LONDON, Nov. 5, 2021 /PRNewswire/ — So what exactly is Cryptocurrency?
Cryptocurrency has been big news in the past couple of years following massive gains for its investors. The most prolific cryptocurrency in the world is Bitcoin with a current market capitalisation of $1.169 Tn (Nov 2021), (Source https://coinmarketcap.com/ ) to put that in context, that’s around the same as the annual GDP of the whole of Indonesia, which has a population of 273m people. (Source https://worldpopulationreview.com/countries/countries-by-gdp)
Bitcoin was created by Satoshi Nakamoto as a way to circumvent the traditional banking infrastructure following the 2008 financial collapse. It is yet to gain traction as a transactional currency, but it picked up huge mainstream interest in 2017 as an investment opportunity when its value rose from $975.70 in March that year to $20,089 on Dec 17. At that point the whole world took notice and cryptocurrency went from the being the preserve of computer geeks to gaining interest from economists and investment banks.
But what exactly is Cryptocurrency?
OK, it’s definitely quite confusing. In short it is a digital version of money. But there is no bank. It is an asset, but it is not attached to anything physical.
It is intended to work in the same way as money. People can have a digital wallet to store the digital money, it can be used to represent value in the economy, which can be traded with others for goods or services or for fiat currency.
Woah there, what is Fiat currency?
Fiat currency is a government-issued currency – US dollars, GB pounds etc, which hold their value based largely on the market’s confidence in that particular country’s economic strength.
Now here is where the similarities lie. The value of the banknote itself is practically nothing it’s just a bit of paper (or plastic these days), it’s what it represents that gives it value.
The serial numbers of the bank notes are recorded by the physical bank and the number in circulation is known. The same is true of cryptocurrency, they are also recorded as numbers in a ledger, and that ledger shows how much of a cryptocurrency is available and who owns it.
So far so good, but here’s where it gets a bit complicated.
Unlike the traditional banking system, the cryptocurrency ledger – the Blockchain – is decentralised. The blockchain is spread across all the parts of the worldwide computing network, recording transactions in a way that is public and verifiable but belongs to nobody in particular.
Why are there so many cryptocurrencies?
In theory, anyone can create a cryptocurrency; at their heart it’s just software. There is no official organisation that decides what is a cryptocurrency and what isn’t, and after the explosion of Bitcoin’s value in 2017 there was a vast number of new altcoins.
OK, what’s an Altcoin?
An altcoin is basically any cryptocurrency that isn’t Bitcoin, it’s an alternative-coin, geddit? They can be mining-based cryptocurrencies, stablecoins, security tokens and utility tokens.
You’re going too fast again.
OK, so Bitcoin is a mining-based cryptocurrency. It is mined by computers, in the case of Bitcoin, at the rate of one block every 10 minutes. The miners are rewarded with Bitcoin, and they also have to validate transactions on the blockchain at the same time as the new blocks are minted.
Bitcoin’s creator capped the total number of Bitcoin at 21 million, and there are currently 18.7m in existence, so at current rate of mining, the last block should be added some time in 2064.
There are some unlimited mining based cryptocurrencies as well – Etherium, is the second biggest crypto in the world, and has an unlimited supply.
Etherium is particularly sought after at present because it is the blockchain which most NFTs transactions are performed on.
NFTs like Crocs League collectables are a particularly exciting area of the investment in crypto, and the first drop sold out for $500,000 in a matter of hours recently. The Etherium blockchain was used on almost all of these sales to publicly show NFT transaction history and token metadata, making it practically impossible to “steal” ownership.
To find out more about NFTs – non fungible tokens have a look at our previous Dummies guide.
There are 1,000s of other altcoins on the market, and to be successful they need to offer new solutions to existing problems with major players like bitcoin: making transactions simpler or more efficient, for example. Others were just created as alternatives, like Dogecoin, which began largely as a joke, and is now the 9th biggest crypto with a capitalisation of $35.1 Bn, so it’s founders are now laughing all the way to the digital bank.
How do you buy them?
Cryptocurrencies, like any other asset, can be bought for cash, such as dollars or pounds. Numerous exchanges exist to make that possible, and users can either hold their cryptocurrency with those exchanges or store them in their own wallet.
There are several types of wallet – Etoro, Coinbase, Binance, CoinCorner, Coinjar, Luno, and it’s a good idea to read their reviews before you get started.
When you have a wallet you can buy some crypto. It’s very important to note that a Bitcoin transaction is considered unconfirmed until it has been included in a block on the blockchain, at which point it has one confirmation. Each additional block is another confirmation. Coinbase requires a minimum of three confirmations to consider a bitcoin transaction final. Each new block takes about ten minutes to be added to the block chain, so a Coinbase confirmation would take around 30 minutes.
The general rule is, the more money you are investing, the more confirmations you should look for before you hand over your money.
Why is investing in crypto so chaotic?
Unlike traditional financial assets, such as stocks or commodities, cryptocurrencies are not valued in terms of what they can be used for. Unlike normal investments which are a bet on a company’s future profits or the usefulness of a given material, cryptocurrencies are a bet on how many people are interested in them, and unlike traditional fiat currencies, cryptocurrencies don’t have a central bank tasked with using monetary policy to ensure that its value does not fluctuate too wildly.
Over the last year, those fluctuations have mostly been upwards: even after both its crash and considerable gains in recent years, the price is up 65 per cent in 2021.
But, as with anything financial, there is no guarantee that the trajectory will keep going upwards. It could go down just as easily as it goes up, so be careful.
Photo – https://mma.prnewswire.com/media/1679340/UK_NFT_Art_Doctor_Troller.jpg