Re: The Long Road To ISA Millionaires
Posted: June 1st, 2017, 12:39 pm
Right, I've had quite a few PMs about Ethereum, so time for a bit of explanation. I've written the below very quickly and shoddily, but hopefully it serves as a very basic intro, happy to answer any questions or offer advice.
It's been a fruitful (but risky) investment for me, I bought a large chunk at $6 (and kept buying up to $100) and the price is now $230. No plans to sell any time soon for the reasons outlined below.
I'll provide a bit of background to cryptocurrency in general, and then an overview of the case for ETH specifically. I understand that crypto is not an investment that many here would choose, but in my opinion you're looking at 'the next internet'. I think the long-term bull case is overwhelming, but am keen to remain objective so if this becomes overenthusiastic then feel free to criticise. It's great to hear a good bear case.
I think it's important to remember that the perception that crypto and the online exchanges where it is traded are a place full of 'kids trying to make some quick money' is partly true, which means volatility is extreme. This just reinforces my belief that taking a longer term view and ignoring the wild short term swings is a potentially sound investment.
If this warrants its own post/thread rather than just a reply in here then please feel free to move. Maybe cryptocurrency will have a board one day!...
Decentralisation & Blockchain
Before moving onto Ethereum specifically, it's important to give an overview of the movement that is is part of.
Blockchain technology is a system where all transactions are kept on a public 'ledger'. This means that the whole system is decentralised. If I want to sell you a car, I can trade you a cryptocurrency for it over the relevant blockchain, but the whole network can publicly see that the transaction has taken place (or hasn't completed). This has huge, potentially positive implications for fraud, counterfeiting etc. No need for 'middle men' to transact currency etc any more, it arguably makes the world much more democratic and 'free'.
Practically, a decentralised blockchain takes the form of 'nodes'. A node is a computer that is connected to the internet and has a live version of the blockchain downloaded. This node is able to validate transactions live and chronologically, so that every transaction that has ever taken place is recorded in public.
The first widespread blockchain currency was Bitcoin.
Bitcoin - Scaling Issues
Bitcoin was 'invented' by a shady character called Satoshi Nakamoto, who many now believe was actually not a person but an NSA project in the US. Bitcoin gained notoriety as a way for criminals to anonymously transact, and the price famously rose from pennies to now around £2000. Stories range from a bloke buying a pizza with bitcoins now worth £28m, to another hopelessly scouring a landfill for an old hard drive with his £8m of bitcoins stored on it.
Bitcoin was always designed to be a store of value, and not much more. It's 'digital gold'. Yes it can be transacted, but as the network has grown and the number of transactions has risen, it has stated to encounter problems with scaling. Each blockchain is made up of 'blocks', a unit of time that segments all transactions, and also potentially creates a bottleneck on the number of transactions available. Once the block has been finalised, all transactions within are confirmed and consigned to public history. Bitcoin's network allows around 7 transactions per second, which is not a lot! There is currently a huge backlog in the Bitcoin network, with people waiting days for transactions to be confirmed and completed.
ETH - Ethereum
A few years ago, a Bitcoin developer named Vitalik Buterin began the Ethereum project.
The Ethereum network is another blockchain, similar to Bitcoin's, but with much more functionality. As an aside, there are plenty of other blockchains; Litecoin, Zcash etc, some of which have merits but many are just copycats.
Buterin and others with similar ideas formed a non-profit, the Ethereum foundation, and set about building Ethereum from the ground up. For clarity, the network is called Ethereum, the currency that is uses is called Ether. You would make an investment in Ether, which is the fuel for the whole network, every time a transaction is made it requires a small amount of Ether (ETH) to be burnt to validate the transaction. These guys built a whole new coding system, called Solidity, which is what the network runs on. You can learn to code in Solidity and build applications to run on the Ethereum network.
So what makes Ethereum so special? Smart Contracts.
As well as transactions being stored on the blockchain, with Ethereum this is expanding to include anything 'contractual'. It has the potential to remove all the middle-men.
Imagine if I wanted to rent my car to you for a day. You can do this by paying me some cryptocurrency. You can see that the receipt of our transaction is there, in our virtual contract, and in the contract it is written that the car will unlock and turn on to your fingerprint, on a certain date, for a fixed amount of time. You can use smart contracts for all sorts of transactions ranging from insurance, legal, property transactions, etc.
