Advice for cryptocurrency investors: You need to consider whether a particular currency, in a particular blockchain, which aims to address a particular problem, will be successful

By Henry Chueh*

Before you decide to invest in a cryptocurrency, you need to understand the technology behind it. In most cases this is blockchain. 

Blockchain is a digital ledger that records all transactions in a decentralised network. Yes, blockchain isn’t the only technology that enables you to track transactions, but here’s what’s unique about it:

1. Tracking and storing data

Blockchain stores information in blocks that are linked together chronologically to form a continuous line, like a chain. If you try to change the information in a block, a new block will be created, showing that the information has changed at a particular date and time.

It is a digitalised ledger that is decentralised, meaning a large network of computers (or nodes) have the same copy of the ledger. It is more difficult to tamper with a decentralised network than a single operator.  

Example: Bob owns a car. This is evident in Block #101 of the blockchain. When he transfers the ownership of his car to Alice, Block #34582 will record this transaction. Every node on the network can verify that this transaction has happened, since they have the same digital ledger (i.e. all the block information).  

2. Creating trust in the data

Before any party can add information to the blockchain, there must be an evaluation and agreement across all the nodes in a decentralised network. In blockchain terminology, this is called “consensus”.

There are different variations of consensus algorithms and in Bitcoin’s case this is called “Proof-of-Work”. In PoW, a cryptographic puzzle must be solved to create a block. The process of solving the puzzle is called “mining” and the node solving the puzzle is the “miner”.

Once a miner solves the puzzle, the solution is passed on to all other nodes in the network to verify its authenticity. If correct, the block will be added to the chain.

These combinations of processes ensure that the data is accurate because the network creates the trust in the data.

3. Removing intermediaries

Currently, when we transact with one another, we rely on trusted intermediaries such as a bank or a lawyer to verify our records and ensure that our personal information is kept confidential. This limits our exposure if anything goes wrong, as we can often pin liability on the intermediary. It does however cost us.

In blockchain, if all the transactions have already been verified to be true, then we can engage in a trustless peer-to-peer interaction without needing an intermediary.

As I mentioned in my previous article, cryptocurrencies are the digital tokens in the blockchain. Anything transactional, be it data or currency, deals with the native token on that ecosystem.

To operate on a public blockchain infrastructure, the native digital token is required to reward those decentralised nodes that help run the ecosystem. You can think of it as a transactional fee required when you interact in the peer-to-peer system.  

There are various forms of cryptocurrencies. Bitcoin, Litecoin, Dash and many others are attempting to be the cryptocurrency at its purest form - digital cash.

However, other cryptocurrencies like Ethereum, Neo, Ripple, Stellar offer completely different blockchain use cases.

Ethereum and Neo are blockchain platforms that incorporate smart contract functionalities. Smart contracts are programming codes that facilitate, verify, or enforce the negotiation or performance of a contract. Developers are then able to write applications on the platform (dApp or decentralised application) that have blockchain features.

An example of a smart use case is in insurance policies. Currently, there are many manual operations that require a lot of human action. Smart contracts can enforce parameters that if x, y, z happens, then the policyholder’s claim can be settled.

Think of it as, “If this happens, do this”. With this functionality, you’d be surprised how many practical problems can be addressed, whether it is in government (voting system), supply chain logistics (if cash received, deliver X), or even entertainment industry (royalties delivered automatically to the artist).

Ripple and Stellar aim to be the leading digital payment networks for retail and financial institutions.

They offer near instantaneous transactions at fees less than 1/10th of a cent, even for cross-border payments. This completely dwarfs other payment system protocols like Paypal, Western Union or SWIFT. 

There are plenty other cryptocurrencies that attempt to tackle different problems. The important thing to understand is that blockchain and cryptocurrencies go hand-in-hand.

When looking to buy a cryptocurrency, you need to consider whether a particular currency, in a particular blockchain, which aims to address a particular problem, will be successful.

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*Henry Chueh researches blockchain and cryptocurrencies in his spare time. He has seven years' experience in the financial services sector, specifically insurance. 

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7 Comments

There really needs to be an article on the historic fraud tied in with cryptos and the original wild west of bitcoin in the early days.

Some coverage of the numerous gambling sites and ponzi schemes that the crypto community willingly participate in. There's been a lot of fun with non-reversible transactions which is perfect for theft and fraud. Vulnerabilities such as double spending and the 51% should also be covered.

Are you saying that Crypto is the new frontier?. I guess the west worked out ok. The railway got built. Some made their fortunes.

