Intro: What is Cryptocurrency?
Most of you have probably heard of Bitcoin and the concept of cryptocurrency, or “cryptos.” But if you’re like most people, beyond the fact that it’s some kind of new digital money that a handful of tech wizards somehow got rich off of, you probably don’t know a whole lot beyond that.
This article is an introduction to help you understand what cryptocurrencies are, how they work, why they’re an important development for preppers to take note of, and how you can get started buying them on your own.
Bitcoin was the first cryptocurrency and is the best-known, so that’s where we’ll start. Other cryptos have their own features, which we’ll get into later, but all of them work off of a new technology called the blockchain, pioneered by the creators of Bitcoin.
We’ll talk more about the blockchain later.
Bitcoin and other cryptocurrencies are essentially a form of digital money—money defined, for our purposes, as anything allowing for an exchange of value. Coins are produced, or “mined,” via computer power. The “crypto” part refers to the cryptographic process of mining.
How Does Mining Work?
To mine cryptocurrencies, a computer loaded with special software essentially has to solve a series of math problems or ciphers. Solving enough of them “mines” a new coin into existence. Once new coins are mined, they can be sold for US dollars or other currencies privately or on public exchanges.
This is how new coins are added to the economy.
After 21 million Bitcoins are mined, no more will be added, ensuring scarcity is built into the Bitcoin ecosystem. Other cryptos have their own mining limits, mining algorithms, and other technological differences. But with the right hardware, software, and know-how, anyone can begin mining.
What is the Blockchain?
The blockchain is where things get really interesting.
Essentially, this technology is what allows cryptocurrencies to be transferred. It’s basically a fraud and tamper-proof public ledger of all transactions.
- It’s decentralized, so it can’t be messed with by authorities or corrupt hackers
- It’s extremely fast.
- It’s secure because the blockchain shows a web, or flow chart, of all transactions—tampering with a single transaction would require you to modify all earlier transactions, making sneaky changes to the record all but impossible.
That doesn’t mean your coins can’t be stolen, but it does mean that there is an eternal ledger of all Bitcoin transactions cannot be altered.
Blockchain technology enables Bitcoin and other cryptos to be transferred quickly and securely, without anyone having to pay any middlemen. That means that without banks, brokers, lenders, or even governments, buyers and sellers could still potentially conduct business in cryptocurrencies.
However, in addition to making payments, the blockchain could potentially be applied to anything where a tamper-proof record would be helpful. That includes managing voting, distribution of tax revenues, inventory for retail outlets, cheaper and faster transactions for existing financial institutions, and other uses that haven’t even been conceived yet—in other words, its potential goes far beyond simply facilitating cryptocurrency transfers.
We’ll get into what this means from a prepping perspective later, but with a little imagination, you can figure it out: in theory, communities could completely rule themselves by transacting financially in cryptocurrencies and politically on the blockchain, making not only conventional banks, but governments as we know them, obsolete.
Just like in the early 90’s, when few could imagine how the Web might evolve beyond just email and sharing basic information, the blockchain technology behind cryptocurrencies has the potential for a similar-scale revolution, but is still so young that few can imagine where that revolution leads.
In the opinion of this author, the blockchain is really the driving force behind long-term growth for cryptos, because it has unrealized well outside the realm of finance.
Individual cryptos will come and go, just as Dot Com companies did, and people will lose money in the process just like they lost fortunes in the Dot Com bubble—but, as with Dot Coms, the crypto and blockchain innovations that weather those volatile ups and downs will change the world as we know it.
Cryptocurrencies for Self-Reliance: What are they good and NOT good for?
From a prepping perspective, everything has to be practical. One wants to be as prepared as possible for as wide a range of disastrous events as you can—geological, social, economic, and beyond.
With a dizzying number of angles to consider, it’s always necessary as a prepper to take a step back and figure out what the best application is for any given innovation.
Cryptocurrencies are new and unique, and to be a true expert on them you have to know all about cryptography, computer science, and economics – a rare set of specialties, no doubt, and a set of specialties I certainly can’t claim to hold. But from a self-reliance and general investment perspective, there are most definitely things that cryptocurrencies are and aren’t good for.
As with any investment, everyone is different in terms of what they should invest in and how much based on their cash, assets, risk tolerance, overall goals, and other factors. But we’ll quickly run through some generalities below.
