Cryptocurrency

What is a cryptocurrency ?

Cryptocurrencies are decentralised digital or virtual currencies that take the form of tokens or coins that have a given value – much like your $50 note is worth $50. As with any currency, cryptocurrency can be exchanged for goods and services or traded as an investment, however many retailers are yet to adopt crypto as legitimate form of currency.

A coin must be unique and unreplicable to have any value, which is determined by supply and demand.

Unlike cash currencies, digital currencies are electronic only.

The word cryptocurrency can be broken into two words:

• Crypto – refers to cryptography that allows digital currencies to be created and processed and transacted across decentralised systems. Cryptography is a form of encryption that uses complex maths equations.
• Currency – refers to the system of money.

There are currently over 40,000 cryptocurrencies now in circulation.

The first cryptocurrency was Bitcoin. Anything after Bitcoin is known as an Altcoin. Some of the more popular altcoins you may have heard of are Ethereum, Dogecoin, Cardano and Polkadot.

Crypto can be mined or purchased.

• Mining cryptocurrency requires you to use your computer to solve cryptographic problems. This creates new blocks in the blockchain which in turn earns you a small amount of crypto.
• Buying crypto requires you to register with a dedicated exchange, much like stock investing. You can pour as much money as you like into the currency of your choice. However, as with any investment you should always take your risk profile into account and never spend more than you can afford to lose.

Crypto is not possible without the blockchain.

What is a blockchain?

Blockchain is the architecture that underpins crypto. It is essentially a decentralised ledger that records all crypto transactions from the day they were made.

Put simply, blockchain allows you to store and instantly transfer information (or data) and currency in a secure manner.

That data is stored in blocks of data and linked to a permanent chain.

Each time data is added to the chain, it becomes more difficult to modify and therefore more secure.

When a transaction is made, the blockchain generates a unique number code known as a hash that is authenticated by a large computer network. Once a transaction is authenticated, it is recorded on the ledger.

It is best to make a trade or keep your crypto safe, using a dedicated exchange.

What is a cryptocurrency exchange?

A crypto exchange is an online platform that allows you to exchange digital assets.

It is the intermediary between buyers and sellers and allows you to:

• trade cryptocurrency for cryptocurrency
• buy and sell of coins
• exchange FIAT into crypto

There are two types of exchanges: centralised and decentralised.

1. Centralised

A centralised exchange is a high liquidity exchange that takes profits from platform fee structures. This is not an anonymous entity and does control funds. Transactions are made by a central authority. Unfortunately, security can be an issue.

2. Decentralised

These illiquid exchanges do not rely on third party control – user’s control their currencies and are therefore less susceptible to fraud or security breaches. Trades take place user to user.

 

What exchanges are there?

It is estimated there are over 500 crypto exchanges. As there is no regulation surrounding them, anyone could feasibly set one up although investors may not use it. ON top of these there are almost 19,000 markets where you can trade crypto.

To be safe, you need to find the most reputable exchanges and find one that suits your needs which may include exchanges for:

• Beginners
• Low fees
• Cheapest
• Country of origin
• Best Altcoins
• Trading
• Range of crypto to buy and sell
• Customer support

 

Exchanges to look out for include:

• CoinSpot
• Swyftx
• Digital Surge
• eToro
• Coinbase
• Coinjar
• Binance
• Cointree
• Gemini
• Paxful
• Paybis
• Gate.io
• Hotbit

 

Some exchanges will hold your currency for you, however it is best to store your crypto in a wallet.

The crypto wallet

While it may be convenient to have a digital wallet to store tickets and credit cards, if you are using crypto, a crypto wallet essential to store your digital currency. How does a crypto wallet work?

The crypto wallet holds a collection of keypairs.

That is:

• A public key and
• A private key

For those unfamiliar with cryptography, a keypair consists of a ‘public key’ and a ‘private key’, which can be used to encrypt or sign bits of data.

1. The public key is known to everyone and can be used to encrypt messages in such a way that the holder of the private key is able to decrypt them. It is a series of numbers similar to bank account numbers.
2. The private key is used to sign messages in such a way that anyone holding the public key may verify that the message truly came from you. Essentially, you control the crypto stored in the wallet – it is like your PIN number.

A crypto wallet keeps a record of all your transactions, that way each transaction is tracked and you can keep an eye on your crypto balance.

Most money in the world today exists merely as transaction histories and balances – cryptocurrency is no exception.

Types of wallets

You can store you crypto in a digital wallet, a specialised hardware wallet or leave it in a reputable exchange. There are also desktop wallets, mobile wallets and web wallets.

 

1. Desktop wallets

Desktop wallets are installed on your computer and are the most common of the wallets. They give you complete control over your wallet. You are responsible for protecting your money and doing backups. Some desktop wallets are tailored for security, while others focus on anonymity. Electrum, Exodus and Copay are good examples of desktop wallets.

2. Mobile Wallets

Running as an application on your smartphone, the mobile wallet can store the private keys for your crypto addresses and enable you to pay for things directly from your phone. Don’t lose your smartphone – anyone who can access your phone, can access your coins. Jaxx, Coinomi and Edge are good examples of desktop wallets.

3. Web wallets

Web-based wallets store your private keys online, on a computer controlled by someone else – exchanges or third parties. There are several online services available which may link to mobile and desktop wallets, replicating the addresses between the different devices you own. One advantage is you can access the web wallet from anywhere, regardless of what device you are using. One major disadvantage is that if they are not implemented correctly, they can put your private keys under the control of the organisation running the website. They are also targets for hackers. You need to make a decision as to whether you want full control of your private keys, or whether you are comfortable with them being owned by the wallet provider. Coinbase, blockchain.info and MyEtherWallet are good examples of desktop wallets.

4. Hardware wallets

Hardware wallets are dedicated devices that can hold private keys electronically and facilitate payments. They can be a USB stick or any other piece of specially designed hardware. You can plug in your hardware anywhere and they are considered the most secure … and the most expensive of wallet options. Your hardware wallet is PIN protected, offering another layer of security. Ledger Nano X, Ledger Nano S, TREZOR and KeepKey are good examples of desktop wallets.

5. Paper wallets

Another highly secure wallet, but not for beginners. They are used by advanced crypto players for higher levels of security. Paper wallets are printouts of your private and public keys that act as your wallet. Paper wallets can be confusing. Bitaddress.org and WalletGenerator.net are good examples of desktop wallets. NB: You can store your cryptocurrency in the wallet attached to your exchange. This is a simple and convenient solution that allows you to access your crypto quickly. You don’t control the private key and they can be hacked.

 

What is the best crypto wallet?

That depends on you. There’s no one size fits all wallet here.

So when determining the type of wallet you want, you should consider the following:

• Bluetooth connectivity
• More memory
• Excellent virus and malware tools for your security
• Touchscreen features
• Which cryptocurrencies its supports
• Cost – hardware wallets will cost you money and some wallets charge fees
• Currency exchange – can you exchange different currencies?

 

Pros

• Blockchain is an open ledger and every transaction is transparent
• 24 hour access
• Complete anonymity to trade
• Low fees
• Decentralised
• Peer to peer transaction

 

Cons

• Hard to understand
• Limited use for general retail
• Subject to scams and can be hacked
• If you transfer your crypto to the wrong address, you can’t get it back
• Value is subject to market fluctuations, much like share trading
• Regulation issues