Alternative Investing with MyConstant Ep2:an Intro to Crypto
Does the word ‘cryptocurrency’ leave you with question marks, or even scare you off? It doesn’t have to.
On this podcast of Alternative Investing, Chris and Peter unpack the basics of cryptocurrency: Who started it? Who’s using it? And why it’s becoming one of the most dynamic forms of currency.
Please give it a listen using the Spotify link below, or if you haven’t got time, check out the transcript.
Remember: All investing involves risk. The content of the podcast is for informational purposes only and is not investment advice. Please always use caution and diversify.
An introduction to cryptocurrencies
Hi, and welcome back to the second episode of Alternative Investing with MyConstant.
I’m Chris Roper, head of communications at MyConstant. And with me again is Peter Upton.
Hey, I’m Peter, the content manager at MyConstant.
Today, we’re going to talk about cryptocurrencies, what they are, how they began and how you might use them to make money.
It’s a big topic with lots to discuss. So let’s just get stuck right in. Peter, why don’t you tell everyone what a cryptocurrency is?
Hey Chris, that’s a kind of a million-dollar question. Crypto is, to put it simply, it’s bits of data online with monetary value.
There’s no physical aspect to it. There are no crypto coins you can put in your pocket. It completely exists online and is traded online.
Most of the cryptos that you probably know about have their own intrinsic value based on supply and demand. But other crypto peg their value to real world assets like the dollar or even things like real estate or art.
Yeah, that’s absolutely right, and you’re probably wondering why are cryptocurrencies called cryptocurrencies? To answer that question, we need to talk briefly about the technology that underpins all cryptocurrencies, and that’s called blockchain.
You might have heard of it before. It was a bit of a buzzword a few years ago, and cryptocurrencies probably wouldn’t exist without it. But what is blockchain?
Well, a blockchain is basically a database that’s hosted on a computer network. Everybody connected to the blockchain has access to its transaction history and they can add new transactions provided the changes are valid and approved by the whole network.
Now, the interesting thing about a blockchain is that it’s designed to be almost impossible to alter its transaction history, which makes it very secure — ideal for financial transactions.
Blockchains are also decentralized, meaning the whole network — everybody connected to that blockchain — must approve new transactions in a process called consensus.
Now, consensus has many different types, but it commonly involves a group of computers on the blockchain network competing to solve a cryptographic puzzle, which is a kind of mathematical puzzle.
This involves a lot of computing power and energy, but the first to solve the puzzle gets to add changes to the blockchain in return for a cryptocurrency reward.
This cryptocurrency reward actually disincentivizes anyone from having total control over the network, since to do so, you’d need a lot of energy and computing power and it would cost you more to take over the network than you’d earn in rewards.
And this cryptographic puzzle solving is also where the name cryptocurrency comes from.
Are you following me there, Peter?
Right. So I will now move on to talk about how cryptocurrency began.
Now, I think the best place to start is probably the 2008 / 2009 financial crisis.
If you remember, the subprime mortgage market collapsed. It started in the US, but it also became a domino effect that impacted the rest of the world.
Lots of people were angry with the banks and how they behaved, and rightly so. And in 2009, a mysterious persona called Satoshi Nakamoto published a white paper entitled Bitcoin, a peer-to-peer electronic cash system.
And it changed the way we think about money forever, because suddenly there was this new digital currency that didn’t need banks or centralized authorities. It could be created, managed and secured by everyone — a democratic, decentralized money system powered by blockchain.
So did this spell the end of the current banking system?
Well, obviously, no, not quite. It has become a valuable and popular asset, though.
For its first few years, Bitcoin traded for pennies. But today one Bitcoin sells for almost $20,000 dollars.
And I don’t know if you may have read about this in the news, but there was a Welshman named James Howells who threw away a hard drive with 7,500 Bitcoin on which he bought back in 2009, which would be worth over $140 million dollars today.
You can imagine how upset he was.
But of course, Bitcoin, it might have been the first really popular cryptocurrency, but it certainly wasn’t the last, right, Peter?
That’s right, Chris.
Another one you may have heard is Ethereum, which has recently gotten much more popular with the rise of decentralized finance.
So Ethereum really got big with smart contract technology. That’s the big thing it brought to the table.