- Like gold and silver, cryptocurrencies are a popular way for preppers to move some of their cash into assets outside the conventional financial system. From a self-reliance and financial prepping perspective, this might be the biggest reason to invest in them. Cryptos give you a unique hedge against an economic crash, so that your wealth could be preserved in a situation where your country’s usual currency has become worthless. They also help protect your wealth against dollar inflation resulting from loose monetary policy from the Federal Reserve and other central banks.
- For young people in particular with disposable income, cryptocurrencies are a no-brainer place to put some extra money you’d otherwise be spending on eating out or going to bars. Cut down on those nights out and invest that money in cryptos. You could make a short-term profit, but even better, “buy and hold” long-term. You might profit bigly. But much more importantly, you’ll be in a better position to preserve more wealth if a crisis arrives, or just as inflation continually reduces the relative value of your US dollars.
- Cryptocurrencies allow you to move money faster and without fees, even if you send massive amounts, compared to moving money through conventional banks.
- Cryptos are extremely valuable in their ability to empower people to generally moving money from one person to another without banks. For example, a rural producer or artisan in a developing country can now do business without having to trek to the only bank in their county, 80 miles from the family farm.
- For speculation and straight market betting, cryptocurrencies are a fun way to gamble money. Cancel that trip to Vegas and buy some cryptos instead. You may not make money right away, but at least with cryptos, the house doesn’t always win!
NOT Good For:
- Investing for retirement—cryptocurrencies are far too speculative for anyone responsible or sane to recommend as a retirement investment. From hackers to new government regulation to private exchanges going out of business, a huge range of factors could send Bitcoin and other cryptos straight to $0 at almost any time. Crypto value fluctuations are sudden and extreme. Retirement investing should be cautious and slow, and crypto markets are the exact opposite.
- Despite that, there’s nothing wrong with putting some extra money into Bitcoin or other cryptos with the hope it will be massively more valuable by the time you retire, but they’re so volatile and their future so uncertain that it should be looked at as a complete gamble. But if you’re the type to buy a weekly Powerball ticket or a monthly pair of new shoes, I would definitely recommend trickling some of that money into cryptos instead!
- “Get rich quick.” Sure, you might. But if quick riches are your goal with cryptos, this is the wrong article for you!
Now that we have some generalities out of the way, let’s get into more detail about the practical uses Bitcoin and other cryptos have for those looking to be more prepared and financially self-reliant.
The System is Not Stable
During good economic times, people have a tendency to assume the boom years will continue. However, as American post-war economic growth has been largely based on taking on extreme levels of debt, many analysts think it’s a matter of time before those chickens come home to roost.
The 2008 crisis taught us what that can look like in the real world. And despite band-aids like the TARP legislation and taxpayer-funded Federal Reserve bailouts to banks all around the world, many of the factors that led to the 2008 crisis are arguably back in play today, some of them to arguably even greater extremes.
The big lesson is, the political and financial Powers That Be are experts at kicking the can down the road–preferably until election season is over—without solving the fundamental problems that actually caused past crashes. But when debts finally come due, anything based in that debt system is under threat of crashing or being evaporated.
With central banks printing money to buy equities, that includes the stock market and many investments once seen as safe, low-risk areas.
Savvy financial preppers tend to see this, and want to get ready for a potential day when assets with values inflated by loose monetary policy, global interest rate fixing scams, and other forms of manipulation reassert their true value – i.e., crash.
Never taking prosperity for granted, the self-reliant prepper will seek ways to preserve and protect their wealth in case this happens.
Historically, this has been possible through acquiring physical assets like gold, silver, land, and even art. And while Bitcoin and cryptocurrencies in general are incredibly different from gold, there are reasons they can serve a similar purpose.
First, by investing in cryptos, you are moving cash outside of the US dollar system. That means that if the dollar crashes, your cryptos could increase in price relative to the crashing dollar, preserving the value of whatever dollars you were prescient enough to convert.
Basically, in a precarious financial system, the more eggs you have in baskets outside your own currency give you opportunities to not lose it all if your currency enters crisis mode. The more cash you can separate out of the global financial system, the less you’ll lose if that system goes bust.
Current Event Examples
A practical example of this can be seen right now in South Korea and Japan. We’ve all watched tensions rise with North Korea lately, and every time there’s a hawkish announcement or Kim launches a new missile, Bitcoin and other cryptocurrencies jump in value.
This is because buyers in South Korea and Japan are afraid of a North Korean attack paralyzing their national economy, leading them to buy more cryptocurrency with every new threat. They believe that if money is wiped out at their own banks by a North Korean nuke attack, what they squirreled away in cryptocurrencies will still have value and give them a second chance to not lose all their savings.
