At the start of its launch in 2009, several thousand bitcoins were used to buy a pizza. Since then, the cryptocurrency’s meteoric rise to $65,000 in April 2021, after its precipitous drop of around 70% in mid-2018 to around $6,000, has blown many people away – crypto investors -currency, traders or just curious who missed the boat.
How it all began
Keep in mind that dissatisfaction with the current financial system has given rise 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 a 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 success sparked by blockchain fever also attracted those who defrauded the unsuspecting public and this caught the attention of regulators.
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 at this point to say that there are fine distinctions between coins, altcoins, and tokens. Altcoins or alternative coins generally describe something other than pioneer bitcoin, although altcoins like ethereum, litecoin, ripple, dogecoin, and dash are considered part of the “core” category of coins, meaning they are traded in more cryptocurrency exchanges.
Coins serve as currency or a store of value while tokens offer uses as assets or utilities, an example being a blockchain service for supply chain management to validate and track wine products from the cellar to the consumer.
A point to note is that low-value tokens or coins offer upside opportunities, but don’t expect meteoric rises similar to bitcoin. Simply put, lesser-known tokens can be easy to buy but can be hard to sell.
Before jumping into any cryptocurrency, start by researching the value proposition and technology considerations i.e. the business strategies outlined in the white paper that accompanies each initial coin offering or ICO.
For those familiar with stocks and shares, it’s not unlike the initial public offering or IPO. However, IPOs are issued by companies with tangible assets and trading history. 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 – 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 always trying to catch up with ever-changing cryptocurrencies. The rule of thumb in the crypto space is “caveat emptor”, buyer beware.
Some countries are keeping an open mind by adopting a hands-off policy for cryptocurrencies and blockchain applications, while keeping an eye out for outright scams. Yet there are regulators in other countries more concerned with the downsides than the upsides of digital cash. Regulators generally realize the need to strike a balance, and some are looking at existing securities laws to try and master the many flavors of cryptocurrencies around the world.
Digital wallets: the first step
A wallet is essential for getting started in cryptocurrency. Think of online 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.
The wallets are of digital type. There are two types of wallets.
Hot internet-related wallets that put users at risk of being hacked
Cold wallets that are not connected to the internet and are deemed more secure.
Besides the two main types of wallets, it should be noted that there are wallets only for one cryptocurrency and others for several cryptocurrencies. There is also an option to have a multi-signature wallet, somewhat similar to a joint account with a bank.
The choice of wallet depends on the user’s preference, whether it’s purely interest in bitcoin or ethereum, as each coin has its own wallet, or you can use a third-party wallet that includes security features.
The cryptocurrency wallet has a public and private key with personal transaction records. The public key includes a reference to the cryptocurrency account or address, much like the name required to receive payment by check.
The public key is accessible to everyone, but transactions are only confirmed after verification and validation based on the consensus mechanism applicable to each cryptocurrency.
The private key can be thought of as the commonly used PIN code in electronic financial transactions. It follows that the user must never disclose the private key to anyone and make backups of this data which must be stored offline.
It makes sense to have a minimum of cryptocurrency in a hot wallet while the largest amount should be in a cold wallet. Losing the private key is equivalent to losing your cryptocurrency! The usual precautions for online financial transactions apply, from having strong passwords to being on the lookout for malware and phishing.
Different types of wallets are available to suit individual preferences.
Hardware wallets manufactured by third parties that must be purchased. These devices work much like a USB device that is considered safe and only connects to the internet when needed.
Web wallets provided, for example, by crypto exchanges, are considered hot wallets that put users at risk.
Software wallets for desktop or mobile are mostly available for free and can be provided by coin issuers or third parties.
Paper wallets can be printed with relevant data about the cryptocurrency held with public and private keys in QR code format. These should be kept in a safe place until required during the cryptographic transaction and copies should be made in case of accidents such as water damage or fading of data printed in the process. over time.
Crypto exchanges and marketplaces
Crypto exchanges are trading platforms for those interested in virtual currencies. Other options include websites for direct trade 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 allowing anonymous registration simply requiring an email to open an account and start trading. Yet 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 user preference, but anonymous exchanges may have limits on the scope of permitted exchanges 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 which will take longer.
All crypto transactions must be duly 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 transactions. 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 These exchanges allow the purchase of fiat-cryptocurrency through direct transfers from banks or credit and debit cards, or through ATMs in some countries.
Cryptocurrency only. There are cryptocurrency exchanges that deal only with cryptocurrency, which means that customers must already own a cryptocurrency – such as bitcoin or ethereum – to be “exchanged” for other coins or tokens, depending on the market rate
Fees are charged to facilitate the buying and selling of cryptocurrencies. Users should research to be happy with the infrastructure and security measures as well as determine the fees they are comfortable with as different rates charged by various exchanges.
Don’t expect a common market price for the same cryptocurrency with different exchanges. It can be worth spending some time researching the best price for the coins and tokens you are interested in.
Online financial transactions are risky and users should heed caveats such as two-factor authentication or 2-FA, keep up to date with the latest security measures, and be aware of phishing scams. A rule of thumb about phishing is to not click on the links provided, regardless of the authenticity of a message or email.
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