What is Cryptocurrency and how does it affect you?
Cryptocurrencies are the rage of the day. Due to the relative newness of the technology (called Blockchain) behind the Cryptocurrencies and a high number of scams in the marketplace, most people shy away from the opportunities that the digital currency provides. In this article, we will try to demystify and help you understand what Cryptocurrencies are and how you can use them without being a genius.
After the 2008 Occupy Wall Street demonstrations, the need for a decentralized currency system was felt all across the globe. The idea was to cut the middleman between the buyer and seller, to take away control from the banks and to keep the transactions transparent.
Cryptocurrencies are created by cryptography. Instead of securing the currency by security threads and watermarks like the ones seen on flat currency like the dollar bills, Cryptocurrencies are created and protected by complex math.
Bitcoin (BTC) is one of the most famous Cryptocurrencies in circulation and also has the highest market cap and reach. It is an application that runs on the new Blockchain technology and is mostly used as a peer-to-peer electronic cash system i.e. To send and receive money between two parties in the form of Bitcoins.
Ethereum is an open software platform that can be used to create and deploy decentralized applications and runs on the Blockchain technology. Value token of the Ethereum Blockchain is called Ether, and it is traded on cryptocurrency exchanges just like Bitcoins.
Let us now understand how to use Cryptocurrencies. For the sake of simplicity, Bitcoin will be as an example of cryptocurrency throughout the article.
Bitcoins can be stored in many forms. It can be secured in a digital wallet on a smartphone or a PC, on paper and even on specialized hardware wallets. Most people keep small change in their mobile or PC wallets and keep the larger stash offline just like how people keep petty cash on hand and the rest of the money in the bank or at home.
There are many ways to get Bitcoins.
- Sell goods and services for Bitcoins
- Buy Bitcoins at a reputable Bitcoin Exchange.
- Exchange Bitcoins with people around, or
- Earn Bitcoin by competitive mining.
A word of caution: There are a lot of Bitcoin exchange scams which dupe people. Research reputable Bitcoin exchanges before making a purchase. In US and Canada, CoinSmart and CoinSquare are two trustworthy Bitcoin exchanges. In the UK, BitBargain UK and Bittylicious are two reliable exchanges.
To exchange money for Bitcoins locally, check out LocalBitcoins.
Transacting with Bitcoins
Sending and receiving Bitcoins is easy. There is no need for a merchant account or card processing machines to take payments. To receive a payment, the Seller needs to share his wallet address with the customer. The customer will enter the seller’s wallet address, the payment amount, fee for the payment and press send. Most wallets support QR code reading to make it easy to enter the recipient’s address.
Once a payment is sent, the transaction broadcasts to the entire network, and it is confirmed by a process called mining. This may take anywhere from 10 minutes to a few hours.
The following are the meanings of the confirmation numbers. Depending on the value of the transaction, different levels of confirmations are used.
0 – Safe only with trusted senders. These payments can be reversed
1 – Reliable (Suggested for <$1000)
3 – Highly reliable (Suggested for <$10000)
6 – Minimum score for high-value BTC transactions (For transactions > $10000)
How is a Bitcoin created?
Bitcoin and other Cryptocurrencies are created by mining. Miners use specialized hardware to process the transactions and are rewarded in Bitcoin for the tasks performed. Apart from that, the fee paid when transacting in Bitcoin will also be paid to the miner. Depending on the value of the fee paid for a transaction, a miner may process the transaction slower or faster than the other transitions in the queue. Example: a transaction with a fee of BTC 0.005 would get processed faster than another transaction with BTC 0.0005.
Cryptocurrencies are typically created with a specific market cap. This helps avoid inflation and deflation that are common in printed currencies.
Bitcoin system was created with a cap of 21 million units. Bitcoin price keeps fluctuating on a daily basis in the exchanges. As of today, Bitcoin’s market cap is $ 0.121Trillion and Bitcoin’s price is 1 BTC= $7092. Bitcoin value has appreciated so much over the last few years that many people are using Bitcoins as an investment instrument.
Ethereum’s current market cap is $30.52Billion and the current Ethereum price is $320.49. Bitcoins have gained wider acceptance as a currency for transactions. Ethereum’s currency is called Ether. It can be used for payments and also for other functions like smart contracts, etc.
Are Bitcoins and other Cryptocurrencies legal?
Bitcoins are not governed by a central regulating authority like the Federal Reserve and do not have any geographical or political boundaries. In some countries, Bitcoins are easy to trade while in a few others, they are prohibited. In the US, people can buy jewelry or a slice of pizza using Bitcoins. But in countries like Bangladesh, Ecuador, and Nepal they are illegal. As time passes, Bitcoins are going mainstream, with more and more businesses accepting them as tradable currency.
Fears around Bitcoin and Ethereum
Early in its journey, Bitcoin suffered a major trust problem when Mt.Gox, one of the biggest Bitcoin Exchanges reported that around 800,000 Bitcoins held in its vault were stolen. The Exchange accounted for over 70% of the total Bitcoin transaction at the time of the robbery in 2014 and is estimated to have lost over $473 million worth of Bitcoins. Bitcoin value went down by 36% in two months after the Mt. Gox was closed.
The vast fluctuation of Bitcoin price has opened opportunities for investment. At the same time, the speed at which the Bitcoin price is rising also brings in a fear of a bubble burst.
Apart from this one major loss, Bitcoin world is filled with many scams that have siphoned off millions from trusting customers. Due to its software complexity and the volatility of its currency, many people avoid using the cryptocurrencies. As time passes and the technology matures, it is getting easier to handle and transact with this new form of payment.
One major problem with the existing Bitcoin transaction is the amount of time it takes to verify a single transaction. Once the Bitcoins are sent to a seller, the transaction needs to be approved by the network. This can take anywhere from ten minutes to a day to be confirmed.
What does the future hold for Bitcoins and Ethereum?
Bitcoin has had a slow pace of acceptance as the first mover in the market. But as Bitcoin’s value appreciated over the last few years, other cryptocurrencies are finding it easy to enter the market. Some of the world’s smartest technologists have hailed Cryptocurrencies as the money of the future. Cryptocurrencies present a new opportunity for safer and transparent transaction. But the world of digital money also has its shades of black in the form of thieves, scammers and swindlers. So it is important to back up your wallets and keep the majority of your currency ‘offline’.
Bitcoins, Ethereum and other digital currencies will probably go through a consolidation phase over the next few years and might even become the norm by the next decade.