The ABCs of Bitcoin and Everything You Need to Know About ‘Forks’

We’re in a hype bubble. Medium/Author provided

Ninety-nine percent of Cryptocurrencies are total scams. And, yes, Cryptocurrencies are in a bubble.

BUT…the opportunity is NEVER going away and generational wealth will be made. So you have to know the basics, why this opportunity even exists and what to watch out for.

Here’s the problem. There’s around 900 different cryptocurrencies that exist, with new ones being created every week.

I can tell you for sure: 95% of the cryptocurrencies are scams or Ponzi schemes. And I get questions every day: “Is XYZ currency a scam?” And nobody listens to the answer.

Everyone is convinced they are right. That’s a bad sign. I always tell myself I’m the dumbest person in the room. Then I call the smarter people and ask them lots of questions. And then I read everything I can. And in this case, I read the code.

But the opportunity is immense. Think, “Internet 1994”. Right before the “right before”.

BC will stand for “Before Crypto” and AC will stand for “After Crypto”. We are in AC right now and the world is about to change.

I’ve never written about Bitcoin and cryptocurrencies before. But there’s a reason I want to start now.

We’re in a hype bubble.

It doesn’t mean cryptos are bad. It doesn’t mean you shouldn’t buy. It just means….there’s a lot of hype and scammers out there. We’ve seen this story at least twice before in past 20 years and many people have gotten hurt.

I’ve been actively involved in investing in Cryptocurrencies since 2013 (I sold my book, “Choose Yourself” in a Bitcoin-only store I created a month before I released it on Amazon). And for the past 18 months I’ve participated in various ICOs (Internet Coin Offerings) that are all doing well.

I say this just to establish some credentials. I will be writing more frequently about cryptocurrencies simply because I see so many people I know starting to be hurt when, in fact, there’s opportunities to make a lot of money in the space.

Big picture:

A simple cryptocurrency transaction looks like this:

A) James wants to send Joe 10 bitcoin.

B) James has 100 bitcoins that he has gotten from 500 people who, in turn, got from 10,000 people, and on and on back to the very first bitcoin transaction.

C) James puts together a “transaction” (technically complicated but simply described as a “transaction”) and sends it out onto the block chain.

D) A “block” is a list of transactions.

E) enough “miners” confirm that the transactions in a block are legit (all of the inputs are legit and all of the outputs are legit). The merchant (in this case, “Joe” ) can decide how much validation he needs.

F) the bitcoins get transferred

Every step above is much more complicated, but for a reason.

Pros and Cons:

THE GOOD:

A) a standardized and neutral confirmation policy backed by software that has no human agendas.

What does this mean?

Imagine I want to send Joe dollars to buy his house. I need to trust all of the middlemen between Joe and me: local bank, central bank, lawyers, governments, Joe’s bank, etc to approve of this transaction if I do it in dollars.

This is ok but at each step someone can be untrustworthy. They are all humans, even the government (humans subtly influence the price of the dollar and also share details of the transaction with unfriendly parties (the IRS)).

Also, each step in the above has a transaction cost. So inflation is built into the system.

If this were a bitcoin transaction, enough miners need to approve that this transaction is valid. So even if a few miners are not trustworthy, the bulk of them will be and we can trust that the transaction between me and Joe is legit.

[This process is complicated. Suffice to say, it works on Bitcoin and any other “legit” cryptocurrency.]

This is the ENTIRE reason for cryptocurrency: avoid governments, borders, middlemen, extra transaction costs. As well as have high security and avoid forgery.

(there is another reason for cryptocurrency, which is to do more complicated transactions that we can call “contracts” without lawyers, etc. This reason is sometimes the basis for legit ICOs).

Imagine the history of money. Money is used as a store of value OR as a way to transact without having to use a barter system.

Store of Value

First it was the land you owned and the resources you developed on that land (wheat, grains, etc).

Then it was metals. Gold, silver, etc. You traveled with it by fashioning it into jewelry. Too much gold = harder to travel.

