Would you ever say, “Oh, you know, who needs e-mail because we already have a national postal service?”
It’s now the same for money. Let’s talk about financial freedom and what appears to be the next phase of human society: cryptocurrency (a/k/a “crypto”).
Okay so first lemme ask you to momentarily suspend the mere desire to get rich fast (although of course that hope is part of it). Evaluating the many cryptocurrency “coins” on offer today — there are over 1300 out there, and counting — starts with getting a grip on what money has been up until now, what crypto is and how it works, current use cases for crypto and forthcoming applications, and how to buy, store, transfer and move crypto as safely and securely as possible.
The lion’s share of this post concentrates on background so that the logistics of buying and using crypto will flow naturally. If you get bogged down at any point, try proceeding and then cycling back through from the beginning.
WTF Is Money?
Money is whatever the hell we believe it is.
At midnight on January 1, 1999, the national currencies of participating Eurozone countries ceased to exist independently and the Euro came into being in non-physical form. Cigarettes — and, more recently, postage stamps — have served as currencies in prison settings. The Micronesian islands of Yap have used gigantic Rai stones — the ownership of which depends on oral history — to underpin transactions, without any physical movement of the objects themselves.
Why Do We Need a New Form of Money?
The anthropologist David Graeber’s book Debt: The First 5,000 years substantiates a thesis that turns conventional beliefs about the origins of money on their head. Although we are accustomed to assuming money replaced barter systems that required moving goods around, he argues, cash was instead born of a mechanism that has governed human economic activity all along — credit and debt:
“[O]ur standard account of monetary history is precisely backwards. We did not begin with barter, discover money and then eventually develop credit systems. It happened precisely the other way around. What we now call virtual money came first.”
The primary beneficiaries of today’s credit systems are, of course, banks. At the heart of the banking system lie central banks, which print money for the state and control interest rates. We are told that central banks serve as “lenders of last resort” during financial crises, and are supposed to make sure that commercial banks remain solvent otherwise.
The continued viability of this way of managing an economy depends on whether the vast majority of us at the bottom of the financial pyramid scheme — folks with mortgages, student loans, business loans, car loans, etc. — will keep paying up.
My own distrust of a centralized financial system stems from what I learned in the course of suing three dozen banks. The case arose on behalf of numerous plaintiffs seeking redress after the home foreclosure “crisis” that you saw unfold in The Big Short.
As it turned out, the implosion was engineered over several decades. Banks — in collusion with various mortgage industry groups — managed to change applicable financial accounting standards and get mortgage liabilities reclassified as assets. Under the guise of pursuing efficiency, the mortgage industry simultaneously built an electronic system designed to facilitate secret and swift transfer of debt ownership — in other words, to elude public registration laws written to protect homeowners and ensure everyone knows who owns what and who owes whom.
Meanwhile, financial firms packaged all that debt into financial “products” that they then sold to “investors” in “securitized” bundles. What a party.
This house of cards toppled to the ground — as we all know — when the world got wise to how distressed, overleveraged and essentially valueless the underlying “assets” (bullshit mortgages) really were.
In an 88-page complaint detailing the history of securitization all the way to foreclosures that banks had achieved against my clients in violation of state law, I alleged claims for precisely what had gone down: racketeering and fraud.
The story ends as you would expect. Judges at the trial court and appellate levels bent over backwards to protect banks at homeowners’ expense.
Business went back to usual. And, similarly, the Federal Reserve went back to printing money (by reducing interest rates) — just as before.
As Bernard Lietaer observed in his essay Why Complementary Currencies Are Necessary to Financial Stability: The Scientific Evidence, such monopoly cycles prioritize efficiency over sustainability, and therefore continue to result in meltdowns.
And there we have the problem that crypto proponents are striving to address with all our talk of “decentralization.” (For a deeper dive into decentralization and its relation to cryptocurrency, I recommend the entire book in which Lietaer’s essay appears — From Bitcoin to Burning Man and Beyond: The Quest For Identity and Autonomy In a Digital Society.)
