What is Cryptocurrency? A Simple Guide to Understanding Cryptocurrencies

Table of Contents

What is Cryptocurrency?

In a nutshell, a cryptocurrency is a virtual or digital currency created to work as a medium of exchange. It is an internet based medium of exchange which utilizes cryptographical functions to perform or conduct financial transactions.

In a broad sense, crypto currencies are limited entries in a database that cannot be changed without first fulfilling specific conditions. A prominent feature of a cryptocurrency is that it is void of any central authority therefore rendering them theoretically immune to government meddling and control. Moreover, many cryptocurrencies are decentralized network based on blockchain technology.

Ever Since Bitcoin made a record hit of $19,800/BTC in Dec 2017 - funny enough was on my birthday the 17th of Dec, Quite a lovely memory it was. There have been mass awareness and interest in cryptocurrencies, the majority being more interested in the high volatility of the market seeing it as an opportunity for playing to the gallery with the popular phrase "to the moon and lambo", the more traditional investors sees it as only a fools dream but reality has tend to prove otherwise as alot of people have been massively enriched via cryptocurrencies, however, like every other business and investment the 80/20 rule still applies more people have had to bear more losses than those with the success stories.

So before all the rumbling and ranting about cryptocurrencies lets rewind the time machine and see how it all started.

The Birth Of Cryptocurrency

During the nineties tech boom, several attempts were made in creating a digital currency, they were systems were several e-cash systems however Digicash was one of the most promising which surfaced on the market but all failed due to fraud and even financial problems. These systems utilized a trusted third party approach meaning that the companies behind them verified and aided the transactions but then again, due to the failure of these companies, the creation of a digital cash system was seen as a lost cause for a long time.

However, in early 2009, cryptocurrencies emerged as a side product of another invention, it was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto” the unknown inventor of bitcoin, the first and still most important cryptocurrency. Although, Satoshi never intended to invent a currency. In his announcement of Bitcoin in late 2008, Satoshi said he developed“ A peer-to- peer Electronic cash system”. Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending.

in bitcoin we trust

It is completely decentralized with no server or central authority.– Satoshi Nakamoto, 09 January 2009, announcing Bitcoin on SourceForge. His aim was to create something many people failed to envision or discover before digital cash. The best part of Satoshi's invention was that he found a way to build a decentralized digital cash system and this was just after witnessing all the centralized attempts fail then he invented a cash system without a central entity. Just like he said; a peer-to-peer network for file sharing and this idea became the birth of the Cryptocurrency.

Cryptocurrencies are the systems that permit the secure payments online which are labelled in terms of Virtual “tokens” represented by ledger entries internal to the system.“ Crypto” applies to the different encryption algorithms and cryptographic techniques that protects these entries such as public- private key pairs, elliptical curve encryption and hashing functions.

The issue of double spending

Nonetheless, one crucial problem faced by any payment network is “ double – spending” — a fraudulent technique of spending the same amount twice and initially, to solve this, a third party is often involved; a central server, who would keep records of the balances and transactions. This method always entailed an authority essentially in control of your funds and your personal details.

But, this is different in a decentralized network as you do not have this server, every single participant on board is expected to do this job and this is done via the blockchain— a digital ledger of transactions duplicated and distributed across the entire network of computer systems, this is made available to everyone in the network to see every account balance. Simply put, blockchain is a system of recording information in a way that makes it impossible or difficult to change, cheat or hack the system.

the issue with double spending

It is worthy to note that every transaction is expected to have been signed off by the sender with their private key and broadcasted in the network after a confirmation, this transaction entails the sender's and recipients public keys or wallet addresses and the amount of coins transferred.

Confirmation is a basic concept in cryptocurrency. One could say that crypto currencies are all about confirmation because when a transaction is confirmed. It is unchangeable unlike when it hasn’t been confirmed then it can easily be duplicated or forged because it is pending.— it is the job of miners to confirm transactions in a cryptocurrency network. Miners authorize transactions and spread them in the network and after this is done every node adds it to it’s database then it completely becomes part of the blockchain and a miner receives a reward plus the transaction fee.

Therefore, Crypto currency network is based on the general agreement of all the participants in regards to the licitness of balances and transactions. Apparently, the system would automatically break if nodes of the network disagree on a single balance. Notwithstanding, there are a lot of rules programmed into the network that prevents this occurrence.