Entering into a contract with somebody is risky. You say, hey, you want to give your buddy a loan. You say, hey, I’ll give you 100 dollars. But let me hold on to your car for a minute.
You really want to know that guy really well before you let him hold on to some kind of asset as collateral.
And this is why loans tend to work better through banks, because a bank — okay, you have a legal right to the deed to my house or something like that when you collateralize a loan.
But Ethereum came in and created something called the smart contract, which lets you — say you want to give money to somebody, but you want some kind of guarantee that the transaction will go through.
You can ask them to lock their money into the smart contract. And then it will create a system where when they pay you back, then the money will automatically go back to them, but they cannot get their collateral back until they pay you back.
So this created this trustless, a system of exchange that really has brought blockchain tech into a lot of real world applications.
So Bitcoin and Ethereum are the two big ones that kind of brought the rest of crypto to the masses. But you could probably say that the creators of both networks did not expect quite the level of success they’ve had.
They have thousands, probably millions of transactions per day. These Bitcoin and Ethereum, they weren’t designed to take on so many transactions.
And because they’re not run by any one person, they sometimes are a bit slow to change. So this has caused a rise of what we call ‘altcoins,’ which are a bunch of new cryptocurrency.
Many of them are built on Ethereum and they have been there to try to cover the weaknesses of these two blockchains.
For example, many of them are faster.
They have more incentives to get people to be active on the chains. Many of them are owned by a company or group, so they have updates and stuff like that.
But let’s talk about some useful cases of crypto besides smart contracts and just money.
Yeah, good idea, because I imagine if you’ve been following everything so far, you’re probably thinking, oh yeah, these cryptocurrencies, they sound great, but what can I use them for?
Well, let’s get the obvious one out of the way. First, some places, some shops, retailers do accept crypto currencies for payment. You can pay in Bitcoin for all kinds of things. You can buy pizza with Bitcoin, you can buy a house with Bitcoin — so there is that.
But of course, we’re very far from mass adoption of cryptocurrency. So they’re not quite poised to take over or replace our global banking system just yet.
And in the meantime, most people use cryptocurrencies as an investment or an investment tool.
For example, Bitcoin advocates argue it’s the digital equivalent of a store of value assets like gold. Only one hundred million bitcoins will ever exist. And that makes it a deflationary currency just the opposite of an inflationary currency.
And as a deflationary asset, its scarcity helps preserve its value over the long term because of the principles of supply and demand. So the less supply there is, then the higher the price goes up.
So that makes Bitcoin a really useful cryptocurrency for storing value long term or even as a long term investment. It’s very good for diversification. So if you are thinking about getting into cryptocurrencies, then something like Bitcoin could be a good thing to add to your portfolio.
They take cryptocurrencies, Bitcoin. They do tend to be more resistant to market changes, such as when stocks fall in a bear market.
So, Peter, how about you tell our listeners a little bit more about other types of investing with cryptocurrencies?
So crypto, it kind of all fell into this very interesting market niche when it hit the markets and that it kind of got a little bit of everything.
It’s kind of a commodity. It’s kind of like forex trading because it’s a currency and it kind of works like stocks in some ways.
Especially — maybe not so much with Bitcoin and Ethereum — but for any coin that is run by an organization. When you buy their crypto, you are essentially investing in a share of that organization and you get voting rights and stuff like that.
So crypto kind of has a little bit of something for most types of investors and a lot of different tools for trading and investing.
So the most classic one is crypto exchanges. You trade pairs of crypto against each other. It’s kind of like Forex trading, kind of like stock trading.
But other ways you can do other things like futures trading options.
Basically, it’s been kind of limitless.
So leverage trading is another thing people like to do with crypto. And this is something that people do with stocks as well.
What a lot of people do — because crypto is a bit of a long term investment — they will hold it for a little while and they wait because they believe the price of crypto will go up.
But they may want extra money to buy into another crypto or something like that.
So what they often will do is they will do a marginal trade where they will take out a loan against the value of their current crypto portfolio, and they will use that money to buy back into crypto and use the profits from that to cover the loan and take a little bit of interest.
Now, this is a bit of a risky trading strategy, but it is one a lot of professionals use and a lot of industries have sprung up around meeting these types of loans.
Since we’re on crypto backed lending. Chris, would you like to elaborate a bit?