Shooting for the Optimum Point on That Graph
We live in an extraordinary moment in history. With cryptocurrency, we can store money somewhere safe, accessible and portable (the Internet) — without hiding bills in the mattress or lugging around chunks of gold in packets around our necks.
And, perhaps more movingly, when we disagree with how banks are using our money, we can instead put those funds in a new bank: ourselves.
The process works by transitioning away from government-issued “fiat” money (dollars, yen, euro, whatever) into crypto, holding it in digital wallets, and downloading and maintaining blockchains if we wish.
Alright, So What Is Cryptocurrency Exactly — and What About a Digital Wallet?
Cryptocurrency is encrypted digital money that arises from the combination of two things: a public address and a private key.
Think of crypto as possessions inside a secure house. You can give out the public address of the location — so that people can send you stuff — but no one can get inside without your key.
Like a password that unlocks all the emails, chats, attachments, etc. that your e-mail account holds, your private key is something inside your head. You might imagine the cyberspace where your crypto exists — inside a digital “wallet” — as similar.
Wallets are getting sexier as various projects improve their user experience, but the basic idea is the same: a history of transactions, a send function (where you’d paste the public address of wherever you’re sending to), a receive function (which supplies your public address to give so someone else can send you coins), and maybe a contacts list. Here’s what a basic Verge coin wallet for a PC (via software called Electrum) looks like:
And, oh hey, here’s a Monero wallet. It’s a little prettier — but, unlike the “light” Verge wallet above, this one requires downloading the entire Monero blockchain (a term I’ll explain next).
Alright, What Is a Blockchain — and What About Mining and Stuff?
A blockchain is how this whole crypto experiment works. It is, well, a chain of “blocks.” Each cryptocurrency has its own blockchain or exists as a “token” on top of another crypto’s blockchain.
One value of a blockchain is that we can explore its blocks and see the entire history of all transactions on that chain, which is, in that respect, a public ledger of transactions. So, you might imagine a blockchain as an economic version of the Code of Hammurabi — a code of law inscribed on a large stone in ancient Babylonia for all to see.
There are two main types of cryptocurrencies right now: minable and pre-mined.
Mining is the process whereby thousands of individual computers (or mining “rigs”) around the world work on a blockchain network to verify transactions and generate new coins.
With a minable coin — like bitcoin, ether or litecoin — mining and transactions between people like you and me are intertwined. The Economist has produced a nifty linear graphic that explains how:
Of course, what’s really going on here is more like a dance between users and the network.
Pre-mined coin networks are a little different. Rather than remaining open to anyone who wants to jump in and mine on them, they operate through “trusted” servers. The plus side here is that centralization enables faster processing and network “scalability” (transactions per second) — but that very advantage is criticized for the same reason: centralization can lead to increased network vulnerability.
Stellar, the project behind lumens, has a pleasant illustration. (Disclosure: I currently own lumens.)
Pause button! Reminder: If you’re worried about computers on public networks processing your stuff, remember that your transactions are encrypted with your private key.
Now, lemme go a little deeper with you just for a sec. When I was first trying to wrap my mind around blockchains and mining (steps 3 and 4 in The Economist’s schematic above), this explanation in The Wall Street Journal, apparently adapted from a Medium post by Collin Thompson, lit up the lightbulb for me:
Yo, guess what?! You now have a grip on “distributed ledger technology” — the magic by which each participant in a blockchain network (A, B, C, D, E and F) maintains a copy of the public ledger.
Scarcity
One of our principle ways to define value — scarcity — is written into the software that blockchain networks run on. With bitcoin, for example, a new block occurs every ten minutes or so, with successful miners reaping a reward of 12.5 bitcoins per block. The reward will get halved every so often up until the last bitcoin is mined around the year 2040 — for a total of 21 million bitcoins. Each crypto may have a different total amount of coins; pre-mined coins are produced all at once.
Okay, Fine — But Why Is Crypto Better?
On the one hand, until we become more accustomed to handling crypto and more convenient mechanisms and user experiences emerge, the medium remains impractical for everyday use — like buying coffee or whatever.
