Cryptocurrency for Newbies, a Must Read Before Investment.

CRYPTOCURRENCY: The New Technology

Over the last couple of years, the term ‘cryptocurrency’ has been rapidly gaining ground and understanding of its use and value in the public eye. At first it seemed unfamiliar and somewhat scary. In some part of the world, it has been likened to a ponzi scheme, HYIP, MLM. The first time I heard about cryptocurrency was from an online friend, he gave me a glimpse of what bitcoin is and from there I became an enthusiast and began to do my own research and review of cryptocurrency marketers. Then, I discovered that there were alot of cryptocurrencies and not just bitcoin. Well, I have written this article to share a little bit of my knowledge and about this ‘new’ technology which is gaining alot of popularity and I hope at the end, you will appreciate this technology, clear your doubts and become an enthusiast just like I’ve become.

What is cryptocurrency?

 

The technical definition according to the Oxford Dictionary is ‘a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.’ What exactly does this mean though? It means that cryptocurrency is online money that, because of a mathematic algorithm, cannot be inflated or tampered with from any single institution like a central bank. In fact, cryptocurrencies are not backed by any government or central bank in the world. It is an alternative private currency developed out of the free market and new digital technologies.

 

How does Cryptocurrency work?

 

To use cryptocurrency, you don’t need to understand it (any more than you need to understand the monetary system to use a debit card). However, if you want to understand cryptocurrency, you need to understand the concept of digital currency, the concept of blockchain (both as a public ledger of transactions and a technology), and the concept of cryptography.

Cryptocurrency works a lot like bank credit on a debit card. In both cases, a complex system that issues currency and records transactions and balances works behind the scenes to allow people to send and receive currency electronically. Likewise, just like with banking, online platforms can be used to manage accounts and move balances. The main difference between cryptocurrency and bank credit is that instead of banks and governments issuing the currency and keeping ledgers, an algorithm does.

Transactions are sent between peers using software called cryptocurrency wallets. The person creating the transaction uses the wallet software to transfer balances from one account (AKA a public address) to another. To transfer funds, knowledge of a password (AKA a private key) associated with the account is needed. Transactions made between peers are encrypted and then broadcasted to the cryptocurrency’s network and queued up to be added to the public ledger. Transactions are then recorded on the public ledger via a process called ‘mining’  All users of a given cryptocurrency have access to the ledger if they choose to download a full node wallet (as opposed to holding their coins in a third party wallet like coinbase or Luno). The transaction amounts are public, but who sent the transaction is encrypted (it is pseudo anonymous). Each transaction leads back to a unique set of keys. Whoever owns a set of keys, owns the amount of cryptocurrency associated with those keys (just like whoever owns a bank account owns the money in it). Many transactions are added to a ledger at once. These ‘blocks’ of transactions are added sequentially by miners. That is why the ledger and the technology behind it are called ‘block’ ‘chain.’ It is a ‘chain’ of ‘blocks’ of transactions.

Bitcoin: The number one cryptocurrency

Many people believe Bitcoin to be very complicated, when in fact it’s a lot more simple and intuitive than what most people think. Bitcoin is often explained by comparing it to something specific people already know. Bitcoin is a new technology that is unlike anything we have seen before, so a better way to think of it is as a combination of a few different things we are already used to:

Firstly, because it allows you to move money so easily, bitcoin functions as a payment system, similar to bank transfers or credit cards, only a bit better.

Second, bitcoin is in some sense similar to gold – that is why many people even refer to it as ‘digital gold’ or ‘Gold 2.0’. Think of it as using gold for money, except it also very easy to move.

Third, Bitcoin is like the internet in that no single person or entity controls it, so anyone can pretty much use it as they like. This gives it some very unique characteristics.

These three characteristics also reinforce one another, so they are all interwoven. Just imagine what would happen if you took a big pot and threw in a credit card, a piece of gold, and a hint of internet – mix it all up – and pull out a brand new compound – Bitcoin!