Paper currency. Backed first by gold but then…faith in God (“in God we trust”) or government. (Or a pyramid…with an eye in it????)

Electronic currency. Easily transportable. But transaction fees all over the system. Zero privacy.

And the next generation is Cryptocurrency. Easily transportable, little to zero transaction fees, no human intervention between payor and payee, high anonymity, and even functionality.

Money evolves, like anything else, and the natural evolution of money is always as a store of value that is easier to move, more secure, and more private.

[RELATED: The Ultimate Cheat Sheet For Investing All Of Your Money]

Transactions

Transactions have the same history. And the same issues. How can you transact across a far geographic area with less fees, less costs, less chance for human error, higher security and privacy.

A natural evolution leads to crypto-currency.

THE BIGGEST TREND:

Theism ==> Humanism ==> Data-ism

Think about every industry in human history:

WAR:

Theism: A country planning on going to war would make sacrifices to their gods. Would pray. And would surrender to the fact that whosever god was stronger would win.

Humanism: More people, more bullets, more human intelligence, equals the winner in a war.

Data-ism: This is the war being fought every day right now. We saw tiny snapshot of it with the election but it’s only a snapshot in a ten year long movie.

The war is on every single day. It’s fought in every country. It’s fought with data and hacking and piracy.

MEDICINE:

Theism: Shamans and priests would pray for health or do rituals to enhance health.

Humanism: The doctor knocks your knee, puts hand on head, take two aspiring and call me in the morning

Data-ism: Bloodwork, DNA work, robotic surgeries, fMRIs, Catscans. Statistical matching with massive database of similar scans to do diagnosis. All medicine is starting to be outsourced to data.

CURRENCY:

Theism: “In God We Trust”

Humanism: Let’s throw a President on there. Let’s get the signature of the Secretary of Treasury up there. “Don’t worry, we’re good for it.” While we print a few trillion without telling anyone.

Data-ism: The natural evolution: Cryptocurrency.

Does this mean Bitcoin is “The winner”. Buy bitcoin?

No. It just means the natural evolution of currency is arriving and nothing will stop it.

The basic philosophy is:

– Decentralized. So no one government entity can quietly mint money for their own purposes and have access to your transactions, accounts, etc.

– Security. So nobody can forge or steal your money.

– Privacy. Your transactions can’t be seen and reported to other entities.

– Functionality. This is the more technical parts of the blockchain in Cryptocurrencies but suffice to say some of the “intrinsic value” of a coin is the functionality and computational power used to “mine” that functionality.

There’s not going to be ONE winner.

Just like there is not one paper currency (or metal currency). There’s dollars, Euros, pesos.

The difference is: those currencies have geographic borders.

Cryptocurrencies have “use” borders. ZCash might be used by people requiring higher anonymity. Filecoin might be used by people requiring decentralized storage. Dash might be used by people requiring faster transactions.

The borders are created when more problems are solved. Which is a true innovation for currency.

As opposed to borders (and supply) being created by geographic boundaries, central banks with secret control, or a gold mine down the block.

THE BAD:

With Bitcoin, a list of transactions is sent out to the network in the form of a “block”. Miners, who are slowly paid in more bitcoin up to a maximum of 21,000,000, validate a transaction.

If a transaction doesn’t make it into a block (on Bitcoin) it waits a certain period of time to get into the next block.

This means it might take more time (a problem).

Another problem is that everyone can “see” the transaction on what is called the blockchain. They can’t see who it was but they can see the size and other details (a problem).

Sometimes software can provide a solution (a coffee shop can say, I’ll verify the transaction anyway and trust that in ten minutes I’ll know for sure and there’s not a lot of risk in this).

But a software layer involves humans and human error and human “evil”. Hence there are scammers and Ponzi scheme and theft (just like with paper currencies).

The good news is these are problems that can be eliminated.

Just like Internet software since 1991 solved (although always improving) the problems of speed, security, transactions, privacy, more functionality, etc think of cryptocurrencies as the “Internet of Money”.

These problems are being solved.