On the other hand, I already prefer crypto hand-over-fist for transactions that tend to be larger, one-time or infrequent payments such as legal retainers. Now, instead of paying a 2.75% fee for processing a Visa or Mastercard payment, or waiting days for a retainer check to clear at the bank — I am able to receive my fee from a prospective client in full, take custody of the funds immediately, and start work on the representation right away — no matter where we are geographically.
More importantly, though, consider the security advantages. First, in the example I just gave, my crypto clients and I are conducting peer-to-peer transactions among ourselves rather than exposing the transaction and our data to third party intermediaries. (Where confidentiality matters, there are specific chains such as Monero, ZCash and Verge that focus on privacy — but that’s the subject of another post.) Absent spyware or malware on our devices — which is always a risk in any online environment — there is therefore no danger that a bad actor at a bank, credit card company or anywhere else can gain access to information that they should not have, or interfere with the transaction or our wallets in any way.
Second — and this aspect is key — decentralization offers security benefits just basically in general. No longer do we have to worry about Equifax or some hacked bank leaking our personal data, rendering our accounts vulnerable, or exposing us to the risk of an attack on their servers.
We become masters of our own destiny.
Did You Say Something About ICOs?
Yes. I wrote about ICOs — Initial Coin Offerings — here. ICOs are just what they sound like — purchase and distribution events for new crypto — often referred to in this context as “tokens.” In 2017, token sales generated over $3.7B in value.
ICOs are super cool because they create instant communities with shared interests and facilitate growth for all involved — project founders, token purchasers and developers alike.
Did You Say Something About “Smart Contracts”?
The Ethereum blockchain — which is powered by a cryptocurrency known as ether — has drawn a lot of attention for incorporating smart contracts. First proposed by a guy named Nick Szabo back in the 1990s, smart contracts program “If… then…” propositions, so that certain aspects of contractual functions may become automatic.
To see smart contracts in action, check out the decentralized token exchange EtherDelta. (Caveat: They experienced problems in December 2017 and I make no comment on the integrity of the platform.)
To execute a trade on EtherDelta, you:
(1) Send ether to your EtherDelta ether wallet;
(2) Deposit that ether onto a smart contract;
(3) Conduct a buy of another token (via another smart contract);
(4) Withdraw that token to your EtherDelta token wallet; and
(5) Transfer your newly purchased token to your own secure wallet.
The magic here is that the entire process — all deposits, withdrawals and transfers — take place on the blockchain.
So what? Well, think about it: with everything occurring on the blockchain, trust has been removed from the equation. No third party custodian executes the trade, and no one takes custody of your funds. Smart contracts handle it all.
Is Crypto Good For Anything Else?
Has there ever been an asset that a corrupt government could never seize, or corrupt law enforcement could never tamper with?
Has there ever been a public ledger that would track government spending or charity funds and provide an ongoing audit of public expenses?
Has there ever been an asset that you could keep in a financial portfolio inside your head — as you got on a plane or crossed a border to escape a failing country or war?
Venezuelans have started mining crypto to weather the horrific inflation in their country. It appears that Iranians have increasingly adopted crypto during recent civil unrest — while even the government has previously said it would “welcome” bitcoin (with regulations).
IMF Managing Director Christine Lagarde has said she believes cryptocurrencies will cause “massive disruptions” in the financial sector, pointing out an exciting feature:
“I think of women in some of the developing countries that have to carry cash around who are at risk of violence and all the rest of it. . . . If they can use their cell phone and operate in a much more discreet and efficient way, it would be terrific.”
Has there ever before been an asset that people could transfer to anyone anywhere in the world at any time, to a recipient who takes virtually immediate custody?
Since 2007, M-Pesa has been facilitating mobile payments and money transfers and “banking” folks who were previously “unbanked” in East Africa. With cell phone adoption outpacing homes that have electricity in some places, imagine what happens to global economic participation when the continent leapfrogs into crypto adoption.