Another real-world example can be seen in Venezuela, where a socialist economic crisis is causing mass unemployment, hunger, and unrest.
With hyperinflation rendering the local currency basically worthless, but electricity still in good supply due to the socialist government subsidizing its costs for citizens, some have turned to mining Bitcoin for income and as a means of transacting with others. Authorities are trying to crack down, calling it an illegal use of electricity, only to have corrupt police then using the confiscated computers to begin mining for themselves.
Of course, government regulation before a crisis strikes could destroy Bitcoin before its value as a source of preserving wealth and means of doing business in a crisis became practically useful.
The current trend appears to be for more corporate and institutional adoption of cryptos rather than less, but it’s anyone’s guess if the future of cryptos includes a regulatory storm that proves too harsh to recover from.
Cut Out Profiteering Middlemen
In addition to being a place to preserve money, make income, and transact with others in a crisis, the fact that cryptocurrencies allow you to bypass profiteering middlemen at banks make it revolutionary for those trying to live a self-reliant lifestyle.
You can buy and sell goods or services, or send money to others basically instantly, without being reliant on institutions that profit enormously just by facilitating comparably slow, expensive money transfers. Cryptos theoretically allow you to exist without relying nearly as much, or at all, on the financial system, both divesting you from the risks of that system and allowing you to transact more freely without it than you could with it.
For small producers trying to get a bigger foothold in markets dominated by corporate giants or in areas with troubled financial systems, Bitcoin and cryptocurrencies gives them a new chance to make a living. It’s an economic equalizer unlike anything that’s been seen in decades.
That said, there are still technical barriers to entry for many people. Contrary to popular belief, Bitcoin is not completely anonymous. Like two people exchanging cash, you can send Bitcoin to other people with Bitcoin wallets completely privately. But most of us still had to transfer funds from a conventional bank account to obtain our Bitcoin to begin with.
Still, divesting from the traditional financial system has its own merits for those who want to be more self-reliant. Our reliance on the government and financial system are probably the two most fundamental forms of reliance in each of our lives, and even if we buy them with traditional bank accounts, cryptocurrencies allow us to separate from both in ways that have never been possible until now.
Are the Risks Worth It?
The risks are substantial if you’re getting into Bitcoin as an investor. Simply as a medium of exchange, the benefits are huge.
And despite the uncertain future of any given crypto, they have great potential as a way to hedge against dollar inflation as long as you understand the risks. But for someone looking for an investment to profit from, understand that we’re still in the early “Wild West” stage of the technology.
Coins will come and go. Regulations will change fast. I can’t emphasize enough that Bitcoin is not a way to make a ton of money on a “sure deal” investment–and anyone who says so is either a fool, or has something to sell.
Some Risks to be Wary of:
- There are new cryptocurrencies coming out seemingly every week, and many are scams or might as well be scams.
- “Electronic” means that all your crypto can be wiped out by power outages (EMP attack), or by a government crackdown on Internet freedom.
- They can be hacked, or exchanges can go down and your money goes poof.
- Cryptos are also prone to manipulation. In fact, someone appears to have at one point convincingly faked the death of the founder of Ether, a major crypto, in order to crash the price and buy it up cheap.
However, in their own ways, these risks also exist in the conventional financial system even if they aren’t widely publicized. If a bank closes, its clients are liable to lose all their savings, as happened to many during the Great Depression.
During that time gold was confiscated from citizens, just as cryptocurrency assets on exchanges could be seized by governments in a crisis or legal crackdown (but not so much the cryptos stored on physical hardware—more on this later).
The vast majority of US dollars in “circulation” only really exist in the digital form, and can be hacked and wiped out like any other digital currency. And, perhaps most shockingly, the historic LIBOR rate-fixing scandal showed that the price of basically literally everything in the conventional financial system is, or can be, drastically manipulated as well.
So – Is it Worth It?
The difference with cryptocurrencies, especially given the potential threat they pose to banks and governments, is that the powers that be could decide to crack down at any time. By making them illegal or regulating them to the point that average people are cut out, it could easily crash their value or destroy their practical usefulness.
This very real uncertainty is a source of risk everyone should understand, and is still keeping out some of the still-fearful investors from dipping their toes into the cryptocurrency water.
The question, then, is: how much do you trust the global financial system, and how much money are you willing to lose if your bet is incorrect? No advisor, pundit, expert, blogger, or commentator can ever answer this question for you.
