In the first days of its launch in 2009, several thousand bitcoins were used to buy a pizza. Since then, the cryptocurrency’s meteoric rise to $65,000 in April 2021, after a nearly 70 percent drop to around $6,000 in mid-2018, has been blowing the minds of many people: crypto-currency investors, traders, or just plain curious. he missed the boat.
How it all started
Note 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, apparently a pseudonym used by a developer or a 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 success of crowdfunding brought on by blockchain fever also attracted the public to cheat and this has come to the attention of regulators.
Beyond Bitcoin
Bitcoin has inspired the launch of many other digital currencies, there are currently over 1,000 versions of digital coins or tokens. They are not all the same and their values vary widely, as does their liquidity.
Coins, altcoins and tokens
Suffice it at this point to say that there are fine distinctions between coins, altcoins and tokens. Altcoins or alternative coins generally describe anything other than the forerunner bitcoin, although altcoins such as ethereum, litecoin, ripple, dogecoin, and dash are considered a “mainstream” category of coins, meaning they are traded on more cryptocurrency exchanges.
Coins serve as a currency or store of value, while tokens provide asset or utility uses, an example being a blockchain service for supply chain management to validate and track wine products from winery to consumer.
One point to note is that low value tokens or coins offer upside opportunities but don’t expect a similar meteoric rise like bitcoin. Simply put, unknown tokens can be easy to buy but difficult to sell.
Before you dive into a cryptocurrency, start by looking at the value proposition and technology considerations, which are the business strategies outlined in the whitepaper that accompanies every initial coin offering or ICO.
For those familiar with stocks and shares, it is not the same as an initial public offering or an IPO. However, IPOs are issued by companies with tangible assets and business history. Everything is done in a regulated environment. On the other hand, an ICO is based on an idea proposed in a white paper by a company – still running and without assets – that is looking for start-up funds.
Illegal, so buyer beware
“You can’t regulate the unknown” probably sums up the state of digital currency. Regulators and regulations are still trying to catch up with the ever-evolving cryptocurrencies. The golden rule in the crypto-space is “caveat emptor”, buyer beware.
Some countries are keeping an open mind while adopting a hands-off policy for cryptocurrency and blockchain applications in view of scams. However, there are regulators in other countries who are more concerned about the downsides of digital money. Regulators are generally aware of the need to strike a balance and some are looking into securities laws to try to get a handle on the many flavors of cryptocurrencies around the world.
Digital wallets: the first step
A wallet is essential to get started in cryptocurrency. Think electronic banking, but minus 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 a digital type. There are two types of wallets.
-
Internet-connected hot wallets that put users at risk of hacking
-
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 single-cryptocurrency wallets and others that are multi-cryptocurrency. There is also the option of having a multi-signature wallet, similar to having a joint account with a bank.
The choice of wallet depends on the user’s preference, pure interest in bitcoin or ethereum, as each coin has its own wallet, or you can use a third-party wallet including security features.
Wallet notes
A cryptocurrency wallet has a public and private key with personal records of transactions. The public key refers to the cryptocurrency account or address, unlike the name required to receive a check payment.
The public key is visible to everyone, but transactions are only confirmed by verification and validation based on the consensus mechanism specific to each cryptocurrency.
The private key can be thought of as a PIN commonly used in electronic financial transactions. As a result, the user should never disclose the private key to anyone and should back up any data that needs to be stored offline.
It makes sense to hold a minimum amount of cryptocurrency in a hot wallet, while a larger amount should be in a cold wallet. Losing your private key is as good as losing your cryptocurrency! The usual precautions for online financial transactions apply, from having strong passwords to being vigilant about malware and phishing.
Portfolio formats
Different types of wallets are available to suit one’s preferences.
-
Third-party hardware wallets to purchase. These devices work like a USB device, which is considered secure and only connected to the Internet when needed.
-
For example, web-based wallets provided by crypto exchanges are considered hot wallets that put users at risk.
-
Desktop or mobile software-based wallets are mostly free and may be provided by coin issuers or third parties.
-
Paper-based wallets can be printed with public and private keys in QR code format containing important information about the cryptocurrency. These should be kept in a safe place until needed in the crypto transaction and copies should be made in case of accidents such as water damage or printed data disappearing over time.
Crypto exchanges and markets
Crypto exchanges are trading platforms for those interested in virtual currencies. Other options include websites and brokers for direct trading between buyers and sellers, where there is no “market” price but is based on a compromise between the parties to the transaction.
This is why there are many crypto exchanges located in different countries, but with different standards of security practices and infrastructure. There are those that allow anonymous registration with just 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 crypto-exchange depends on the user’s preference, but anonymous ones may have limits on the extent of allowed trading or may be subject to sudden new regulations in the exchange’s home country. Minimal administrative procedures with anonymous registration allow users to start trading quickly while KYC and AML processes will take more time.
All crypto trades need to be properly processed and validated which can take anywhere from a few minutes to a few hours depending on the coin or token being transacted and the trade volume. Scalability is known to be a problem in cryptocurrency and developers are working on ways to find a solution.
Cryptocurrency exchanges fall into two categories.
-
Fiat-Cryptocurrency Such exchanges offer purchase via direct bank or credit and debit card transfers or through ATMs in certain countries.
-
Cryptocurrency only. There are crypto-exchanges that only deal in cryptocurrencies, meaning that customers must already own a cryptocurrency – such as bitcoin or ethereum – in order to “exchange” it for other coins or tokens, depending 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 they are comfortable with, such as the different rates charged by various exchanges.
Don’t expect a common market price for the same cryptocurrency with difference exchanges. You may spend time doing research on the best price for coins and tokens that are of interest to you.
Online financial transactions involve risks and users should consider precautions such as two-factor authentication or 2-FA, stay up-to-date on the latest security measures and be aware of phishing scams. A golden rule about phishing is to not click on links offered, regardless of whether a message or email is genuine.