Do you know Bitcoin from Ripple, or wondering how to buy and trade digital currencies and what the risks are? Our beginner’s guide to cryptocurrency has the answers
Have you been tempted to dip your toe into the cryptocurrency pool but don’t know where to start? During the Covid-19 pandemic, there has been an upsurge in first-time investors exploring the world of digital currencies. One of the biggest lures of cryptocurrency is that it is accessible to everyone and it can be traded anywhere in the world at the touch of a button.
With a little bit of self-education, complete novices have racked up thousands – some, millions. If you’re keen to ride the tide of cryptocurrency, here are some top tips to keeping your head afloat in the world of virtual assets…
What is cryptocurrency?
A cryptocurrency (or “crypto”) is a digital currency denominated in terms of virtual “tokens” or “coins” that can be used online to trade goods and services. It is a decentralized form of currency, designed to be free from government manipulation and control.
Cryptocurrencies work using a technology called a blockchain. Blockchain is a decentralized technology spread across many computers that manage and records transactions. Part of the appeal of this technology is its security, as it is extremely hard to hack.
How did cryptocurrency come about?
Many investors consider bitcoin to be the original cryptocurrency.
Founded in 2009 by a programmer (or, possibly, a group of programmers) under the pseudonym Satoshi Nakamoto, bitcoin paved the way for a new age of blockchain technology and decentralized digital currencies. Following the creation of bitcoin, more cryptocurrencies surfaced and they continue to grow.
Why would you use cryptocurrencies?
As mentioned, ease of use and accessibility is a major reason to use crypto. There are millions of people who don’t have the right to use traditional exchange systems but cryptocurrencies do not discriminate against users.
Another desirable feature is that the encrypted decentralized systems are secure, anonymous, and never controlled by one central authority.
To top it off, transactions are quick and your payments can be viewed in real-time, whereas traditional bank transactions can sometimes take several days to update.
What are the most popular cryptocurrencies and what are they worth?
Today, more than 10,000 different cryptocurrencies are traded publicly, according to the market research site, CoinMarketCap. The total value of all cryptocurrencies on August 18, 2021, was more than $1.9 trillion — down from April’s high of $2.2 trillion.
To this day, bitcoin continues to top the leaderboard in cryptocurrencies in terms of market capitalization, user base, and popularity. However, it has one of the most volatile trading histories. Its first price increase occurred in 2010 when the value of a single bitcoin jumped from around $0.0008 to $0.08. It has seen many highs and lows since then. As of September 1, the price of bitcoin was $47,620.09 per (BTC / USD), putting it 26.58% below the all-time high of $64,863.10.
How do you buy, sell and trade them?
To get going with cryptocurrencies, you will need to choose an exchange to buy and sell and a wallet app to store it securely. When looking at crypto exchanges it’s best to pick one that suits your needs, with some of the checkpoints including the supported currencies, pricing, withdrawal options, and security.
Some of the top-rated options are Coinbase, Cash App, and Bisq. When it comes to digital wallets, these can be online, on your computer, or an external hard drive. In 2020 a study showed that there were between 5.8 million and 11.5 million active cryptocurrency wallets. Once you have a digital wallet from sites like Coinbase, Trezor, or Ledger, you can generate an address that can be given to the person who you’re planning to make a transaction with.
After transactions, miners (computers dedicated to the network) validate their legitimacy and verify them on a public ledger.
Is Bitcoin a good investment and what are the risks?
Bitcoin is known for being one of the most volatile cryptocurrencies. For instance, in a three-month span from October of 2017 to January of 2018 the volatility of the price of bitcoin reached nearly 8%. However, bitcoin advocates say it is going to reach new highs and if this projection of true, investors stand to make top returns. A good way of learning more amount the status of bitcoin is by joining online communities, with Reddit one of the main hubs for digital currency users.
Another big risk of bitcoin is the increasing number of crackdowns that have started emerging across the globe, from the UK to China. It has also faced negative publicity around its environmental impact and the United Nations says ‘the amount of energy needed to power the bitcoin network is staggering’.
Bitcoins don’t exist as physical objects, but new coins are “mined”, or brought into circulation, through a process that involves using powerful computers to solve complex mathematical problems. This process requires so much energy that the Bitcoin network is estimated to consume more energy than several countries, including Kazakhstan and the Netherlands.
Tim Berners-Lee, credited as the inventor of the World Wide Web, has gone so far as to describe “bitcoin mining” as “one of the most fundamentally pointless ways of using energy.”
Where are cryptocurrencies accepted?
A growing number of companies across a range of industries – from big tech to airlines – are embracing cryptocurrencies, allowing customers to use them as an official form of payment for goods and services.
Some of the most crypto-friendly countries include Portugal, Switzerland, Germany, Singapore, Malta, Cyprus, and Japan.
In the US, the nation’s second-largest mortgage lender United Wholesale Mortgage recently announced that it aims to give borrowers the option to pay their mortgages in Bitcoin by the end of the year.
Continuing on the property theme Bequia, the second-largest island in the Grenadines plans to have the world’s first fully Bitcoin-enabled community. One development on the island, featuring 39 luxury villas, will be the first of its kind in the Caribbean to accept bitcoin as payment for the properties. Bitcoin will also be accepted as payment at stores and outlets within the development.
In Central America, the first cryptocurrency ATM in Honduras opened in August after neighboring El Salvador became the first country to establish bitcoin as legal tender. While some countries are tapping into the crypto trend, others are not so keen on a decentralized system. Some of the countries where there have been crackdowns on the use of cryptocurrencies with bans and restrictions in place include China, Bolivia, Colombia, Egypt, Iran, Russia, and Turkey.
What to watch out for
When paying with cryptocurrency, it’s important to realize that it’s different from paying with credit cards or with other traditional methods. The US Federal Trade Commission highlights three key pointers: Cryptocurrency payments do not come with legal protections, they are not typically reversible and some information about your transactions will likely be public.
It also warns about financial scams via email, social media, and imposter websites, as if you pay via cryptocurrency the amount cannot be reclaimed.
So the biggest takeaway?
Do your research before investing in cryptocurrency and don’t get caught up in the hype.