A simple guide to cryptocurrency and how to get involved
What is Cryptocurrency?
Cryptocurrency is simply digital cash. It’s virtual, there’s nothing you can physically touch. They’ve been around since Bitcoin was born in 2009.
Utilizing blockchain technology, digital currencies are internet-based monetary transactions just like internet banking. One of the most important distinctions between any given current cryptocurrency and money stored digitally in banks is centralization. Cryptocurrencies aren’t centralized like standard currencies are.
Several people before Bitcoin attempted and ultimately failed to bring a successful cryptocurrency onto the market, the difference is that those who failed were trying to birth centralized currency. Cryptocurrencies that exist today are used to complete online transactions between peers. Ownership is traded in the same way we trade ownership of traditional currency by physical or digital transfer. You might also wish to invest in cryptocurrencies in the same way you would with stocks and shares.
How does Cryptocurrency work?
Answer: There are several factors to consider to understand the mechanics of how the whole thing actually works. It comes down to the processes involved in trading, mining, and recording peer-to-peer cryptocurrency transactions and the technologies involved.
Once a Bitcoin or Altcoin has been created, it’s information is stored in something called a public ledger. This ledger is a record containing details of the history and, most importantly, the ownership. All information about the identity of a currency’s owner is fully encrypted, making it difficult to trace back to its origins.
Its decentralization and encrypted peer-kept records make it the perfect way to pay for things while retaining privacy, Unfortunately, the introduction of Bitcoin and the privacy benefits that come with it have led to an increase in its use on things like the dark web.
Transactions are defined as the transfers of funds between the digital wallets of two people. Transactions are submitted into the public ledger and confirmed by the crypto software and digital technology is used to keep track of it.
Unlike traditional currency transfers through a bank or other entity, transactions of cryptocurrencies are completed from one wallet to another using an encrypted signature. This signature contains mathematical proof that the transaction originated from a specific wallet while keeping all other information strictly private, such as the identity of wallet owners.
Once a transaction has taken place, the cryptocurrency then goes through a process called mining. Mining is simply the set of processes involved with confirming a transaction and having it added to the public ledger. Once it’s added to the public ledger and confirmed, you own the balance of that transaction. Mining is done through a set of complex mathematical problems solved by a third-party user in order to claim ownership of new coins.
As an open source process, mining can be done by anyone with the know-how or technological capabilities to create computers dedicated to solving the complex problems involved with mining. This is where the term ‘mining for Bitcoin’ came in, although it’s not just for Bitcoin.
That’s the process of a cryptocurrency, its life cycle. However, there are several other factors to consider in order to understand just how cryptocurrency works.
One of these factors is called adaptive scaling. Adaptive scaling basically means that the rate of which cryptocurrency can be mined is limited by an algorithm. This in-built measure allows the algorithm to detect the amount of time it takes for 2016 blocks to be mined. The algorithm then increases or decreases the difficulty level for the next set of 2016 blocks.
There’s also an in-built algorithm that allows approximately one transaction to be mined every 10-15 minutes, meaning it can’t be done constantly. The adaptive scaling makes cryptocurrency an adaptive model that can survive in both large and small scale markets.
It’s traded completely anonymously, with encrypted data and wallets and no physical currency like traditional pounds, euros or dollars.
100% digital, the process used to mine cryptocurrencies uses something called ‘proof of work’. Proof of work schemes ensure that the mining potential of cryptocurrencies isn’t taken advantage of and over-exploited. It does this by requiring an easy-to-prove puzzle be solved. This puzzle is of a hexadecimal nature and requires significant computing power, meaning it takes expertise and time to be able to mine significant amounts.
The APIs used in mining and transactions is completely open source. Open source means that developers don’t have to pay anything to download and use the framework needed to create programs needed to participate in cryptocurrency exchange or mining.
The main thing to remember about how cryptocurrency works is that the concept is virtually the same as the original dollar system. American dollars were used to represent gold, which needed to be physically mined and refined by miners. Cryptocurrency hides behind algorithms and complex data set, but it uses the same concept in digital form.
It an upgrade to how we’ve done things for centuries. It takes the basic fundamentals of how we used to place value on and use currency and updates them for the modern world.
The driving factor behind how cryptocurrency works isn’t just how it physically works. It’s not just how it’s traded or mined or what it means. It’s why it works. How is it possible? Especially when so many others before Bitcoin came and tried and failed.