It’s up to you and you alone.
But as far as I’m concerned, everyone with a few hundred dollars of disposable income should buy some cryptocurrency—especially if you’d otherwise just spend the extra money on going out to restaurants or leisure. For those interested in promoting self-reliance, it sends a powerful message to de-couple ourselves from dependence on a fragile global economy.
You’ll also be “voting with your wallet” for a more open, equal, and less centralized financial system. It has great potential to protect some of your wealth when, eventually, another 2008-style (or worse) crisis inevitably occurs. And, finally, it’s a whole lot of fun!
Getting Started: Bitcoin Wallets and Trading Exchanges
At the beginning, you had to have a pretty high degree of technical wizardry to get involved in cryptocurrencies at all. Now, however, the tech and public interest have developed enough for stable trading exchanges like Coinbase, Kraken, and CoinMama to open up, making trading easy for everyone, and for there be lots of easy-to-use wallet options to safely store your crypto.
Basically, all crypto is stored digitally in a “wallet” accessible via a unique alphanumeric access key.
- Online exchanges typically store your coins on wallets on their own servers, so the downside is that if the exchange is taken down, turns out to not have been reputable, or just goes out of business, you could lose your coins.
- Offline wallets are great because they can be stored on a hard drive or other hard storage, so you keep the wallet yourself, making it less vulnerable to attack. But if you lose the drive, can’t decrypt it, or forget your password, your money will be gone. We’ll get more into what that means below.
How it Works: Coinbase
Popular exchanges like Coinbase allow you to link a bank account, like you would with a stock trading account or a PayPal account, to buy major cryptocurrencies with your normal currency as if they were stocks.
Fees are higher than trading cryptos person-to-person, which can be done simply by exchanging your wallet addresses (and for which fees are close to $0,) but are still extremely reasonable by any standard. Add in the convenience of being able to trade quickly on an open market and, to me, they are worth the downsides for the majority of people thinking of putting some money in.
But to be seriously prepared and self-reliant using cryptocurrencies, local storage of your wallets on a physical drive is critical. Again, you might lose access to the exchanges during a crisis or, worse yet, they can be hacked, go out of business, or get shut down by the government at which point you lose everything.
That’s why, once you buy on Coinbase or another platform, you want to create a separate wallet where you can transfer the crypto you buy for long-term storage somewhere that’s safer.
You can download a free desktop wallet that lives on your PC. A hardware wallet, which is a physical drive, is safest because it can’t be hacked. This is called “cold storage.” A wallet that lives on your PC could be compromised by malware or hackers.
How to Start
I recommend starting by buying through an exchange that allows transfer to your own wallets, and then obtaining an offline, physical wallet to transfer your money. Coinbase actually stores the vast majority of their users’ funds offline, but keeping your cryptocurrencies stored on any of the exchanges limits your control of how they are stored.
Having thousands of dollars in cryptos without control of your own wallet access keys is no way to hold them long-term. A cold storage wallet gives you full control, access, and security.
Think of physical wallet like a private vault where you can put some of your investment in case your bank goes bust, but where the investment can continue appreciating in value. Just don’t lose your access key or the wallet itself!
An important thing to understand is that it’s still very early in the game, despite the insane increases in value cryptocurrencies have seen during the past several years. It’s still a Wild West environment, but as the technology and companies involved mature, cryptos will only become faster, more stable, more widely accepted as payment, safer, and easier to use. While many coins won’t make it long-term, those improvements will only increase the value of the coins that last the test of time.
I use one of the biggest exchanges, Coinbase, to store, buy, and trade most of my cryptocurrency. I started with Coinbase because I saw it as one of the earliest functioning, secure, and stable exchanges, and it makes the process super-easy.
Using Coinbase, I bought my first Bitcoin when it was trading at only at $200 (it’s nearing $4,200 now). I wish I bought a lot more, but I can’t complain!
All the exchanges have pros and cons. Some have reported questionable customer service at Coinbase, but they make the process very easy and are probably the most established exchange out there. For me, they’ve been great, so I recommend using them as long as you establish an offline wallet right away to store the crypto you buy off of their servers.
Which Cryptocurrencies Do I Buy?
All cryptocurrencies are premised on the blockchain technology pioneered by Bitcoin. However, the most-traded cryptos are:
Personally, as of this writing, I think all three will gain significantly more value in the medium to long-term, but each of them has distinct advantages and disadvantages.
