions. Some credits, debits etc. Entire banking system works on this ledger. It was maintained physically once, and now, electronically.

If I send you Rs. 100, there will be an entry in my ledger of debiting this amount. You (receiver) will have a similar entry of credit. However, between our ledgers, there will be bunch of other ledgers of banks, regulators, intermediaries, enablers etc.

What’s the Issue?

If you think about it, there are some issues related to this system of maintenance of ledgers:

A. This is not cost effective. Because each ledger maintaining intermediary will have to be compensated for it’s work.

B. It is time consuming. All ledgers have to be reconciled in order to validate the transaction.

C. It is centralized i.e. a central authority (Banks) in our case maintain it. So there is a lack of transparency. Apart from that, if banks fail, there is no way you would ever be able to retrieve your ledger information.

Now imagine, if there were just one single ledger. Once you make a transaction, everyone having access to that ledger will validate it. Therefore, only one entry would be sufficient to keep a record. Since involved individuals validated it, it would be faster, cheaper and decentralized.

We call this entry (or details related to this entry) as a block. Every new transaction gets added as a block to this chain and hence the name Blockchain. If you are still with me, we just finished a fundamental explanation of what in god’s name blockchain is.

Textbook Definition: Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

Properties of Blockchain:

Now that you know what a blockchain is. Let’s explore a few more of it’s properties:

A. Immutable and Secure:

As you have seen, that each block is added as a part of this chain. So, there’s a linkage between the current block and the previous block and the one before. Which means that if a hacker tries to manipulate the transactions, he would have to change the entire chain. Which is just not possible. That means, blockchains cannot be tampered with. They are extremely secure. These blockchains are also governed by strongest cryptographic algorithms which are theoretically impossible to crack.

Immutable and Secure

B. Traceable:

Once again, due to the linkage between the blocks, one can easily trace back the root of a transaction easily. Every event is recorded and can be accessed by everyone. Therefore, traceability is a key feature of blockchains.

C. Decentralized:

No one owns a blockchain. There is no bank or an individual maintaining a chain. So how does it run? Maintenance of blockchain requires resources like electricity, computing power etc. Why would someone provide it for free? Therefore, when Satoshi Nakamoto invented this technology in 2008, he introduced a concept of currency. This currency would incentivize people who maintain and validate the transactions happening on a blockchain.

This currency was called Bitcoin and people who work to earn this currency are called miners. Hence the term, mining bitcoin.

D. Distributed Trust:

I heard about this amazing analogy from a Ted Talk by Jaspreet Bindra. Imagine a kitty party of 10 women. Each women puts in a Rs. 1000 each. Every month, some woman would win a sum of Rs. 10,000 through a lucky draw. By the end of 10 cycles, there is no return on the investment but everyone has had a chance of using the consolidated fund in one go.

If you think about it, who manages that money? The entire premise of this system is trust. Trust, not placed on an individual, but a group of people.

Similarly, Bitcoin works on the same principal of distributed trust. If you were supposed to cheat the system, you would have to influence multiple people. Therefore, making the system stronger.

What is Bitcoin?

There are multiple use cases of blockchain technology. You could put your country’s real estate on a blockchain and hence would be able to trace the history of a piece of land. You could potentially claim ownership of a digital art piece by listing it on a blockchain (NFTs (Topic for another day)). There are so many of them that it’ll take another blogpost of it’s own. Therefore, in this one, I focus on something that we all are most interested in. The Cryptocurrency. Bitcoin primarily.

As mentioned, bitcoin is a cryptocurrency which is earned by maintaining the bitcoin blockchain. Alternatively you can get some bitcoin if some one gives it to you, or you buy it from someone.

Each Bitcoin is basically a computer file which is stored in a ‘digital wallet‘ app on a smartphone or computer. People can send Bitcoins (or part of one) to your digital wallet, and you can send Bitcoins to other people. Every single transaction is recorded in a public list called the blockchain.

Why is Bitcoin Valued So Much?

If it is just a currency, why the heck is it valued insanely. For those of you who don’t know, 1 BTC or Bitcoin currently costs about Rs. 40 lacs as I am writing this article. For understanding the real value behind BTC, let’s dive into a short and sweet concept of economics.

You all know the game of demand and supply. More demand and less supply means that higher the price (value) of the item being traded, and vice-versa. Fair enough?

Okay let’s take a recent example to talk about it. When the pandemic began, sanitizers were so costly. I remember ordering a 1L bottle for Rs. 450. Later, as the supply ramped up, the prices fell down. Now, a similar bottle would cost about Rs. 200.

A. Non Depreciating Currency:

Apply the similar concept to dollar. Entire world transacts in dollars right now. It is a global currency.

If US government needs more money, it could technically print more dollars and fulfill its requirement. There is no cap to it right? So, if you are valuing your assets against dollar, it is highly likely that someday when dollar is not in demand any more and the printing happens at the same rate, it’s price will fall. India currently holds a foreign currency reserve of $580bn (Source). If dollar starts falling, we are likely to lose an exorbitant sum.

Image Courtesy: Coin Credits

In contrast to dollar, BTC is cannot be mined limitlessly. The incentive for mining BTC is halved every four years roughly. That means if you get 10 BTC for validating a transaction today (example), this will reduce to 5 BTC in 2025. Hence, there is a limit to the number of BTC that can come in the circulation. This number is capped at 21million.

