BEGINNERS’ GUIDE TO CRYPTOCURRENCY
By Tom Alford
Most people don’t know much about cryptocurrency. Yes cryptocurrency sounds exciting, but TotalCrypto understands it can be very confusing. In this article we will explain what cryptocurrency is, unravel the mystery behind confusing cryptocurrency terms and examine why you might consider investing in cryptocurrency.
What is Cryptocurrency?
Cryptocurrency is a completely virtual currency that is intended to be used as a medium of exchange for goods and services. A clever technique called cryptography is used to verify and secure transactions. The cryptography method also means that infinite units of a cryptocurrency cannot be created. This means different cryptocurrencies have a preset maximum supply.
Virtual currency may sound like madness. However, the reality is that your bank bank balance is just virtual dollars. With conventional currency the problem is that there is no maximum supply. Central banks can make unlimited dollars or unlimited Euros. Maybe completely virtual cryptocurrencies are not so mad after all?
There Are Actually Two Main Types Of Cryptocurrency
Most of you have probably heard of Bitcoin, but did you know there are over 1,600 different cryptocurrencies out there? Many people are not aware that Bitcoin actually only makes up 36% of the entire cryptocurrency market. This means the majority of the cryptocurrency market is made up of cryptocurrencies, other than Bitcoin.
Cryptocurrencies can be broken down into two major categories:
1. Transactional Cryptocurrencies: are a store and transfer of value. This type of Cryptocurrency included the likes of Bitcoin and Litecoin.
2. Utility Tokens: are cryptocurrency projects that are creating a product or service. The tokens investors buy are intended to be used to pay for the projects services. It is the same as buying Disney dollars to use at Disneyland. However, you must be aware that most of these cryptocurrency projects do not yet have a working product. Ethereum and EOS are examples of this type of cryptocurrency.
How Are Cryptocurrencies Used Now & How Might They Be Used In The Future?
Transactional cryptocurrencies like Bitcoin or Litecoin are simply used as a medium of exchange or a store of value. Right now, it is quite hard to pay for items or services with cryptocurrency – not many merchants have adopted them as a payment method yet. Currently, Bitcoin’s main function is a store of value and it is also used to buy other cryptocurrencies on crypto exchanges like Binance.
With transactional cryptocurrencies, investors are betting on their widespread use in the future. Twitter CEO Jack Dorsey explains this well:
Cryptocurrencies like Bitcoin have the potential to replace the US Dollar as a world currency. We live in a new digital age and, with this in mind, doesn’t a digital currency make sense?
Utility tokens are issued by cryptocurrency projects. Once the project has finished creating their ecosystem, then the idea is that these tokens can be used to pay for ecosystem services. You must be aware that the majority of cryptocurrency projects are still working on their products and token investors are essentially betting on a successful future product launch. What type of services are these projects creating?
Projects like Wanchain are creating a framework in which financial assets can be digitalised and traded on the blockchain. Financial institutions can benefit from the Wanchain system through reduced costs and increased security. Imagine if every financial asset was traded this way, then there would be a tamperproof record of every single trade. This would allow regulators to do a better job and help them prevent insider trading or money laundering.
Factom is another utility token project that is putting land registries on the blockchain. This prevents unethical leaders in developing countries from buying support through land gifts to supporters. Imagine if the World Trade Organisation made this a requirement for every member country? Such initiatives should have a massive impact in reducing corruption levels.
If there is a big world problem, chances are that a utility token cryptocurrency project is working on a solution. No matter what problem a utility token is trying to solve, the common theme is that they aim to improve efficiency and hyper-connect the world in their chosen area.
What Is Bitcoin?
Bitcoin is a digital currency that is not controlled by any world government. Everyone is familiar with currency and use it every day but what most people do not consider is where currency gets its value from. Why can you swap a piece of paper saying 10 USD for a MacDonalds? The truth is that our regular currency only has value because enough people ‘believe’ it has value and have confidence in it. Money really is just a transfer of confidence. We can see the collapse in a nations belief/confidence in its currency by looking at modern day Venezuela. During March and April 2018, the Venezuelan currency had 18,000% inflation. Literally, if you had $180 worth of Venezuelan currency at the beginning of March, two months later it would have bought you $1 worth of good and services. No wonder people don’t want to accept the currency or believe in it anymore. Bitcoin gets its value from belief that it has value. The more people that are willing to buy or accept Bitcoin, the more valuable it becomes.
But why would anyone believe in Bitcoin? Over the years, most of you would probably have heard news presenters talking about ‘quantitative easing’ or ‘QE’. In case you didn’t know what this is, it’s an controversial financial strategy where central banks create money out of thin air, in the hopes of stimulating economic growth. Have you been to buy food over the years and noticed that the prices seem to be going up pretty quickly? You can thank QE for that.
Central banks increasing the supply of money by magically creating it, reduces the purchasing power of the currency we all hold. Like regular currency, Bitcoin is a store and transfer of value. The difference is that the bankers don’t have control over it.
Why Do People Believe In Bitcoin?