The answer, quite simply put, is that it’s decentralized. What does that mean? Well, it means that it doesn’t rely on a central governing body and has absolutely no official oversight. Most currencies are created and distributed by central governments. Cryptocurrency is created by anyone than to its open source nature. It’s peer-to-peer currency that is regulated by code rather than entities or establishments.
Is cryptocurrency dead?
In a word, no. Since its conception 10 years ago, successful cryptocurrency has been steadily gaining traction. Despite the constant claims by several groups of people that it’s doomed and will never last in the market, it has.
There are now over 2,000 different cryptocurrencies available today, all using the same methods and framework as the original successful cryptocurrency, Bitcoin. The market has become incredibly popular and reached incredible heights in 2017, with a single Bitcoin worth over $20,000.
However, there are some issues with cryptocurrency. They may not be quite dead, at least not yet, but they are struggling to break into the mainstream. Mainstream currency still rules, despite it being a decade since cryptocurrency was introduced into the world.
That’s the main problem with cryptocurrencies across the world, very few vendors accept it as a legitimate payment. As it doesn’t have physical form, it’s impossible to use it in stores even if it was an accepted currency. Furthermore, it’s not really accepted for online transactions either. Finding somewhere outside of the dark web that takes it as a form of payment is like finding a unicorn.
Most of the very few places that accept it are technological or internet-based websites offering services rather than products. Most of those services are also technological in nature.
One of the biggest reasons it’s struggled so much to take off in the mainstream world is the exact same reason it was so popular with the masses. There’s no governing body for it and its value changes at any given time. It’s a risk.
Back in 2017, Bitcoin was at the height of its success and was worth five figures, in 2018 it crashed. It crashed hard. Instability in the market surrounding cryptocurrencies caused Bitcoin and all other digital-based currencies to lose their value.
While each single Bitcoin is still worth four figures, that’s a lot less than it was worth only two years ago. That simply doesn’t happen with traditional currency. Traditional currency is assigned a value and that value is retained until the currency is rendered obsolete. Inflation rises in place of value fluctuating, which has a similar effect but it just…feels different.
The lack of consistency, the peer-to-peer nature of it and the fact it is not and will never be governed by a central body or regulated like traditional currency means that it may never be mainstream.
Of the 2,000 current cryptocurrencies that are available to mine and trade, over 800 of them have ‘coins’ worth less than a penny. So, some cryptocurrencies are dead, yes, but not the concept as a whole.
Experts believe that since the crash, cryptocurrencies have been getting stronger. They believe that the almost 400,000 transactions since prove that it’s nowhere near dead. The steady increase in transactions proves that not only is the market booming again, with value climbing back up, but the market as a whole is on trend to be successful.
Cryptocurrencies have been steadily recovering from the instability and doubts that caused the crash. This steady recovery and rise back to the top in terms of value per coin could attract the attention of several investors, who can get the currency back on track. With the help of institutional investors, cryptocurrency could begin to be seen more and more in the mainstream. There are a few traders that accept it now, but the number has risen already in the last year alone.
The digital and technological age we live in could see many more adopt cryptocurrency as a form of payment, especially with the fluctuating confidence in our mainstream, traditional currencies.
Cryptocurrency isn’t that different from traditional currency. The main difference is that the value can change. However, this is also true of mainstream currency when compared to other currencies or the rate of inflation.
The main argument behind allowing cryptocurrencies to rise to the top, above traditional currencies, is the decentralized nature and worldwide value if traditional currencies were eliminated altogether.
It would mean a whole new form of currency used across the world. While this does have its serious downsides, such as the need for internet access, which some of the world simply doesn’t have, it’s the natural progression of the way we trade money.
It’s nowhere dead. In fact, it’s still incredibly young and may take decades to become mainstream, but many believe that it will reach heights beyond its previous peak and will eventually become the universal standard for currency.
How to invest in Cryptocurrency?
There are several reasons to want to invest in the cryptocurrency market. For starters, the value has been as high as five figures for a single Bitcoin, making it a potentially lucrative investment. Maybe you’re in for it the social implication, investing in a decentralized currency in the name of privacy and freedom. Maybe you’re interested in gaining returns over time and want to invest long-term. Maybe you believe that the Dollar and other Fiat currencies are inevitably doomed.
Whatever the reasons, we’re here to let you know exactly how you can invest in a cryptocurrency such as Bitcoin or any of the Altcoins available.
First of all, you need to understand the nature of cryptocurrency investment and make yourself aware and educated on the risks involved. A significant potential risk is involved with investing in something like Bitcoin. Cryptocurrencies are IPOs, meaning that they’re traded on an open market. They’re known as ICOs rather than standard IPOs, as the way they work is slightly different, but the principle of open trading is the same.
