In the first days of its launch in 2009, several thousand bitcoins were used to buy a pizza. Since then, the cryptocurrency’s meteoric rise to US$65,000 in April 2021, following its mid-2018 plunge of 70 percent to around US$6,000, has blown many people’s minds : Cryptocurrency investors, traders or just the curious who missed the boat.
How it all started
It should be noted 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 the 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 the blockchain fever also attracted those to scam the unsuspecting public and this has drawn the attention of regulators.
Beyond bitcoin
Bitcoin has inspired the launch of many other digital currencies, there are currently over 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 distinctions between coins, altcoins and tokens. Altcoins or altcoins generally describe other than the pioneer bitcoin, although altcoins such as ethereum, litecoin, ripple, dogecoin, and dash are considered in the “mainstream” category of coins, meaning they are traded on more cryptocurrency exchanges.
Coins serve as a currency or store of value, while tokens provide assets or utilities, an example being a blockchain service for supply chain management to validate and track wine products from the winery to the consumer.
One point to keep in mind is that undervalued tokens or coins offer upside opportunities, but don’t expect similar meteoric rises like bitcoin. Simply put, lesser-known tokens can be easy to buy, but they can be hard to sell.
Before jumping into a cryptocurrency, start by studying the value proposition and technology considerations, such as the business strategies outlined in the white paper that accompanies each initial coin offering or ICO.
For those familiar with stocks and shares, it is no different than an initial public offering or IPO. However, IPOs are issued by companies with tangible assets and a business history. Everything is done in a regulated environment. On the other hand, an ICO is based exclusively on an idea proposed in a white paper by a company – still in operation and without assets – that is looking for funds to get started.
Unregulated, so buyers beware
“You can’t regulate the unknown” probably sums up the situation with digital currency. 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 an exclusionary policy for cryptocurrency and blockchain applications, while keeping an eye on scams. However, there are regulators in other countries who are more concerned about the cons than the advantages of digital money. Regulators generally realize the need to strike a balance, and some are looking to existing securities laws to try to control the many flavors of cryptocurrency globally.
Digital wallets: the first step
A wallet is essential to get started in cryptocurrency. Think electronic banking but less the protection of the law in the case of virtual currency, so security is the first and last thought in the crypto space.
The wallets are digital. There are two types of wallets.
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Hot wallets that are linked to the Internet that put users at risk of being hacked
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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 an option to have a multi-signature wallet, a bit like 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, since each currency has its own wallet, or you can use a third-party wallet that includes security features.
Portfolio notes
The cryptocurrency wallet has a public and private key with records of personal transactions. The public key includes a reference to the cryptocurrency account or address, as opposed to the name needed to receive a check payment.
The public key is available for everyone to see, but transactions are only confirmed after verification and validation based on the consensus mechanism relevant to each cryptocurrency.
The private key can be thought of as the PIN commonly used in electronic financial transactions. In this way, the user must never disclose the private key to anyone and make backup copies of this data that must be stored offline.
It makes sense to have a minimum cryptocurrency in a hot wallet, while the largest amount should be in a cold wallet. Losing your private key is as good as losing your cryptocurrency! The usual precautions about online financial transactions apply, from having strong passwords to being alert to malware and phishing.
Portfolio formats
Different types of wallets are available to suit individual preferences.
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Hardware wallets made by third parties that must be purchased. These devices work somewhat like a USB device that is considered secure and only connects to the Internet when required.
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Web-based wallets provided by, for example, crypto exchanges are considered hot wallets that put users at risk.
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Software-based wallets for desktop or mobile are mostly available for free and may be provided by coin issuers or third parties.
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Paper wallets can be printed with the relevant data about the cryptocurrency owned with public and private keys in QR code format. They should be kept in a safe place until needed during the crypto transaction, and copies should be made in case of accidents such as water damage or printed data that fades 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.
Therefore, there are many crypto exchanges located in various countries, but with different standards of security practices and infrastructure. They range from those that allow anonymous registration to those that only require an email to open an account and start trading. However, there are others that require users to comply with international identity confirmation, known as Know Your Customer and Anti-Money Laundering (AML) measures.
The choice of crypto exchange depends on the user’s preference, but anonymous ones may have limitations on the scope 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 longer.
All crypto trades 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 trading volume. 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.
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Fiduciary Cryptocurrency These exchanges allow the purchase of fiat cryptocurrency through direct transfers from bank or credit and debit cards, or through ATMs in some countries.
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Cryptocurrency only. There are crypto exchanges that only deal in cryptocurrency, meaning customers must already own a cryptocurrency, such as bitcoin or ethereum, to “exchange” for other coins or tokens, depending 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 the fees they feel comfortable with as different fees are charged by different exchanges.
Don’t expect a common market price for the same cryptocurrency with difference exchanges. It may be worth spending some time researching the best price for the coins and tokens you are interested in.
Online financial transactions carry risks, and users should heed warnings such as two-factor authentication or 2-FA, stay up-to-date on the latest security measures, and be aware of phishing scams. A golden rule about phishing is to not click on provided links, no matter how authentic a message or email is.