In the early days of its launch in 2009, hundreds of thousands of bitcoins were used to buy a pizza. Since then, after the cryptocurrency’s meteoric rise to US$65,000 in April 2021, it fell nearly 70 percent to around US$6,000 in mid-2018, much to the chagrin of many people – cryptocurrency investors, traders or just plain curious people who boat. Miss.
How it all started
Remember that dissatisfaction with the current financial system gave rise to the development of digital currencies. 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 of crowdfunding due to blockchain fever has also attracted them so that they can defraud the unsuspecting public and this has caught the attention of regulators.
Bitcoin has inspired the launch of many other digital currencies, with over 1,000 versions of digital coins or tokens currently in existence. 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 subtle differences between coins, altcoins, and tokens. Altcoins or alternative coins usually describe other than the pioneer Bitcoin, although altcoins such as ethereum, litecoin, ripple, dogecoin and dash are considered in the ‘main’ category of coins, meaning they are traded on more cryptocurrency exchanges.
Coins act as a currency or store of value whereas tokens use resources or utilities, an example being a blockchain service to manage supply chains to validate and track wine products from wineries to consumers.
One thing to note is that lower value tokens or coins offer upside opportunities but don’t expect the same meteoric rise as Bitcoin. Simply put, lesser-known tokens can be easy to buy but hard to sell.
Before getting into a cryptocurrency, start by studying the commercial strategies such as value proposition and technical considerations outlined in the white paper that accompanies each initial coin offering or ICO.
For those familiar with stocks and shares, this is not the same as an initial public offering or IPO. However, IPOs are issued by companies with tangible assets and a business track record. It is all done in a controlled environment. On the other hand, an ICO is based entirely on an idea proposed in a white paper by a business – still operational and without assets – that is looking for start-up funding.
Unregulated, so buyer beware
The ‘unknown that cannot be controlled’ probably sums up the situation with digital currencies. Regulators and regulations are still trying to catch up with cryptocurrencies which are constantly evolving. The golden rule in the crypto space is ‘caveat emptor’, let the buyer beware.
Some countries are keeping an open mind to adopt a hands-off policy for cryptocurrency and blockchain applications, and are keeping a direct eye on scams. Yet regulators in other countries are more concerned with the harms than the benefits of digital money. Regulators generally recognize the need to strike a balance, and some are looking at existing securities laws to try to get a handle on the many flavors of cryptocurrency worldwide.
Digital Wallet: Step One
A wallet is essential for getting started in cryptocurrency. Think e-banking but minus the legal protections of virtual currency, so security is the first and last consideration in the crypto space.
Wallets are digital type. There are two types of wallets.
Internet-connected hot wallets that put users at risk of being hacked
Cold wallets are not connected to the internet and are considered secure.
In addition to the two main types of wallets, it should be noted that there is a wallet for cryptocurrency only and another for multi-cryptocurrency. There is also the option of having a multi-signature wallet, a bit like having a joint bank account.
The choice of wallet depends on the user’s choice whether to be purely interested in Bitcoin or Ethereum, as each currency has its own wallet, or you can use a third-party wallet that includes security features.
Cryptocurrency wallets contain a public and private key with private transaction records. The public key includes a reference to the cryptocurrency account or address, not unlike the name required to receive a check payment.
The public key is available for all to see but transactions are confirmed only after verification and validation based on the consensus process relevant to each cryptocurrency.
The private key can be considered as a PIN which is commonly used in e-financial transactions. It follows that the user should never disclose the private key to anyone and should back-up this data which should be stored offline.
It makes sense to have minimal cryptocurrency in a hot wallet while larger amounts should be in a cold wallet. Losing private keys is as good as losing your cryptocurrency! The usual precautions about online financial transactions apply, from having strong passwords to being wary of malware and phishing.
Various types of wallets are available to suit individual preferences.
Hardware wallets made by third parties that must be purchased. These devices act somewhat like USB devices that are considered secure and are only connected when the Internet is needed.
Web-based wallets offered by crypto exchanges are considered hot wallets, putting users at risk.
Software-based wallets for desktop or mobile are mostly available for free and may be provided by currency issuers or third parties.
Paper-based wallets can be printed in QR code format with relevant data about the cryptocurrency owned by the public and private keys. These should be kept in a safe place until needed during crypto transactions and copied in case of accidents such as water damage or printed data fading over time.
Crypto exchanges and marketplaces
Crypto exchanges are trading platforms for those interested in virtual currencies. Other options include websites for direct transactions between buyers and sellers as well as brokers where there is no ‘market’ price but is based on an agreement between the transacting parties.
Hence, there are many crypto exchanges in different countries but the security practices and infrastructure standards are different. These range from allowing anonymous registration that only requires an email to open an account and start trading. Still there are some 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 may have restrictions on the level of anonymous trading allowed or may be subject to sudden new regulations in the exchange’s country of residence. Minimal administrative procedures with anonymous registration allow users to start trading quickly while KYC and AML processes take longer.
All crypto trades must be properly processed and verified, which can take minutes to hours, depending on the coin or token being traded 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.
Such fiat-cryptocurrency exchanges offer the purchase of fiat-cryptocurrency by direct transfer from banks or credit and debit cards, or in some countries through ATMs.
Cryptocurrencies only. Crypto exchanges there only deal in cryptocurrencies, meaning customers must already own a cryptocurrency – such as Bitcoin or Ethereum, – to ‘exchange’ for other coins or tokens based on market rates.
Fees are charged to facilitate the buying and selling of cryptocurrencies. Users should research the various rates charged by different exchanges to determine the fees they are comfortable with while being satisfied with the infrastructure and security measures.
Don’t expect a normal market price for the same cryptocurrency with difference exchanges It may be worthwhile to spend time researching the best prices for the coins and tokens you are interested in.
Online financial transactions carry risks and users should be aware of precautions such as Two Factor Authentication or 2-FA, keeping updated on the latest security measures and phishing scams. A golden rule of phishing is to not click on provided links, no matter how authentic a message or email is.