CHEAT’S GUIDE TO CRYPTOCURRENCIES
Mining, blocks and MARKET caps… What DOES it all MEAN – and should you really INVEST?
what does it all mean – and should you really invest?
I f the word ‘cryptocurrency’ sends your brain into a hectic spin, you’re not alone. There’s a certain skill in being able to accurately and simply explain cryptocurrencies, but, for many people, it involves plenty of research. Recently, it feels like everyone’s posting things about their ‘portfolio’ on Facebook, with the world divided into bitcoin converts and sceptics.
Don’t want to get lost in dinner party conversation? Here’s the low-down on invisible currency, considered by some to be the money of the future.
Cryptocurrency is digital money, created as a way to replace money transactions with a digital-only exchange. The word comes from ‘cryptography’ – a technique that converts information into a code which helps track purchases and transfers. Most cryptocurrencies are variations on bitcoin – the first cryptocurrency. Similar to traditional currencies, cryptocurrencies are counted in units. You can say, ‘I own 15.5 bitcoin,’ the same way you’d say ‘I’ve got $15.50.’ But first, if you really want to understand bitcoin, you should really know a bit more about the elusive person who created it…
The pseudonym Satoshi Nakamoto (a common Japanese name, like John Smith) was given to the creator of Bitcoin, and mystery surrounds his identity. In 2006, he produced a white paper (a report to the government) explaining the concept of a decentralised currency he named bitcoin, which he described at the time as a ‘peer-to-peer electronic cash system’.
Put at its simplest, bitcoin is a digital currency that’s secured in an online ‘digital wallet’. A network of computers across the world produce or ‘mine’ a virtual currency at a certain rate. It’s not controlled by the government or central banks and is completely unregulated.
Satoshi – who bowed out of the project by 2010 – set a limit on the number of bitcoins that are able to exist: 21 million. Now, you can either buy bitcoin (via an exchange agent) or ‘mine’ them. Bitcoin miners are rewarded with extra currency if they unlock ‘blocks’ in the Bitcoin network and verify transactions. Anyone can do this, with the correct software.
THE MARKET LEADERS
There are thousands of cryptocurrencies. Besides bitcoin, the most attractive is Ethereum, which is an open software platform based on blockchain technology (a decentralised, digitised ledger of all cryptocurrency transactions that keeps growing as completed ‘blocks’ are added).
According to data scientist Jonathan Butow, director of Data Wolf, the website CoinMarketCap is a great place to source current cryptocurrency prices. “You’ll be able to see a list of all 1319 of them and their rank by market cap, which is the total amount of USD invested,” he says.
Bitcoins are stored in digital wallets, each of which have a private key known by the owner. “I’d recommend hardware wallets,” says Jonathan. “Similar to a physical wallet, like a USB stick, it’s a lot more secure.”
HOW TO SPEND IT
Today, there are various online stores where you can use bitcoin – or fractions of bitcoin – to pay for real things. There are even bitcoin ATMs across the world. Be wary, though, as there are risks that come with any unregulated market. “If you can imagine, it’s the miners – the network – that’s managing the computers that actually have all the power,” says Jonathan. “If they decide to switch off all of their computers one day, the block chain would no longer be functioning because you wouldn’t be able to store all those transactions. And to make matters worse, there’s no official body you can chase up or way to identify who these people are.”
WHAT THE BANKS THINK
The world’s central banks have two major issues they’ve highlighted: the question of whether anything should be done about the growth of private cryptocurrencies, and whether official versions should be issued. In the US, the Federal Reserve is investigating cryptocurrencies and seems a long way from showing public enthusiasm. It appears the Reserve Bank of Australia has no immediate plans to issue its own digital currency, and the Bank of England has issued a caution. Meanwhile, the Reserve Bank of India has banned the use of cryptocurrencies as officials fear money laundering and the funding of terrorist groups.
WHAT’S IN THE FUTURE?
“The future is very bright but will not come without its fair share of legal and regulatory hurdles,” says Jonathan. “Cryptocurrency is still in its infancy and we are only beginning to taste its mainstream adoption. The battle lines are drawn between cryptocurrencies and [paper] money.”
Tellingly, even Bitcoin.com’s CTO Emil Oldenburg has called it “the riskiest investment you can make” because there are so many question marks around its use in the future. Instead, he recommends trying bitcoin cash – an offshoot of the cryptocurrency that claims to have lower transaction fees.