Yes people are now buying Bitcoin to speculate on it’s price. However, at the beginning the whole point of Bitcoin was to create a better currency than the ones we have now. How is it better?
Only 21 million Bitcoins can ever be produced. 17 million of these are circulating right now. Bitcoins are created by a process called mining, which essentially involves computers solving complicated maths problems and being rewarded with Bitcoin. These puzzles get progressively more complicated over time and the rate that new Bitcoins are ‘mined’ reduces over time. Current estimates put the last Bitcoin being mined in 2140.
The capped supply of Bitcoin means that no government, person or organisation can create more Bitcoins after the supply hits 21 million. This means that there can be no financial trickery or Bitcoin quantitative easing. A central bank cannot magic up more Bitcoin out of nothing, this fixed supply protects Bitcoins purchasing power in the future. In fact, as Bitcoin becomes more popular, there are an increasing number of dollars chasing a fixed supply of Bitcoin. This will result in the price increasing.
Bitcoin can also process transactions to anywhere in the world within minutes and do so at a lower fee than traditional banks. Sounds great right? Millions of people already agree. Many people believe in Bitcoin because it is a better cross border payment system then we have already and there is mathematical certainty in it’s supply. Government issued money has no such guarantees.
What Is Bitcoin Used For?
Have you ever sent or received money from abroad? Chances are you waited between 2 and 5 days for the transaction to clear. Surely there is a better way? Actually, there is. Bitcoin transactions can be processed in minutes to anywhere in the world. This makes it a better transfer of value than what banks can currently offer us. Bitcoin can also be viewed as a hedge from government oppression. Sound far fetched? Well in 2016 the Greek government actually went into ordinary citizens bank accounts and confiscated €1.6 Bn from 500,000 different accounts. The sad truth is that governments do have the power to raid private bank accounts in a time of crisis. Where did the Greek people seek shelter? They turned to Bitcoin and cryptocurrency exchanges saw a massive spike in new Greek accounts. At a time of unprecedented worldwide national debt, maybe it’s a good idea to consider what Bitcoin could do for you. The debt clock here will give you an idea of the scale of the problem.
Of the 7.6 billion people on the planet today, 2 billion of them are unbanked. This means that banks will not give them an account, which excludes them from the financial system and global economy. Doesn’t sound very fair right? Well, it isn’t and this is a key driver behind the world’s growing wealth inequality. The beauty of Bitcoin and cryptocurrencies is that they enable people to become their own banks. This means the unbanked can participate in the global economy by receiving cryptocurrency for their work and exchanging it for goods and services in their home country.
Bitcoin Sounds Great But I Cannot Touch Or Hold It.
Actually, you can now. A Singapore startup has already developed and launched a physical Bitcoin banknote. Currently there are two denominations of:
- 0.01 Bitcoin ($100)
- 0.05 Bitcoin ($500)
The company co-founder has told reporters that the business is now producing millions of Bitcoin banknotes. TotalCrypto, thinks the physical banknotes will be a success and really help in the widespread adoption of Bitcoin.
How Many People Actually Own Bitcoin?
Chances are that you have heard of Bitcoin and know it’s a digital currency. The mainstream media love to talk about it. However, it’s Bitcoin’s price that gets most of the attention. Sure, reporting on the price makes great news, but isn’t particularly helpful in explaining what it actually is. With the lack of good cryptocurrency education, numerous confusing terms and technical jargon, it is not surprising that less than 0.3% of the population actually own any Bitcoin.
If we were to estimate, over 99% of the world’s population don’t really understand what Bitcoin or cryptocurrency actually is. For all Bitcoin’s fanfare in the media, did you know that only 22 million Bitcoin wallets have ever been created? Not sure what a Bitcoin wallet is? It is just software that allows Bitcoin investors to store their digital coins. You can think of them being similar to a self controlled bank account.
Now consider that there are 7.6 billion people in the world. This means that if every Bitcoin wallet was owned by a single person (many Bitcoin investors have more than one wallet), then only 0.29% of the world’s population own some Bitcoin.
22 million / 7.6 billion * 100 = A maximum of 0.289% of the world’s population own some Bitcoin.
With all the news surrounding Bitcoin, that’s not very many people. In practice, there will be many Bitcoin wallets with nothing in them and many Bitcoin investors will have multiple wallets. The incredible thing is that nearly half of all Bitcoin wallets have less than 0.001 Bitcoin in them (that’s about 10 USD worth). What is certain is that Bitcoin is an asset that everyone is talking about and practically no one owns.
Why Are Utility Tokens Like Ethereum A Big Deal?
1521658557-Ethereum-ETH-Price-Analysis-1 The first thing to know is that Ethereum is a public blockchain. Blockchain is essentially a secure and transparent way to store data. Ethereum allows application developers to build Apps on top of their blockchain and enjoy all their benefits. This means the App developers can concentrate on doing what they are best at (building apps) and can just piggyback on Ethereum’s existing infrastructure. To use the a real world example, it similar to how the Clash Of Clans app is built on the Apple and Android operating system.