There is what Peter’s just described, I suppose, is kind of traditional trading, traditional investing, but with a kind of unusual asset, cryptocurrency.
But cryptocurrencies have also enabled some interesting forms of alternative investing. Now, the obvious one is, as Peter said, crypto-backed peer-to-peer lending. We covered this a bit on the last podcast. So I do recommend you go back and listen to that if you haven’t.
But the key thing here is what’s really good about cryptocurrencies and peer-to-peer lending is that they are one, liquid, and two, people hold on to them for a long time.
So Peter describes a lot of investors, sometimes they buy cryptocurrencies expecting them to rise in price over time.
And sometimes these individuals — they might need to get cash for purchasing or financing a loan of another cryptocurrency. Or maybe they just have some sort of life emergency that they need to pay for.
Now, ordinarily, they might go and sell their cryptocurrency and then they lose the potential uplift in value.
But through crypto-backed peer-to-peer lending, they can borrow against their cryptocurrencies to get a loan to then go and to pay for whatever they need to pay for or to finance the purchase of a new cryptocurrency.
And the thing is, because cryptocurrencies make great collateral, then the investors in these alternative P2P lending platforms like our own — it’s a less risky investment for them.
Because with us, for example, on MyConstant, if a borrower defaults or their cryptocurrency collateral falls too much in value, we sell it to repay the investor.
Now, in traditional P2P lending, that doesn’t exist, which is what makes crypto back P2P lending such an interesting alternative investment.
But of course, that’s not the only one. There are others apart from crypto-backed lending.
Peter, would you like to talk about them?
Yeah. So as I mentioned, crypto kind of goes into many different avenues.
It’s got futures, it’s got everything.
But there’s a couple new ones that it brings to the table. One example is staking.
Proof of stake coins have kind of come around to basically create a almost a dividend model in crypto. So it gives people more incentive to run the network.
You basically, you get extra interest by holding on to a crypto.
And this has been quite popular. And I believe the newest Ethereum update, as was made to include staking in Ethereum because people on Ethereum thought it would be a better way to get the protocol a bit more active.
And besides staking, there’s one other very big aspect of crypto-back, one thing that has really hit the market, and that is — liquidity pools. Which, Chris, I think you have a little bit on that.
As we actually have a product at MyConstant called Crypto Lend, which exploits liquidity pools.
So every day hundreds of billions of dollars are traded on cryptocurrency exchanges.
Now, depending on demand, these exchanges might need to buy extra cryptocurrency to service their customers.
Now, one way of doing this is through liquidity pools.
For example, like our crypto product, as I said, is a liquidity pool. So when you invest Bitcoin, Ethereum or a Binance coin, you’re funding a pool from which our exchange partners can borrow and pay you a cut of trading fees.
So the exchange gets the liquidity they need for their customers. And you earn a 9% APY return.
And most liquidity pools are instant access, which means you can invest or withdraw whenever you like and as often as you like. So they’re a great way to earn a little extra on your crypto currencies.
Well, I think that sums up today’s introduction. Yeah, I mean, I hope you’ve enjoyed it as there’s lots of information in there. And we could have expanded, but we wanted to keep this introduction quite short.
It goes much deeper — don’t worry.
Absolutely. I hope this has been a good overview for you. We’ll put some links in the show notes where you can learn more. Oh, and our free 2,000 dollar trial is still running, right, Peter?
Can you tell the listeners a little bit more about it?
Sure. So right now, if you sign up for an account in the US, we want to show you a bit about how our platform works and how much you can earn at just 4% APY off a small amount.
So when you sign up and complete our Know Your Customer (KYC) verification, we will deposit $2,000 dollars into your account and you will earn 4% APY on that amount for the first 30 days.
Now, of course, we can’t give away $2,000 dollars. We will take the money back, but you will keep all interest you make on that. And you can do whatever you want with it — withdraw it, you can reinvest it, which we would encourage, of course.
And yeah, it’s just our way of showing you how you can start earning on our platform.
Yeah, so if you haven’t signed up for our 2,000 dollar trial and you are a US resident, then please do sign up and take advantage of it now.
And if you’re referring friends, any interest they earn on that 2,000 is part of your referral as well.
Yeah, you get ten dollars for every person you refer and 10% of their Flex interest provided that you are both US citizens.
Thanks very much for listening, everyone, and we’ll catch you again next time.
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