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Cryptocurrency is a complicated topic. Now you'll say, "Hey, friend, why are you teaching such difficult subjects?" We already have a lot of difficult courses to learn in college. Why are you adding even another complication to the mix? There are two explanations for this.
The first group of investors is made up of college students and young professionals. They'll lose a lot of money by investing in incredibly foolish cryptocurrencies. As a result, you should read this article very carefully.
The second reason why many people will remain on the sideline is that we do not comprehend what cryptocurrencies are, and they are so complicated that we do not understand them. As a result, let us refrain from making any investments.
Okay, maybe your friend will prod you after 5, 10, 15 years and say, "Hey, you know what I told you, invest in cryptos." You didn't do it. Now, have a look at the outcomes. As a result, you may feel a lot of regrets. So I'm going to explain cryptocurrency to you in a no-nonsense, easy-to-understand manner so that you can explain it to fifth-graders as well.
I'll only focus on four issues, and everything will be crystal clear. And I'll show you three specific cryptocurrencies and give a fundamental study on each of them. And there are four specific areas that I'd like to go over that will help you create a comprehensive grasp of what cryptocurrencies are, what are some of the existing good cryptocurrencies, and why they're good cryptocurrencies.
Also Read: 6 best cryptocurrencies to invest in for the future 2022
Concept of 'Bubble' and 'Intrinsic Value'
The first concept to grasp is that bubbles and intrinsic value are concepts that must be understood. So, these are exceedingly high-tech financial terminology. So please don't be concerned. You only need to comprehend these concepts through examples.
So, you've probably heard that there was a financial crisis in 2008, which was a housing financial crisis. Now, if you go to your investment banking pals and ask them, "Hey, why did financial crises occur?" They'd say, "OK, what do you think?" There was a housing bubble, which broke and caused banks to fail.
That is a highly complicated financial term. But the essential term to remember from that dialogue is that there was some sort of bubble growing, whether it was a housing bubble or a real estate bubble. It has a long and complicated backstory.
But the simple explanation is that banks, commercial banks, they were giving loans to anyone, literally anyone on the road to go and buy houses. Why? Because the banks believed that the housing prices will always go up. It will never come down. So in case, the borrower of the loan is not able to repay the loan to the bank, the bank can sell off the house and make money.
So that was the simple philosophy. It was called a subprime crisis. So subprime mortgage crisis. Now, that's a very complex explanation. But essentially the simple dynamics were that the banks ended up giving loans to people who could not afford to pay the banks back. And the housing asset as a result collapsed and the banks had to take a lot of hits, a financial hit, and the 2008 crisis happened.
Because the real estate bubble burst is the simple three-word answer to why the 2008 financial crisis occurred. Ok, that's a four-word answer. So, essentially, bubbles arise in various asset classes and economies, and you must be cautious when these bubbles form and in which asset class they form.
As a result, there have been some incredible money stories around it. There was a dot-com bubble in the 1990s. Why did it burst again? The reason for this is that the bubble has burst. In the 1990s, there were businesses that had no business plan at all, such as the Zero business model, but were Internet-based. As a result, they went to investors, proposing profitable fantasies and raising millions of dollars.
So this is a concept called a Zero to One that was also described in Peter Thiel's book. So take a look at it. You will gain a better understanding of the concept of a bubble and why the crisis of the 1990s occurred.
So the first essential point I'm trying to make here is that in any economy, there will be bubbles forming in particular asset classes, whether it's real estate, stocks, small caps, or debt. As a result, you should avoid these bubbles right now. What does this mean in terms of cryptocurrency?
Currently, there are over 4.5 thousand cryptocurrencies available. Of course, many of them will now be trapped in a bubble. So you don't have to go out and buy in 50, 60, or 70 different cryptocurrencies. All you have to do now is choose some good core cryptocurrencies with a high intrinsic value.
I'll go over this in more detail later in the article. But keep in mind that you should only invest in cryptocurrencies with a high intrinsic value. Every asset now has some intrinsic value.
Now, the intrinsic value is super easy to understand, again, a very complex financial concept, but I'll explain it in a very simple manner. So let's say that ITC stock is trading at 210, and that is the market price. Is this the intrinsic value? No, this is the market value. Intrinsic value is the present value of expected future cash flows.