All the BTC that could ever be mined would end in the year 2140. Therefore, more the demand, higher the price of BTC. Because you cannot have more than 21mn in any case. This makes BTC a very strong candidate for an alternate currency.

B. Tool of Investment:

What if no one is willing to trade in BTC. And if you are not able to purchase real life things like Pizza, Car, Stationary using BTC as a mode of payment? What if people don’t trust it? All these questions are highly likely to pop up. Therefore, there is an additional driver of value of BTC.

This time around, think of BTC as an asset class. Why is gold so valuable? Because it is limited in nature and is used for making ornaments since time immemorial. This value of gold has been a man made concept right?

If suddenly, everybody starts hating gold jewelry, it would have no value. As a matter of fact, Aluminum used to have much more value than gold in 19th century, just because it was harder to obtain and had much more practical uses (source)

Now think if Gold can be pegged so high in value, why can’t BTC? After all, valuation is a notion built up in human mind. If people think BTC is valuable then it would be.

C. Hype:

Because Blockchain and BTC is a very new technology, there is a lot of buzz around it. Some people understand it, some don’t, so the ambiguity continues. In the middle of this, when a celebrity decides to endorse BTC, the market just blows up. Recently Elon Musk confirmed that they would accept BTC as the mode of payment to buy Tesla. In the past, Gary Vaynerchuk, Kevin O’Leary from Shark Tank etc. all have revealed their investments in BTC. Therefore, driving the trust and hence the price much higher.

WazirX- How to invest in Cryptocurrency:

Finally. Now that you all are apparently experts in blockchain and crypto. How to invest in it? I will try to draw a parlance with stock market here. Just like every stock requires careful evaluation of a company, it’s future prospects, past performance, so is the case with cryptocurrency. There are tons of cryptos out there. A careful evaluation is needed in terms of which one to pick up.

The way we discussed about BTC in detail, there has to be an analysis behind each of the cryptos. Once you double down on the crypto of your choice, WazirX comes into picture.

WazirX, is a fintech platform that helps you invest in these cryptos. There are a lot of apps in the market having the similar offering. Eg. CoinDCX, CoinSwitch, Binance etc.

These trading platforms, just like stock brokers, will charge a commission in lieu of enabling a transaction. The overall concept and UI is pretty similar too. You complete your KYC, add in funds and hit the buy/sell button on crypto of your choice.

Famous Cryptocurrencies Listed on WazirX (Personal Investments):

There are multiple cryptos which are doing great. Let’s quickly discuss about a couple of them. I am not keeping BTC a part of this discussion as it is the largest crypto by market cap. So, if you have limited funds and want to invest in just 1 crypto, BTC is your answer.

A. BAT or Basic Attention Token:

Ever since the role of social media in US elections surfaced, there was a huge concern around data and privacy. If you are not aware of the situation, let’s think of it from the moral ground point. Companies like Facebook and Google actually use your data and sell it to brands for advertising. Don’t you think that you deserve to be paid? After all, it’s your persona which is being sold in the open market right?

Now there is a browser named ‘Brave Browser’. This browser is based on the fact that none of the advertisers are allowed to access user data for free. In case they want to do so, they would have to pay the user. This payment would happen in the form of crypto currency called, BAT or Basic attention token.

So if you think that a concept like Brave browser could blow up, so would BAT.

B. Doge Coin:

This is just a joke blown out of proportion. Back in 2013 two techies named Billy Markus and Jackson Palmer decided to take a jab on crypto world by making a currency out of then famous meme, Doge (Shiba Inu). The Doge coin has no real use.

Soon enough, it became the tipping currency of the internet. People used to tip others using doge on reddit. Since the entire aim was never to make money, donations became another use case of doge. Back in 2015, people donated 4.2mn ($7000 worth) of dogecoin to Indian Olympians to fund their visit to Russia. Later, it was used to fund a well in Kenya. So you get the idea.

Around the time Gamestop saga happened, Doge caught some momentum. And when Elon musk decided to tweet about it, it just went berserk. This year, Doge has grown by 8031% and hit a valuation of $50bn. Wah!

While one may think that there is no actual value of dogecoin and they are not wrong either, intrinsically it is the social currency which drives it. Instead of actual use, it is the fun, benevolent, punter nature of dogecoin that makes the difference.

Conclusion:

I understand that this is a lengthy post but I tried my best to breakdown blockchain and bitcoin for the dummies by a dummy. Got any questions? Would try my best to address them!

Apart from that, do you want me to dive deeper into working of blockchains? How is it so secure? What’s happening in the background?

Do you invest in crypto? Did this article change your mind?

Let me know in the comments section below. Hit me up on FacebookTwitter or Instagram. If you find this article interesting, please consider sharing it on social media using the links below:

Until Next Time. . .

This article is in association with Blogchatter’s #BlogchatterA2ZChallenge.

rgvdudeja
A techno manager by profession and a hardcore geek at heart. I love to poke my nose into tasks where other usually gave up on. My hobbies include, reading about latest trends in tech industry, playing guitar and yes, memes!
http://pandatechiein.wordpress.com

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