What is a cryptocurrency?

 

Cryptocurrency is digital money. It is intended to be used as a medium of exchange like fiat Currencies.  The basic premise is that cryptocurrency would allow transactions to take place between two parties without the facilitation of a third-party/financial institution (“Peer-to-Peer transactions).  Many “newbies” to cryptocurrency are quite weary of its viability due to the lack of physicality and security of digital cryptocurrency.  The term cryptocurrency is interchangeable with terms such as digital currency and decentralized digital currency or even digital cash so don’t fret if you come across variables of the original term as they all refer to cryptocurrency.

 

photo of crypto

 

Cryptocurrency is not physical – it is not printed and essentially requires an electronic means of transferring units from one person to another.

 

Where did cryptocurrency come from?

 

Bitcoin, a form of cryptocurrency and, arguably, the first cryptocurrency was created by an anonymous entity that went by the name, “Satoshi Nakamoto”. It is not clear as to whether Nakamoto was an individual or a group of programmers but nevertheless during 2008, Nakamoto released the infamous “white paper” which detailed how Bitcoin should work.  This paper is called “Bitcoin: A Peer-to-Peer Electronic Cash System”.

 

During 2009 Nakamoto released Bitcoin as open-source software.  Open source means the source code used to create the software is available to everyone to view, alter or modify. “Source code” is the unique code that allows a programme to perform the task for which it was created.  Programmers typically assemble or create this code in order to manipulate the program into doing what they’d like it to do.

 

digital coins

 

Who controls cryptocurrency and how are they created?

 

One of the terms we use is decentralized digital currency.  This term explains exactly who controls cryptocurrency.  No single entity control cryptocurrency or its value.  This is why it is considered decentralized.  For example, a community of “miners” creates Bitcoin digitally.  Anyone can join this community provided that they have the necessary equipment to “mine” cryptocurrency.  A cryptocurrency miner is a person who has machinery or computers that are capable of verifying and processing transactions between two parties. The process of verifying these transactions require equations and algorithms to be solved by these computers.  In some instances these algorithms become increasingly difficult to solve and inevitably, more computing power, and, indirectly more electricity is required to continue the mining process.  In Bitcoin’s instance, Bitcoin explained simply will reach a limit of 21 Million Bitcoins due to the increasing rate of mining difficulty.

 

Ultimately, a self-serving, efficient ecosystem is created where existing cryptocurrency is circulated from one user to another and more cryptocurrency is created through the facilitation of the transfer of cryptocurrency.

 

Is cryptocurrency secure?

 

In summary, one of the issues Nakamoto sought to address in the “white paper” was a means of preventing double spending through peer-to-peer transactions.  By finding a way to prevent “double-spending” or the duplication of funds one could securely pave the way forward for reliable transactions between two parties.  This is where the term “crypto-“ finds relevance.  Cryptocurrency is created through cryptography .  Cryptography is a means of encrypting or disguising a message from one party to another party in the presence of a third party or multiple third parties which are not the intended recipients of message.  Although this explanation has been overly simplified, the same concept is applied to the transfer of digital coins.  Each coin has a unique “digital signature” which is updated with each transaction.  At this point we ask  “how does blockchain work”?.

 

Blockchain technology facilitates the above process by creating a publicly viewable imprint of a cryptocurrency transaction.  The security lies in the fact that if a transaction is publicly known to have taken place between two parties then there can be little dispute as to whether the transaction has taken place.  Essentially the transaction is imprinted on a public ledger, with the consequence that the same ledger rejects a fraudulent action. A legitimate transaction is therefore guaranteed and is also secure.

 

currencies of the internet

 

Why does cryptocurrency have value?

 

Why would cryptocurrency have value? This question doesn’t have a surprising answer.  You need to ask yourself why does any currency or commodity hold value.  Economically speaking, value is subjective and something holds value because society gives it value.  The fact that society gives something value coupled with limited availability causes fluctuations in value.  This is essentially “Supply and Demand”.  With an oversupply of something, demand will reduce and vice versa.

 

Cryptocurrency values are attributed to their demand.   Of course, as cryptocurrency enters the “asset space” it becomes susceptible to things like speculation.  Due to speculation, cryptocurrencies may be overvalued or undervalued.  The value of cryptocurrency tends to fluctuate according to market forces at play.  At this early stage there is major volatility in cryptocurrency values because society is coming to terms with this new form of currency.  Along with great promise comes great uncertainty.

 

How do you buy cryptocurrency?

 

Cryptocurrencies are bought at exchanges.  Exchanges are online platforms much like a stock exchange where you would be able to purchase a cryptocurrency at market value and pay some sort of fee or premium set by the broker. In the U.S. there are a number of popular exchanges such as Coinbase, GDAX (part of Coinbase) Kraken, and Bitfinex.  In Europe and specifically the U.K., Luno is a popular exchange.  In South Africa there is Luno, Ice3x, and Cex.  In Australia, you can look up CoinSpot.  In India Cryptocurrency exchanges include BuyUCoin which offer up to 30 different cryptocurrencies and coinsecure which exchanges Bitcoin only. Find out more about investing in cryptocurrencies here.

 

Where to keep cryptocurrency?

 

Cryptocurrencies can be kept in “wallets”.  These are not conventional wallets as we know them to be but they exist in various forms including a physical form.  Firstly, cryptocurrencies can be stored on an exchange but this is not recommended for reasons that we’ll discuss below.   Secondly, they can be stored on an online “wallet” which is essentially a secure internet portal which can only be accessed through specific files being uploaded along with passwords being entered. Exchanges sometimes fulfill the function of an exchange as well as providing online wallet storage services.  Thirdly, they can be stored within mobile wallet apps or desktop wallet apps and fourthly they can be stored on a “hardware” wallet which is likened to a USB device of some sort.  As a last resort you can create a paper wallet and transfer your cryptocurrency to a unique wallet address which you create.  The paper with the relevant details is then kept safe in a vault or safe area as you would determine. Read more about different cryptocurrency wallets here.

 

Can cryptocurrency be stolen?

 

As with traditional currency or fiat currency, there are both good players and bad players.  Exchanges have been known to be hacked. Online wallets have also been hacked with the result that cryptocurrency has been stolen.  However, this must be distinguished from fraud.  There are no specific cases of cryptocurrency having been duplicated or cloned.  As we are still in an early stage of the cryptocurrency era there is lots of room for improvement in wallet/transfer security.  For the time being it is always advisable to remove your cryptocurrency from an exchange soon after purchasing it as this is the least secure method of keeping hold of your cryptocurrency.