What is Cryptocurrency, How Does it Work and Why Do We Use It?

You might have heard of Bitcoin. It is a digital currency that was created in 2009 by an anonymous person using the alias Satoshi Nakamoto. So what exactly is a Bitcoin?

It allows you to make transactions without a middleman – meaning you have full control over your transactions. Along with Bitcoin, however, there are many other cryptocurrencies available. 

The Basics of Cryptocurrency

For years, people have traded assets for goods.  Today, those assets are mostly currencies – normally printed bills or coins. The currencies circulating today are all administered by centralized authorities such as governments or central banks.

The launch of Bitcoin, however, partially changed how the world viewed money. For example;

What if currency were monitored and regulated by math rather than by governments?

There are several types of cryptocurrencies with many functions. Besides these features, these cryptocurrencies are supported by a decentralized network, called the blockchain.

Blockchain technology assures that all cryptocurrencies are kept in track, regardless if they are being held in a digital wallet or used for trading. Of course, running any type of system like this requires an infrastructure that makes sure that no one is trying to game the system. 

For example, Bitcoin was the first cryptocurrency to market, creating a system where the peer-to-peer network, so the sender and the receiver of tokens/coins, must create a digital signature to sign off on these payments.

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What Are the Most Popular Cryptocurrencies?

Cryptocurrencies have changed the world’s expectations surrounding money. They have also evolved incrementally since the first Bitcoin block was mined in early 2009.

Since then, many other cryptocurrencies have started to gain popularity and recognition in the world. Despite the thousand different cryptocurrencies available, Bitcoin still remains the most popular.

So what is the reasoning behind Bitcoin’s immense popularity compared to other cryptocurrencies in the world? But first, let’s find out what cryptocurrencies are.

What are Cryptocurrencies?

Before we delve into the most popular cryptocurrencies in the market, let’s step back and briefly define these terms like cryptocurrency.

A cryptocurrency is usually something seen as intangible, also known as digital ‘coins’. While some cryptocurrencies have ventured into the physical realm with credit cards or other forms of payments, the large majority still remains digitized.

Let’s break down the word ‘cryptocurrencies’ to help you understand this term further. It certainly does sound futuristic to most, and many fail to grasp the significance of this term.

The “crypto” refers to the general encryption algorithm used in the generation of the currencies. Cryptocurrencies are almost always designed as an independent entity from the control of the government, which makes it far more credible.

So now since we’ve explained the basics of cryptocurrencies, let’s delve into a list of the most popular cryptocurrencies in the market today.

1. Bitcoin (BTC)

It has been around a decade since Bitcoin gained popularity on the Internet.

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Bank vs Crypto – Making a Choice

Over a decade ago, Bitcoin gained popularity worldwide. I think it’s important to note that today,  Bitcoin has achieved a position as the most well known cryptocurrency in the market. 

Over the years, blockchain has become known as the technology that brought Bitcoin to life. 

Advocates of cryptocurrencies often claim the main advantages over traditional banking systems: they are fast, and they are cheap – this mirrors the capitalistic society where people are drawn to efficient and reliable services at a low-cost.

When international businesses are faced with a choice between waiting 24 hours or more for a wire transfer or paying huge fees for express transactions, Bitcoin sure does sound like a good alternative.

So let’s see how far banks and crypto differ. 

Traditional Money vs CryptoCurrency 

So let’s start by distinguishing traditional money and crypto. To put it into perspective, the main difference between traditional money and cryptocurrency is that crypto is a decentralized and often global digital currency.

This also means that it is independent from the control of any government. As a result, many people prefer using cryptocurrency as they gain more control over their transactions. 

Advantages of Decentralized Financial System 

The main advantage of cryptocurrency is the ability to function independently. Most of the cryptos are based on P2P settlement systems and are fully operational at any given moment in time.

Due to its independent system, cryptocurrencies offer businesses and individuals many advantages wherein government entities often control banks and financial institutions.  

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Using Cryptocurrency

Being a digital currency, cryptocurrency is technical in nature and needs to have strong security characteristics. They can be interchanged between two parties directly using a set of private and public keys, similar to the way encryption works.

The interesting thing about these exchanges is that since they are not under the purview of traditional financial institutions, the fees involved to facilitate the exchange are usually quite minimal comparatively.

1. Sign up for a Digital Cryptocurrency Wallet

To use a cryptocurrency, you need to own some first but even before that you need a means to store them. Sign up for a digital wallet, then look for an exchange willing to accept the purchase of your desired cryptocurrency.

Some digital wallets include:

2. Buy Your Cryptocurrency

Once you’ve gotten your wallet, you need to buy some cryptocurrency. Wallets like Coinbase allow you to purchase them via their service as well, so that’s convenient for new users. The digital wallet acts like any other virtual payment method (think Google Pay or Apple Pay), except that it facilitates payments in cryptocurrency.

