Those of you who are members of the Access a Trader community have likely heard me say that the PS60 Theory can be applied to trading cryptos the same as stocks, Forex, etc. You’ve also likely heard me say that I don’t know anything about them. However, one of the members of our team here at Access a Trader has put together a guide to understanding cryptocurrencies that I wanted to share. So for anybody who is interested in learning what all the recent fuss is about, this one’s for you.
This guide is intended to be a to-the-point introduction to cryptos. If you want to learn more about them, you can check out articles by Laura Shin, or this very well thought out blog post by Adam Ludwin. There is also tons of information available on Medium.
Introduction to Cryptocurrencies
So let’s get to it. Bitcoin and the cryptocurrencies that followed it are different from fiat currencies for one big reason — decentralization. That simply means that there is no central authority controlling the currency. It is a true peer-to-peer network for global transactions, with no middleman.
Decentralization is accomplished using cryptographic hash functions, consensus protocols, and a bunch of other computer science jargon that isn’t critical to understand unless you really want to. However, it is important to understand what those things accomplish.
The first thing is security. Equifax, PayPal, Visa, Mastercard, etc. are all corporations that store information in data centers full of servers. The majority of the time that information is secure, but sometimes — as recently seen with Equifax — hacks do happen. But through decentralization, cryptocurrencies achieve a far greater amount of security. Instead of being concentrated in server rooms, crypto networks consist of many nodes spread out around the world. In Bitcoin’s case, there are over 10,000 of these nodes participating at any given time. A helpful analogy for this is to think about the network as if it were a town. To break into a centralized system, you have to break into one or two homes. To break into a decentralized system, you’d have to essentially break into more than half the homes in the town. One is difficult, the other is borderline impossible.
Another result of decentralization is that it comes with an added layer of privacy. The addresses used to send and receive cryptos do not need to be linked to an ID in any way. This pseudo-anonymity appeals to libertarians and criminals alike. But it actually has a far more important application, as you’ll learn in the next paragraph.
So finally, there’s perhaps the most critical feature of cryptocurrencies: censorship resistance. Over 50% of the world’s population doesn’t have access to bank accounts or credit. Over 1 billion people don’t even have legal identities. But to participate in a crypto market you don’t need to have a credit score, birth certificate, or any other form of identification. There is no central authority that cares who you are or if you’re qualified to use the network. Anybody who can connect to the internet can use cryptos.
For Americans, the access to this global financial network may not matter much. Elsewhere in the world, however, it’s a different story. A great example of this is Venezuela, where hyperinflation wrecked the national economy. There, Bitcoin and other cryptos are used for everything from buying groceries to operating small businesses. This global accessibility has been critical to the success of cryptos thus far and will continue to be so for as long as they exist.
So those are some of the more important things that make cryptos interesting and have fed the recent hype, leading to the total cryptocurrency market cap exceeding $150 billion in 2017. But make no mistake about it, much of that value is based on uneducated speculation. Many people see cryptos as a sort of get-rich-quick ticket but don’t understand what they are. They contribute to what is certainly an overvalued market given the present usage and applications of the technology. That being said, if more people begin to see cryptos as a store of value and hedge against the other major markets, there’s no saying how far this hype might take it.
I’ll write up part 2 of this cryptocurrency guide shortly. It will primarily talk about some pros and cons of trading cryptocurrencies versus participating in the other major markets. However, it will also include an explanation of how to get started for anybody who is ready to apply the PS60 Theory to the volatile world of cryptos.