Why Is Crypto So Important?
This post is targeted to the beginners. I have had an influx of people recently and I want them to understand the single most important principle behind the cryptocurrency movement.
DECENTRALIZATION
This is a direct response to yesterday and my article I wrote about Gamestop.
Quick run down :
Massive Hedge Fund shorts Gamestop to oblivion ( bets on price to go down)
Reddit/WSB (Retail Investors) catch wind of this and collude to drive price upwards
Hedge Fund takes massive loss.
Hedge fund cant handle being blown the fuck out by retail so they start calling up their buddies at exchanges and clearinghouses
Robinhood, Schwab, and numerous other brokers refuse to accept new buy orders on Gamestop but still allow sell order
Price immediately tanks because all buy pressure disappeared instantaneously leaving only sell side pressure.
Retail gets left holding the bag, price drops, hedge funds given an opportunity to close their positions.
What went wrong?
These hedge funds in collusion with clearing houses and brokerages disgraced the free markets but banning all buy orders. If they really were attempting to “protect the investors” they also would have banned sell orders until volatility came down a bit. This is a farce and only happened to protect the hedge funds from losing their shirt.
The problem here lies with centralized services. You, as an investor, depend on the clearinghouses and brokerages to fulfill all of your trade. They also hold all of your stock positions. It may be “ your portfolio” but “your portfolio” is confined to their website and their Terms of Agreement.
As yesterday shows, these centralized services will immediately throw you and anyone else right under the bus the very second their hedge fund buddies start to get rekt.
How Does Cryptocurrency Solve This?
Read this entire article. Yes, its dry but it is extremely important.
Before cryptocurrency, every service you have ever used for a financial transaction involved a centralized service such as a bank or Paypal. These services cost you money via fees, they make transactions more expensive because that’s what middlemen do. As a result, billions of people around the world have been locked out of the system because it is too expensive to service them. Some of these people do not have any identification. Try opening a brokerage account with no documentation. All of this is old news and tiresome.
Yesterday, the middleman in question was Robinhood and their clearinghouse. They got involved in the process and shut it down when it was of benefit to their friends. This is what middlemen can do. Yesterday it was Robinhood but tomorrow it might be your bank. What would you do if your bank decided to close you account and take all of your savings? Who would you contact? This may seem unlikely to you as an American but most of the world is fraught with corruption. Corruption like we saw yesterday.
Cryptocurrency gets rid of the middleman. If I want to send my friend some Ethereum, he sends me his cryptocurrency address and I send it to him. I push a button which calls upon the Ethereum blockchain to transfer Eth from my account to his. This Ethereum blockchain is an open source computer program that is being verified by thousands of computers around the world. There is no middleman. There is no PayPal that can get in the way. No Robinhood that can stop my transaction.
It is a decentralized network that comes to consensus and updates the blockchain with the new balances. For the first time in history I can send somebody a digital asset that has real world value without the need for a bank or any intermediary.
It is nearly impossible for anyone to get in the way of this transaction. Furthermore, when my friend sends me his address it is a long alphanumeric string of letters and numbers. There is no name or identity tied to this address. He simply logged on and created it and kept the private key to himself. The transaction was entirely anonymous. Nobody knows who sent money and who received it.
It should be noted that these types of transaction only occur when you leave Coinbase and self custody your coins in a hard wallet. Coinbase has one foot in the decentralized world and one foot in the centralized because they have to connect to your legacy bank.
Beyond simple transaction, Ethereum has a programming code built on top of it. Now, you can create dapps, or decentralized apps. These dapps are run on the same blockchain and have the same mechanics ( verified by thousands of decentralized nodes around the world) but they greatly expand our capabilities.
There are dapps that allow anyone around the world to create their own decentralized hedge fund. I can create my own hedge fund right now for free and you could invest into it and the dapp would autonomously allow your wallet to make all the same investment decisions that I do. Why shouldn’t I be able to create my own hedge fund? Who is the government or anyone else to tell me I am not allowed to do that?
There are dapps that produce parametric crop insurance. If rainfall does not meet a certain threshold in the rainy season, farmers will be paid out by an insurance fund automatically with no middleman involved.
The possibilities are endless but change is clearly in the air. The old age of centralized hedge funds calling in the favors and changing the rules is on its way out. A new decentralized world is being built that will level the playing field for all.
It is my personal opinion that the early adopters of this new world will be rewarded handsomely. This new technology will win out and I am certain of this. The entire legacy system will have to transfer over into this decentralized realm or they will be replaced by someone who did. It is way more powerful, way cheaper, and way more honest than what we currently have.
-Matt
Awesome. I sooo bullish on DeFi and Blockchain right now. LG