But essentially what is happening is that you have a business called ITC that is generating cash flow in year one, let's say, it generates 1000 Million, in year 2 generates 2000 million, in year 3 it generates 3000 million. You need to discount it back and that gives you intrinsic value. So that's a slightly complicated financial model. Don't worry about it.
Any asset's intrinsic value can now be calculated. There is no correct answer in this situation. The intrinsic value of that ITC should be exactly this amount. No, that isn't how it works. The word "intrinsic value" is a subjective one. People define, analyze, and estimate these intrinsic values according to their own preferences.
However, as an investor, you must have a feeling of which assets, whether they are Cryptos, stocks, or other assets in which you are putting your money, have a specific intrinsic value. You're investing in a terrible asset if it doesn't have intrinsic value.
Now, let me explain my top three cryptocurrencies, which I believe have a high intrinsic worth. Because this is a developing technology, determining the exact amount is difficult. So, what makes me believe that these digital currencies have some real value?
First Crypto (Bitcoin)
Bitcoin is the first well-known cryptocurrency having intrinsic value. Ok, many of you say ok it's bitcoin we know about it and may skip this part. This part should not be skipped. This is critical since you must understand several crucial aspects of Bitcoin.
So the first thing you should know about Bitcoin is that it was designed to be used as a currency replacement. As a result, it was considered as a potential replacement for what is known as fiat currency. So you have INR, Singapore dollars, and US dollars, which are all fiat currencies. All of these currencies are backed by the government. As a result, Bitcoin was viewed as a potential alternative for this money.
So it was, so bitcoin is essentially a cryptocurrency and it is one of its kind. It is seen as a currency, a right measure to compare Bitcoin is with gold. Now, if I ask you that, what according to you, makes gold valuable? I'm essentially asking that what gives gold intrinsic value? So what would be your answer?
You would say that gold has been in existence for years, centuries. And the thing that makes gold valuable is the scarcity that there is a finite supply of gold. And because of the fact that there is a finite supply of gold, gold becomes very valuable. It has been in existence for centuries now. Even fiat currencies used to be gold-backed.
But what this means is that if the United States or any other country's government wanted to print, say, 10 billion in fiat currency, they would need to have that much gold in their reserve, and only then could they do so. But then we abandoned this standard, abandoning the gold standard entirely. And it was from there that the issue arose.
As a result, Bitcoin supporters believe in a concept known as decentralization of currency, which states that bitcoin is not controlled by anyone. Bitcoin comes with a limited supply. That is what gives Bitcoin its intrinsic value.
So, briefly summarising, what gives Bitcoin intrinsic value, and why do I claim it has intrinsic value? So let me quickly go over those points. first and foremost, Bitcoin has a finite supply. There are only 21 million bitcoins in circulation.
The mining procedure is the second item on the list. Right. As a result, there is a procedure known as bitcoin mining. These twenty-one million bitcoins must be mined over a specific amount of time. This mining technique is now quite extensive. It takes a lot of time. It necessitates the solution of numerous complex mathematical problems. As a result, the mining procedure is difficult.
So it's not like there's money by the side of the road for you to pick up. It's a complicated procedure. It gives Bitcoin intrinsic value once more.
The network is the third factor that contributes to Bitcoin's strength. The network is referred to as a blockchain network. Now, because this is a ledger-based system, there is a network. So, for example, the Internet is a network. Bitcoin, like other cryptocurrencies, has a network that is both hack-proof and transparent.
So it's really easy to keep track of who's buying and selling Bitcoin because everything is recorded on a single ledger. Bitcoin has value due to its transparency, limited supply, and tough mining process. Bitcoin has a very specialized mining procedure, which provides it a lot of power because Bitcoin's inflation is very limited.
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| pic credit: Coin Metric Network |
So there is a chart that you will see and essentially what it says is that after every two thousand and ten blocks mined or roughly every four years, the block reward given to Bitcoin miners for processing transactions is cut in half.
This cuts in half the rate at which new bitcoins are released in the system. So this is a very important point for you to understand because this is one of the key points that is giving intrinsic value to bitcoins that unlike printing money.