3. Find a Vendor Who Accepts Cryptocurrency Payments

Vendors willing to accept cryptocurrencies will list them under payment methods

When you’ve gotten your wallet and cryptocurrency,

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Staying Safe With Cryptocurrency: Choice of Apps and VPNs

As with all things involving the Internet and money, cryptocurrency has also come under attack by hackers from time to time. Study says cyber criminals netted $4.3B from crypto-related crime in 2019. While the cryptocurrencies themselves are strong, hackers often target the institutions holding large amounts of currency.

“The results show that privacy coins are barely used in dark markets and at dark vendor sites (e.g. only 4% of instances involve Monero (XMR). Instead, Bitcoin remains the coin of the realm in this shady world, with BTC used in 76% of dark market cases and ETC used in only 7% of instances.”.

Cryptocurrency Owners: How to Protect Yourself?

While there may not be much you can do about the security of cryptocurrency exchanges or platforms, you can still do your bit. For example, securing your own devices and communications between your devices and service providers can go a long way to keeping you safe.

Some of the things you can do include:

1. Run a VPN

Virtual Private Networks (VPNs) help keep you safe in two ways. They protect your identity by routing communications through secure servers. At the same time, all data is encrypted for additional protection. Always opt for a reputable VPN service provider like ExpressVPN to avoid less savoury service providers from selling your data.

2. Keep applications up to date

Always make sure that the software you use are the latest versions.

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Cryptocurrency for Investors: Is This Right for Your Portfolio?

If you’re interested in cryptocurrency past its value in utility, then you might be considering investing in some of it. Interestingly enough, investing in cryptocurrency isn’t as different as investing in any other stock for the most part.

In a one-year time span from December 2016 to December 2017, Bitcoin went from $750 to a staggering $10,000! This means that anybody who invested $10,000 in December 2016, would get back a mind-numbing $133,333 in exactly 365 days. In fact, the total market cap of cryptocurrencies went all the way up to an astounding $500 billion by the end of 2017 (source).

For example, if you’re looking to participate in an Initial Coin Offering (ICO), it’s up to you to do your own due diligence. Much like regular companies going public, companies offering ICOs will generally release prospectus to attract investors.

A good sign will be the reputation of the company doing the ICO, along with whom other notable investors are. Since these are all likely to be digital offerings you also need to be aware of whether you’re buying a slice of the company or merely some value equivalent in the cryptocurrency.

ICO vs Dot Com Burst

Investors who were around for the dot com burst also have to be aware that there is a distinction between a currency that is new and that is still under development. Developmental currencies are much higher in risk profile and the company carrying out the ICO is likely looking for funds to further develop it.

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Are Cryptocurrencies Legal?

As with many things that governments cannot control, there has been much debate over the legality of cryptocurrency in various countries around the world. Both governments and their central banks have raised various points of concern regarding cryptocurrency, but in many areas the debate is still ongoing.

In this research done by Reuters, the team has looked at governmental attitudes toward cryptocurrencies, not limited to Bitcoin alone. The picture produced across the world is patchy. Some countries have become global advocates, while others have actively banned cryptocurrencies completely, with various shades in between.

Among the concerns that they have regarding cryptocurrencies are:

  • Lack of regulation
  • Lack of Control
  • Potential to diminish effectiveness of fiscal policies
  • Crime (e.g. money laundering)

However, since each country usually has their own policies and whatnot, the status of cryptocurrency ranges far and wide. Reactions to have have fallen into a few broad categories such as;

Complete bans

Some countries have completely banned the use of cryptocurrency. For example, Algeria prohibits the purchase, sale, use, and holding of cryptocurrency. Egypt meanwhile has classified all commercial transactions in bitcoin as ‘haram’ (meaning unclean, or forbidden by Islamic law).

Partial bans

In countries such as Bangladesh and Iran, there are no regulations banning the possession, trade,or use of cryptocurrency. However, financial institutions in the county are not allowed to facilitate any such transactions.

The terms of partial bans vary widely,

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Introduction to Cryptocurrency

Cryptocurrency is a form of virtual currency. These Internet-based forms of currency have real-world value equivalents but do not belong to any sovereign nations. Like fiat currencies, their value depends on many factors including demand.

The biggest value seen by users of cryptocurrencies is that they are not (in many cases) regulated by any one country. This gives their users a high degree of anonymity and immunity from general acts of currency manipulation that some fiat currencies are open to.

The Cryptocurrency Ecosystem

Much like how real-word currency is circulated and utilized, cryptocurrency is similar in many ways. For example, you need to either buy or earn cryptocurrency then store it in a digital wallet.

To use cryptocurrency you will need to find a vendor who is willing to accept the currency you have. To get an idea of this scenario, imagine you currently have US dollars. While overseas, some vendors may accept that, but others will want you to convert to a currency they accept.

As a broad overview, the ecosystem consists of:

Miners – These are the ones who invest in the hardware and tools needed to produce cryptocurrency. The process is time consuming and drains much resources.

Buyers/Sellers – These are the largest groups of cryptocurrency users. They use real money to buy or sell cryptocurrency, giving them real value.

Exchanges – Similar to banks, these digital entities allow users to trade cryptocurrencies. Here, you can either exchange one cryptocurrency for another,

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