What can you do with cryptocurrencies?

Aside the fact that cryptocurrency makes it extremely easy to transfer funds directly between two parties with the exception of a trusted third party like a bank or credit card company and at a ridiculously cheap fee in most cases there are lot of other interesting services that could be done with cryptocurrencies.

Shopping;

It was quite difficult to find a merchant or marketer that accepted cryptocurrency, nowadays the situation is entirely different; we have quite a number of marketers both online and offline that accepts Bitcoin as the form of payment (NFX online digital store would also be featuring cryptocurrency as main means of payment for products when launched). Bitcoins can be used to pay for a college degree, apps, hotels, jewelries and even flights. There are market places like Bitify and OpenBazaar that only accept cryptocurrencies. Other digital currencies like Ethereum litecoin, Peercoin and Namecoin etc. aren't accepted widely yet. Nonetheless, things are changing for the better as at least 10 different crypto currencies has been accepted by Apple as a viable form of payment on App store.

Mine and Earn:

Much like trading, mining is an investment, one of the fascinating things about mining is that the difficulty of the puzzle is ever increasing, corresponding with the number of people trying to solve the puzzle. Meaning, when a certain cryptocurrency becomes popular the more people try to mine it the more difficult the process becomes. A great deal of people have made fortunes by mining Bitcoins. Miners are essential to any cryptocurrency network. Moreover, mining Bitcoins can become profitable if you are willing to invest in industrial-grade mining hardware. Mining becomes harder as a crypto currency attracts more interest and the amount of coins received as a reward decreases. A miner manages to make profit by the high level of computing power they posses thereby giving them more chances to solve cryptographic puzzle. Once a miner manages to solve the puzzle, they receive a reward as well as a transaction fee.

Trading:

As more and more cryptocurrency are being created, traders have taken it upon themselves to benefit from the high volatility of the market, in the early days it was a lot more difficult and complex to trade the crypto market however as of today there are lot of great exchanges and crypto brokers which have made it possible for anyone to trade on the crypto market with over 1000+ cryptocurrency assets available to be traded on. Traders profit from scalping the market on an intraday basis and also most utilizes the futures and margin trading option which is still fairly new amongst crypto traders- this gives them the opportunity to control larger amount of money with smaller deposits just like leverage in the the traditional forex trading market. With this new concept of trading, traders profit from both the ups and downs of the market without the need to wait for only when the market goes up like the spot traders.

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Investment :

A lot of people believe that cryptocurrencies are the groundbreaking investment opportunity presently available; as there have been endless stories of people becoming millionaires through their Bitcoin investment. Nonetheless, one should remember that cryptocurrencies are high-risk investments with a market value that sways like no other assets. Market prices for cryptocurrencies are based on supply and demand, thus, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely because the design of many cryptocurrencies ensures a high degree of scarcity. However, if one decides to invest in cryptocurrencies; Bitcoin and Ethereum being the most well known. You will need to pay close attention to the cryptocurrency market value and “Coinmarket” is a perfect solution to that as it guides you by tracking the price, circulation supply, volume, market cap of any existing currency as well as any news related to them.

Nonetheless, If you are considering investing in cryptocurrencies, it may be best to treat your “investment” in the same way you would treat any other highly speculative venture. In essence, you must recognize that you run the risk of losing most of your investment, if not all of it because a cryptocurrency do not have any underlying value apart from what a buyer is willing to pay for it at a particular time, this fluctuates the price which in turn increases the risk of loss for an investor. Bitcoin, for example, plummeted from $260 to about $130 within a six-hour period on April 11, 2013. If such volatility terrifies you, it is advisable to look elsewhere or think twice before investing.

Merchant means of Payment;

The interest in cryptocurrencies has never been higher and it’s only going to increase. For business owners who are in need of more potential customers, considering cryptocurrencies as a form of payment would be helpful. There are various services that can be used to accept payments in cryptocurrencies. Like Bitpay— accepting only bitcoins and others like Coingate, cryptonator and even coinpayments which is currently accepting over 75 different digital currencies charging just 0.5% commission per transaction. Accepting Cryptocurrencies is exactly the same as accepting cash, gold or gift cards because in the United States, Bitcoin and other cryptocurrencies have been recognized as a convertible virtual currency.

