In the early days of its launch in 2009, several thousand bitcoins were used to buy a pizza. Since then, the cryptocurrency’s meteoric rise to US$65,000 in April 2021, after its heart-stopping drop in mid-2018 by about 70 percent to around US$6,000, boggles the mind of many people – cyptocurrency investors, traders or just the plain curious who missed the boat.
How it all began
Bear in mind that dissatisfaction with the current financial system gave rise to the development of the digital currency. The development of this cryptocurrency is based on bitcoin dice blockchain technology by Satoshi Nakamoto, a pseudonym apparently used by a developer or group of developers.
Notwithstanding the many opinions predicting the death of cryptocurrency, bitcoin’s performance has inspired many other digital currencies, especially in recent years. The success with crowdfunding brought on by the blockchain fever also attracted those out to scam the unsuspecting public and this has come to the attention of regulators.
Bitcoin has inspired the launching of many other digital currencies, There are currently more than 1,000 versions of digital coins or tokens. Not all of them are the same and their values vary greatly, as do their liquidity.
Coins, altcoins and tokens
It would suffice at this point to say there are fine distinctions between coins, altcoins and tokens. Altcoins or alternative coins generally describes other than the pioneering bitcoin, although altcoins like ethereum, litecoin, ripple, dogecoin and dash are regarded as in the ‘main’ category of coins, meaning they are traded in more cryptocurrency exchanges.
Coins serve as a currency or store of value whereas tokens offer asset or utility uses, an example being a blockchain service for supply chain management to validate and track wine products from winery to the consumer.
A point to note is that tokens or coins with low value offer upside opportunities but do not expect similar meteoric increases like bitcoin. Put simply, the lesser known tokens may be easy to buy but may be difficult to sell.
Before getting into a cryptocurrency, start by studying the value proposition and technological considerations viz-a-viz the commercial strategies outlined in the white paper accompanying each initial coin offering or ICO.
For those familiar with stocks and shares, it is not unlike initial public offering or IPO. However, IPOs are issued by companies with tangible assets and a business track record. It is all done within a regulated environment. On the other hand, an ICO is based purely on an idea proposed in a white paper by a business – yet to be in operation and without assets – that is looking for funds to start up.
Unregulated, so buyers beware
‘One cannot regulated what is unknown’ probably sums up the situation with digital currency. Regulators and regulations are still trying to catch up with cryptocurrencies which are continuously evolving. The golden rule in the crypto space is ‘caveat emptor’, let the buyer beware.
Some countries are keeping an open mind adopting a hands-off policy for cryptocurrencies and blockchain applications, while keeping an eye on outright scams. Yet there are regulators in other countries more concerned with the cons than pros of digital money. Regulators generally realise the need to strike a balance and some are looking at existing laws on securities to try to have a handle on the many flavours of cryptocurrencies globally.
Digital wallets: The first step
A wallet is essential to get started in cryptocurrency. Think e-banking but minus the protection of the law in the case of virtual currency, so security is the first and last thought in the crypto space.
Wallets are of the digital type. There are two types of wallets.
- Hot wallets that are linked to the Internet which put users at risk of being hacked
- Cold wallets that are not connected to the Internet and are deemed safer.
Apart from the two main types of wallets, it should be noted that there are wallets just for one cryptocurrency and others for multi-cryptocurrency. There is also an option to have a multi-signature wallet, somewhat similar to having joint account with a bank.
The choice of wallet depends on the user’s preference whether the interest purely in bitcoin or ethereum, as each coin has its own wallet, or you can use a third-party wallet that include security features.
The cryptocurrency wallet has a public and private key with personal transaction records. The public key includes reference to the cryptocurrency account or address, not unlike the name required for one to receive a cheque payment.
The public key is available for all to see but transactions are confirmed only upon verification and validation based on the consensus mechanism relevant to each cryptocurrency.
The private key can be considered to be the PIN that is commonly used in e-financial transactions. It follows that the user should never divulge the private key to anyone and make back-ups of this data which should be stored offline.
It makes sense to have minimal cryptocurrency in a hot wallet while the bigger amount should be in a cold wallet. Losing the private key is as good as losing your cryptocurrency! The usual precautions about online financial dealings apply, from having strong passwords to being alert to malware and phishing.