Some Questions Answered
A Quick Intro to the World of Cryptocurrencies: Some Questions Answered
Cryptocurrency. For the uninitiated, the word itself conjures up images of James Bond villains and futures described in science fiction novels. It would have been perfectly reasonable to think of cryptocurrency as science fiction just a decade ago. That was then, though. Today, cryptocurrencies are real – although not tangible – assets used to purchase and sell real things, as well as traded on currency markets around the globe. However, cryptocurrencies remain a mystery to even seasoned financial experts, not to mention most average citizens.
So, what is cryptocurrency?
Cryptocurrency is a digital or virtual asset that functions as a medium of exchange in much the same was as more traditional forms of legal tender (like metal or paper currencies). It employs cryptography to ensure security in the transfer of funds and creation of additional currency units. The foundation of any cryptocurrency lies in its security, anonymity, and accessibility to anyone with an internet connection.
Cryptocurrencies can be used to buy and sell goods and services, but today are primarily an investment asset traded on currency exchanges around the world.
Currently, over 1500 cryptocurrencies exist, although there are a number of well-known, highly-capitalized coins that garner the lion’s share of action and attention. Bitcoin, of course, is the biggest name by far. Other important cryptocurrency players, as of this writing, include Ethereum, Litecoin, Ripple, EOS, NEO, Monero, Tron, Cardano, and Stellar. Keep in mind, though, that the market for these coins is extremely volatile and often quite fickle. Put another way: Today’s hot coin may not be so hot tomorrow.
A (Very Brief) History of Cryptocurrencies
As histories go, the history of cryptocurrency is a fairly brief one. Although there were a few earlier futile attempts at establishing online currencies with encrypted ledgers, cryptocurrencies really began in earnest with the publishing in 2008 of “Bitcoin – A Peer-to-Peer Electronic Cash System”, a paper written by Satoshi Nakamoto that outlined the concept and basic technical issues of a digital payment system that allowed for sending and receiving payment without the involvement of banks or other financial intermediaries.
Nakamoto quickly followed up the paper in early 2009 with the introduction of Bitcoin, the world’s first real cryptocurrency.
Bitcoin gained quick popularity among a small group of enthusiasts who began mining and exchanging the digital currency. The first known use of Bitcoin came in 2010, when someone purchased two pizzas for 10,000 Bitcoins. By 2011, a broader interest in Bitcoin had gained footing, and other cryptocurrencies began to appear with the intention of improving on the speed, security and anonymity characteristics of Bitcoin. Today there are literally hundreds of cryptocurrencies in circulation around the world.
You may ask, “Who is Satoshi Nakamoto?”
Satoshi Nakamoto is legendary in the world of crypto currency and has been described as “the world’s most elusive billionaire,” with a net worth estimated at $7 billion.
Here’s the thing: No one seems to know who Satoshi Nakamoto actually is. Nakamoto has, to say the least, kept a low profile, employing state-of-the-art encryption technologies and other methods to keep his – or her – identity a secret.
There is, of course, tremendous speculation about Nakamoto’s true identity, with more than a few names having been suggested. It’s believed that the U.S. Department of Homeland Security knows, but if they do, they’re not talking. It’s even possible that Nakamoto is actually more than one person. Regardless, as of this writing, the true identity of Satoshi Nakamoto, possibly one of the richest individuals on the planet, remains a mystery.
What is a Blockchain?
You can’t get too far into the world of cryptocurrencies without encountering the word “blockchain” or the term “blockchain technology.” An explanation of blockchains can get very complicated and technical, and would take up much more room than is available in this article.
Here’s a simple, but workable explanation: A blockchain is a digitized, shared public ledger that contains all transactions of a cryptocurrency. Put another way, a blockchain consists of a series (or chain) of files (blocks) containing the records of the most recent transactions of a cryptocurrency. As transactions take place, the blocks recording the transactions are added to the chain, allowing for a constantly up-to-date ledger. Blocks are kept in chronological order and each one contains a hash of the previous block. The blockchain database is shared by all nodes (computers connected to the cryptocurrency’s blockchain system), therefore assuring that the database cannot be altered or deleted.
Blockchains are at the heart of Bitcoin, likely the currency’s biggest single innovation, and variations of blockchain technology are the foundation of every other cryptocurrency.
What is Cryptocurrency Mining?
Another term anyone looking into cryptocurrencies is bound to run into is “mining”. Cryptocurrency mining doesn’t require owning a pickaxe or shovel, or spending your days in an underground tunnel. But it does bear some resemblance to traditional gold mining, for example.
Here’s why. Cryptocurrency mining (aka cryptomining, altcoin mining, and Bitcoin mining) is the process by which cryptocurrency transactions are verified, authorized and added to the currency’s blockchain. The process involves the efforts of cryptocurrency “miners” whose responsibility is to ensure the validity of transactions by verifying the elements of those transactions, primarily by determining that the coin owner has enough of the currency to pay for the transaction. This is accomplished by examining the balance in the owner’s wallet. (More on cryptocurrency wallets below.)
Once the transaction information is verified, it is authenticated and added to the blockchain by solving a complex mathematical equation or puzzle that is part of the cryptocurrency’s program. In the case of Bitcoin, the puzzle involves discovering a “nonce”, which is an integer between 0 and 4,294,967,296. Cryptocurrency miners, in effect, compete to solve the puzzle, with the first one to solve it rewarded by being given the task of authorizing and adding the transaction to the blockchain, and by earning a given amount of the cryptocurrency itself.