Forthcoming Applications
I don’t want to go too crazy in one post, but suffice it to say that blockchains are being explored where immutability matters — medical records, property records and transfers, bill payments, and so on. Dubai has set out to become the first blockchain-powered government by 2020. Certain municipalities in Switzerland already permit citizens to pay taxes in bitcoin. Estonia — which, incidentally, offers digital e-residency — has indicated interest in issuing a national cryptocurrency.
Kik Messenger — which is reputedly used by 40% of American teenagers — recently did an ICO for their own token, Kin. The project white paper lays out how Kin is intended to facilitate digital ecosystem development through monetizing popularity, incentivizing premium user-generated content, creating a “tipping” function for rewarding liked content, etc. (Disclosure: I currently own Kin.)
Another application would be tokenizing stuff like airline miles. Wouldn’t it be awesome to be able to sell or gift them and monetize our value as consumers?
But, for a real trip, try combining the potential inherent in crypto and blockchain with liquid democracy — a form of governance where we put voting authority in “delegates” rather than representatives.
In liquid democracy, after I vest a delegate with my vote, she can in turn delegate to another, who then represents everyone who has delegated up to him so far.
It is conceivable that algorithms could synthesize politics into a model involving crypto stake, network participation, expert status, reputation, and who knows what else. Although systemic vulnerabilities would have to be addressed on an ongoing basis, wouldn’t it be nice to be able to immediately withdraw support for an elected person if they suddenly shifted on campaign promises? Sayonara.
For an interesting intro to how liquid democracy might play out in crypto, I recommend this “Treasuries” YouTube video from the Cardano Project. (Disclosure: I currently own ADA, the native token of Cardano.)
Alright, How the Fuck Do You Obtain Crypto and Use It?
Almost there. Before even thinking about transitioning some funds into crypto, the question any prospective buyer should be prepared to answer revolves around maintaining security.
I am a cyber attack survivor. Last summer, a call I was on suddenly dropped and my phone indicated that the network was unavailable. I dashed out the door and ran across Manhattan during a heat wave to a carrier store location. Sure enough, my hacker had managed to infiltrate the carrier, remotely port my SIM card to a device of his, and use it to impersonate me.
Fortunately, he was only inside me for 22 minutes, and I managed to cauterize the damage just in time. Please take my story to heart and digest Laura Shin’s Forbes article Hackers Have Stolen Millions of Dollars in Bitcoin — Using Only Phone Numbers before doing anything in crypto.
Security starts with calling your phone company and putting a PIN on your phone account (not just the phone itself — also the account). The reason is that your phone is a potential in-road to your identity — as Laura’s article details — and can be utilized to burrow into pretty much any account it’s associated with (including all your existing non-crypto accounts, like your bank, that recognize your phone number as you).
The next step is setting up two-factor authentication (2FA). Google Authenticator, available from Google Play and iTunes, locks down accounts by generating one-time passwords every 30 seconds for each site or app you connect it to. Please consider implementing 2FA asap for your e-mail account, your crypto exchange accounts (discussed below), and, for extra protection, withdrawals from crypto exchange accounts (also discussed below).
Crypto is a very adversarial environment. It’s safe to assume, at any given time, that a hacker may be trying to steal your funds.
Wallets
You’ve already learned about “hot wallets” — online cuties like the Verge Electrum and Monero blockchain examples above. (Disclosure: I currently hold and mine Verge and Monero.)
Light wallet software (the Verge sample) is way faster to download, for sure — but the cool thing about downloading the Monero blockchain is that you can easily switch on the mining function and throw your hat into the lottery for some rewards — all while helping secure the network as one of the C-D-E-F computers in that WSJ/Collin Thompson diagram.
“Cold storage wallets” (or “hardware wallets”) are even more secure. Something like the Ledger Nano S — which supports some currencies, but not all — will store your private key electronically.
After being opened with a PIN, the device can then access a coin app or online account that pretty much resembles the hot wallets you’re already familiar with. Extra security kicks in with a request for confirmation of every outgoing transaction on the physical device.
