A pizza was purchased with several thousand bitcoins in the early days of its launch in 2009. Since then, many people — cryptocurrency investors, traders, or just the plain curious who missed the boat — are perplexed by the cryptocurrency’s meteoric rise to US$65,000 in April 2021 after its jaw-dropping drop in mid-2018 by about 70% to around US$6,000.
How it all began
Remember that the development of digital currency was prompted by dissatisfaction with the current financial system. By using the alias Satoshi Nakamoto, which is reportedly the name of a developer or group of developers, this cryptocurrency was created using blockchain technology.
Despite the widespread predictions of cryptocurrency’s demise, many other digital currencies have been inspired by bitcoin’s success, especially in recent years. Regulators have taken notice of the fact that the success of crowdfunding made possible by the blockchain mania also attracted scammers looking to defraud the public.
Beyond bitcoin
There are currently more than 1,000 different types of digital coins or tokens, with Bitcoin serving as the model for many others. Their values and levels of liquidity are not all the same, and they are not all the same.
Coins, altcoins and tokens
At this point, suffice it to say that tokens, altcoins, and coins all have specific characteristics. The term “altcoins” or “alternative coins” refers to coins other than the original bitcoin. However, coins like ethereum, litecoin, ripple, dogecoin, and dash are considered to be in the “main” category of coins because they are traded on more cryptocurrency exchanges.
Coins are used as a medium of exchange or a form of value storage, whereas tokens are used as an asset or a utility. A blockchain service for supply chain management, for instance, can be used to authenticate and track wine products from the winery to the consumer.
It’s important to keep in mind that tokens or coins with low value present opportunities for growth, but don’t anticipate rapid increases like those seen with bitcoin. Simply put, it may be simple to buy lesser-known tokens, but it may be challenging to sell them.
Study the value proposition and technological considerations in relation to the marketing strategies described in the white paper that comes with each initial coin offering (ICO) before investing in a cryptocurrency.
It is comparable to initial public offerings, or IPOs, for those who are familiar with stocks and shares. But companies with real assets and a track record of success issue initial public offerings (IPOs). Everything is carried out in a controlled setting. An ICO, on the other hand, is solely based on an idea put forth in a white paper by a business that has not yet begun operations and has no assets and is seeking funding to get off the ground.
Unregulated, so buyers beware
‘Probably best summarizes the situation with digital currency is “one cannot regulate what is unknown.” As cryptocurrencies continue to develop, regulators and regulations are still attempting to keep up. Let the buyer beware is the guiding principle in the cryptocurrency world, or caveat emptor.
While others adopt a hands-off approach and keep an eye out for obvious scams, some nations are keeping an open mind and adopting a hands-off policy for cryptocurrencies and blockchain applications. Regulators in other nations, however, are more focused on the disadvantages of digital currency than the advantages. In general, regulators are aware of the need to strike a balance, and some are looking at current securities laws to try to control the various cryptocurrency flavors worldwide.
Digital wallets: The first step
To start using cryptocurrencies, you need a wallet. Security is the first and last thought in the crypto space; think of it as e-banking without the legal protection.
Digital wallets are the current trend. Wallets come in two varieties.
- Hot wallets that are linked to the Internet which put users at risk of being hacked
- Cold wallets, which are considered to be safer because they are not linked to the Internet.
It should be noted that there are wallets specifically for one cryptocurrency and others for multiple cryptocurrencies, in addition to the two main types of wallets. Another choice is to have a multi-signature wallet, which functions somewhat similarly to a joint bank account.
Since each cryptocurrency has its own wallet, the user can use a third-party wallet that has security features, or they can choose a wallet based solely on their interest in bitcoin or ethereum.
Wallet notes
The cryptocurrency wallet has a public and private key with details on each user’s individual transactions. The public key contains information about the cryptocurrency account or address, similar to the name necessary to receive a cheque payment.
The public key is visible to everyone, but transactions are only confirmed after they have been validated and verified according to the consensus mechanism that applies to each cryptocurrency.
The PIN that is frequently used in e-financial transactions, known as the private key, can be compared to it. As a result, the user must always keep the private key a secret and create offline backups of this information.
It makes sense to keep a small amount of cryptocurrency in a hot wallet and a larger quantity in a cold wallet. The private key can be lost just as easily as your cryptocurrency! The standard safeguards for conducting financial transactions online still hold true, such as using strong passwords and keeping an eye out for phishing and malware.
Wallet formats
To accommodate individual preferences, various wallet types are available.
- third-party manufactured hardware wallets that must be purchased. These gadgets function somewhat similarly to a safe USB device that is only occasionally connected to the Internet.
- Hot wallets, like those offered by cryptocurrency exchanges, are those that put users at risk.
- The majority of software-based wallets for desktops or mobile devices are free to use and may be offered by coin issuers or other parties.
- The relevant information about the cryptocurrency owned, along with the public and private keys in QR code format, can be printed on paper-based wallets. These should be kept in a secure location until needed during a crypto transaction, and backup copies should be made in case of mishaps like water damage or printed data fading over time.
Crypto exchanges and marketplaces
For those with an interest in virtual currencies, crypto exchanges serve as trading platforms. The other choices include brokers and websites for direct trading between buyers and sellers where the price is determined by agreement between the parties to the transaction rather than a “market” price.
Because of this, there are numerous cryptocurrency exchanges spread across numerous nations, each with a unique infrastructure and standard of security. The ones that only require an email address to open an account and begin trading range from those that permit anonymous registration. Others, referred to as Know-Your-Customer (KYC) and anti-money laundering (AML) regulations, call for users to abide by these requirements.
The user’s preferred cryptocurrency exchange will depend on their preferences, but anonymous exchanges may have restrictions on the amount of trading permitted or may be suddenly subject to new regulations in the exchange’s home nation. Users can start trading right away thanks to minimal administrative procedures and anonymous registration, but it will take longer to go through KYC and AML procedures.
Depending on the coins or tokens being traded and the volume of trade, all cryptocurrency transactions must be properly processed and validated, which can take a few minutes to a few hours. Developers are trying to come up with a solution because scalability is a known problem with cryptocurrencies.
Exchanges for cryptocurrencies fall into two categories.
- Fiat-cryptocurrency These exchanges allow users to buy fiat-cryptocurrency through ATMs in some countries, direct bank transfers, credit and debit cards, or online.
- Cryptocurrency only.There crypto exchanges dealing in cryptocurrency only, meaning customers must already own a cryptocurrency – such as bitcoin or ethereum, – to be ‘exchanged’ for other coins or tokens, based on market rate
For the convenience of buying and selling crypto currencies, fees are assessed. Users should conduct their own research to ensure that the infrastructure and security precautions meet their needs, as well as to ascertain the fees they are comfortable with given the wide range of exchanges’ fee structures.
Do your research to find the best price for the coins and tokens that interest you; do not expect the same cryptocurrency to trade at the same price on all exchanges.
Online financial transactions are risky, so users should consider the warnings about 2-FA, staying up to date on the latest security measures, and being aware of phishing scams. No matter how legitimate a message or email appears to be, one cardinal rule of phishing is to never click on any provided links.