After the holidays, your parents have invited you back to their house. Your mom pretends that she just wants to cook some nice dinner for you but one, you know that your dad will do the cooking anyways and two, you have long learned not to trust invitations out of the blue.
This will either be another Virginia Incident [which we do not talk about], or she has some “computer problems” because you “broke her internet” that last time you were at their house.
Imagine your surprise when your mom’s computer is working just fine and she just wants to talk more about cryptocurrencies and blockchain technology. You are happy that they are so interested in the topic and are looking to share your knowledge with them.
This article is for you if…
- … you are looking for ways to explain to everyone (or understand yourself) how the Crypto space works,
- … you want to have a clear explanation for what the differences between wallets, addresses, private and public keys are,
- … you want to understand where and how to buy Bitcoin,
- … you want to learn more about what kinds of coins you should invest in,
- … you want to find out how to keep your portfolio together,
- … you have read part I and part II of this series and want to know what happens next.
Your mom has obviously thought a lot about cryptocurrencies and is now eager to learn more. She welcomes you with a summary of the last time you two were talking.
If you would rather skip the summary, feel free to scroll down until you read “Dinner’s Ready”!
“So, let’s see if I got this right. The initial idea of Bitcoin was to create a form of money that can easily be used and is independent of location or government.
This means that you can send large sums of money anywhere basically for free and in a very short amount of time, only using a few computers, so there is no need for intermediaries such as companies, banks or governments.
Right now, there are many people working on solutions using this technology and it isn’t clear yet where it will be most successful.
The tokens that they work on can generally be classified as one of three kinds of tokens that are called security, equity, and utility tokens. They all have different characteristics. While securities are used to make money, equity tokens are most like stock and utility tokens are used to buy products or services.
Currently, crypto is mostly used as an investment opportunity, but there are a few use cases for the real world – there are a lot of online and offline shops where you can pay with Bitcoin and other cryptocurrencies.” You reply with a nod with the mouth open as in shock.
Your dad yells, standing in front of the oven. You get up to help set the table. “So I think I understand the basics of how this stuff works”, your mom says getting up from the sofa. “I would like to try it out. Will you help me buy a few of those currencies?”
You are a little cautious for a few reasons. One, your mom usually is a nightmare when it comes to technology. You helped her set up her iPad once and ever since she calls you whenever her favorite animal or candy game doesn’t work. Two, investing money for other people without a license is not really something you want to be doing – not only because you don’t want to mix money and family, but also because you’re not sure about the legalities of it.
But since your mom seems genuinely interested, and she just wants to use a few bucks to try it out, you decide to help her out.
Your mom is taking the silverware out of the drawer. “Since the holidays, I have read a lot of blog articles and crypto news and while I do get the gist of it, I do have a few questions left.”
What is a Crypto Wallet?
“I keep hearing about wallets and coins all the time – didn’t you tell me that the money is digital? How does this fit together?” she asks with an accusing tone towards me.
Well, you try to explain:
Cryptocurrencies aren’t tangible. You can’t touch or see them. So the name “wallet” is a little misleading. You can think of a crypto wallet like a bank account for your digital currencies. It is used to store the coins and keep track of them. You can also send those coins to different wallets to pay for goods (like shoes for example). You can pretend that it is a currency for a world without cash. Because the only thing you can’t do with cryptocurrencies is withdrawing physical money – unless you convert it back to “FIAT” money.
Just like in a bank account, you can’t store different currencies in the same wallets. Since there are no banks in the crypto world, you need a different kind of wallet for each currency. So for example, you can have a Bitcoin wallet and a Lisk wallet.
There are a few wallets that can hold more than one kind of coin, Ethereum being the most well-known example. The Ethereum project has built a platform that can be used by developers to create currencies within that platform and store those coins in Ethereum wallets.
It is like a huge and open farm. Ethereum rents out the land to farmers (programmers) to grow their own plants or animals (projects) on it. They all live on the Ethereum farm even though the fruits of their labor (tokens) can be very different.
But to make it short, a crypto wallet is simply the place where you store your cryptocurrencies.
Got it so far?
“So if I understand you correctly, a “wallet” is just another term for my personal crypto checking account.”
Short and to the point – your mom might be more talented in learning about technology than you had anticipated. However, since she has now gotten her feet wet, she wants to know about more household items that have lent their name to the Crypto World.
What are Keys and Addresses?
Now if you want to, you can really start making things complex. Those innocent-sounding words have a whole armada of mathematicians, statisticians, cryptographers and programmers behind them who have been working on them for decades.
But of course, you don’t want to confuse your mom. And if you’re totally honest, you don’t quite understand all of this either. This is a rabbit hole you don’t want to dig up.
So let’s look at those two things from a conceptual angle.
Imagine you had an actual house with an actual address, an actual front door and an actual, high-security safe inside the living room.
Don’t hide your public key like this
Imagine that in that safe, you have stored all of your crypto. The key to your safe has your home address printed on it and also opens your front door. So if you lose that, you are – well… let’s say out of luck… Anyone who has the key to your safe (or “private key” as they are called in the crypto world) can access your home because it contains all of the information necessary to get there.
Your house key (“public key” in the crypto world) lets you access the living room. There, you can look at all of the transactions that have happened in your house and look at how much money is in the account.
Don’t ever hide your private key like this
The house key also has the address printed on it so if you ever find a house key, you can locate the address as well. The one thing you can’t do is steal anything, because you don’t have access to your actual coins inside the safe.
With the address, you can find the front door, but it’s locked.
So people can send you stuff (that magically appears in your safe), but they can’t come inside your house or access your safe.
You might have heard stories of people searching through junkyards looking for old hard drives with Bitcoins worth millions on them. This is because, without the private key, they are basically standing in the living room looking at the safe, but can’t open it.
If this is too theoretical for your mom, she doesn’t show it. What’s more, she tries to condense your far-fetched story and bring it a little closer to the Crypto world.
So if I understand correctly, a crypto wallet consists of a public and a private key, and your public address.
- The public address is like your account number.
- The public key is like having access to your account statements without being able to do transfers.
- The private key allows you to actually spend your coins. It also includes all information necessary to retrieve the public key and address – but it only goes one way.
You have nothing more to add. A bit flustered, you only manage a surprised “yes, that’s actually one hundred percent correct…”
“Guys, let’s eat! The food is getting cold”, your dad says a little impatient while holding steaming hot plates of food in his gloved hands. “You can finish this conversation after dinner. I wanna hear about your week.” You head off to dinner and you stare into your mom’s eyes. She smiles at you and you just know…she fell into the rabbit hole.
In the next part, after finishing up this lovely dinner, we’ll go deeper into the different ways of buying coins (where, how, which ones and why), and about accounting and taxation.