And now for the kicker. Both hot and cold wallets have a “seed” — a series of ten, twelve or more words that you can use to restore your wallet if desired. You can use this seed to create or restore multiple copies of the same hot wallet on different devices, or multiple cold storage wallets with the same address.
Pause button! Remember: Just as you do not need to be home to receive postal mail or logged in to receive e-mail, the public addresses of your wallets can receive funds at any time. Even a hardware wallet sitting in a safe deposit box can receive a send — and you can check the blockchain to see the transaction right there, waiting for you.
You Still Haven’t Talked About Buying Any Goddamn Crypto!
As you can see from these Google search images of one of the most popular sites for buying crypto with fiat (bank account or credit card) in the United States, Coinbase has invested in making the user experience easy and pleasant.
Coinbase currently offers four coins for purchase: bitcoin, bitcoin cash, ethereum (actually it’s ether — I don’t know why they call after the blockchain rather than the coin), and litecoin.
Word to the wise 1: bank account purchases take days to deposit, whereas credit card purchases are available instantly; both are subject to adjustable buy limits.
Anyway, once the deposit occurs, you can then send any portion of it to your hot or cold wallet for personal storage.
Now, if you want to trade for one of the other 1300+ coins, you send whatever coin you bought first to a secondary exchange that offers more options.
Word to the wise 2: bitcoin and ether, depending on network congestion, can take longer, and network fees have recently tended to be higher; my experience is that litecoin is consistently much faster and cheaper.
Secondary exchanges include larger centralized ones like Bittrex or Binance, and many, many other smaller ones, including decentralized platforms like EtherDelta.
Word to the wise 3: click on the plus sign to generate a receiving address in your secondary exchange wallet for whichever coin you’re sending to trade — and make sure it’s a wallet for the same coin!
In the secondary exchange, you’ll sell your coin into bitcoin, and then use that bitcoin to buy whatever new coin you’re after.
Word to the wise 4: Unless you’re actively trading, you’ll want to send your newly acquired coin into whichever storage arrangement you’ve set up beforehand.
Exchanges — even the more reputable ones — tend to be the weaker link in this whole thing. Even if they’re not hacked in any way that exposes you to theft risk, they tend to go down during market rushes or crashes — which happen regularly! In my experience they always pull through, but I swear I rest way easier — and feel much more empowered, free and autonomous — when I am in full possession of my own coins.
Seems almost intuitive now, doesn’t it?
Welcome to the future.
Aren’t We In a Cryptocurrency “Bubble” — Should I Really Consider “Investing”?
Personally, since I believe that cryptocurrencies are here to stay — though which one(s) will win remains an open question — I use the term “transition into” rather than “invest in” when I talk about this subject.
No matter how we spin it, though, the ascendency of the crypto “market cap” is indeed dizzying.
Economists will leap up to warn us that this explosion replicates Dutch “tulip mania” — a phenomenon in the 17th century when speculative prices skyrocketed over the course of a year and “some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsworker.”
A must-read reality check from the creator of Dogecoin — a “joke” crypto that recently, albeit so far briefly, surpassed a $2B market cap — is here.
My own view here is that there are at least two additional dimensions to consider.
The first is whether we may contemplate cryptocurrencies from an economic perspective as technology, in which case the adoption curve could look like this:
The second question is whether a curious aspect of cryptocurrency — that the “public” preceded “institutional investors” in valuation phases — somehow distinguishes it from a typical “bubble”?
I don’t know what I don’t know, but I do know that, if we are looking at adoption rather than mere speculation, I’d rather have at least some stake — but surely no more than I can afford to lose entirely — early on.
Looking Forward To Your Comments
I wrote this post to share information with friends who keep asking questions about the crypto space, and I am really looking forward to participating in discussion that will test and advance our collective knowledge. Please comment!
About Me
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Some Additional Resources That Really Helped Me
Want to Invest in Crypto? Here’s A Crash Course.
Joseph Lubin: The Basics of Blockchain and Ethereum