PoW & PoS
Bitcoin works on a Proof Of Work (PoW) system. At the end of every block, a specified number of bitcoin are released as a reward.
The way that these rewards are granted is known as 'mining'. I can set my PC up to sit there completing complicated maths problems, and if it's doing this 'mining' there is a chance at the end of a block it will be rewarded with some bitcoin. This system works well enough, except it has the potential to become centralised as some enterprises have huge mining 'farms' of thousands of computers trying to earn these bitcoin.
Ethereum also currently runs on a PoW system, but it has always been planned that it will move from Proof of Work to a Proof of Stake system, which is planned for early 2018.
With proof of stake, miners are no more. The way that the network generates new ETH is it rewards people who 'stake' or lock up their Ether for a fixed period of time. Welcome to my ETH HYP
From next year, you will be able to lock your ETH up for a period, and be rewarded when it is unlocked with some extra ETH. The finer points are still being decided, but rewards will likely be around 5%.
DAPPS -ICOs
So, it's some new technology, but is it actually useful in the real world? Well, the Enterprise Ethereum Alliance seems to think so...
The EEA is a recently formed group of companies including Microsoft, JP Morgan etc etc that have agreed to work on developing Ethereum. Every month the EEA is announcing new members, with 80 more due in June.
A DAPP is a decentralised application. Ethereum, as mentioned above, is a coding system that allows developers to build applications and then use the network for any transactional elements required, and we're starting to see the first DAPPs being launched. Some better known ones include Golem, a DAPP that allows users to be paid for any spare processing power that their PC is willing to give up to be used. The classic use case is a photographer who needs lots of photos rendering, but he doesnt have a very powerful PC, so the Golem network rewards people who help render the photos for him. Another is TokenCard, an Ethereum-based debit card.
Many of these new companies are using ICOs, initial coin offerings, as a way of generating development funds. It's a bit like Kickstarter with cryptocurrency. These are happening weekly now, the latest, the Brave brower and it's token BAT raised something like $35m in 1 minute yesterday. I personally think we're in a bit of a token bubble right now, so am not investing, and am just holding the underlying ETH that these all need to run.
The important point is when you invest in Ethereum, you're investing in the whole 'ecosystem', not just buying a currency. This is a decentralised development platform.
Exchanges - How To Buy
So, you want to buy some Ether as an investment, great! The bad news is you can't do it in an ISA yet...
ETH is traded on cryptocurrency exchanges, some more reputable than others.
By far the easiest way to buy ETH in the UK is through a US company called Coinbase. Sign up for a Coinbase account, verify your ID and you can buy some ETH today, if you're happy to pay the 4% debit card fee...
Coinbase is a very 'public facing' company, so the fees are too high, but they also have their own exchange called GDAX. If you want to save fees, or buy more than your coinbase limit allows, you can do a SEPA transfer in Euros into GDAX or Coinbase (you can move fiat freely between the two). They currently don't support GBP deposits so you lose a bit on the forex exchange, but you can then just do a market buy on the EUR/ETH market on GDAX and you'll have your Ether! Probably looking at around 1% fees this way.
Storage
The final thing to consider is storage. Your cryptocurrency is essentially a list of private 'keys' (hashed numbers and letters). Do not share these with anyone. You need to move your ETH off of the exchange you used to buy them and into a 'wallet' ASAP. Wallets take many forms, you can have a paper wallet (try myetherwallet.com) where you write down a string of random words, and use these words to unlock your wallet, or you can buy a hardware wallet such as a Ledger Nano S. If you've got any real money invested then do this!
A Ledger Nano S hardware wallet is essentially a little USB stick that stores all your private keys for you, and you plug it in to make any transactions, it's really simple and really secure, don't be caught out as if you lose your keys, you've lost your currency. You Nano will come with a 24 word 'seed' that you need to store in a secure location and will allow you to restore your wallet if you lose the USB stick.
Forms of storage like hardware and paper wallets are called 'Cold Storage' because your keys and currency are separate from the network, and therefore much more secure.
Hopefully that's a useful intro, it's a whole new world and if you can get your head around it and see the future use cases I think it's a great opportunity. There is no promise that Ethereum will be the blockchain that eventually comes to dominate, and new tech will come along all the time, but there are a lot of Myspace/Facebook comparisons being drawn between Bitcoin and Ethereum right now, and mainstream media is slowly starting to catch on. Happy to answer any questions that people may have, and this is definitely NOT a recommendation to invest!!
