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Cryptocurrencies: Bitcoin, Ethereum, and Essential Concepts

Why Does Bitcoin Exist?

Bitcoin first appeared in a 2008 paper credited to “Satoshi Nakamoto.” It is a system that lets people send money over the internet. It emerged from the Cypherpunks, a group of cryptography researchers who looked for ways to make the internet more secure. In the 1990s, they created PGP, which let people send encrypted messages.

Until then, cryptography was used mainly in wars. In fact, the person who created this protocol was imprisoned by the U.S. government and accused of giving the public a weapon of war.

Bitcoin began with a small group of cryptography enthusiasts and grew exponentially over time. It is now a global system.

Today, the entire internet and payment network charges fees of about 2% to 5% on transactions around the world. People naturally began moving to Bitcoin, and today there is also a great deal of speculation.

Ethereum

This new network brought the concept of smart contracts, which let us program money. Smart contracts can act as intermediaries for services in a decentralized way.

The Blockchain Revolution

A transaction without blockchain usually involves about 5 to 10 intermediaries. They add trust and security to the process, but they are inefficient and take a long time. This is where blockchain becomes an alternative.

  1. You want to send an amount of money to a recipient. The transaction contains the recipient and the amount.
  2. When you press Send, the transaction goes to the internet and reaches many computers, called miners. They check whether the information is valid.
  3. If everything is valid, the transaction is added to a block with other approved transactions. Proof of work creates a unique signature, or identifier, for each block based on its information.
  4. Each block connects to the next by referring to the previous block’s ID. This creates a large network of information blocks.

The result is a shared, transparent, immutable database where we can see every transaction since the start of the internet era.

Advantages

  • Payments can be more direct and faster, without intermediaries.
  • Transactions are irreversible.

Miners

Miners allocate computing resources to secure the blockchain network. They validate blocks and receive bitcoins as a reward.

Is Bitcoin Digital Gold?

Gold has existed for thousands of years and is valuable for several reasons. One of the main reasons is scarcity. Holding bitcoin is like holding gold, but in digital form.

Bitcoin is scarce because there is a maximum supply of 21 million bitcoins. No more can be created.

Halving

A miner receives new bitcoins for each block mined, with about 10 minutes between blocks. Every four years, the bitcoin reward is cut in half. The reward per block is 6.25 bitcoins. When mining ends in 2145, the reward per block will be zero because no bitcoins will remain to be mined. Over time, Bitcoin becomes more established.

What Backs It?

Gold is backed by its physical properties. The U.S. dollar is backed by the power of the United States. Bitcoin is backed by thousands of miners and all the computing power behind its network.

  • Scarcity
  • Security
  • The miners’ ability to mine

A Guide to Altcoins

Every crypto asset is a cryptocurrency, but not every cryptocurrency is a crypto asset. A crypto asset is a financial asset with a market value that can be traded on an exchange.

Crypto Assets

  • Means of payment
    • Bitcoin, Ripple, Litecoin (a faster version of Bitcoin), and others.
  • Layer 1: A base layer where you can have many services. Ethereum, Stellar, and Polkadot (digital oil) are examples. These are large platforms and ecosystems where you can build many things. This is where Web3 comes in, aiming to change Web2 and break its current model. You own your data because you control it and it is stored on a blockchain. Brave, for example, rewards us for our attention by paying us to view ads.
    • In Web2, the business model uses our data to make money. Companies use our data and sell it to advertisers to profit from our attention.
  • Layer 2: BAT (which runs on the Ethereum network) and Chainlink, an oracle that brings real-world information onto a blockchain. It is an information supply network.

Why Invest in Cryptocurrencies?

Crypto has great potential to change the future because it is a disruptive technology. Artificial intelligence and the internet also took time to reach their peaks. Crypto may follow a similar path.

Make a small investment with a long-term view. A small amount can have little effect on your overall risk and still increase in value significantly.

Be careful with price swings. In the short term, volatility can obscure the technology’s growth.

  • New technology with significant potential.
  • Low correlation.

How to Invest in Cryptocurrencies Safely

There are two ways: buy through an exchange or invest through funds.

Ideally, buy through an exchange and then store the crypto assets in a vault, meaning your personal wallet. Exchanges are not very secure places to store assets.

With funds, you can invest more simply. You do not need to handle the complexity of buying the asset, and you delegate custody. Funds may be the ideal investment option.

If you want to take part in the technology and immerse yourself in crypto, buy through exchanges and store your assets in private wallets.

Passive management: You choose a fixed investment and hold it for the long term.

Active management: You make frequent changes to your portfolio and adapt over time.

  • How does Hashdex invest safely? Which assets should you invest in? It relies on an index called the NASDAQ CRYPTO INDEX, which is well regarded by NASDAQ.
  • Next, choose an exchange. These are regulated exchanges in the United States with financial statements, internal policies, and solid track records.
  • Then, use custody with highly secure storage. Funds hire third-party custodians that use deep cold storage, an expensive option for individual investors but available through funds.

How to Store Crypto Assets

A cryptocurrency wallet has a public key (your address) and a private key (your password). In crypto, you hold your private key. Store it very securely.

Hardware Wallet

A flash drive that stores the private key. It stays disconnected from the internet. This is the safest option for ordinary users.

Digital Wallet

Less secure, but much more common: an app that manages your wallet.

Deep Cold Storage

You generate the key completely offline on computers that have never been connected to the internet. You split the key into several pieces and store them in vaults. This is what the wealthiest investors do. Companies usually hire specialized custodians for this type of storage. They keep keys in underground shelters around the world. They use computers that have never been used before and remove the network card. They generate the private key on that computer, split it into several pieces, and store those pieces in separate locations.

  • This type of storage is only used for very large investors. Hashdex funds use this kind of storage.

IN PRACTICE: Setting Up a Bitcoin Wallet

When you download a hot wallet:

  • Choose a trusted wallet.
  • Remember that your crypto is on the blockchain and you can access it only with your seed phrase.
  • Store your seed phrase safely.
  • You will pay a mining fee, which is the cost of recording your transaction on the blockchain.
    • When more people want to make transactions, the basic law of supply and demand applies. If the network is congested, the fee rises. You can choose other options with lower fees, but sending will take much longer.

Which Cryptocurrencies Should You Buy?

There are more than 1,500 projects. Choose those that:

  1. Trade on regulated exchanges.
  2. Have support from institutional custodians.
  3. Have a minimum level of liquidity.
  4. Have market representation.

Case Study: DeFi

DeFi removes the need for financial intermediaries by creating programmable money. For example, if you need a loan today, you usually go to a bank, a financial institution. The bank acts as a trusted link between account holders, who provide its capital, and people who need money. Banks charge high spreads (fees) in exchange for that trust.

With blockchain, you can automate these processes and place trust in the technology. In this case, smart contracts act as intermediaries. This makes the process faster and more accessible, with much lower fees. You deposit capital into the protocol, and it manages the rest.

Layers

  • Asset settlement layer: the blockchain itself.
  • Asset issuance: tokenization (recording real estate on a blockchain instead of registering it at a notary office; stablecoins are tokenized fiat currency).
  • Smart contracts with specific functions: exchanges, collateral management, electronic trading, and delivery versus payment (ensuring that I receive something from the person who buys it).
    • You give your money to the smart contract. It holds the money and delivers it to the recipient once the condition is met.
    • You could replace B3 entirely in a safer and cheaper way.

Final Advice

Keep a small allocation with a long-term view. DeFi has the potential to change the financial industry completely.