Bitcoin was invented by a person or group of people using the name ‘Satoshi Nakamoto’. Does anyone know who this really is? Despite many articles and investigation to unmask the person(s), there is still no conclusive evidence of who they are. Does it matter? Not at all. Satoshi designed the entire bitcoin system in an ‘open source’ manner – this means the code is available for everyone to inspect and see, so there are no hidden secrets, and no influence on it from the creator. Over time many others have also worked on this code so it’s already very different from the initial outline Satoshi proposed.

It is also worth mentioning that there is a common misconception that Satoshi invented bitcoin all by himself. Like many big breakthroughs in the sciences, Satoshi’s invention was built on the shoulders of giants. For the past few decades many top scientists, engineers and mathematicians were involved in research around cryptography, systems and so on. Satoshi managed to pull all of this work together into one coherent plan and then helped to start implementing it. If you read the Satoshi whitepaper, you’ll even notice that he references all the other work on which he relied to complete his invention.

What are the different types of cryptocurrencies?

In the world of cryptocurrency, bitcoin isn’t the only ‘show in town’. There are many alternative cryptocurrencies, commonly known as altcoins:- these are electronic currencies with their own blockchains, miners, and wallets. Many cryptocurrencies have been attempting to replicate bitcoin’s success, some with better results than others. With about 1,600 altcoins at the time of writing, this market does not seem to be slowing down. While most of these are merely a copy of bitcoin (with very few modifications or improvements), others are attempting to do new things with the underlying bitcoin technology.

Some like Ethereum, have been using the blockchain to allow the development of decentralized applications where the data is held by every user of the blockchain instead of a single server.

 

What are altcoins?

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Because many casual users use ‘cryptocurrency’ and ‘bitcoin’ interchangeably and because ‘cryptocurrency’ is too long a word, especially in marketing materials, new cryptocurrencies released after bitcoin began using the moniker ‘altcoin’ – a conflation of ‘alternative’ and ‘coin’. Cryptocurrency can be bitcoin or altcoin – which are alternative coins to bitcoin. The name bitcoin is derived from the combination of ‘bit’ and ‘coin’. Bit means small quantities of computer memory while coin is a small quantity of cash.

Altcoins (alternate coins) are other digital currencies derived from the bitcoin protocol with unique features of their own. Any other coin or token apart from bitcoin are called altcoins. As the first cryptocurrency, bitcoin has its own particular rules. For example: There were rules that were made when the bitcoin protocol was originally designed, but there’s no law book that says those rules can’t change. The software development team that governs bitcoin is very conservative and don’t like making drastic changes to bitcoins software, or the rules inside it. There are good reasons for this; bitcoin has a market capitalization in the billions of dollars, and many businesses now rely on it so making too many changes could create problems for the people that depend on a cryptocurrency as popular as bitcoin. Instead, many people have taken the basic principles of cryptocurrency and developed their own versions, with different rules to suit their own needs. They form the altcoin community and there are many of them.

 

Many altcoins are also very similar to bitcoin in the sense that:

  • They are created through a mining process.
  • They are based on a peer-to-peer network, hence they’re decentralized.

Altcoins have become extremely popular recently due to the rising price of bitcoin and costly mining process. Bitcoin mining has become almost unaffordable for the majority, thus cryptocurrency enthusiasts have started turning into more economical options. Even though altcoins resemble bitcoin in the way they are designed, most of them serve a different purpose than just being a financial tool. The vast majority of altcoins don’t do anything special at all and they try to mimic bitcoin with little tweaks. Some, on the other hand, have been designed with a purpose of becoming a worldwide computer and can be used as a platform for building decentralised applications (Ethereum).

 

Not all altcoins have been created with a serious purpose in mind. There are coins devoted to dogs (Dogecoin), Kanye West (Coinye). Putting jokes aside, some altcoins also experiment with a code or new security features that could be later implemented to the bitcoin protocol.

 

The most popular altcoin as of this day is Ethereum. In many ways,  ethereum is similar to bitcoin. It’s a public, peer-to-peer network or blockchain with its own digital currency called ether. Ethereum was created by Vitalik Buterin in 2014 and the purpose of ethereum is to be a platform on which smart contracts can be built and run. Put very simply, ethereum is intended to be a world computer. Where bitcoin stores a list of balances and transactions on its blockchain, the ethereum blockchain is designed to store different types of data. This data can be accessed and used by computer programs running on the ethereum blockchain. These programs are called decentralized apps or dapps. Let me put it simpler for you to understand, as you know, bitcoin is basically a digital currency i.e. a kind of money that is made of computer codes but for ethereum, it is a currency that works like an application where different data can be sent in form of codes.