It's been a fruitful (but risky) investment for me, I bought a large chunk at $6 (and kept buying up to $100) and the price is now $230. No plans to sell any time soon for the reasons outlined below.
I'll provide a bit of background to cryptocurrency in general, and then an overview of the case for ETH specifically. I understand that crypto is not an investment that many here would choose, but in my opinion you're looking at 'the next internet'. I think the long-term bull case is overwhelming, but am keen to remain objective so if this becomes overenthusiastic then feel free to criticise. It's great to hear a good bear case.
I think it's important to remember that the perception that crypto and the online exchanges where it is traded are a place full of 'kids trying to make some quick money' is partly true, which means volatility is extreme. This just reinforces my belief that taking a longer term view and ignoring the wild short term swings is a potentially sound investment.
If this warrants its own post/thread rather than just a reply in here then please feel free to move. Maybe cryptocurrency will have a board one day!...
Decentralisation & Blockchain
Before moving onto Ethereum specifically, it's important to give an overview of the movement that is is part of.
Blockchain technology is a system where all transactions are kept on a public 'ledger'. This means that the whole system is decentralised. If I want to sell you a car, I can trade you a cryptocurrency for it over the relevant blockchain, but the whole network can publicly see that the transaction has taken place (or hasn't completed). This has huge, potentially positive implications for fraud, counterfeiting etc. No need for 'middle men' to transact currency etc any more, it arguably makes the world much more democratic and 'free'.
Practically, a decentralised blockchain takes the form of 'nodes'. A node is a computer that is connected to the internet and has a live version of the blockchain downloaded. This node is able to validate transactions live and chronologically, so that every transaction that has ever taken place is recorded in public.
The first widespread blockchain currency was Bitcoin.
Bitcoin - Scaling Issues
Bitcoin was 'invented' by a shady character called Satoshi Nakamoto, who many now believe was actually not a person but an NSA project in the US. Bitcoin gained notoriety as a way for criminals to anonymously transact, and the price famously rose from pennies to now around £2000. Stories range from a bloke buying a pizza with bitcoins now worth £28m, to another hopelessly scouring a landfill for an old hard drive with his £8m of bitcoins stored on it.
Bitcoin was always designed to be a store of value, and not much more. It's 'digital gold'. Yes it can be transacted, but as the network has grown and the number of transactions has risen, it has stated to encounter problems with scaling. Each blockchain is made up of 'blocks', a unit of time that segments all transactions, and also potentially creates a bottleneck on the number of transactions available. Once the block has been finalised, all transactions within are confirmed and consigned to public history. Bitcoin's network allows around 7 transactions per second, which is not a lot! There is currently a huge backlog in the Bitcoin network, with people waiting days for transactions to be confirmed and completed.
ETH - Ethereum
A few years ago, a Bitcoin developer named Vitalik Buterin began the Ethereum project.
The Ethereum network is another blockchain, similar to Bitcoin's, but with much more functionality. As an aside, there are plenty of other blockchains; Litecoin, Zcash etc, some of which have merits but many are just copycats.
Buterin and others with similar ideas formed a non-profit, the Ethereum foundation, and set about building Ethereum from the ground up. For clarity, the network is called Ethereum, the currency that is uses is called Ether. You would make an investment in Ether, which is the fuel for the whole network, every time a transaction is made it requires a small amount of Ether (ETH) to be burnt to validate the transaction. These guys built a whole new coding system, called Solidity, which is what the network runs on. You can learn to code in Solidity and build applications to run on the Ethereum network.
So what makes Ethereum so special? Smart Contracts.
As well as transactions being stored on the blockchain, with Ethereum this is expanding to include anything 'contractual'. It has the potential to remove all the middle-men.
Imagine if I wanted to rent my car to you for a day. You can do this by paying me some cryptocurrency. You can see that the receipt of our transaction is there, in our virtual contract, and in the contract it is written that the car will unlock and turn on to your fingerprint, on a certain date, for a fixed amount of time. You can use smart contracts for all sorts of transactions ranging from insurance, legal, property transactions, etc.
PoW & PoS
Bitcoin works on a Proof Of Work (PoW) system. At the end of every block, a specified number of bitcoin are released as a reward.