Now the government can wake up any day and print 10 trillion dollars and you and I can't do anything. And the money that we are keeping in our bank account, our hard-earned money that loses its value because of inflation, just because the government decided to print so much money.
Now, you can't do that in the Bitcoin network. In Bitcoin, as the graph shows, you can see that the rate at which the Bitcoins are released on the network, that it keeps going down and down and down every four years.
So essentially what is happening is that every four years, fewer and fewer bitcoins are released into the network. Therefore, there is a finite supply of Bitcoin and even that supply is fixed. And from this graph, you can also observe that after every halving period, when we move on to periods 2, 3 periods 4, the price of Bitcoin keeps going up.
For example, there are four blocks on this chart and you can see that the price has been generally up in each of these for blocks subsequently. So this is a very important point to note. This, according to me, gives a lot of intrinsic value to a cryptocurrency like Bitcoin.
Also Read: Top 5 best Cryptocurrencies to Invest in 2022
Second Crypto (Ethereum)
Now, let's talk about the second cryptocurrency, Ethereum or Ether, which I believe has a lot of intrinsic value. Ethereum is the network, while Ether is the cryptocurrency that can be purchased on an exchange. So, what's the difference between Bitcoin and Ethereum?
So Bitcoin is a form of currency, right? It is envisioned as a money replacement, as well as a physical cash replacement. So, Bitcoin is just a digital wallet. What exactly is Ethereum? Ethereum is a type of programmable currency. Bitcoin is a kind of payment. Ethereum is a type of programmable currency. Ether, like bitcoin, now has its own network. It's on a whole other network.
So, how does this network differ from Bitcoin in terms of utility? Bitcoin was a form of currency. Ether is a digital currency that can be programmed. As a result, these two concepts are diametrically opposed. You might now say, "OK, friend, it's fine." So, how would you describe the difference between Bitcoin and Ethereum in layman's terms?
Let me give you an example. Assume that we live in the year 2050 and that individuals are conversing and participating with various cryptocurrencies. And there is a great deal of trading going on, similar to how it is in today's market, where you may buy items with US dollars, INR or SGD.
Consider a scenario in 2050 when we can go and trade in several cryptocurrencies. You can trade in both Ether and Bitcoin. Let's pretend I own a burger joint in Singapore where I sell burgers and produce French fries. Now I must go out and purchase potatoes in order to prepare French fries.
I'm currently putting an order with an African farmer for a particularly special sort of potato. I tell the African farmer to send me X KG of potatoes for 2 Bitcoin. So that's how a Bitcoin transaction works. What might a transaction in Ether or Ethereum look like? So, Ether is a programmable currency. As a result, the transaction would include smart contract technology.
Now in the same example where I'm running my own burger shop now to make my French fries, I need a specific type of potato wedges that need to be cut into two by two centimeters or whatever. Right. So I will give an order to the farmer in Africa, I will say that African farmer, please send me X kilos of potatoes, but cut it in this two by two wedges. So that's programmable money.
And once this contract gets executed that you send me the money automatically, the network on which Ethereum is fixed, it will pay the farmer the money. So this is the difference between a simple transaction through Bitcoin vis a vis transaction via Ethereum.
Now you might say that OK, fine, looks cool. That you get like potato wedges in a certain shape and it makes your life easy. But what is the other utility? Right now there are twenty-seven hundred decentralized applications that are using Ethereum as a network.
So I gave you an example of running a burger shop. So that's just one way. There might be a company that is just helping you customize food contracts, similarly, the applicability is unlimited when it comes to Ethereum. Financial contracts can be designed, the housing market can be revolutionized.
So let me explain this through an example. So let's say what is the process of buying a house right now? Right now, if I'm buying your house, you will say that you come to New Jersey and I have a house, pay me money, pay me like 67K USD, and take my house.
And then I say, ok, I'll have to travel by train. I'll have to come to your house. Then we'll go to the registrar's office. I'll have to sign the document. Then you will say that even before going to the registrar's office, first, pay me 15k. And then I will do that in good faith. You will be compensated.
