In the early days of its launch in 2009, several thousand bitcoins were used to buy pizza. Since then, the cryptocurrency’s meteoric rise to $65,000 in April 2021, following its heart-stopping drop in mid-2018 by around 70 percent to around $6,000, has boggled the minds of many people – crypto investors, traders or just curious who 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 blockchain technology by 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 crowdfunding boom fueled by blockchain fever has also attracted those seeking to defraud the unsuspecting public, and this has caught the attention of regulators.
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Bitcoin has inspired the launch of many other digital currencies. There are currently more than 1,000 versions of digital coins or tokens. Not all of them are the same, and their values vary widely, as does their liquidity.
Coins, Altcoins and Tokens
At this point, it will suffice to say that there are subtle differences between coins, altcoins, and tokens. Altcoins or altcoins usually describe something other than the pioneer bitcoin, although altcoins such as ethereum, litecoin, ripple, dogecoin, and dash are considered the “mainstream” category of coins, meaning they are traded on more cryptocurrency exchanges.
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Coins serve as a currency or store of value, while tokens offer the use of assets or utilities, an example being a supply chain management blockchain service to validate and track wine products from the winery to the consumer.
It should be noted that low-value tokens or coins offer upside opportunities, but don’t expect the same meteoric increases as Bitcoin. Simply put, lesser-known tokens may be easy to buy, but may be difficult to sell.
Before getting into cryptocurrency, start by learning the value proposition and technology considerations, namely the trading strategies outlined in the white paper accompanying any 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 entirely on an idea proposed in a white paper by a business – not yet operational and with no assets – that is looking for start-up funds.
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Unregulated so buyers beware
“One cannot regulate the unknown” probably sums up the digital currency situation. Regulators and regulations are still trying to catch up with the ever-evolving cryptocurrencies. The golden rule in the crypto space is caveat emptor, let the buyer beware.
Some countries maintain an open-mindedness by adopting a no-action policy on cryptocurrencies and blockchain applications, while keeping an eye out for detected scams. Yet there are regulators in other countries who are more concerned about the downsides than the upsides of digital money. Regulators are generally aware of the need to strike a balance, and some are looking at existing securities laws to try to deal with the many flavors of cryptocurrency globally.
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Digital Wallets: The First Step
A wallet is essential to get started with 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.
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Wallets are of digital type. There are two types of wallets.
- Hot wallets that are connected to the Internet that expose users to the 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 multi-cryptocurrency. There is also the option of having a multi-signature wallet, somewhat similar to having a joint bank account.
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The choice of wallet depends on the user’s preference whether the interest is purely Bitcoin or Ethereum, as 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 private records of transactions. The public key includes a reference to the account or address in cryptocurrency, not unlike the name needed to receive a check payment.
The public key is available for everyone to view, but transactions are confirmed only after verification and validation based on the consensus mechanism applicable to each cryptocurrency.
The private key can be thought of as a PIN, which is commonly used in electronic financial transactions. It follows that the user should never reveal the private key to anyone and make backup copies of this data that should be stored offline.
It makes sense to have minimal cryptocurrency in a hot wallet, while the larger amount should be in a cold wallet. Losing your private key is as good as losing your cryptocurrency! The usual safeguards for online financial transactions apply, from having strong passwords to being on the lookout for malware and phishing.
Different types of wallets are available according to individual preferences.
- Hardware wallets made by third parties that must be purchased. These devices work somewhat like a USB drive, which is considered safe and only connects to the internet when needed.
- Web-based wallets, such as those provided by crypto exchanges, are considered hot wallets that expose users to risk.
- Software-based wallets for desktop or mobile are mostly available for free and may be provided by coin issuers or third parties.
- Paper wallets can be printed carrying the relevant data of the cryptocurrency held with public and private keys in QR code format. They should be kept in a safe place until they are needed in the course of the crypto transaction and copies should be made in case of mishap such as water damage or fading of printed data over time.
Crypto exchanges and markets
Crypto exchanges are trading platforms for those interested in virtual currencies. Other options include direct trading websites between buyers and sellers, as well as brokers, where there is no “market” price, and it is based on a compromise between the parties to the transaction.
Hence, 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, requiring only an email to open an account and start trading. Still, there are others that require users to comply with international identity verification, known as Know-Your-Customer, and anti-money laundering (AML) measures.
Choosing a crypto exchange depends on the user’s preferences, but anonymous ones may have restrictions on the scope of allowed trading 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 going through KYC and AML processes will take longer.
All crypto transactions must be properly processed and validated, which can take anywhere from a few minutes to a few 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 fall into two categories.
- Fiat Cryptocurrency Such exchanges provide the purchase of fiat cryptocurrency through direct transfers from bank or credit and debit cards, or through ATMs in some countries.
- Cryptocurrency only. There are cryptocurrency-only crypto exchanges, meaning that customers must already own a cryptocurrency – such as Bitcoin or Ethereum – in order to be “exchanged” 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 and determine the fees that are convenient as different rates charged by different exchanges.
Don’t expect a common market price for the same cryptocurrency with different exchanges. It may be worth your while to research the best price for coins and tokens that are of interest to you.
Financial transactions online carry risks, and users should consider warnings such as two-factor authentication or 2-FA, update themselves on the latest security measures, and be aware of phishing scams. A golden rule of thumb for phishing is to not click on provided links, no matter how authentic a message or email is.