Cryptocurrency Explained
A lot of noise surrounds cryptocurrencies; with limited knowledge around the subject, it is difficult for the average person to understand what cryptocurrencies are about. We’ll try to keep it as short and concise as possible. A cryptocurrency is a digital or virtual form of currency that uses cryptography as a security measure.
What makes cryptocurrencies different from other currencies is that these virtual currencies are not issued by any central authority (such as a federal reserve bank) making it theoretically immune to government interference or manipulation.
So if cryptocurrency is a digital currency with no central authority, could someone spend the same amount twice, or a couple of times? Initially there were calls for a central server to record all transactions, but that also meant the control and privacy of members personal could be compromised. Then came blockchain to solve all the problem of double spending.
Blockchain acts as a digital ledger where transactions are recorded and made public. Blockchain uses a peer-to-peer network that decentralizes the digital currencies. Think of blockchain as a copy of Google Docs/Sheet/Slide where multiple parties have access to the same document at the same time and can observe any changes made in real time.
Bitcoin
There have been a couple of digital currencies since the early 90s, but most failed to attract many users. Then in early 2009, Satoshi Nakamoto, an anonymous programmer or a group of programmers, introduced Bitcoin. It took off and is arguably the most popular cryptocurrency in the world today.
The actual number of bitcoins in circulation has grown incrementally and hit over 16 million at the end of 2017. Statista reports that there were 2,163 Bitcoin ATMs globally with the highest recorded Bitcoin ATMs found in the US (1,176), Canada (309), United Kingdom(104), Austria (93), Spain (35) and Australia (22)
How to Acquire Cryptocurrency
There are several ways you can acquire cryptocurrency as an ordinary investor. The two most popular ways are mining and buying.
Mining
Mining can be compared to puzzle solving where new cryptocurrencies like bitcoin, litecoin and monero are generated. With the help of a couple of tutorials and the right computer hardware and software, virtually anyone can mine for cryptocurrencies. Mining revolves around compiling recent crypto transactions into blocks and trying to solve them.
New cryptocurrencies are generated as a reward for solving these puzzles.
It is important to note that most bitcoins have already been mined — over 80%, which represents 16.9 million of the total 21 million bitcoins ever produced. This leaves only 4 million to be mined by 2021, creating a huge demand for bitcoin, thus requiring miners to increase their efforts to get new bitcoins.
Mining in groups called pool mining lowers the hardware spending and makes it much easier to solve blocks. The best bet for miners is newer crypotos, but most pay between 50 cents to $10 per day.
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Buying Cryptocurrencies
Since mining for cryptocurrencies requires a lot of computation, electricity and effort, the best next way to acquire new coins is to buy them.
Digital Currency Exchanges
These are essentially the equivalent of brokers in the digital currency world. They are widely used and trusted to make online exchanges for cryptocurrencies in exchange for other forms of currency like cash and gold. They accept major debit/credit card payments, wire transfers, postal money orders and major online payment platforms.
The major ones include Coinbase, Kraken, Gatehub, GDAX and Bitstamp. Coinbase enables users to trade with Bitcoin, Bitcoin Cash, Litecoin and Ethereum
In order to begin trading in cryptocurrencies you need a “wallet” to store your currency. It gives you access your cryptocurrency and safely stores your private key and secret number. There are two types of wallets: hardware and software.
A hardware wallet looks like a flash drive and you can unplug it from the internet once you are finished trading. Coinbase, Mycelium, and blockchain.info have their own software wallet. Once you download their app, open an account, register and start buying cryptocurrencies instantly.
How to Use Cryptocurrency
Paying for Goods and Services
Today, Bitcoin has been widely accepted as a form of payment by a huge number of merchants. Bitcoin can be used to buy goods from popular retailers like Newegg and Overstoc. You can book hotels (Expedia) and buy airline tickets (BTCTrip.com), jewels, pizza, burgers and NBA tickets (Mavericks) using Bitcoin.
Bitcoin allows you to pay tuition in some colleges, pay for plastic surgery and pay for caskets in the case of funerals.
Investment
Cryptocurrencies are highly volatile and high risk investments. Their values fluctuate like almost any other asset in the market. The upside to having a high risk investment is that there is potential for high return. In 2017, bitcoin jumped up a massive 800% in value. This means if you had $100 invested in Bitcoin at the start of the year you’d be looking at $80,000 in just under a year.
Cons of Cryptocurrencies
Scams and Fraud
Bitcoin has come under attack from hackers to small time pansy schemes. Bitcoin is popular with underground criminals who delve in the dark web. Most international criminals prefer Bitcoin as there is no clear international legal system to regulate it. Other cryptocurrencies do not have a large base of users to make them profitable to criminals
Volatility
Bitcoin and other cryptocurrencies are susceptible to huge price surges and dips over short periods of time. Currencies can lose up to 50 to 70% of their value over short periods of time. Bitcoin is preferred by speculative investors as opposed to long term investors.
No Refund Policy
Once a transaction is complete there are no refunds. Bitcoin’s decentralized system means there is no arbitration in case a paid seller fails to deliver goods.