By now you've probably heard about the cryptocurrency hype. Either a family member, friend, neighbour, doctor, Uber driver, sales associate, waitress, barista, or passer-by on the street, has probably told you how he or she is getting rich quick with virtual currencies like bitcoin, Ethereum, Ripple, or one of the lesser-known 1,300-plus investable cryptocurrencies.
But if you are one of the new people to digital currencies such as Bitcoin or Etherum, how much do you really know?
Today, we go to walk through the basics of cryptocurrencies, step by step, and explain things in plain English. Just examples of how today's cryptocurrencies work, what they're ultimately trying to accomplish, and how they're being valued.
What is Cryptocurrency?
The name cryptocurrency is a combination of cryptography and currency. Since the earliest days of networked computing, researchers and scientists have theorized that a protocol could be devised to allow people to exchange truly digital money. Cryptocurrency is just like a digital form of cash. The idea remained little more than a dream until the invention of Bitcoin in 2009. Cryptocurrency is digital, it can also be sent anywhere in the world.
The common properties of cryptocurrencies generally include:
You do not need to provide information, nor permission, to create a wallet and own a cryptocurrency. No one can stop you from using cryptocurrency. Centralized payment services, on the other hand, can freeze accounts or prevent transactions from being made.
You can send and receive cryptocurrency from anywhere in the world.
Cryptocurrency can be used over and over again without degrading.
Transactions cannot be reversed and units cannot be spent twice.
5. A cheap and fast payment method
When you make a transaction to someone at the other side of the world, your money can be with them within seconds – at a fraction of the cost of an international wire transfer.
How many cryptocurrencies are there?
The number is always changing, but according to CoinMarketCap.com as of 2019, there were around 1,375 different virtual coins that investors could potentially buy. It's worth noting that the barrier to entry is particularly low among cryptocurrencies. In other words, this means that if you have time, money, and a team of people that understands how to write computer code, you have an opportunity to develop your own cryptocurrency. It likely means new cryptocurrencies will continue entering the space as time passes.
What is Blockchain Technology?
Blockchain most often refers to a network of computers that uses a common software to order data in such a way that, after being sequenced, ensures it can't be adjusted or tampered with by any one dishonest user. A blockchain creates a trusted record using cryptography.
What is cryptography?
At the root of all cryptocurrencies today lies cryptography, the techniques used for secure private communication, and encryption, the process of encoding that information. Cryptography is the science behind creating codes and cyphers that allows people to transmit information in a private and secure way. This goes way back to certain ancient civilizations, the use of symbol replacement in Egyptian writings. In the early 1900s, cryptography was mainly used by the military and spy agencies, particularly during war, where secret communications were a vital way to send information between posts. Today, the method that secures cryptographic transmissions when they are in transit from one party to the next, particularly over the internet, is called encryption.
What is blockchain used for?
Below is a list of industries that have attempted to incorporate blockchain technology with varying degrees of success.
Blockchain technology's original, and still most popular, use case is to power cryptocurrencies. In fact, some would argue blockchains are their central element, allowing users to run software that then enforces the rules around their currencies, making this data scarce and valuable.
2. Financial Services
Given blockchains can now govern digital money supplies, major companies have sought to extend this technology further to other types of financial services. As such, it's believed blockchains could solve inefficiencies in parts of the financial system – inter-bank transactions, clearing and settlements – that have typically been the domain of some of the world's largest and most opaque financial entities. The idea is these institutions can use blockchain technology to cut costs, better adhere to regulation and generally upgrade the somewhat antiquated technology that helps them run.
Operational bottlenecks, data errors, and bureaucracy are a significant concern for the healthcare industry. Blockchain has several use cases in healthcare, including tracking drugs through the supply chain and managing patient data.
4. Business Management
One of the most talked about use-cases for blockchain technology is using it to manage supply chains for businesses. Global trade is a trillion dollar industry, with goods and services being shipped across the world daily. In order for something to travel from one place to the next, there are multiple supply chain participants, each relying on different systems to approve and process transactions. Blockchain technology could help reduce the barriers formed from these different systems, removing certain costs and potential points of failures along the way.
Records today, be it health care, real estate or voting, are often maintained by centralized data centers, which brings added costs and risks to the entities entrusted with them. By nature, this means that information is vulnerable to security breaches and can be difficult and expensive to access. Many industries need a more efficient and secure system for managing these records while performing and recording other complex transactions. This is where blockchain technology comes in, and there is some hope it could help solve these long-standing issues, offering a mechanism for recording and maintaining comprehensive records while allowing individuals to have more control over their own data.
6. Royalty payments
Musicians, video game creators, and artists in general often struggle to get the pay they deserve due to digital piracy, unfair relationship with third-party agencies, or simply by not being paid royalties that are due.
What is a crypto wallet?
A crypto wallet is a tool to interact with a blockchain network. There are various crypto wallet types which can be divided into three groups: software, hardware, and paper wallets. Depending on their working mechanisms, they may also be referred to as hot or cold wallets. The majority of crypto wallet providers are based on software, which makes their use more convenient than hardware wallets. However, hardware wallets tend to be the most secure alternative. Paper wallets, on the other hand, consist of a "wallet" printed out on a piece of paper, but their use is now deemed as obsolete and unreliable.
How do cryptocurrency wallets work?
