Cryptocurrency: Beginners’ guide
Quick background overview:
Prior to 2009, the world was without a perfect system for electronic transactions. History made us realized how difficult it was for entrepreneurs and business people to either send or receive payment for products and services been delivered at the global level. Few options existed, still available though for cross border payment. One could use western union, money gram, PayPal etc.
However, those traditional centralized government controlled systems were known for high fees associated to transaction, rigorous verification processes to mention a few. The aforementioned factors necessitated the need for better if not perfect system for cross border payment and electronic transactions across the globe. Then came the introduction of the premier cryptocurrency Bitcoin by Satoshi Nakamoto.
What is cryptocurrency?
Simply put, cryptocurrency is digital money that could be used for electronic transaction in a decentralized and peer-to-peer manner without third party interference. It’s the most secure, reliable, fast and affordable system for cross border payment.
Characteristics of cryptocurrency:
- Its digital money
- Its inflation secure
- The value is set by demand and supply (utility)
- It enables a brand new financial industry
- It enables faster, affordable, reliable and more secure transactions
Classes of cryptocurrency:
According to coinmarketcap (CMC), there are over 3000 cryptocurrencies on the market by now. Beginners easily get confused by such terms as coins, token, stablecoin or CBDC.
Let’s quickly take a look at basic categories like Bitcoin, altcoin or token.
Bitcoin- The king of all cryptocurrencies.
Bitcoin (BTC) basically is the first cryptocurrency. The most popular and valuable coin in the crypto space. In 2008 the Bitcoin whitepaper was published by Satoshi Nakamoto. According to the whitepaper, Bitcoin was described as a peer-to-peer electronic cash system that enables the participants to transfer funds without third party involvement such as financial institution.
During the crypto rally in 2017, it apparently appeared that scalability is the major challenge in Bitcoin ecosystem. Despite the drawback, the all-time high (ATH) of 2017 has shown that Bitcoin can do wonders in near future. The possibilities for investors are endless. The total supply of Bitcoin is 21 million. The network uses a consensus mechanism known as proof-of-work (PoW) miners are rewarded when they solve some mathematical problems on the network.
Altcoins:
This refers to those alternative coins after Bitcoin.
Ether (ETH) is the commonest altcoin and the native currency of the Ethereum blockchain. Ethereum is well known for its capability of been a fully programmable blockchain. Developers can easily program distributed applications (dApps) or smart contracts on the platform. The network uses proof-of-stake consensus algorithm.
The next altcoin we want to look at is Litecoin. This coin functions as a peer-to-peer currency for an international payment network. According to Charlie Lee, the inventor of Litecoin, the parallels to Bitcoin are intentional. Lee just wanted to establish Litecoin as a complementary currency to BTC. Coinmarketcap currently carries over 879 altcoins.
Tokens:
The third most common type of cryptocurrency is the token. Many newbie usually use the terms token and coin interchangeably. However, a clear disparity still exists. A token cannot function independently, rather its based on already existing blockchain. Token does not have its own distributed ledger. According to coinmarketcap, there are over 1,613 tokens currently listed. Chainlink (LINK), Huobi Token (TK), USD Coin (USDC), Basic Attention Token (BAT) are few of the tokens based on Ethereum platform (ERC20 standard).
NEO- Another altcoin usually refer to as the Chinese version of Ethereum and offers functionality for dApps and smart contracts. Some tokens on NEO are Gas (GAS), Nash Exchange (NEX) etc.
Tether (USDT) – it’s a stablecoin.
Stablecoin is a coin pegged at 1 USD (1$) value no matter the volatility in the market. As a stablecoin, it is suitable for the secure transfer of various assets. USDT is based on Omni blockchain.
Generally speaking, there are more tokens than coins. Simply because the technical requirement for a token is less when compared to coin.
Other categories of cryptocurrency exist. Let’s look at them briefly.
Stablecoin:
This category of cryptocurrency cannot be affected by the volatility in the market. As its stable, the value is usually equal to 1 USD (1$). A good example of stablecoin is Tether (USDT).