Open trading means that the value of any given cryptocurrency and vary greatly at any given time. The buying and selling of stock affects the value directly. Fluctuations are greater with cryptocurrencies than with other IPOs, with a variant of 10% potentially being standard daily fluctuations.
An important thing to really drive home about investing in the cryptocurrency market is that going all-in out of excitement or fear of missing isn’t advised. Carefully take stock of how the market is behaving and buy your coins at the right time. Buying in during peaks or dips may cause losses of significant amounts.
Honestly,, you might lose money anyway. Stock markets are hard to predict in general, and while cryptocurrency is not quite a traditional IPO, it has the same principle behind it.
Choose which cryptocurrency you’d like to invest in first. Do this before you do anything else. You can use websites and resources that are publically available to see a list of available currencies. You might only know about or have heard of Bitcoin, but there are plenty of other currencies that can give you potential returns.
Thanks to some loss of confidence and technical hitches, as well as arguments over the block size, there has been an explosion of new cryptocurrencies in the last three years.
Once you’ve decided on a cryptocurrency to invest in, it’s time to get started on some real work. Simply guessing doesn’t cut it in the investment world. You need to learn all you can about the currency you’ve chosen to put your cash into. You need to read the whitepaper.
Each cryptocurrency is required to have a whitepaper that potential investors can read to get information about it. You might feel like you can skip this step, but you really shouldn’t. Reading the whitepaper gives you valuable knowledge about the currency itself, what it’s putting into the currency ecosystem and how it value benefits as a utility. You’ll also be able to tell how serious the developer is about the project by how well-written it is.
Some whitepapers don’t have much effort put in, so it stands to reason that the developers behind them won’t be putting in too much either. If it’s badly written or doesn’t make any sense, it may be best to avoid investing in that particular coin.
You’ll need to consider the potential and current value that the cryptocurrency is bringing into the ecosystem. To do this, consider the three main problems that developers of the currency are constantly trying to solve. Those three problems are scalability, interoperability and privacy. Those three pillars are the entire reason for the creation of cryptocurrency. Find currencies that address one or more of these problems and that can actually add value and utility to the market.
Before you go ahead and look at your investment options for a cryptocurrency you’ve decided on, you need to check it’s viability. By viability, we mean whether or not it’s actually legitimate. Is it on the blockchain? Does it use tokens? If yes, then great! You’re one step closer to it being legitimate.
All ICOs should either use blockchain or tokens. Tokens are what allow you to have the right to certain benefits. For instance, you may get voting rights on something. They can also give you traction within the ecosystem itself or bring specific benefits regarding the coin or platform.
Watch out for scams. This is why it’s so important to do as much research into a currency before you actually invest. As with anything, there are people exploiting other people for their own benefit by creating fake cryptocurrencies just to raise funds.
Once you’ve decided on the currency you’ll be going for and have done your due diligence in researching it as thoroughly as possible, it’s time to look at how you actually invest.
Essentially, there are two ways you can do it. If you choose to invest in Bitcoin, there’s a way you can actually just ‘bet’ on it. This method sees you place money down as if you’re betting on the outcome of the market rather than choosing to purchase actual coins. It’s the easiest way to do it. It is so much less complicated than buying and storing real Bitcoins.
In this instance, you don’t have ownership of the currency itself, so you can’t use it to complete transactions, but when the value rises and the bet pays off, you’ll be glad you did it. Simply pay a certain amount of money to a broker and watch as it increases or decreases depending on the value of Bitcoin at the time. Choose to cash out and go back in at specific times, then do it all over again.
The second way to invest is how you’ll need to invest if you’ve chosen any other Altcoin (meaning any cryptocurrency that isn’t a Bitcoin). You’ll need to purchase and store the currency.
This is somewhat complicated, but it’s not as complicated as you may think. You can buy the cryptocurrency from specialist brokers, of which there is an increasing number, and then choose how you wish to store it.
If you’ll be using the currency to make micro-transactions, you’ll need to keep it on an internet-ready device in a virtual wallet specific to the cryptocurrency so it’s easily accessible. However, this method makes it easier for hackers to gain access. Unlike real-world currency, there’s no real way to retrieve lost cryptocurrency, and the system is so encrypted that catching the hacker may prove almost impossible. So, essentially you risk losing your entire wallet.
You can also choose to store it externally, on a USB drive or something similar. This eliminates the live connection and the risk of hacking with it. If you’re looking for a long-term investment rather than a short-term one, paper storage may be the best option. Paper storage has all the information stored on a QR code on a piece of paper. This eliminates any chance of someone corrupting, losing or hacking the data and your currency with it.