Ethereum is not the only application developer platform out there. Indeed there are dozens of projects doing a similar thing and trying to take market share away from Ethereum. A few examples include:
- Neo – the Ethereum of China.
The special feature all these platforms have is called a smart contract. These contracts allow for the collection and distribution of digital assets in a predetermined way, that has no need for a middleman. The growing trend is the increasing digitalisation of assets. For example, a deed to a house can be digitalised and then traded. Bitcoin can be seen as the digitalisation of money.
Smart Contracts & How They Could Change Everything?
Smart contracts cut out middlemen such as lawyers and make commerce easier. An example would be if Elon Musk wanted to sell one of his SpaceX rockets to NASA. Even if a price was agreed, the sale would require expensive lawyers and there maybe an issue of trust – does NASA send the money first or does Elon give them the rocket first? With smart contracts, the agreement can be written into it. This might be that NASA want to pay $1 bn in digital currency to buy the rocket. The deed to the rocket can be digitalised and so can money, by using Bitcoin. Both the digital deed to the rocket and the $1bn in Bitcoin can be sent to the smart contract. If either Elon or NASA fail to send the asset to be traded, then the smart contract will return the asset of the person who sent it.
Elon ends up sending the digital deed to the rocket and NASA do send the $1bn in Bitcoin to the smart contract. Once this is done, the smart contract then makes the trade and send NASA the rocket deed and Elon the money. The whole trade has been done with minimal legal fees and is entirely trustless.
Big businesses are exceptionally interested in how smart contracts can make their businesses more efficient and reduce costs. This is why the likes of J.P.Morgan, Intel and Santander have joined the Enterprise Ethereum Alliance. Smart contracts can truly revolutionise business and that’s why it might not be a bad idea to look at these other cryptocurrencies as well.
Is It Too Late To Get Involved In Cryptocurrencies?
There was a lot of hype around cryptocurrencies at the end of 2017. However, cryptocurrencies are so new that the regulation has not been made to allow institutional investors (like J.P.Morgan) to get exposure. This means there are potentially trillions of dollars sitting on the sidelines waiting to get in on cryptocurrencies.
Venture capital and family offices have begun buying cryptocurrencies recently, with the likes George Soros, the Rockefeller’s and the Rothchild’s recently investing the cryptocurrency space. Many commentators see this as the smart money getting into cryptocurrency before the crowd does.
How early is it for cryptocurrencies? Consider that earlier we worked out that:
- A maximum of 0.289% of the world’s population own some Bitcoin.
- Around half of all Bitcoin wallets have less than $10 worth of Bitcoin in them.
Let’s have a look at the level of adoption levels for major technologies for the last 100 years. We can see that none of these major technological breakthroughs had an eventual adoption rate of less than 50%. It is fair to say that not even 1% of the population has adopted cryptocurrencies yet, demonstrating how early we are.
Is Cryptocurrency A Good Investment?
Cryptocurrencies are exceptionally volatile and you should be aware that crashes of 50% or more are pretty common. It all depends on if you personally see value and potential in cryptocurrency and the technology they bring to the world. Only you can make that decision and this is why TotalCrypto always encourages everyone to do their own research.
How Do I Keep My Cryptocurrency Safe?
All cryptocurrencies have a free wallet you can download to store it in. For every cryptocurrency featured on TotalCrypto, we have made dedicated wallet guides showing you how to use them and the best way to store your cryptocurrency.
We must accept that there are many hackers targeting cryptocurrency right now and that this issue is only likely to get worse as cryptocurrency prices rise. The most secure wallet solution on the market right now is a hardware wallet device. This stores your private keys on the device and protects them from malicious attacks such as keyloggers and phishing attempts. Your computer could have a load of viruses on it, but with a hardware wallet your crypto should be safe.
TotalCrypto.io Important Terminology
Private Key: Think of this as a complex password that proves you own the tokens and are authorised to access them. It’s exceptionally important you never share this with anyone. If anyone finds out your private key they can access your crypto and do whatever they choose. A private key is essentially the same as the PIN to your bank account; you should treat it the same way.
You get one private key. Do not lose it. If you do, you will likely lose access to your cryptocurrency.
The two most respected hardware wallet devices out there are Ledger and Trezor.
Many people are excited about the technology behind cryptocurrencies and we have shown you just how early this technology is. Although the technology is exciting and is attracting significant interest by large companies, you must know that the cryptocurrency markets are exceptionally volatile. If you choose to invest in a cryptocurrency, just be prepared for this and don’t invest money you are uncomfortable with losing.
TotalCrypto is dedicated to bringing you the most exciting cryptocurrency projects and explaining them to you in a straightforward way. Our comprehensive ‘how to buy’ walkthroughs and wallet guides remove the mystery of cryptocurrency. We look forward to seeing you around on our site and hope you find our insights useful. If you’re looking to educate yourself further on blockchain and cryptocurrency, you might also like Trade Finance Global’s Blockchain Guide.
Article written by Tom Alford, TotalCrypto.io.
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This article was originally published on TotalCrypto.io.