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top most popular cryptocurrencies

1. Bitcoin:

This is the first blockchain- based crypto currency and still remains the most prominent. It serves as a digital gold standard in the whole cryptocurrency industry. The price of Bitcoin has risen from zero to more than 10,000 Dollar, and it’s transaction volume reached more than 200.000 daily transactions After just seven years in existence. Apparently, Bitcoin is here to stay.

The cumulative value of all the cryptocurrencies in existence today is around $214 billion. Bitcoin currently represents more than 68% of the total value. Bitcoins are digitally created through a “mining” process that requires strong computers to solve complex algorithms and crunch numbers. At present, they are created at the rate of 25 Bitcoins every 10 minutes and will be capped at 21 million, a level that is expected to be attained in the 22nd century, probably in the year 2140.

2. Ethereum:

This is the second-largest cryptocurrency, Ethereum can not only process transactions but also contracts and programs. This makes it more prolific than Bitcoin. It permits developers to build different distributed apps and technologies that wouldn’t work with Bitcoin.

The flexibility of Ethereum makes it the perfect instrument for blockchain application. Although the original version of Ethereum is Ethereum Classic— this happened after a decentralized autonomous organisation built on top of the original Ethereum was hacked.

Ethereum is a family of cryptocurrencies than a single currency, there are several clones of Ethereum and Ethereum itself is a host of several Tokens like Kyber and Augur.

3. Ripple:

Unlike Bitcoin and Ethereum, Ripple has no mining since all the coins are already pre- mined. Ripple has found great value in the financial sector and a majority of banks have joined the Ripple network. Ripple doesn’t use a Blockchain in order to reach a network-wide consensus for transactions. Instead, a repetitive consensus process is implemented, which makes it faster than Bitcoin but also makes it more exposed to hackers. Ripple was launched by OpenCoin, a company founded by technology entrepreneur Chris Larsen in 2012.

4. Bitcoin Cash:

This is supported by the biggest bitcoin mining company and a manufacturer of Application – specific integrated circuits( ASIC) bitcoin mining chips. Bitcoin cash has only existed for a couple of months but has already soared to the top five cryptocurrencies.

5. Polkadot:

Polkadot is believed to be a next-generation blockchain protocol connecting multiple specialized blockchains into one unified network. Designed as part of a broad vision for a web that returns control to individuals over internet monopolies, Polkadot builds on the revolutionary promise of previous blockchain networks while offering several fundamental advantages.

6. Chainlink:

Chainlink is a tokenized oracle network that provides price and events data collected from on-chain and real-world sources. Launched in 2017 by Sergey Nazarov, Chainlink aims to offer a solution to the “oracle problem,” or the ability to get the off-chain data needed to operate many blockchain-based smart contracts. The token incentivizes participants to provide and use this data. Chainlink does not operate its own blockchain. Instead, the token protocol is blockchain agnostic and can run on many different blockchains simultaneously.

7. Litecoin:

This is a fork of Bitcoin but more prolific, Litecoin- the digital silver- can generate blocks four times faster and have four times the maximum of coins at 84mln. Litecoin was regarded as bitcoin leading rival, and it is designed for processing smaller transactions faster. It was founded in October 2011 as “a coin that is silver to Bitcoin’s gold,” according to founder Charles Lee.

8. IOTA:

This is an open-source distributed ledger and cryptocurrency designed for the internet of things. The Cryptocurrency breakthrough ledger technology is called ‘Tangle’ and it requires the sender in a transaction to do a proof of work that would approve two transactions, thereby removing all dedicated miners from the process.

9. Dash

This comprises of a two tier network. The first tier is protected and controlled by miners who also record the transactions; this is faster than Bitcoin. The second tier is completely anonymous as it involves master nodes that relay transactions and enable instant send and private send type of transaction.

10. Monero:

Monero is a perfect example of the cryptonight algorithm that was created to include the privacy features Bitcoin didn’t have. It was quite easy to trail transactions in Bitcoin but with the introduction of a concept called “ ring-signatures” Cryptonight algorithm succeeded in cutting through that trail. The popularity of monero heightened in 2016 when some darknet market decided to use it as a currency. Although Monero is used more as a currency than for the reason of its actual creation. 