Either with new currencies (examples: Ether, Dash, filecoin, etc) some of which may be scam currencies, others may be legit. Time and research will tell (just like with the Internet in 1995)…OR with “forks” in currencies, like what is happening today with Bitcoin and Bitcoin Cash.

SO WHAT IS BITCOIN CASH AND WHAT SHOULD I DO?

Bitcoin Cash tries to solve the problem of how can I buy a cup of coffee with bitcoin without using the software layer of Bitcoin.

Remember, if a transaction doesn’t make it onto a block that is then sent out into the network to be validated, it has to wait.

Bitcoin Cash is simply the same as Bitcoin, except it increases the size of a block from 1MB to 8MB. Hence, faster transactions.

The reason that many exchanges are nervous about this “hard fork” is:

A) it’s never happened before. So there could be the possibility that smart developers can find a flaw in the process and steal money.

B) A “fork” is similar to a human election. We had a choice between Clinton and Trump and forked to Trump (not an exact analogy but rough).

Bitcoin is designed to limit human involvement as much as possible because all humans have different agendas.

For instance, perhaps China is greatly in favor of Bitcoin Cash because they currently have a huge edge on mining and they will be able to amass a large amount of Bitcoin Cash before others can.

So the fallout of Bitcoin Cash, while probably correct philosophically and from a software point of view, is still unclear from a human point of view.

Same for the development of any new cryptocurrency (although all new currencies need scrutiny on the software side as well). But this fork is a bit more intense because Bitcoin is so big and it’s the first time this has happened.

This leads immediately to some logical conclusions:

What to do right now about Bitcoin Cash and August 1:

A) remove your bitcoin wallet from exchanges and store it in cold storage. If you google “cold storage” you can see step by step how to do that.

B) If Bitcoin crashes 20% over the next few days because of this fork, I’d be a buyer. The philosophy of Bitcoin remains the same, it’s still the biggest, and volatility only creates opportunity.

C) If Bitcoin Cash goes up too much, I’d sell or sell short, only because we don’t really know how people should value it.

Cryptocurrencies are going to be volatile for awhile. So in addition to the basic opportunity (Cryptocurrencies taking over all currencies) there is many additional trading opportunities due to the volatility.

First, back to the basics:

Why does volatility create opportunity?

Because it’s rare that intrinsic value changes very quickly from day to day.

Example: We know everything there is to know about McDonalds and 1000s of analysts research the company.

The intrinsic value of McDonald’s will almost certainly never go down 20% in a day. But if the stock went down 20% in a day (example: a 9/11 event occurs causing a mass fear selloff across all stocks), then MCD becomes a value buy because the volatility exceeded the normal change in value.

If you can identify the Cryptocurrencies that are legitimate and not scams, then you can make a lot of money playing in volatile situations in Cryptocurrencies.

Conclusion:

A) Cryptocurrency philosophy is valid and not going anywhere and is a natural evolution in:

a. the history of money from bartering to coins to paper money to data money

b. the history of every industry from theism to humanism to data-ism.

B) Volatility is huge as people determine what coins are real and what aren’t.

These are the basics.

I wrote these basics around the circumstances of the event happening today: The bitcoin fork.

But I also want to begin helping the many people who are being scammed by all sorts of schemes and layers of schemes that are trying to dupe people into buying or trading cryptocurrencies that can be potentially worse than giant Madoff schemes.

The evolution of money, and the evolution of every industry, strongly imply that Cryptocurrencies, probably in many forms, will be in our future. And will dominate the money supply at some point.

And how we get from “here” to “there” will be paved with many lucrative opportunities.

But I was burned plenty this type of opportunity in the 90s and in the 00s and I don’t plan on doing so again. The solution is research, diversification, building a network of intelligence people who understand all the relevant issues, and then making smart allocation decisions.

James Altucher is the author of the bestselling book Choose Yourself, editor at The Altucher Report and host of the popular podcast, The James Altucher Show . Join the 136,000 readers getting a dose of my best and controversial content. Join here.