What Is Cryptocurrency?
By now almost everyone has heard of Bitcoin, the most popular cryptocurrency.
Most people stop learning about Bitcoin after hearing complicated techy jargon words such as distributed ledger technology, blockchain, and distributed computing. Luckily, you do not need to understand how cryptocurrencies work in order to understand why they are important. This article skips the technological inner workings and delves straight into the most crucial things to keep in mind when the B-word is used in conversation.
Cryptocurrency Began in the 1980s
The most famous cryptocurrency, Bitcoin, was created in 2009. However, cryptographers have been experimenting with cryptocurrencies over the past four decades.
In 1983, an American inventor named David Chaum designed an electronic cash system called DigiCash that was based on cryptographic algorithms. In 1997, a British cryptographer named Adam Back created HashCash that used the proof-of-work scheme to prevent email spam. In 1998, b-money and bit gold were released by Wei Dai and Nick Szabo, respectively.
Major Businesses Are Adopting Cryptocurrency
The list of firms that accept Bitcoin is constantly growing.
Dell, Microsoft, Virgin Galactic, and Tesla are just some of the firms that accept Bitcoin as payment. However, there are several small and more grass-root firms that also accept Bitcoin, including Etsy, Wordpress, Wikipedia, and the Grass Hill Alpacas farm in Haydenville, MA.
Several non-profit charities also use Bitcoin in order to making donating easier. The BitGive Foundation supports several campaigns including earthquake relief in Nepal and clean water projects in Kenya.
There Are Over 1000 Different Cryptocurrencies
At the time of this writing, Bitcoin is the most famous and the most valuable cryptocurrency. Each Bitcoin is worth approximately $2400 USD. However, several cryptocurrencies were created by copying the open-source code for Bitcoin and then making a minor change. Dogecoin was originally released as a joke cryptocurrency; however, Dogecoin’s market capitalization in June was close to $340 million.
Cryptocurrencies Are Digital Assets Secured by Cryptography
Cryptocurrencies are privately competing currencies that compete with other types of money and payment systems. The terms electronic money and digital currency are used interchangeably with the term cryptocurrency.
Unlike physical currencies, such as gold and U.S. dollars, cryptocurrencies do not exist physically or even digitally. Instead, cryptocurrencies are an accounting ledger that keeps track of how much money each account user owns. Cryptocurrencies are intriguing for economists because each one has a unique monetary policy.
The Top Cryptocurrencies Attempt to Solve Different Problems
Although Bitcoin is on top, there are several cryptocurrencies that are trying to take Bitcoin’s market share.
Ethereum currently has the second highest market capitalization worth approximately $28 billion. Unlike Bitcoin, Ethereum is a Turing-complete virtual machine that enables “smart contracts.” The third largest coin, Ripple, is a settlement system that was advertised towards banks, and several banks including UBS and Santander experimented with this cryptocurrency.
The Value of Each Cryptocurrency Is Determined by Supply and Demand
The term “inflation", as it relates to cryptocurrencies, has two meanings: originally, it referred to an increase in supply. Today, it refers to an increase in price.
Bitcoin is price deflationary but supply inflationary. The reason that Bitcoin allows investors to hedge the expansionary monetary policies adhered to by central banks is because the demand for Bitcoin is growing at a pace that is higher than the increase in the supply of Bitcoin. Several critics of cryptocurrency exclaim that the inflation rate of Bitcoin is infinite because you can always make another cryptocurrency. This is false! In the same way that the supply of gold does not change the supply of silver, the supply of one cryptocurrency does not necessarily impact the supply of another cryptocurrency.
Investors Follow the Latest Initial Coin Offerings and Token Generating Events
In 2017, there has been approximately one new Initial Coin Offering (ICO) or Token Generating Event (TGE) every week. During the second week of June, Bancor raised $150 million in three hours. Before I invest in any coin, I make sure to read the coin’s whitepaper and to read about the coin’s developers. This helps me to avoid fly-by-the-night scammers.
There Are Several Easy Ways to Buy Bitcoin
Coinbase is the largest exchange in the U.S.
A state-issued ID or driver’s license is required to open an account. Coinbase charges 1.49% of each Bitcoin purchase if you use your bank account to buy Bitcoin via ACH transfer. If you buy with a credit card, the fee is 3.99%. Even though Coinbase is the largest exchange, I prefer to use Gemini, which is the exchange owned by the Winklevoss Brothers. In Europe, the most liquid exchange is Kraken. Keep in mind that regulated exchanges are obliged to share all of their customer data with the government. For cryptocurrency enthusiasts that want more privacy, Localbitcoins.com and Bitcoin ATMs are an option.
There Are Several Easy Ways to Store Bitcoin
There are two main ways to store cryptocurrency: hot and cold.
A “hot wallet” refers to any type of wallet that is stored on an electronic device that is connected to the internet. A cold wallet is a wallet that is stored on a piece of paper or an electronic device that is not connected to the internet. Since the former are connected to the internet, they are easier for thieves to hack compared to the latter. Therefore, only small amounts of money should be stored on a hot wallet just in case it gets hacked.