11. Neo:

This actually has same goals as Ethereum, although it was developed in China which gives it more advantages considering the improved relationship it would have with Chinese regulations and local businesses; it is a smart contract network that allows the development for all kinds of financial contracts and third- party distributed apps.

How to buy cryptocurrency

Unlike the early days of crypto, it is now extremely easy to purchase cryptocurrency with lots of options, such as using giftcards, crypto ATMs online exchanges, peer-to-peer exchanges, investment trust or even direct trade face to face. There are currently almost 1,800 Bitcoin ATM’s in 58 countries, However you can buy BTC To purchase other less popular cryptocurrencies, the buying options aren't so different. There are numerous exchanges where you can acquire various cryptocoins or flat currencies or Bitcoins. Face to Face trading is a popular way of acquiring coins. Buying options depend on particular cryptocurrencies, their popularity as well as your location.

how to store cryptocurrency

Cryptocurrencies entails a completely different approach when it comes to storing it because it is digital not like the usual traditional currency. In Cryptocurrency you don’t store your units, what you store is the private keys used for signing your transactions. Your private keys need to be utterly guarded.There are several different types of cryptocurrency wallets that cater for various needs. If your utmost priority is ‘ privacy' you might want to opt for a paper or hardware wallet. Those are the most secure ways of storing your crypto funds. There are also ‘cold’ ( offline) wallets that are stored on your hard drive and online wallets which can either be affiliated with exchanges or with independent platforms.

Ledger Nano X - The secure hardware wallet

cryptocurrency legality

Time has changed greatly as unlike 2017 and 18 most countries have come to accept cryptocurrencies even the United States of America currently recognises the use of cryptocurrencies as an asset and means of payment with exception to only a few being bitcoin, ethereum and litecoin while others yet to be fully accepted, however on a global scale, as cryptocurrencies continues to evolve, the law enforcement agencies, tax authority and legal regulators worldwide are trying to understand the very concept of cryptocoins and their place in existing regulations and legal frameworks.

A new paradigm surfaced with the invention of the first ever cryptocurrency- Bitcoin, as a decentralized, self sustained digital currency discarding existence in any physical shape or form and not controlled by any singular entity, it was sure to cause a shivaree among the regulators.

Moreover, a great deal of interest have been raised regarding cryptocurrencies decentralized nature and their competence to be used virtually entirely anonymously. The authorities are agitated about the use of cryptocurrency in money laundering and tax evasion schemes.

The laws and regulations regarding the usage of cryptocurrencies intensely varies depending on the country. As at November 2017, Bitcoin and other digital currencies became illicit only in Bangladesh, Bolivia, Ecuador, Kyrgyzstan and Vietnam, with China and Russia being on the verge of banning them as well, None the less, this doesn’t make the use of cryptocurrency illegal.

As of present time, the utilization of the AML/KYC enforced by most cryptocurrency brokers and exchanges have made it more government friendly not to say the more majority of the crypto community are in favor but time will tell what the future holds.

legality of cryptocurrency

Legality of Cryptocurrency Worldwide

Key features of cryptocurrency

Skeptics often wonder; ‘ What makes cryptocurrency so special?” Well:

1. Immutability:

Immutability means it cannot be “ undone” Cryptocurrencies are well secured; with strong cryptography and the magic of big numbers makes it highly impossible to break this scheme.

Immutability in regards to blockchain and cryptocurrency means it should be very difficult or impossible to rewrite history and then again, only the owners of the private key can send cryptocurrency as it is highly improbable for anyone to just move funds. Lastly, all transactions are recorded on the blockchain— the element of centralization and trust are not present in cryptocurrency so transactions are made public and immutable( unchangeable) because there is no third party to trust.

2. Decentralization:

“The problem in this world is to avoid concentration of power — we must have a dispersion of power .— Milton Friedman”.

As a decentralized system, it is less likely to fail accidentally because they rely on networks of separate components. Unlike a centralized system where the government and corporations could act in ways that would benefit them at the expense of others, this is quite difficult for members of a decentralized system. According to Vitalik Buterin; Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized(there is one commonly agreed state and the system behaves like a single computer).