 

Ethereum was first mentioned in 2013 in a whitepaper by Vitalik Buterin, a developer who was working on bitcoin at the time. Buterin believed that bitcoin should be made more customisable. He believed bitcoin should go a step further than simply being a store of wealth and that it needed smart contract features to determine automatically when payments should occur, for example. This project was not taken up for bitcoin, therefore Buterin created ethereum in 2014 for this purpose.

 

Ethereum pioneered what is known as an initial coin offering (ICO), selling to initial investors about 60 million ether tokens while the project was still in development. This kick started a large drive to develop and further promote the ethereum ecosystem whilst paying for legal fees and development costs. Since then, ethereum has grown substantially. Multiple other projects have launched, and begun development on the ethereum platform, with varying degrees of success.

 

Other altcoins

Visit coinmarketcap and you will see the different types of cryptocurrencies with information on their market capitalization, their market value, growth over time and exchanges they can be traded.

 

The future of cryptocurrencies-benefits and drawbacks

 

There are different and confronting opinions regarding the future of cryptocurrencies in general and bitcoin in particular. While those with libertarian views of life are optimistic and embrace  the cryptocurrency system, other authors, economists, and scholars from this field are not  enthusiastic about the use of cryptocurency in the system of payments and financial transactions.

 

The optimistic view of cryptocurrencies use is backed by the fact that they make it easier to transfer funds between two parties in a transaction; these transactions are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks. In addition, many countries have started to accept some cryptocurrencies especially bitcoin as a valid currency especially countries that aim to get rid of cash have a very friendly approach to cryptocurrencies. An argument that promoters of bitcoin use is Market Capitalization of bitcoin, ethereum and other cryptocurrencies, claiming that cryptocurrency market has become very large and powerful, so  banning it would be too costly for any country.  On the other side the opponents of cryptocurrencies claim that cryptocurrencies are very volatile, can be used for money laundry or financing illegal activities.

 

However, the benefits of cryptocurrency outweighs the disadvantages.

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The benefits of digital currency are a plethora. Not only is it good for the business or the business owner but the buyer themselves. Of course if you purchased a specific crypto and it has shot up in price, you’re buying using pennies on the dollar. In the long term, it definitely pays off. That is definitely one of the benefits of bitcoin.

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  • Easy access – Cryptocurrency is readily available to the general public. Almost anyone can make use of it. It is a decentralized operation and investors from all over the world have easy access to them. You can find various projects trying to raise funds through cryptocurrency. Almost anyone that can make online fund transfers can become part of such projects.
  • Quick and easy payments – Making payments using cryptocurrency is very easy.  You can do it in just a matter of a few seconds. It is very fast because you don’t require to feed many details, you don’t even need to enter your credit/debit card details. All you need is the address of the wallet of the person or enterprise to whom you wish to make the payment too. The amount shall credit to the receiver within few seconds to a few minutes depending on the crypto. The ease of transfer and the low transaction fees makes it very desirable.
  • Fast Settlements – With crypto, you don’t need to wait a couple days for your business to receive the money. Due to the technology cryptocurrencies are based on, the blockchain, it removes delays, payment of fees and a host of other third party approval that might have been present. For traditional businesses, there are often hiccups and bottlenecks due to the number of middlemen that you have to cut through. With cryptocurrency transactions, there is a quick settlement as the peer-to-peer nature of the networking structure cuts off the middleman.
    Crypto contracts were designed to eliminate the bottlenecks that have come to characterize traditional settlement. The settlement is immediate and can be completed for a fraction of time and expense that it would have taken a traditional transfer.
  • Private – You don’t need to share your identity or whereabouts or the details of the transactions made between you and the beneficiary. No information is required to share with the government and the bank regarding the deal. It is truly decentralized.
  • Highly secured – All your transactions will be secure. It is next to impossible for any person other than the owner of the wallet to make any payment from the wallet, unless they were hacked which there are many ways to protect yourself from.
  • Remain anonymous – Some coins can help you stay anonymous but contrary to popular belief, not all of them can. Bitcoin is pseudonymous which means people won’t know exactly who you are on the blockchain but they can get some information from it.
  • Identity Theft – Nobody can steal your personal information from merchants, which ensures the privacy of your sensitive data. By creating a proxy ID, you can make sure that no one knows anything about you. Among the benefits that come from using cryptocurrency is the protection of your online identity. With cryptocurrency transactions, it is almost impossible for your private key to be found or hacked unless you’re not smart about it. Your transaction history can be seen but only if someone has your public key. Cryptocurrency transactions are also unique each time you make them even when the parties are similar.
  • No third party – You are the master of your money. You can keep it in your wallet and use it as per your wishes. There is no third party involved like a bank on whom you need to trust.
  • Facilitate International Trades – When you talk about transactions using cryptocurrencies then there are no limits. You may be in a different part of the world and the receiver might be in some other hemisphere, you can still transfer the amount without any hassle. The inter-country transaction is extremely easy with cryptocurrency because its function is not under the control of any central bank.  This makes it easier for users to transact with it without having levies imposed on them or have their value reduced by exchange rates. This makes it quite suitable for cross-border transfers without any form of hindrance.

