In the early days of its launch in 2009, several thousand bitcoins were used to buy pizza. Since then, the cryptocurrency’s meteoric rise to US$65,000 in April 2021, following its incredible mid-2018 drop of around 70 percent to around US$6,000, has baffled many people – crypto investors, traders, or simply curious as to who missed the boat.
How it all began
Keep in mind that dissatisfaction with the current financial system led to the development of digital currency. The development of this cryptocurrency is based on the blockchain technology of Satoshi Nakamoto, a pseudonym apparently used by a developer or group of developers.
Despite many opinions predicting the death of cryptocurrency, bitcoin’s performance has inspired many other digital currencies, especially in recent years. The crowdfunding success brought on by blockchain fever has also attracted those trying to scam the unsuspecting public and this has attracted the attention of regulators.
Outside of bitcoin
Bitcoin has inspired the launch of many other digital currencies. There are currently more than 1,000 versions of digital coins or tokens. They are not all the same and their values vary greatly, as does their liquidity.
Coins, Altcoins and Tokens
Suffice it to say at this point that there are fine differences between coins, altcoins and tokens. Altcoins or altcoins generally describe something other than the pioneer bitcoin, although altcoins such as ethereum, litecoin, ripple, dogecoin and dash are considered a ‘mainstream’ category of coins, meaning they are traded on multiple cryptocurrency exchanges.
Coins serve as a currency or store of value, while tokens offer the use of assets or utility services, an example being a supply chain management blockchain service for validating and tracking wine products from winery to consumer.
The thing to note is that low value tokens or coins offer growth opportunities, but don’t expect similar meteoric gains like bitcoin. Simply put, lesser-known tokens can be easy to buy but hard to sell.
Before diving into cryptocurrency, start by studying the value proposition and technology considerations vis-a-vis the commercial strategies outlined in the white paper that accompanies each Initial Coin Offering or ICO.
For those familiar with stocks and shares, this is not unlike an initial public offering or IPO. However, IPOs are announced by companies with tangible assets and business records. All this is done in an organized environment. On the other hand, an ICO is based solely on an idea proposed in a white paper by a company – yet to be started and with no assets – seeking start-up funds.
Untidy, buyers beware
‘Can’t regulate the unknown’ probably sums up the digital currency situation. Regulators and regulations are still trying to catch up with the continuously evolving cryptocurrencies. The golden rule in the crypto space is ‘caveat emptor’, let the buyer beware.
Some countries keep an open mind by adopting a policy of free use of cryptocurrencies and blockchain applications, while keeping an eye out for outright scams. However, there are regulators in other countries who are more concerned about the disadvantages than the advantages of digital money. Regulators generally understand the need to strike a balance and some are looking to existing securities laws to try to control the many types of cryptocurrencies globally.
Digital wallets: The first step
A wallet is necessary to start working with cryptocurrency. Imagine e-banking, but without the protection of the law in the case of virtual currency, so security is the first and last thought in the crypto space.
Wallets are of digital type. There are two types of wallets.
Internet-connected hot wallets that expose users to hacking risks
Cold wallets that are not connected to the internet and are considered more secure.
In addition to the two main types of wallets, it should be noted that there are wallets for only one cryptocurrency and others for multiple cryptocurrencies. There is also the option of having a multi-signature wallet, something similar to a joint bank account.
Choosing a wallet depends on the user’s preference whether it is purely bitcoin or ethereum, as each coin has its own wallet, or you can use a third-party wallet that includes security features.
Notes from the wallet
A cryptocurrency wallet has a public and private key with personal transaction records. The public key includes a reference to a cryptocurrency account or address, similar to the name needed to receive a check payment.
The public key is available for anyone to view, but transactions are confirmed only after verification and validation based on a consensus mechanism relevant to each cryptocurrency.
A private key can be thought of as a PIN commonly used in e-financial transactions. It follows that the user should never reveal the private key to anyone and make backup copies of that data to be stored offline.
It makes sense to have a minimum amount of cryptocurrency in a hot wallet, while a larger amount should be in a cold wallet. Losing your private key is just as good as losing your cryptocurrency! The usual precautions for online financial transactions apply, from having strong passwords to malware and identity theft warnings.
Different types of wallets are available according to individual preferences.
Third-party hardware wallets that must be purchased. These devices work something like a USB device that is considered secure and only connects to the Internet when needed.
Web-based wallets provided by crypto exchanges, for example, are considered hot wallets that expose users to risk.
Desktop or mobile software-based wallets are generally available for free and may be provided by coin issuers or third parties.
Paper wallets can be printed with relevant information about the cryptocurrency owned with public and private keys in QR code format. They should be kept in a safe place until requested during a crypto transaction, and should be copied in case of accidents such as water damage or the printed data fading over time.
Crypto exchanges and markets
Crypto exchanges are trading platforms for those interested in virtual currencies. Other options include websites for direct trading between buyers and sellers, as well as brokers where there is no ‘market’ price but rather it is based on a compromise between the parties to the transaction.
Therefore, there are many crypto exchanges located in different countries, but with different standards of security practices and infrastructure. They range from those that allow anonymous registration that only requires an email to open an account and start trading. However, there are others that require users to comply with international identity verification, known as Know-Your-Customer, and anti-money laundering (AML) measures.
The choice of a crypto exchange depends on the user’s preferences, but anonymous exchanges may have restrictions on the scope of trading allowed or may be subject to sudden new regulations in the country of the exchange’s headquarters. Minimal administrative procedures with anonymous registration allow users to start trading quickly, while going through KYC and AML processes will take more time.
All crypto trades must be properly processed and confirmed, which can take anywhere from a few minutes to a few hours, depending on the coins or tokens being transacted and the trade volume. Scalability is known to be a problem with cryptocurrencies and developers are working on solutions.
Cryptocurrency exchanges are in two categories.
Fiat-Cryptocurrency Such exchanges enable the purchase of fiat-cryptocurrency through direct bank transfers or credit and debit cards or through ATMs in some countries.
Cryptocurrency only. There are cryptocurrency-only crypto exchanges, meaning clients must already own a cryptocurrency – such as bitcoin or ethereum – to ‘exchange’ for other coins or tokens, based on the market rate
Fees are charged to facilitate the buying and selling of cryptocurrencies. Users should do their research to ensure they are satisfied with the infrastructure and security measures as well as to determine the fees that suit them as the different rates charged by different exchanges.
Don’t expect a common market price for the same cryptocurrency with different exchanges. It may be worth spending some time researching the best price for the coins and tokens you are interested in.
Financial transactions online carry risks, and users should consider precautions such as two-factor authentication or 2-FA, staying up-to-date with the latest security measures, and watching out for phishing scams. One golden rule about phishing is to not click on the links offered, no matter how authentic the message or email is.