Moreover, The users of fiat currencies are at the mercy of the central banks’ money-printing whims as the creation and supply of money are only controlled by the bank. If you are not yet infuriated with the central bank ‘ money- printing scam' it is helpful to think of it as a hidden tax when they print and destroy the wealth you have stored in those fiat currencies, this is different in cryptocurrency as no individual nor organization is able to affect the supply of currency or exert significant influence over it without the approval of the majority.

3. Safe:

You do not need to trust anybody for this network to function; with bitcoin, each part of the ecosystem validates what the other part is saying without needing to trust anyone, so it is safe. Every other currency before Bitcoin required a central authority that you had to trust to use it. In all cases that central authority becomes the central weakness that leads to the demise of the currency. In Bitcoin, if you broadcast a transaction, all nodes receive it and confirm that the signatures are valid. If the signatures are not valid, they discard the transaction. Aside from other major benefits of cryptocurrencies and blockchain technology, solving the centralized trust issue alone is enough innovation for the Cryptocurrency to stay.

monetary property of cryptocurrency

To ascertain the revolutionary impact of cryptocurrencies, one should consider both features; The features of Bitcoin makes it significantly different from Fiat currency which is controlled by the faith and credit of it’s government. Fiat currencies are issued by a nations central bank, the bank regulates the amount of money issued in line with it’s monetary policy objectives.

Theoretically, there is no apex to the amount of fiat currency issuance. And then , we have Bitcoin which is completely decentralized; it does not have such support mechanism and it’s value is highly dependent on what investors are willing to pay for it at a particular time.

It cannot be changed or controlled by a bank, government or any central organizations and this attacks the scope of the monetary policy by taking away the control central banks have on inflation or deflation in manipulating monetary supply. Although, if a Bitcoin exchange folds up, the client’s with Bitcoin balances does not have any alternative to get them back.

However, all cryptocurrencies control the supply of the token through a schedule written in the code, it is highly possible to discover the future monetary supply of a cryptocurrency in every given moment ; in Bitcoin, the supply decreases in time and would likely reach it’s final number in the 22nd century , sometime in the year 2140.

the future of cryptocurrency

Cryptocurrency has provided a fast evolving and flourishing market for investors and speculators ; with the revolutionary properties of the cryptocurrency, it has become much more of a success than the Inventor ever thought it would be. The cryptocurrency made the leap from being an academic concept to reality with the invention of Bitcoin in the year 2009. In April 2013, Bitcoin significantly seized the attention of Investors and the media when it peaked at a record of $266 per bitcoin after undulating 10- fold in the preceding two months.

Bitcoin displayed a market value of $2billion at it’s peak but a 50% plunge shortly after that, triggered a raging debate about the future of cryptocurrency in general and Bitcoin in particular. Some economic analyst predict a big transformation in the future of cryptocurrency as institutional money joins the market. However, will these alternative currencies eventually usurp traditional currencies and gradually become as universal as dollars and euros? Or are crypto currencies just a passing mania that will end soon?

The answer lies with Bitcoin; Despite Bitcoin’s recent issues, its success since its launch in 2009 has influenced the creation of alternative cryptocurrencies like; litecoin, Ethereum , and Ripple. A cryptocurrency that might want to become part of the prevailing financial system would have to satisfy very divergent criteria. Moreover, the possibility of that seems secluded but there is little doubt that Bitcoin’s success or defeat in dealing with the challenges it faces may determine the fortunes of other cryptocurrencies in the future. Some hindrances currently encountered by cryptocurrency – such as the fact that one’s digital fortune can easily be erased by a computer crash, or that a virtual vault could be rummaged by a hacker – would probably be conquered in time through technological advances.

The difficult thing to overcome or surmount is the riddle that plagues cryptocurrencies – the more popular they become, the more regulation and government scrutiny they would likely attract, which corrodes the crucial premise for their validity. Nonetheless, the number of merchandisers who accept cryptocurrencies has steadily increased, even though the minority is still on the high side. For cryptocurrencies to become more widely used, they have to first gain widespread acceptance among consumers.

Still, their relative sophistication compared to traditional currencies will likely discourage most people, except for the technologically adept. Yet, there is a probability that crypto will be floated on the Nasdaq, which would further add credibility to blockchain and its uses as a recourse to conventional/traditional currencies. Economic analyst predicts that cryptocurrency only needs an ETF. An ETF( Verified Exchange Traded Fund)would definitely make it easier for people to invest in Bitcoin.

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