How to mine Cryptocurrency?
Mining cryptocurrencies such as Bitcoin has significant advantages. Mining is essentially another way of investing, but it doesn’t require you to physically pay for the coins. That being said, it’s not free. You’re not paying for the coins themselves but for the computing equipment and manpower needed – it’s not easy.
Although, it isn’t all that difficult either. Essentially, mining is a process where a user verifies a set of transactions. As a reward for this, the user is then eligible to receive cryptocurrency. Each miner verifies 1Mb of information containing transactions in exchange for one block of cryptocurrency. The blocks amounts vary depending on the specific cryptocurrency, but with Bitcoin (the gold standard) it’s currently 12.5 Bitcoins per block. This number halves around every four years to prevent oversaturation.
It’s an incredible system. It was designed to ensure the integrity of the users by preventing them from spending coins twice while also keeping the system decentralized, Miners receive a reward in exchange for verifying transactions. It’s basically just auditing. They’re getting paid in cryptocurrency to audit information, instead of a bank or government doing it.
Unfortunately, simply putting in the work of verifying transactions doesn’t automatically guarantee you ownership of the cryptocurrency. To be able to mine coins, there are two steps involved.
First of all, you’re required to verify a certain amount of information. Rather than give a set number, it’s set at 1Mb. 1Mb maybe hundreds of transactions or it maybe tens of thousands. It’s done in the same way an auditor of Fiat money would do it, by going through the transactions and tracking the changes of ownership. It’s painstaking, but it can pay off.
It’s also worth noting that since the variance of each cryptocurrency means the amount actually earned in Fiat money once you’ve liquidated coins can vary greatly. So it can be best to either use them in transactions or store them until you’ve got enough to justify cashing out.
The second task involves how much computing power you have and a touch of sheer luck. After you’ve verified the transactions, you’re then eligible to receive your cryptocurrency block, but you can’t just have them. You need to perform an action that allows you to be verified. It’s a similar system to a captcha but much more complex. You’ll need to solve a numerical problem that is very complex. A complex problem that you can’t do without significant processing power.
Each miner has to ‘guess’ a 64-digit code. Each block has a code assigned to it, you need to find a code with a lower value than the one assigned. The codes that are used are hexadecimal codes. Hexadecimal codes are codes that contain numbers but also case-sensitive letters. It’s not possible to do this in your head or guess manually, there are an unbelievable number of potential combinations. It requires a computer program to crack the code, and you only get the coins if you’re the first one to do it.
If several people solve the code at exactly the same time, the network usually assigns the block to the person who confirmed the greatest number of transactions. Again, this is just pure luck again. You have no control over how many transactions are in each given 1Mb of information.
Mining Bitcoins requires technology capable of solving hexadecimal code. This requires one of two things. A networked graphics card mining system or an ASIC. The costs of these set-ups can be tens of thousands of dollars, but, as the fastest usually mine the most, it’s worth the investment.
So, even if you audit and solve the problem you might still come away with nothing. It’s not too bad considering the current dollar value of a block of Bitcoins is around $45,000 – so even if you only succeed a few times, you’ve still made a potentially large sum of money.
The secret behind mining cryptocurrency is mainly just about the processing power behind it. The transaction confirmations just gain your eligibility, to actually get the currency you’ll have to have a powerful computer system that allows you to beat everyone else and get there first.
Your best chance of success lies within mining clubs. Mining pools or clubs work similarly to lottery syndicates. You pool your computing power to increase the chance that you’ll solve the code before anyone else. Once the coins are in the ownership of the mining pool, they’re split up among the members.
The won coin can either be split up evenly or depending on how much computing power you brought to the table. So the person with the most computing power gets the largest share of the coin block.
They’re essentially the only viable method of mining if you’re looking to get a consistent income of Bitcoins or other cryptocurrencies.
With how difficult the coins are to mine increasing the more coins are mined, and the very low odds of getting the code, going it alone is foolish unless you’ve got an incredible amount of networked power.
Considering costs of setting up and ongoing costs of electricity and internet usage, mining pools give far less risk of these things causing you to make a loss.
Is cryptocurrency safe?
There are two potential layers to this question. Is cryptocurrency itself safe, and is it a safe investment?
The answer to the first is relatively simple. Yes, it’s safe. It’s a highly encrypted and anonymous system. It offers people privacy and functionality above all else. There is an element of risk that your cryptocurrency will get stolen by hackers. This goes with the territory of it being a purely digital, online currency. The safest thing to do is to store your currency on paper or external drives.
