In the first 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, after a stunning drop of around 70 percent to around US$6,000 in mid-2018, has boggled the minds of many people – crypto investors, traders, or simply the curious. missed the boat.
How it all began
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, 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 success with crowdfunding brought on by blockchain fever has also attracted those to scam the unsuspecting public and this has caught 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 widely, 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 alternative coins generally describe other than the pioneer bitcoin, although altcoins like 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 an asset or utility, an example being a supply chain management blockchain service to verify and track wine products from the winery to the consumer.
It’s important to note that low-value tokens or coins offer upside opportunities, but don’t expect the same meteoric increases as bitcoin. Simply put, lesser known tokens are easy to buy but hard to sell.
Before diving into cryptocurrency, start by studying the value proposition and technology considerations, ie. commercial strategies outlined in the white paper that accompanies each Initial Coin Offering or ICO.
For those familiar with stocks and shares, this is no different than an initial public offering or IPO. However, IPOs are issued by companies with tangible assets and business experience. Everything is done in a regulated environment. On the other hand, an ICO is based solely on an idea proposed in a white paper by a company – yet to operate and with no assets – seeking start-up funds.
Unregulated, so 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 are keeping an open mind by adopting a hands-off policy for cryptocurrencies and blockchain applications, while keeping an eye on outright scams. However, there are regulators in other countries who are more concerned with 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 manage the many types of cryptocurrencies globally.
Digital wallets: the first step
A wallet is necessary to start working with cryptocurrency. Think 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 put users at risk of hacking
Cold wallets that are not connected to the internet and are considered more secure.
Apart from 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, somewhat similar to a joint bank account.
The choice of wallet depends on the user’s preferences, whether the interest is exclusively for bitcoin or ethereum, since each coin has its own wallet, or you can use a third-party wallet that includes security features.
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, unlike the name needed to receive a check payment.
The public key is available for anyone to see, but transactions are confirmed only after verification and validation based on the 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 must never give the private key to anyone and make backup copies of this data that should 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 being wary of malware and phishing.
Different types of wallets are available to suit individual preferences.
Third-party hardware wallets that must be purchased. These devices work as a USB device that is considered secure and connected only when needed to the Internet.
Web-based wallets provided by, for example, crypto exchanges are considered hot wallets that put users at 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 required during a crypto transaction, and copies should be made in case of accidents such as water damage or 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 is based on a compromise between the parties to the transaction.
So 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 crypto exchange depends on the user’s preferences, but anonymous ones may have restrictions on the volume of trading allowed 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 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 several hours depending on the coins or tokens being transacted and the volume of the trade. Scalability is known to be a problem with cryptocurrencies and developers are working on ways to find a solution.
Cryptocurrency exchanges are in two categories.
Fiat-cryptocurrency Such exchanges allow the purchase of fiat-cryptocurrency through direct transfers from bank or credit and debit cards, or through ATMs in some countries.
Cryptocurrencies only. There are crypto-only cryptocurrencies, meaning that 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 be satisfied with the infrastructure and security measures, as well as to determine what fees they are comfortable with as different rates are charged by different exchanges.
Don’t expect a regular market price for the same cryptocurrency with difference exchanges It may be worth spending time researching the best price for the coins and tokens you are interested in.
Financial transactions online carry risks, and users should consider warnings such as two-factor authentication or 2-FA, stay up-to-date with the latest security measures, and be aware of phishing scams. One golden rule for identity theft is to not click on provided links, no matter how authentic the message or email is.