The way that these rewards are granted is known as 'mining'. I can set my PC up to sit there completing complicated maths problems, and if it's doing this 'mining' there is a chance at the end of a block it will be rewarded with some bitcoin. This system works well enough, except it has the potential to become centralised as some enterprises have huge mining 'farms' of thousands of computers trying to earn these bitcoin.
Ethereum also currently runs on a PoW system, but it has always been planned that it will move from Proof of Work to a Proof of Stake system, which is planned for early 2018.
With proof of stake, miners are no more. The way that the network generates new ETH is it rewards people who 'stake' or lock up their Ether for a fixed period of time. Welcome to my ETH HYP
From next year, you will be able to lock your ETH up for a period, and be rewarded when it is unlocked with some extra ETH. The finer points are still being decided, but rewards will likely be around 5%.
DAPPS -ICOs
So, it's some new technology, but is it actually useful in the real world? Well, the Enterprise Ethereum Alliance seems to think so...
The EEA is a recently formed group of companies including Microsoft, JP Morgan etc etc that have agreed to work on developing Ethereum. Every month the EEA is announcing new members, with 80 more due in June.
A DAPP is a decentralised application. Ethereum, as mentioned above, is a coding system that allows developers to build applications and then use the network for any transactional elements required, and we're starting to see the first DAPPs being launched. Some better known ones include Golem, a DAPP that allows users to be paid for any spare processing power that their PC is willing to give up to be used. The classic use case is a photographer who needs lots of photos rendering, but he doesnt have a very powerful PC, so the Golem network rewards people who help render the photos for him. Another is TokenCard, an Ethereum-based debit card.
Many of these new companies are using ICOs, initial coin offerings, as a way of generating development funds. It's a bit like Kickstarter with cryptocurrency. These are happening weekly now, the latest, the Brave brower and it's token BAT raised something like $35m in 1 minute yesterday. I personally think we're in a bit of a token bubble right now, so am not investing, and am just holding the underlying ETH that these all need to run.
The important point is when you invest in Ethereum, you're investing in the whole 'ecosystem', not just buying a currency. This is a decentralised development platform.
Exchanges - How To Buy
So, you want to buy some Ether as an investment, great! The bad news is you can't do it in an ISA yet...
ETH is traded on cryptocurrency exchanges, some more reputable than others.
By far the easiest way to buy ETH in the UK is through a US company called Coinbase. Sign up for a Coinbase account, verify your ID and you can buy some ETH today, if you're happy to pay the 4% debit card fee...
Coinbase is a very 'public facing' company, so the fees are too high, but they also have their own exchange called GDAX. If you want to save fees, or buy more than your coinbase limit allows, you can do a SEPA transfer in Euros into GDAX or Coinbase (you can move fiat freely between the two). They currently don't support GBP deposits so you lose a bit on the forex exchange, but you can then just do a market buy on the EUR/ETH market on GDAX and you'll have your Ether! Probably looking at around 1% fees this way.
Storage
The final thing to consider is storage. Your cryptocurrency is essentially a list of private 'keys' (hashed numbers and letters). Do not share these with anyone. You need to move your ETH off of the exchange you used to buy them and into a 'wallet' ASAP. Wallets take many forms, you can have a paper wallet (try myetherwallet.com) where you write down a string of random words, and use these words to unlock your wallet, or you can buy a hardware wallet such as a Ledger Nano S. If you've got any real money invested then do this!
A Ledger Nano S hardware wallet is essentially a little USB stick that stores all your private keys for you, and you plug it in to make any transactions, it's really simple and really secure, don't be caught out as if you lose your keys, you've lost your currency. You Nano will come with a 24 word 'seed' that you need to store in a secure location and will allow you to restore your wallet if you lose the USB stick.
Forms of storage like hardware and paper wallets are called 'Cold Storage' because your keys and currency are separate from the network, and therefore much more secure.
Hopefully that's a useful intro, it's a whole new world and if you can get your head around it and see the future use cases I think it's a great opportunity. There is no promise that Ethereum will be the blockchain that eventually comes to dominate, and new tech will come along all the time, but there are a lot of Myspace/Facebook comparisons being drawn between Bitcoin and Ethereum right now, and mainstream media is slowly starting to catch on. Happy to answer any questions that people may have, and this is definitely NOT a recommendation to invest!!