Cryptocurrrency notes

Cryptocurrrency notes

Overview:

Cryptocurrency is a digital asset created using cryptogrpahic tech allowing it to be bought sold or traded securely without govt oversight or control and with no central bank.

Cryptocurrencies are not protected by the FDIC or the SIPC

Can be used to pay for goods, services and for speculative investment.

Powered by blockchain

Crypto prices extremely volatile. Lots of uncertainty in the industry.

Tax consequences do exist when buying or selling crypto.

Bitcoin remains the dominant crypto (a/o 7/2024) , then Ethereum.

Philosophically, to some people crypto is not used for investment purposes at all, but rather as an improved monetary system compared to the our current fiat system. I.e., they want to replace fiat currency with crypto and use it for everyday financial transactions. Also believe that it shouldn’t be valued relative to USD, but by its value as a new monetary system.

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Summary History:

Bitcoin was first cryptocurrency.

– Was largely derided as worthless or a scam. Price is subject to dramatic ups and downs and lack of understanding of the technology likely contributed to this doubt.

– 2021Bitcoin’s price hit a high of $60,000. 2022collapsed to

$17,000. Experts wrongly claimed it wouldn’t recover from this.

– 2024 hit series of record highs. Possibly attributable to SEC

approval of “spot bitcoin ETFs” in Jan, 2024.

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Top cryptocurrencies:

– Bitcoin: relatively simple, blockchain-based cryptocurrency. Uses a ledger much like a bank, to track transactions.

– Ethereum “Ether”: the currency of the Ethereum blockchain. Devs can build financial apps without need for a third party financial institution. Devs build and run apps on Ethereum. in theory, more apps built on Ethereum blockchain, higher demand for Ether.

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Basic transaction types: ETFs, Spot Bitcoin ETF, Bitcoin Strategy ETF:

– ETF: Exchange-Traded Fund. Basically, a bundle of securities. ETFs are not specific to cryptocurrency but are used to bundle cryptocurrencies and trade them just like stocks. ETf prices fluctuate throughout the day as the ETF is bought and sold.

(Differs from mutual fund, which trade only once a day, after market close.) Gerernal advantage of ETF over individual stocks is lower expenses and broker comissions due bundling aspect.

– Spot Bitcoin ETF: ETF that tracks the value of a cryptocurrency (e.g. Bitcoin) while directly holding it.

– Bitcoin Strategy ETF: ETF that attempts to track Bitcoin price indirectly. some invest in bitcoin futures, some in bitcoin mining  stocks. Due to indirect nature, returns on this type of fund is prone to large deviation from returns on bitcoin itself.

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Platform concepts:

Consensus Mechanisms:

– Proof of Work (Mining) for validating transactions between people

Minercompetes to solve a cryptographic puzzle. Winner earns right to be latest block of verified trnasactionsonto the blockchain and receives dome crypto in return

Eg. Bitcoinuses Miners. It’s a relatively simple crypto, functions a lot like a bank’s ledger, tracking incoming and outgoing transactions. Prooof of work using miners is a scalable solution in this case.

– Proof of Stake (Staking)newer consensus mechanism. Serves similar purpose to mining. Aims to increase speed and efficiency while keeping fees low. Does this not by using Miners, but Stakers.

Staker people selected to validate transactions by voting their own tokens to ensure the security of the blockchain.

Stakers are selected to add the latest batcxh of transactiomns to the blockchain. They earn crypto in return. Stakers establich which blocks are valid. Their “staked” tokens act as a guarantee that they’re acting in good faith and also create a disincentive from violating protocol rules.

(Implementations vary from project to project but basically users vote their tokens to ensure the security of the blockchain.)

Advantages: in the long term, crypto holders use staking as a passive way of making their crypto work for them.

also is a way to contrinute to the security of the blockchain projects you support.. staking some of your funds makes blockchain more resistantto attacks and strengthens its abaility to process trnsaxctions

Disadvantages: staking often requires a lockup or “vesting” period. during verasting your crypto can’t be transferred for a period of tuime. drawback is tyiou cant trade the locked crypto during this period. Before staking should research specific staking rules and requirements for each project you’re looking to get involved in.

How to get started as a Staker: generally open to anyone. There are varying levels of particip[ation.

A “full validator” requires a minimum number of tokens, tech knowledge and a dedicated computer that can perform validations 24/7, without downtime. This level of participatioon has inherent security considerations and is a serious obligation, as downtime can cause a validator’s stake to become slashed.

Other levels of participation as a Staker are available through exchanges such as Coinbase. You contribute any amount you like and have no overhead requirement of dedicated, expensive hardware for validation. Staking is available to most Coinbase customers in the U.S. and many other countries.

DeFi (Decentralized Finance): allows investors to buy and sell crypto without a middle man, long wait times and high brokerage fees. Smart Contracts are traded via Peer-to-Peer architecture on public blockchains.

– Smart Contract: transaction agreement coded to automatically run on a blockchain when terms are met. They replace traditional financial services by allowing investors to exchange assets directly with one another with complete control over each transaction. Drawbacks exist – lack of regulation increases susceptibility to hacking and manipulation. Smart contracts are enforceable by law but difficult to trace ownership (users are identified by a crypto wallet address, not by legal name.)

– Peer-to-Peer: Decentralized platform. One or more users interact directly with no need for an intermediary or separate system.

Crypto Wallets:

– Hot Wallet: App connected to internet, easy to trasnact with, more vulnerable to hacking. Top choices: Crypto.Com, Zengo, Coinbase.

– Cold Wallet: Separate piece of hardware, not connected to internet. Not internet connection = harder to use but more secure. Top 3: Ledger, Trezor, Safepal.

Exchanges (Brokerages:)

– Cryptocurrencies trade on public exchanges, just as stocks, bonds, funds.

Coinbase: best for beginners. largest U.S. based crypto exchange. trades more than 200 cryptocurrencioes. fees may be higher. company is facing some legal issues as SEC is accusing it opf breaking securirties rules. Fee averages about .5%.

Kraken: lowest fees, for experienced traders

Sofi: ?

Crypto.com: best mobile app

Gemini: best security

BitMart: best for alt coins

Cash App: best for bitcoin

Bisq: best decentralized exchange

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