Whether or not it’s a safe investment is a little more complicated. Nothing is ever a ‘safe bet’ in the investment market. You can never be sure of anything because you can’t predict the future. Cryptocurrency is a high-risk investment because the market can suffer from great fluctuations. These fluctuations also mean it can be a highly lucrative investment.
The safest way to invest is to do research and watch the market for a while so you get an idea on when to invest. Investment is all about choosing the right currency and investing at the right time.
There are scams to be aware of. Scams that target people who may want to invest and offer fake currencies as a way to earn money. They can be avoided by conducting extensive research on a cryptocurrency before deciding to invest.
On a different note altogether, the blockchain technology behind cryptocurrency means that it’s not as untraceable as people think. In fact, it’s much more difficult to use it for things like money laundering, as the records aren’t possible to manipulate and are recorded every time. Any single coin can be traced back to its origin and then tracked through transactions.
There are risks involved with cryptocurrency, just as there are risks involved with stepping out your front door every day to go to work. There are also many potential benefits. Benefits include the ability to trace the currency to avoid money laundering, the potential of huge returns and the ability to safely store it so it can’t be stolen.
How to get started buying Cryptocurrency?
Before buying, decide where you want to store your coins. You can store them in your own digital wallet or leave them on the platform you used to purchase them. Keeping them on the platform you purchased them with maybe riskier, as networks, servers and personal information may be vulnerable to downtime or hackers.
You have to find an exchange and sign up to it. This will allow you to purchase the cryptocurrency of your choice. An exchange is an online marketplace where you buy Altcoins and Bitcoins using dollars, pounds and other Fiat currencies. Once you’ve signed up, you’ll need to verify your account and identity. The exchange will request documents and information from you that, when supplied, allows you to buy and sell large amounts.
You need to find a wallet if you’ve decided you want to store your coins yourself. There a few reputable wallets out there that let you store and transfer cryptocurrency. They each have two keys, one for sending funds and one for receiving.
The best way to get started buying cryptocurrencies is to start with Bitcoin or another ‘blue-chip’ currency considered similar and safe. After you’ve got yourself in the market, you can begin to research other currencies.
Getting started isn’t that difficult. It just involves some time and research. Research into the currency you want to buy is the most important part. Look up the history of the currency, read its whitepaper and learn everything you can about it before you decide to buy.
You can join an exchange before or after you’ve decided on the specific currency, but after is better. Not all exchanges deal in every currency. Almost all will include Bitcoin, but some won’t include the full list. You should be able to see the list of cryptocurrencies each platform trades in before you sign up.
Which cryptocurrency to invest in 2019?
With over 2,000 different cryptocurrencies to choose from, how do you know which one is the best to invest in?
When deciding which is the best option, there are several things you need to consider. For a start, the stability of the cryptocurrency is hugely important. By stability, we mean how steady has the price been over the last 6 or 12 months. Big dips or fluctuations equal instability and usually make a cryptocurrency even higher risk than normal.
Another thing to consider is the actual price per coin. Although, don’t use this metric alone to determine which coin to invest in. Price per coin can vary from a few cents to a few dollars depending on the currency. The most stable can also be the most expensive, but are a much safer bet than currencies costing a few cents with frequent instability.
Finally, consider what the company behind the currency are doing. How dedicated are they to the cryptocurrency the created? How dedicated are they to creating networks of people? Are they focused on gaining investors who can help to increase the market value? Are they developing technologies that can help the financial market accept cryptocurrency as the new mainstream?
Developers who are just sitting back and waiting, not doing much maintenance or who have a product that doesn’t work properly aren’t worth investing in. Remember that it’s not just the currency you’re investing in, it’s the people behind the currency as well. It’s the industry as a whole you invest in, and companies or developers who are the most dedicated to progress, maintenance and adaptability are the ones most likely to make the most difference in the ecosystem.
As the first blockchain-based cryptocurrency and still the top performing in the market, Bitcoin is probably the best bet. It’s always a risk with cryptocurrency, and Bitcoin has a history of crashing hard, but it’s also the best cryptocurrency out there and has set the bar for all the Altcoins. The price has been relatively stable over the past 12 months, making now a great time to buy.
Ripple is also a good choice. It’s second only to Bitcoin in its stability in the market. The company behind Ripple is working towards creating an international network of banks and payment processors. They are also developing revolutionary technology that could make international transfers safer, easier and faster.