Some died, plenty got ripped off but everyone got a piece of land somewhere. At least no one hacked the smart contract system and stole their land.

I dabbled in Ripple last year, got out in time and broke even.
My one impression was that transactions were incredibly fast.

Ouch, this does nothing to describe what blockchain is and how a cryptocurrency is different (it even confuses the two), why cryptocurrency is popular for implementation, difference between proof of work to proof of stake (pros, cons with either), wallets, smart contract issues on exchanges, forks to new tokens & coins, primary method of encryption, hard and soft security, how to set up a coin, how cryptocurrencies are linked to projects, (utility, ICO etc), main mechanisms to buy and trade coins, the functional difference in cryptocurrency transactions which result in formation of dust & new address amounts, the second layer transaction networks needed now for scaling e.g. lightning, and the development risks in the company, open vs closed source projects, the core risks in investment, the core tax differences for investments, identifying any number of the hundreds of poorly formed & fraudulent ones being sold, the influence of false trading volumes and pump & dump schemes etc. Essentially anything that would aid identification, use or investment. The above does not even go to the depth of the 2 minute elevator pitch or napkin description. There are thousands of NZ Bitcoin intros from years ago including public quick lecture series talks that could have been linked into. It really needs questioning as to why this article now, 4-5 years after it would have been anyway appropriate? Especially when there have been many, even on this website, that have done more and gone into much more depth. The news is nowhere near this slow, even the technology has moved on years ago and with the shift in technical & financial conversations on the matter. Is this really the best article that could be posted now? Just another insubstantial plug? Even talking about shifts with smart contract tokens, the cryptokitties scaling issues, & achain would be closer to the mark now (and that is still old news). Even the recent conferences were groundbreaking enough to get a mention. In fact on just the investment side there is a far deeper well in crowdfunding of companies to go down which you also could have written an article for. NZs own cryptocurrency companies who have had successful ICOs & one has made it to top 100 on coinmarketcap. ergh. Even the image goes back to early 2016. We have moved on from this now & have better images to detail the new regulatory & payment environment. Even NZ script kiddies on reddit are writing their on family blog versions which have far more depth in a one page summary, and this is a financial news site. Other cryptocurrency blog sites have scraped better articles than this from this site alone... argh. Sorry I am exasperated because this should be at a higher level of information than this, yet it is so far behind, if you want to ref cryptocurrency news or intros there are a lot of good references to start with.

The crypto/blockchain space is still in it's infancy. A lot of people are fearful because they don't understand it, it just gets passed off as another speculative asset. However when companies like IBM and ANZ are jointly developing solutions based on blockchain, i think that says something.

Don't confuse blockchain with cryptocurrency it is a beginner mistake, much like how the internet did not guarantee the success of netscape. The development of a technology itself does not share the same path as a single implementation or tool. Likewise online trading, and virtualisation is still in it's infancy given the same period of development using your comment and the growth in those has been far more successful & prevalent in the industry. What we have seen is that any form of technical advantage in financial trading is rapidly adopted being that it generates a direct amount of financial benefit. Cryptocurrencies are the water riding off the ducks back for that (the duck being the growth in financial tech where spinoffs benefit from the developments).

As web services, trading bot apps, and interface design improves more users find it more approachable. Granted most still lose money, like many day traders, but at least tools can help aid in description & use. Trouble is there is not an equal amount of investment education going into security, investor strategies, risk analysis, trading AI, fraud & scam identification etc, aka the stuff normal investors expect as a basis to wade through the murky pond & see what is underneath, (which those new entrants need just as much if not more as they are far more likely to have less diversification, less access to legal, financial and technical advice). Even the bot market has lead to a few gotchas, and the trading AI is prone to flash crashes among large players.

What is surprising is the level of ineptitude in many cryptocurrency trading tools when even other investments have far more features to use, (instead of starting with the current level they are far behind, even approaches to kyc, tax are rushed & slapdash). Updates & deployments are run in such a poor fashion serious breakdowns are path of the course, (which many other development houses can easily iron out in the first level of testing & staging deployments, so it is a bit rich from any financial app to not even have a QA process at all). Many of these new teams had the opportunity to start from scratch with all the benefits of previous tech and companies at their fingers so they could run with a headstart so to speak, (something which idealised in development because of the ease to build without support issues), yet they stumbled out of the gate and provide investment risks from poor development the size of the grand canyon. Literally multi day shutdowns from a single fumbled update & ineptly fudged volume data is insane in any market or service, and on the illegal side for financial ones.