I want to take a step back for those just learning about what Blockchain. Many people have read that Blockchain is a “decentralized” community. However, what exactly does that mean? Why should one care? Is this a fad, or will I see real world use cases with Blockchain?

Glad you asked. Describing what the Blockchain is COULD go into a whole book. The easiest way to break it down to to think of it as a decentralized database. The first instance of Blockchain technology was built to facilitate transactions for Bitcoin.

Evolution of Transactions

Every “transaction” in the history of Bitcoin has documented on the blockchain. Imagine being able to view what George Washington bought at the Grocery Store in 1776. Of course the first Bank of the United states was created in 1781 so lets pretend George is buying cabbages. The only record of the tThose ledgers were documented individually by the Grocery Store. George places his coins down and walks out of the store. The only record of the transaction would be from the Grocery Clerk, which then records the transaction in a ledger. Grocery clerk stores their money in the First Bank of the United States. The Government then collects taxes based on what was recorded in that ledger at the end of the year. Lots of responsibility placed on the Grocery Store clerk, as they also could have forged information to get away with paying less taxes to the state. In addition, on their way to the bank, the Grocery Clerk may be robbed of their hard earned money and never see the thieves (or money) again!

This system has gotten more efficient at documentation, but the process has remained the same. Transactions are not easily verifiable and need to go through third party regulators like banks, credit reporting agencies, and other financial institutions. By relying on third party institutions, we expose our privacy and become vulnerable to hackers. The Equifax scandal is one of the prime examples of why this is dangerous to have third parties collecting and storing your information.

Benefits of Decentralization

So, we know that trust in third party institutions can be dangerous. How does Blockchain solve this problem? Well, it makes every transaction visible to the world.

Anonymously of course. This gets complicated, so I’ll go back to the George Washington buying cabbages. Before, the grocery clerk would confirm the transaction by documenting it in their personal ledger and share this information with third party institutions. What if pharmacist took a look at George Washington and The Grocery Clerk to verify their identifies. All the pharmacist has to do is give two thumbs up and the transaction has been verified for the entire system.

Very basic example. On the block chain, the pharmacist would not know this is George Washington and the Grocery Clerk. Just the string of numbers (public key) indicating a transaction has taken place. More technical details can be found in Bitcoin’s white paper here. If proper security measure are in place, it would take 100 years for a NASA computer to hack a Bitcoin wallet. By removing third party financial institutions, we no longer need security of a bank, which removes financial costs, and protects our privacy. Welcome to the future of transaction.

I learned about Bitcoin in 2013 after I waited in line for 10 minutes at Subway. A stranger in front of me asked to pay with something called “Bitcoin.” He scanned a barcode and received his food. What sorcery was this? I never saw that man again, but his sandwich changed my life.

Witnessing a Wizard pay for food was enough for me to google about Bitcoin. Many articles were classic tails celebrating rags-to-riches success. People invested a few thousand dollars only to become millionaires a few years later. It peaked my curiosity. I told my mom about delusions of grandeur. She mistook Bitcoin as the money she used to buy equipment in Farmville.

Why am I telling you this? Because I’ve been following the scene for a while. I’ve made some money and a lot of mistakes. I’m no millionaire, but I care about the future of this technology. I noticed a lot of concerning similarities between 2014 markets and 2017 markets . Here are a few of my issues I want to talk about for new crypto investors.

Exponential Price Rises

A rising tide raises all ships. Record price increases is great hype. People are learning about cryptocurrency because they want to know how to make great investments. But bitcoin was not meant to serve as an investment.

Bitcoin’s innovation comes from they way people do transactions. Its a means of exchange. I went to the original white paper and did Command+F with “transaction.”

Mentioned 69 times. Now lets try, “Invest.”

One result. And its talking about Proof-of-Work, not actually investing.

People expecting the price to increase causes “buy-and-hold” mentality. For many, buying your groceries with Bitcoin is like tearing off a corner on your Google stock certificate and handing it to the cashier. No one does that.

Even though Bitcoin’s price has increased 400% since January, transactions have been relatively flat. You also see the number of transactions go down as the price was reaching record “highs” near $5,000.00 mid May-August.

Buying and holding goes against what Bitcoin was made to do. Its also not healthy for markets. Let’s focus on adoption of the currency with different outlets instead of how high the price can go.

“FOMO” Investing

This may be an effect from exponential price increases, but a slightly different concept. “FOMO” is an investors worst enemy. It causes irrational thinking, and can lead to bad investments. While I believe the inherent “value” of cryptocurrencies will rise in the future, people are willing to throw money into something they do not understand. Smart investments start with knowing what you are getting yourself into. Don’t invest in the Tanzanian Shilling just because a couple experts expect it to go up 500%. Yet a surprising number of people will do just that.

Many investors will admit to not knowing the full understanding the technology behind Blockchain innovation. I don’t know everything either. Don’t invest in cryptocurrency because you think the price will go up. Invest because you believe in a future of decentralized technology.

Scams and Snake Oil

Cryptocurrency is still in the wild west days, but the SEC is trying to tame the wild outbacks. A few years ago we had Ponzi Coin, The new hot trend with in cryptocurrency relies on ICOs. Millions of dollars have been raised by groups touting the possibility of disrupting industries using the Blockchain.

Fast money bring worms out of the woodwork. The scene is still filled with shameful opportunists. In 2014, PonziCoin came into existence. In 2017, you can find PonzICO came into existence. Please don’t invest in either of these. Now scams are becoming more advanced. OneCoin, was believed to be the next great cryptocurrency. This group was tactful and scammed Millions.

Below is a checklist I like to use before I consider supporting in a cryptocurrency.

1. Problem-Solution Fit

Will this technology actually impact an Industry or is the white paper just throwing around the term “Blockchain” to sound revolutionary?

2. Package Buy-Ins

If you literally get “paid” or “incentivized” to bring new people into a cryptocurrency, you’re part of a Ponzi scheme bud. One could argue that you benefit from getting in early to any cryptocurrency, labeling anything a Ponzi scheme. Please don’t get these concepts confused with each other.

3. Product Roadmap

Is there a plan from a foundation to adopt the technology to real world uses and markets? If not, rethink your investment.

4. Online Discussions

Search what people are saying on reddit or bitcointalk. If you can figure out what people are saying about a particular cryptocurrency, you can find the general consensus. Be sure to make rational judgements.

Its not bullet proof, but it helps having a “Bullshit Detector” when looking at the thousands of Blockchain variations. These types of scams have been around for a long time, and are getting smarter. Be smart with what you want to support.

Final Thoughts

Don’t get into cryptocurrency unless you understand and believe in the technology. Don’t be greedy. Don’t be stupid. I lost a bit of money from those kinds of mistakes.

The easiest way to get into cryptocurrency? Think of a dollar amount that you wouldn’t mind ever seeing again. Divide it by 52, and set weekly auto withdraw on Coinbase. Deposit equally between Bitcoin and Ethereum. This spreads the risk over the course of highs and lows for the year. Remember, we are “investing” because we believe in the technology. Not because we think the price will go up.