 

All the advantages do not mean that there are no risks involved in investing in cryptocurrencies. Just like anything else financially, they are not perfect and there are drawbacks of Bitcoin. Here we will discuss the drawbacks of cryptocurrencies:

  • Difficult to understand – Cryptocurrencies are relatively new and come with a learning curve. People end up investing without proper knowledge and lose money to something they did not learn about.
  • Lack of knowledge – People are not aware of how to use cryptocurrency and hence open themselves to hacker. The technology is somewhat complex and therefore one needs to be mindful of it before investing.
  • Not accepted widely – Not many websites and companies accept digital currencies yet. Very few countries have legalized the use of cryptocurrencies. It makes it impractical for everyday use. Due to lack of acceptance, before buying or investing online or offline, you need to make sure that it’s accepted at that place where you want to use it. Although it is slowly getting the acceptance around the world, it will take time to take the idea entirely out of the shadows. While popular cryptocurrency such as bitcoin is currently being used in different ways, there is still a long way to go for it to be used for commerce, international bank transfers as well as electronic payments. For cryptocurrency to get to this level, smart and scalable applications will need to be built for handling the wide scale of money transfer as well as micropayment services.
  • Can lose your wallet – There is a possibility of losing your wallet. If you have stored the money in the form of digital currency on your phone or computer, you better remember your password and not lose those devices. Losing your coins means you won’t be able to retrieve it, even with the help of legal assistance.
  • No way to reverse the payment – If you mistakenly pay someone by using cryptocurrency, then there is no way to get a refund of the amount paid. All you can do is to ask the person for a refund and if your request is turned down, then just forget about the money.
  • Uncertainty & Volatility – Since cryptocurrencies are so new, they are also very volatile. This is one of the main reasons mass adoption is taking longer than it should. Many corporations don’t want to deal with a form of money that is going to go through huge swings in volatility.

As of now, cryptocurrency has no significant reception which is a major drawback but slowly and steadily, it is consolidating its position. Both developed as well as developing countries are legalizing and regulating the use of cryptocurrency in some way or another. Even countries with a high political restriction like Russia and China are trying to make it so people can be able to freely spend them. We can already see bitcoins effect on the economy. It is very large and only growing at an outstanding rate. Singapore and Switzerland are the most advanced countries in the use of cryptocurrency as of now. Clearly, the advantages do overcome the disadvantages and this is the reason why the base of cryptocurrency is increasing. After seeing the benefits of using cryptocurrency, people are more than willing to accept the risks involved. This article will help you to form a better perspective on its use. Like anything else, there are few shortcomings but the positive aspects outshine the drawbacks.

With everything in life, there are always pros and cons and this is why you need to weigh both actions thoroughly before making a decision. For cryptocurrency, it’s ascension has been due to its ability to initiate secure and untraceable transactions. Now, that the technology is here, only time will tell if the rest of the world will accept it.

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