How do you purchase cryptocurrencies?
Mining is far from the only method of obtaining cryptocurrencies. The easiest way is simply to buy them. There are a number of options for purchasing cryptocurrencies, but the place most people buy them is on a cryptocurrency exchange. Cryptocurrency exchanges (also known as digital currency exchanges or DCE’s) are online platforms where people buy, sell, and trade cryptocurrencies.
There are literally dozens of them in operation, each with its own fees, processes, ancillary services, and particular currency listings. Most operate outside of the U.S. in order to avoid strict regulation of their activities.
There are two basic types of exchanges: fiat exchanges and cryptocurrency to cryptocurrency exchanges. Fiat exchanges allow customers to purchase cryptocurrencies with traditional money sources, like U.S. dollars or euros. Cryptocurrency to cryptocurrency exchanges, as the name implies, allow those who own one kind of cryptocurrency to trade it for another kind. Most major exchanges offer both fiat purchases and cryptocurrency to cryptocurrency trades.
How do you store cryptocurrencies?
There are lots of great security advantages that make cryptocurrencies attractive. But there is one big – and scary – security task that individual currency owners must take upon themselves: storage. That’s because the short history of cryptocurrencies is rife with stories of hacks that have resulted in owners losing their coins forever. So, taking personal responsibility for the proper storage of one’s coins is an absolute must.
Storing cryptocurrency means using a wallet. A cryptocurrency wallet is nothing like that old leather thing you’ve got in your back pocket, however. A cryptocurrency wallet refers to any one of several methods for securing the digital information a currency owner needs to store, receive and send his or her coins. More precisely, a cryptocurrency wallet stores the owner’s public and – most importantly – private keys that allow the owner access to his/her cryptocurrency stash.
There are a wide variety of types of cryptocurrency wallets, including desktop wallets (installed directly on an owner’s computer), online wallets (storage on the cloud), and mobile wallets (storage on a smartphone).
The problem with these wallet types is that they all leave their owners vulnerable on some level to hacking. That’s why it is highly recommended that owners employ a hardware wallet for their cryptocurrency storage. With a hardware wallet, the owner’s keys are stored on an external digital device, like an USB stick or smartcard. Hardware wallets are very secure since the information on them is contained offline and thus not assessable to hackers. The main disadvantage – and this can be a big one – is that if you lose your wallet, or if your wallet is damaged beyond repair, the keys stored on it are gone, along with the owner’s coins. And that loss may be forever. Unless, that is, the owner keeps a backup.
What can you do with cryptocurrencies?
There are two basic uses. The first is to treat your coins as an investment: buying, holding, trading, and selling them to (hopefully) make a profit. The second is to use them to buy stuff – actual products and services.
In most cases, online retailers use the services of a third-party processor, like Hedpay, to facilitate payment with a cryptocurrency. Customers simply follow the prompts on the retailer’s website in much the same was as when making payment with a credit or debit card. Retailers that accept cryptocurrencies at their brick-and-mortar locations also use third-party processors, but payment by the customer is most often made via a “spending wallet” app on the customer’s smartphone or similar device.
Who accepts cryptocurrencies as payment?
The list of merchants and companies that accept cryptocurrencies to pay for their products and services is relatively small, but that list is growing, and it includes a lot of very recognizable names. Not surprisingly, the most widely accepted cryptocurrency is Bitcoin, but many retailers will accept other major coins as well. Most merchants accepting cryptocurrencies do so online through their websites, but a growing number are starting to accept them at their brick-and-mortar locations.
The benefits to merchants include immediate processing, lower transaction costs, avoidance of fraud and chargebacks, and the attraction of new – and younger – customers.
Dell, Expedia, Microsoft, Subway (at select locations), are some of the major merchants currently accepting one or more cryptocurrencies as payment for their products and services.
Should I invest in cryptocurrencies?
When it comes to cryptocurrencies, the big action is in investment. It’s easy to see why. Consider this: When Bitcoin was launched in 2009, its price hovered just above $15. It remained that way for years before jumping into the hundreds of dollars in 2013. It first broke the $1,000 mark in early 2017.
And then the rocket was lit, with Bitcoin’s price peaking at over $19,000 in January 2018. Not long after, however, Bitcoin’s price dropped substantially, and those buying the currency at its peak found themselves witnessing their investments drop precipitously. As of the time of this writing, the price of Bitcoin was just under $7,000.
The bottom line: With huge potential rewards, many investors simply can’t resist the lure of cryptocurrency investment. Along with big rewards, though, come big risks – and the real possibility of seriously big losses.
Today, of course, Bitcoin is only one of hundreds of cryptocurrencies open to investment, which is both exciting and concerning to the average investor. All of this begs the very important question: Should you invest in cryptocurrencies?
Deciding whether or not to invest in cryptocurrencies, determining how much of your hard-earned traditional cash to invest, and picking the specific coins to purchase – all require at least as much time and effort in research as one would put into any other investment.
To learn more, read CouponChief’s cryptocurrency primer: https://www.couponchief.com/guides/cryptocurrency_primer