Crypto

Bitcoin and the Potato Farmer

My Grandpa was a farmer. Not the huge corporate kind of farmer, but just a simple farm with some cattle, chickens, pigs, and potatoes. As was common in his day, most of his daily needs were provided by the farm. It wasn’t very often that he needed to buy or sell something. But when he did, he only dealt with cash. No checks, no credit cards. Just cash.

When my Grandpa did business, the transaction was easy to understand. Grandpa would give you freshly dug potatoes, and you would give him cash. Both parties easily understood the transaction, and there was no need for a third party to mediate the deal. My grandpa would have looked at you all confused if you handed him a credit card or Apple pay.

What did they add to the deal, really? Security? Ability to reverse the transaction if the potatoes proved to be rotten? To some, those might be valid concerns, but there was no way my grandpa was going to give up a couple percent of his hard earned profits to some credit card company. No. If you wanted potatoes bad enough, you’ll just have to dig deeper into that wallet and find some…cash.

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A lot has changed since Grandpa peddled potatoes through town. Among those changes are the way we pay for things. In Grandpa’s day, it was cash. In my parents day, it was checks. In my day, it was credit cards. Now my children pull out their phones to pay. But whether it is a credit card or Apple pay, today’s transactions involve a financial institution that is going to get its cut out of each deal.

As we become more entwined with our phones, a logical extension is to be able to pay for things with them. We can do that currently, but it always comes with friction cost. The financial institution’s cut. Even if you use a credit card or Apple pay to buy a single potato, the credit card company will get their couple of percentage points. Most transactions involve zero risk, yet they get paid nonetheless.

Enter Satoshi Nakamoto. I like to think of Satoshi as rather crusty, like Grandpa. I can think of him any way I want to, since nobody knows for sure who he is. But what we do know, is that he didn’t like a third party getting a cut of an ordinary transaction that doesn’t need outside help.

The white paper that he released makes it clear that his intent was to be able to duplicate that simple transaction that my grandpa had, one that only involved two parties, and the digital network provided the security of the transaction without the need for a third party intermediary.

That was the goal of Bitcoin. To enable secure peer-to-peer transactions without a financial institution’s involvement. Since we aren’t all using bitcoin to buy our potatoes, we can say that we might not yet be realizing Satoshi’s dream, but bitcoin has embedded itself, along with thousands of other crypto currencies, into the fabric of our society, and it isn’t going anywhere anytime soon.

Now that we know why bitcoin was invented, let's look closer at this thing called bitcoin.

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Despite the popularity of images displaying Bitcoin as a physical coin, these do not exist.

What is cryptocurrency?

A cryptocurrency is like a coin, only it is digital. It uses cryptography to regulate how the coins are created, how they are used in transactions, and how secure they are. It is a decentralized monetary system that exists without the need for a third party intermediary (think Federal Reserve).

Bitcoin got first movers advantage. Being the first one on the scene, it has come to dominate a space that is now made up of thousands of different types of cryptocurrencies. Bitcoin is a peer-to-peer electronic cash system that is run on a network called a blockchain. The Bitcoin blockchain began in January 2009. Today, there are many different blockchains.

In summary, cryptocurrencies are:

Digital: That means you can’t touch or hold them. They exist only online. That doesn't mean that each coin isn't unique, but they do only exist in the digital world.

Peer-to-peer: Bitcoin is exchanged between parties without the need for a financial middle man to approve of the transaction. This is a feature, not a bug. Think in terms of a cash transaction between two parties. If I were to give you $5, you know you received it when it is in your hand. But with digital currency, there is no way of knowing if you handed me a fiver, or just a copy of a five dollar bill. The original and the copy look identical on a computer.  Cryptocurrencies solve that, and bring real world transactions into the digital realm.

Decentralized: All cryptocurrency transactions are stored on a public, global ledger. The way it is designed assures that the records are stored in many different places at the same time. That way, there is no need for a government or central bank to authenticate the transaction.

Where does Cryptocurrency come from? Most cryptocurrencies generate new coins through a process called mining. This is where expensive computers race to solve complicated puzzles to verify bundles of transaction records to the ledger. In exchange, miners earn new coins that are created through the process.

Still Sound Complicated?

To those of us less technically savvy than others, this still sounds very complicated. Truth is, what goes on behind the scenes is complicated. But that complicated process is done by computers, and is what makes it unique and secure. The part we need to worry about is much simpler. If you've ever traded stocks through an online brokerage, you can almost certainly trade/invest in cryptocurrencies. Major exchanges make this easy.

In a series of articles over the coming weeks we'll explain Bitcoin and other cryptocurrencies in more detail, as well as show you the easiest ways to get started investing. We'll also explain the inherent risks with crypto, and why this should be treated as a piece of your investing pie, not the whole thing. It doesn't take a ton of technical knowledge, and it doesn't take a lot of money to get started. Like with investing in stocks, getting started is the hard part, and now we've done that.

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I've been trading and traveling my entire adult life. I'm currently trading from my boat in the Caribbean. Over the years this has gotten easier and easier to do. Drop the anchor, tether your phone to your laptop, browse some charts, and trade.

At Wanderer we first began investing in Bitcoin in 2017 when it was worth $2,500. Fortunately, we recognized its potential, unfortunately, we didn't realize it even earlier. Today it is worth about $50,000, and we believe it is here to stay. Bitcoin will have its ups and downs along the way, but years from now we expect it will be much higher, and we'll still be bopping around in the islands.

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