In the early days of its launch in 2009, several thousand bitcoins were used to buy pizza. Since then, the cryptocurrency has skyrocketed to $65,000 in April 2021, after a sharp decline in mid-2018 of around 70 percent to around $6,000, surprising many – cryptocurrency investors, traders or simply wondering who’s left the boat.
How did all this start
Recall that dissatisfaction with the current financial system gave rise to the development of digital currencies. The development of this cryptocurrency is based on blockchain technology by Satoshi Nakamoto, a pseudonym apparently used by a developer or group of developers.
Despite the many opinions predicting the demise of cryptocurrencies, bitcoin’s performance has inspired many other digital currencies, especially in recent years. The crowdfunding success caused by the blockchain fever has also attracted them to defraud the unsuspecting public and this has caught the attention of regulators.
Bitcoin has inspired the launch of many other digital currencies, There are currently more than 1,000 versions of the coin or digital token. Not all of them are the same and the value varies greatly, so does the liquidity.
Coins, altcoins and tokens
Suffice it at this point to say there is a fine distinction between coins, altcoins, and tokens. Altcoins or alternative coins are generally described as other than pioneer bitcoin, although altcoins such as ethereum, litecoin, ripple, dogecoin and dash are considered the ‘main’ coin category, meaning they are traded on more cryptocurrency exchanges.
Coins serve as currency or store of value whereas tokens offer the use of an asset or utility, an example is blockchain services for supply chain management to validate and track wine products from wineries to consumers.
A point to note is that low value tokens or coins offer upside odds but don’t expect a similar meteoric increase like bitcoin. Simply put, lesser known tokens may be easy to buy but may be hard to sell.
Before getting into cryptocurrency, start by studying the value proposition and technological considerations i.e. the commercial strategy outlined in the white paper that accompanies any initial coin offering or ICO.
For those who are familiar with stocks and shares, it is not like an initial public offering or IPO. However, IPOs are issued by companies with tangible assets and a business track record. It’s all done in a regulated environment. On the other hand, an ICO is purely based on an idea proposed in a white paper by a business – not yet operating and without assets – seeking funding to start up.
Unregulated, so buyers beware
‘One cannot control the unknown’ might sum up the situation with digital currencies. Regulators and regulations are still trying to catch up with the ever-evolving cryptocurrency. The golden rule in the crypto space is ‘caveat emptor’, let buyers beware.
Several countries are keeping an open mind adopting hands-off policies for cryptocurrencies and blockchain applications, while keeping an eye on outright fraud. Yet there are regulators in other countries who are more concerned with the cons than the pros of digital money. Regulators are generally aware of the need to strike a balance and some are looking to existing laws on securities to try to address the many flavors of cryptocurrencies globally.
Digital wallet: The first step
Wallets are essential for starting cryptocurrency. Think e-banking but minus the legal protections in the case of virtual currencies, so security is the first and last thought in the crypto space.
Wallets are the digital kind. There are two types of wallets.
Hot wallets connected to the Internet that put users at risk of being hacked
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 multi-cryptocurrencies. There is also the option of having a multi-signature wallet, somewhat similar to having a joint account with a bank.
The choice of wallet depends on the user’s preference whether the interest is purely in bitcoin or ethereum, as each coin has its own wallet, or you can use a third party wallet that includes security features.
Cryptocurrency wallets have public and private keys with private transaction records. The public key includes a reference to a cryptocurrency account or address, not unlike the name a person needs to receive a check payment.
The public key is available for everyone to see but transactions are confirmed only after verification and validation based on the relevant consensus mechanism for each cryptocurrency.
The private key can be considered as a PIN that is commonly used in e-financial transactions. Therefore, the user should not divulge the private key to anyone and make a backup of this data which should be stored offline.
It makes sense to have minimal cryptocurrencies in hot wallets while larger amounts should be in cold wallets. Losing the private key is the same as losing your cryptocurrency! The usual precautions regarding online financial transactions apply, from having strong passwords to being aware of malware and phishing.
Different types of wallets are available to suit individual preferences.
Hardware wallets made by third parties that must be purchased. These devices work like USB devices which are considered secure and only connect when needed to the Internet.
Web-based wallets provided, for example, by crypto exchanges, are considered hot wallets that put users at risk.
Software-based wallets for desktop or mobile are mostly free and can be provided by coin issuers or third parties.
Paper-based wallets can be printed by loading relevant data about cryptocurrencies held with public and private keys in QR code format. These should be kept in a safe place until needed during crypto transactions and copies should be made in the event of an accident such as water damage or printed data fading over time.
Crypto exchanges and markets
Crypto exchange is a trading platform for those who are interested in virtual currencies. Other options include websites for direct trading between buyers and sellers and brokers where there is no ‘market’ price but based on a compromise between the transacting parties.
Therefore, there are many crypto exchanges located in different countries but with different standards of security practices and infrastructure. Starting from which allows anonymous registration which only requires an email to open an account and start trading. But there is something else that requires users to comply with international identity confirmations, known as Know-Your-Customer, and anti-money-laundering (AML) measures.
The choice of crypto exchange depends on the preferences of the user but the anonymous one may have restrictions on the level of trading allowed or may be subject to sudden new regulations in the country of domicile of the exchange. Minimal administrative procedures with anonymous registration allow users to start trading quickly while going through the KYC and AML process will take longer.
All crypto trades must be properly processed and validated which can take anywhere from a few minutes to several hours, depending on the coin or token being traded and the trading volume. Scalability is known to be a problem with cryptocurrencies and developers are looking for a way to find a solution.
Cryptocurrency exchanges fall into two categories.
Fiat-cryptocurrency The exchange provides the purchase of fiat-cryptocurrency by direct transfer from a bank or credit and debit card, or through ATMs in some countries.
Cryptocurrencies only. There are crypto exchanges that only deal with cryptocurrencies, meaning the customer must already own a cryptocurrency – such as bitcoin or ethereum, – to be ‘exchanged’ for another coin or token, based on the market price.
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 and to determine the fees they feel comfortable with due to the different rates charged by different exchanges.
Don’t expect the same market price for the same cryptocurrency with different exchanges. It might be worthwhile to spend some time doing some research on the best prices for coins and tokens that interest you.
Online financial transactions carry risks and users should consider warnings such as two-factor authentication or 2-FA, keep up to date with the latest security measures and be on the lookout for phishing scams. One major rule of thumb in phishing is never to click on the links provided, no matter how authentic the message or email is.