What happens if you don't show up? It's a serious issue. And this type of issue often arises in real estate transactions, when we have no idea when we will receive the funds. When the registry is signed, you must pay commissions to a slew of intermediaries, as well as brokerage and other fees. Buying and selling a home is thus a nightmare.
But with ether, these types of frictions can be reduced completely. For example, if I have to buy a house, I will program the money saying that if these conditions are met, if one, two, three, four, five, then automatically this block of the network will transfer money into your account or you will get X amount of Ether and the house will be named in my name.
So that's why people are so bullish about Ether. Is it Bitcoin or Ether that I am more bullish on? I'm bullish on both, but Ether is where I'm putting my money. So, if I ask you what Ethereum's intrinsic value is, you'll respond "smart contract." And that is the correct response.
Is it a product of utility? Absolutely. What is the source of the inefficiency? Consider the case of an African farmer. Consider the case of my purchasing your home. I'm not seriously considering it; I'm just joking.
However, you can see how the market has a lot of inefficiencies and how there is room for improvement. As a result, Ethereum is aiming to address and solve this area of improvement. And it is for this reason that I believe it has a high intrinsic value.
Third Crypto (Polygon Matic)
Polygon Matic is the third cryptocurrency that I believe has intrinsic value. So, why am I so optimistic about Polygon Matic? Because it is, in some ways, an extension of Ethereum. And I'll do my best to explain Polygon Matic in a straightforward manner. So, Ethereum is really a smart technology that incorporates smart technology.
The Ethereum network is home to a number of decentralized applications. So it's like the Internet in the 1990s, where the speed is terrible and the transaction costs are expensive. So the network has gotten very slow and they are not able to manage the workload. So there is a lot of friction in terms of execution.
Technology-wise, Ether is great. But from a processing point of view, from a cost friction point of view, Ether, right now, it just sucks and it is just bad. So that is where Polygon Matic comes into the picture. So essentially, let me give you a parallel example that will help you understand.
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| pic credit: Google Images |
Now, this is what Ethereum looks like. This is what an Ethereum network is. Now, essentially, it's like a central Electricity system. Assume you live in New Delhi in India, and that there is just one central grid from which all of Delhi's power is drawn.
Everyone, whether you live in North Delhi, South Delhi, East Delhi, West Delhi, or anywhere else in Delhi, has their energy needs supplied by the central power system. It's a fantastic grid. It provides you with electricity, making your life easier.
This central power system provides all of the electricity. The issue now is that power surges can occur at any time. When it comes to sharing power and distributing power equally, there can be a lot of friction. Now, I'm not an expert on electricity distribution, but the point is that if you just have one central system to handle so many needs, so many residences, it can become a major issue.
So, therefore, we have a distribution network of electricity that there is a central hub. Then it gives power to different small hubs, East, West, North, South so all these decentralization of power happens and these grids then start transferring power to different houses. So this is what is happening and this is the difference between Ether and Polygon Matic.
That Polygon Matic supports Ethereum and patches together different Ethereum based networks, they are going to make the entire operations and processing simpler and faster. That is the prime value-add of Polygon Matic. So this cryptocurrency is developed by Indians and it's a proud matter for Them.
So, this is just a quick technical note. This is an image of Polygon Matic that you may view now. Polygon Network is attempting to address Ethereum's scalability and usability difficulties while also providing faster and less expensive transactions. This is how Polygon Matics appears.
To sum things up quickly, Bitcoins are a type of digital currency that may be used to hold money. Ethereum is a smart contract platform. Polygon Matic improves the speed and smoothness of Ethereum transactions.
All three cryptocurrencies are vastly different. As a result, they all have quite different inherent values. As a result, make the best selection possible when it comes to selecting reputable cryptocurrencies.
Now, of course, there are so many cryptocurrencies that I can't cover all of them in this post. If there are specific cryptocurrencies that you would want me to pick and analyze, I will definitely try to give my inputs on those cryptocurrencies.
So let me know in the comment box. But just a final word of caution that if you are looking to trade-in even these three cryptocurrencies, please do dollar-cost averaging. Yes, it relates to the stock market. So the same principle applies in terms of buying cryptocurrency as well. So understand the fundamentals and start your crypto investment journey