If you asked how much money to invest in each of these three cryptos, you’ll get a hundred different replies from a hundred people, and there’s simply no answer that is correct for everyone.
So for now, I’ll just give some basics regarding the pros and cons of each.
Bitcoin has the unique advantages and disadvantages of being first.
- It’s open-source, which keep it wide open to improvements, but also keep it open to greater instability as competing factions vie for their preferred updates to be the ones that make it into the ecosystem.
- Its mining is capped, so after a certain point, no more Bitcoins will be able to be mined. This is true for the other two cryptos below, Litecoin and Ether, though each has a different maximum with arguable advantages and disadvantages.
- I personally predict that Bitcoin is here to stay, but thoughtful preppers will recognize being early is no guarantee of being the longest-lived.
Case in point: around 1995, people at about age 28 and older might remember searching the web with Altavista, an early search engine that was once the cream of the crop. Those born just a few years later will have no memory of Altavista ever existing at all. I actually doubt Bitcoin will end up as irrelevant in 20 years as Altavista is now, but either way, you get the point.
Aside from that, Bitcoin is currently by far the highest-priced of the three, making it the priciest to get into right now. If you believe “the big three” cryptos are here to stay, you might have an opportunity for a larger return in one of the other two, which are priced drastically lower. But if you’re radically bullish on Bitcoin like AntiVirus software kingpin John McAfee, and think it will go to $500,000 within 3-5 years, then its current high is a drop in the bucket.
Litecoin has been a bit of a sleeper crypto in terms of maintaining a lower, less volatile price for a longer period of time, but I think it’s poised to explode far beyond its recent record high of about $90 (a bull run which was itself a sign of more extreme new ups and downs in Litecoin’s future).
- Its ability for faster transaction speeds and a higher volume set it apart from Bitcoin. It also uses a different mining algorithm.
- The community around Litecoin is also known as being more unified than the community around Bitcoin, which is a potentially huge deal when there will be inevitable changes and new directions to take that not everyone will agree on.
Like the others, there’s anyone’s guess where Ether will go, but it has a few distinct cons compared to Bitcoin.
- First, it’s not completely decentralized in the sense that Bitcoin is. The platform for Ether is called Ethereum, and it’s the project of a Swiss company, so it has much more potential to be shut down.
- It’s also newer. So, while some say Bitcoin is in a bubble, it already has eight years of history behind it. Ether’s price increases have been in a smaller time-frame, making its valuation look more like a potential bubble waiting to burst.
- However, Ether can be transacted faster than Bitcoin. Its link to the Ethereum network could give it additional value as well, because the Ethereum blockchain is set up to execute all kinds of “smart contracts” beyond simply sending and receiving the Ether currency. For that reason, some think Ether might emerge as a great way to transact, while Bitcoin proves superior as a means of storing value.
The messenger app company Kik is even using Ethereum technology as a basis for launching their own coin. With their established technical and engineering team focused on the technology, we could see new improvements and innovations, and price increases of the original Ether currency coming with them.
When it comes to being prepared and self-reliant, financial readiness is one of the most important aspects. The principles are the same as prepping for anything else.
When we buy stored food, we try to ensure we have the right balance of nutrients to feed ourselves in a variety of situations: short-term, long-term, high caloric need, low caloric need, et cetera.
That’s why diversifying your means for preserving the value of your cash is no different than making sure you have the right balance of carbohydrates, fats, and proteins in your emergency food supply. You don’t know today if a future crisis will call for more carbs, more fats, or more protein for survival, so you try to have enough of each for the widest-possible variety of situations.
Financial prepping is no different.
All the currencies and asset types have value in different contexts, so the more you can diversify, the more prepared you’ll be for whatever comes your way.
Cryptocurrencies give the average person on the street a new and unique opportunity to do exactly that:
- Insulate your dollars from a systemic crisis (at least one that doesn’t take down the Internet)
- Give you a way to exchange currency for goods and services without a formal banking system in place
- Maybe even make some speculative profits in the process
Resources to Learn More
For those looking to learn more, Reddit.com is a great resource with robust discussion groups on the community in general, as well as each of the above three cryptos and more obscure ones. Just go to their homepage and search for a community board focused on the crypto you want to learn about.
CoinDesk.com is also a major player, with a news feed constantly publishing updates on price movements and other developments in the crypto world.
As a final note for good measure, never put more money into cryptos than you’re ready to lose. Talk to your financial advisor or CPA about the potential tax implications. And last but not least, have fun!
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