There are several reputable companies that offer wallets and storage solutions. For a hot wallet, I recommend iOS users to download Breadwallet. For Android users, I recommend Mycelium. For a cold wallet, I like to generate my own paper wallets at bitaddress.org or I like to use Xapo’s cold storage vault.
Economic Theory Dictates that Cryptocurrencies Are Not “Money”
Bitcoin has several characteristics of money including scarcity, durability, fungibility, and divisibility. However, mainstream monetary theory suggests that money is a medium of exchange, a unit of account, and a store of value. Bitcoin does not make the best medium of exchange, since transaction fees have increased from close to a nickle to almost $4. Due to the fluctuations in bitcoin’s price, bitcoin is difficult to use as a unit of account or a store of value.
Although cryptocurrencies do not fit the economic definition of money, many people are still using Bitcoin and other cryptocurrencies as a way of sending value around the globe.
U.S. Anti-Money Laundering and Security Law May Apply
Due to the features of Bitcoin that resemble money, anti-money laundering (AML) and know-your-customer (KYC) laws apply in many states in the U.S. Also, U.S. Security law may apply because several cryptocurrencies have security-like features. Recently, some cryptocurrencies are blocking the IP addresses of U.S. based investors in order to ensure that U.S. laws do not apply.
The Average Cryptocurrency User is a Young Male
In a 2015 report by CoinDesk, over 4,000 responses were collected and analysed on the topic, “Who Really Uses Bitcoin.” Recently, more and more young males living in Asia have begun trading cryptocurrencies as well.
According to the survey: 90% of Bitcoin users are male 56% are married or in a serious relationship 55% are from either North or South America 61% do not consider themselves actively religious
A Philosophical Civil-War is Thwarting Innovation
A large debate over a problem called, “scaling” is tearing the Bitcoin community apart.
The more time that developers devote to this problem, the less time available for research and innovation. Essentially, the debate is about how to increase the number of transactions that the network can process per second. The “big blockers” from the Bitcoin Unlimited (BU) camp want to raise the 1 megabyte limit on each block of transactions. This will allow more data to fit inside of each block, and therefore, more transactions can be processed per minute. The “little blockers” from the segregated witness (SegWit) camp want to decrease the data size of each transaction in order to process more transactions within each block.
Some Cryptocurrencies Require Immense Amounts of Energy
For example, the bitcoin proof-of-work system costs approximately $10,000 per block mined. Every ten minutes a new block is mined. In a recent report by The University College London’s blockchain research center, the annual mining costs of the bitcoin blockchain are approximately $400 annually (Aste, 2016).
All Cryptocurrencies Rely on the Internet
A major setback of cryptocurrency is that it relies on internet, electricity, and hardware devices.
As I wrote for Forbes Austria in April, Bitcoin would not function properly without internet. If all nodes lose access to the internet, the speed of broadcasting a transaction across the network would decline steeply. The increased latency would result in more forks of the Bitcoin network because miners would build blocks with an incomplete list of recent transactions. Although cryptocurrencies do not have the standard counterparty risk that arises from trusting an intermediary such as PayPal or Wells Fargo, cryptocurrencies do have a different type of counterparty risk that arises from the network’s reliance on machines.
Beware of Scams
There are several scam companies that are trying to lure newbie investors to cryptocurrency.
The most popular scam that is currently fooling many innocent minds is “One Coin.” One Coin is a multi-level marketing scheme that sells plagiarized educational material. The oldest scam is malware downloads. A malware called, WannaCry, has infected 36,000 computers. The malware encrypts the files on a victim’s computer and demands a ransom between $300 and $600, which must be paid in Bitcoin to the attacker’s Bitcoin wallet. The total amount that the hacker’s have earned is approximately $125,000. The incoming ransom payments can be watched live on the attacker’s public addresses:
In order to avoid scams, I always Google the coin or company’s name and then write scam. Badbitcoin.org also keeps an updated list of the latest Ponzi schemes and scams.
Cryptocurrency is Illegal in Five Countries
Cryptocurrency enthusiasts in Kyrgyzstan, Bangladesh, Vietnam, Bolivia, and Ecuador can face criminal charges for using Bitcoin.
Bolivia outlawed cryptocurrency because it is illegal to use “currency that is not issued and controlled by the government.” Ecuador banned Bitcoin to increase demand for its own government made digital currency. In a similar fashion, the government of Kyrgyzstan claims that the only currency that is legal tender is the Kyrgyzstani Som (KGS). In Bangladesh, Bitcoin users face three to twelve years in jail. Finally, Vietnam outlawed Bitcoin because criminals can use cryptocurrency to launder money.
On the Other Hand, Several Governments Are Using Cryptocurrencies
The City of Zug in Switzerland recently began accepting Bitcoin for taxes and fines. The Singapore government recently finished a test experiment that tokenized the national currency on a private Ethereum network. The government of South Africa is working on a project that issues digital identities using the Ethereum network. Last but not least, the Republic of Georgia is using the Bitcoin blockchain to transfer and store land titles.