Privacy coins:
People that uses privacy coins are anonymous, as their information is never known to the public. Private and anonymous transactions are performed using blockchain platform. Zcash and Dash are few of the most common privacy coins available.
Exchange tokens:
When an exchange or trading platform create a token basically for users, it is called “exchange token” the idea could be to enable access of some services or reduce transaction fee. Examples abound; binance coin (BNB), kucoin share etc.
The Central bank Digital Currency (CBDC)
So many institutions are researching CBDC, notable amongst them is the peoples bank of China. Earlier this year 2020, the financial institution made a statement about its plans to publish digital Yuan. We could see that happen soon. CBDC will likely receive relevance as soon as the first one is released.
How to trade cryptocurrency:
To be able to buy or sell crypto one needs a reputable exchange. There are other ways, such as Bitcoin ATMs, P2P trading or over –the-counter (OTC). Our focus is on how to trade through exchange.
Let us look at how to buy crypto using an exchange. First and foremost, find an exchange to buy cryptocurrency. Some exchange support credit card or even fiat. Register your account and submit required documents for KYC verification. Some exchange could allow trading without KYC/AML but, with limitations on the account. After registration, the next step is to deposit funds into the account provided by the exchange of course by those that accept fiat. This does not take much time to complete. Upon confirmation of deposited fund, the trader will then select the needed cryptocurrency and place buy order, once the order is successful, the asset could be ready to be traded or storage. I highly recommend binance for trading cryptocurrency.
Cryptocurrency wallets and storage:
Different wallets are available for traders and investors alike. A wallet is needed for storage purposes. The type of asset should be considered before choosing a wallet because not all wallets are compatible and supported for storing cryptocurrencies. Wallet therefore, is a place where digital assets are stored for future use. Three distinct categories of wallets exist, they are: software wallet which can include desktop, mobile and online. Hardware and paper wallets. Let us further discuss them bellow.
Software wallets:
Desktop: this type of wallets are downloaded and installed on a laptop or pc. The only challenge is that one could lose his funds if the pc is hacked or attacked by virus. However, desktop wallet has one of the highest levels of security.
Mobile: This type of wallet run on an app on your smart phone and are useful because they can be used anywhere including retail stores globally.
Online: wallets run on the cloud and are accessible from any computing device in any location. Online wallets store your private keys online and are controlled by a third party which makes them more vulnerable to hacking attacks and theft.
Hardware wallets:
Although hardware wallets make transactions online, they are stored offline which delivers increased security. Users simply plug in their device to any internet-enabled computer or device, enter a pin, send currency and confirm transactions. Hardware wallets offers one of the highest security because it enables transactions to be made while keeping funds offline. I highly recommend Ledger Nano S.
Paper wallet:
The last, but not the least. The process involved while utilizing paper wallet is known as “sweeping” it requires entering private keys manually or by scanning the QR code on the paper wallet. This type of wallet is very easy to use with much technicality needed. To use paper wallet, software wallet must be created, after that the public address and private keys are then printed out on a paper. Transferring coin or token to your paper wallet is accomplished by the transfer of funds from your software wallet to the public address shown on your paper wallet. Consequently, if your want to withdraw your asset, simply transfer funds from your paper wallet to your software wallet. I highly recommend paper wallet as it enhances security of funds and cost virtually nothing to implement.
Cryptocurrency wallets are safe. However, no matter the type you choose to use, ensure that you’re in full control of your private keys, recovery phrase and backup seed. Always write down your private keys and recovery phrase; duplicate it into three places if possible and keep it in a secure place.
Conclusion:
Cryptocurrency opens the door for revolutionary technological possibilities. The most interesting thing about cryptocurrency is the underlying blockchain technology behind it.
Generally speaking, cryptocurrency is relatively new and still craving for relevance and mass global adoption. Therefore, there’s need for collaboration and partnership at the global level to create more informative and educational materials. At the moment, security and scalability are some of the major challenges the industry is facing. We hope to see more projects with innovative ideas in the future. Cryptocurrency is the future of finance.
Thanks for reading.