Contrary to popular belief, crypto wallets don't truly store cryptocurrencies. Instead, they provide the tools required to interact with a blockchain. In a nutshell, these wallets can generate the necessary information to send and receive cryptocurrency via blockchain transactions. Among other things, such information consists of one or more pairs of public and private keys.
The wallet also includes an address, which is an alphanumeric identifier that is generated based on the public and private keys. Such an address is, in essence, a specific "location" on the blockchain to which coins can be sent to. This means you can share your address with others to receive funds, but you should never disclose your private key to anyone.
The private key gives access to your cryptocurrencies, regardless of which wallet you use. So even if your computer or smartphone gets compromised, you can still access your funds on another device – as long as you have the corresponding private key (or seed phrase). Note that the coins never truly leave the blockchain, they are just transferred from one address to another.
Hot vs. cold wallets
As mentioned, cryptocurrency wallets may also be defined as "hot" or "cold," according to the way they operate.
A hot wallet is any wallet that is connected somehow to the Internet. For example, when you create an account and send funds to your wallets, you are depositing into a hot wallet. These wallets are quite easy to set up, and the funds are quickly accessible, making them convenient for traders and other frequent users.
Cold wallets, on the other hand, have no connection to the Internet. Instead, they use a physical medium to store the keys offline, making them resistant to online hacking attempts. As such, cold wallets tend to be a much safer alternative of "storing" your coins. This method is also known as cold storage and is particularly suitable for long-term investors.
Software wallets come in many different types, each with its own unique characteristics. Most of them are somehow connected to the Internet (hot wallets). The following are descriptions of some of the most common and important types: web, desktop, and mobile wallets.
You can use web wallets to access blockchains through a browser interface without having to download or install anything. This includes both exchange wallets and other browser-based wallet providers.
As the name implies, a desktop wallet is a software you download and execute locally on your computer. Unlike some web-based versions, desktop wallets give you full control over your keys and funds. When you generate a new desktop wallet, a file called "wallet.dat" will be stored locally on your computer. This file contains the private key information used to access your cryptocurrency addresses so you should encrypt it with a personal password.
Mobile wallets function much like their desktop counterparts but designed specifically as smartphone applications. These are quite convenient as they allow you to send and receive cryptocurrencies through the use of QR codes.
Hardware wallets are physical, electronic devices that use a random number generator (RNG) to generate public and private keys. The keys are then stored in the device itself, which isn't connected to the Internet. As such, hardware storage constitutes a type of cold wallet and is deemed as one of the most secure alternatives.
A paper wallet is a piece of paper on which a crypto address and its private key are physically printed out in the form of QR codes. These codes can then be scanned to execute cryptocurrency transactions. Some paper wallet websites allow you to download their code to generate new addresses and keys while being offline. As such, these wallets are highly resistant to online hacking attacks and may be considered an alternative to cold storage.
Trading generally implies a shorter-term approach to generating profit. Traders may jump in and out of positions all the time.
Investors look for long-term bets based on the fundamentals of an investment. For example, how much profit a company is making. While cryptocurrencies are a new and unique type of assets, they can also be viewed through a similar lens.
The importance of backups
Losing access to your cryptocurrency wallets can be quite costly. So it's important to back up them regularly. In many cases, this is achieved by simply backing up wallet.dat files or seed phrases. Also, if you opted for password encryption, remember to back up your password as well.
Privacy and Security
Cryptocurrencies have brought lots of exciting possibilities, but they are also full of risks and dangers for the inexperienced. Follow the three main security principles outlined below to mitigate some risks associated with using, holding, and trading cryptocurrencies
Maintain your privacy
There are plenty of people with malicious intent employing tactics in an attempt to steal your data
It is recommended:
- To consider the risks of boasting about your successful trading rallies
- Not to share your previously used addresses
- To be careful mentioning your balances
- To avoid sharing information which is connected to your offline identity
- To use encrypted communication channels
Users of both the traditional banking system and cryptocurrencies are often victims of similar scams and frauds. However, with cryptocurrencies, various factors are pushing the burden of responsibility on the shoulders of the end-user – mainly an inherent lack of trust and immutability of processed transactions.
Be vigilant. Learn about common phishing tactics, find out what keyloggers are, and get to know common threats. Getting familiar with these dangers will help you keep your coins secure.
Using strong and unique passwords and enabling the 2 Factor Authentication protection for your online accounts should be the first step towards improving your general security.
To ensure the availability of your coins and maximize your security, it is recommended to hold your private keys offline. Although exchanges are generally much safer than ever before, it is still recommended to keep substantial amounts on the exchange accounts only if you are an active trader. Furthermore, similar to money in a bank account, unless you own and have exclusive access to your private keys, you cannot claim ownership of your coins, and you are left with a promise.
For the first time in history, you have a chance to own a digital asset in the same way you own physical cash or a chunk of precious metal. Unlike these other forms of assets, you can back up your cryptocurrencies on a piece of paper and gain access to your possessions safely anywhere in the world.
The types of cryptocurrency wallets designed to hold your private keys vary in their security, ease of use, number of use cases, and even availability. Consider your options and choose a type that fits your needs.
Remember, security is never absolute and finished. Take your time to update your knowledge base from time to time and check your potentially weak points on a regular basis. ALWAYS do your research- Before investing your money into a particular project, make sure you do your due diligence.