Written by Brenda Nakalema

Introduction to Cryptocurrency

Unless you’ve been living under a rock, you’ve probably heard about Cryptocurrency. Cryptocurrency, often referred to as crypto, is a …

Unless you’ve been living under a rock, you’ve probably heard about Cryptocurrency. Cryptocurrency, often referred to as crypto, is a digital currency that uses cryptography to secure transactions. These currencies don’t have a central issuing or regulating authority and operate via a decentralised system to record transactions and issue new units.

Cryptocurrency is a peer-to-peer system that allows anyone to send and receive payments without the interference of banks. With Cryptocurrency, there is no need to carry physical cash around or perform transactions through intermediaries, payments made using crypto exist as purely digital entries to an online database outlining specific transactions.

Cryptocurrencies were named such due to the high-security encryption used to verify transactions. This essentially means that advanced coding is used in storing and transferring cryptocurrency data between wallets and public ledgers.

The first Cryptocurrency was Bitcoin, founded in 2009 and remains the most popular to date.

How does Cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called a blockchain, which records all transactions updated and held by currency holders.

Through a process called mining, units of Cryptocurrency are created. This process involves using computers to solve complicated mathematical problems that generate coins. Users can also purchase currencies from brokers and then store and spend them using cryptographic wallets.

A cryptocurrency isn’t a physical asset; you can’t touch or see it. Instead, owning a cryptocurrency means holding a key that allows you to move a record or unit of a measure from one person to another without the necessity of a trusted third party.

Despite the fact that Bitcoin was created in 2009, cryptocurrencies and blockchain technology as a whole are still relatively new and are in the foundational stages. Transactions including bonds, stocks and other financial assets might eventually be traded using this technology in the distant future.

Blockchain

At the core of excitement and drive towards cryptocurrencies is the blockchain technology. As the name indicates, a blockchain is a set of connected blocks or an online ledger. Each block contains a group of transactions that each member of the network has independently verified. Each node must verify every new block before being confirmed, making it nearly impossible to fake transaction histories. The contents of the online ledger must be agreed upon by the entire network of an individual node or computer that has a copy of the ledger.

According to experts, blockchain technology can serve different industries, such as supply-chain and processes like online voting and crowdfunding.

Examples of Cryptocurrencies

Bitcoin;

Developed by Satoshi Nakamoto, Bitcoin was founded in 2009 and was the first Cryptocurrency and is still my most popular Cryptocurrency. The currency is believed to be a pseudonym for an individual or group whose identity remains mysterious and unknown.

Ethereum;

Ethereum is a blockchain platform with its own currency that was created in 2015. The currency is called Ether (ETH) or Ethereum. This is the second most popular Cryptocurrency.

Litecoin;

Similar to Bitcoin, this currency has made huge strides in innovations, including faster payment systems and processes to allow more transactions.

Ripple;

Founded in 2012, ripple is a distributed ledger system that can be used to track different kinds of transactions, not just Cryptocurrency. The company behind this currency has collaborated with various banks and financial institutions in its development.

It is widely believed that each Cryptocurrency has a different purpose and specification. For instance, Ethereum’s ether markets itself as gas for the underlying smart contract platform. Banks utilize Ripple’s XRP to facilitate transfers across different geographies.

With Bitcoin’s success, other lesser-known cryptocurrencies, commonly known as “altcoins”, have been launched. Some of these are merely duplicates of Bitcoin, while others are new currencies created from scratch. They include currencies like Solana, Litecoin, Ethereum, Cardano, and EOS.

Advantages of Cryptocurrency

Cryptocurrencies usher a fundamental change in how money works and is perceived. They offer a decentralised system in which intermediaries such as banks and monetary institutions are not essential to enforce transactions between two parties. Cryptocurrencies, therefore, eliminate the possibility of such institutions like banks from causing huge financial crises due to their mismanagement or failure.

Cryptocurrency transactions are faster as a result of the fact that there are no third-party intermediaries to delay the process. For example, flash loans in decentralised finance are processed without backing collateral and can be executed in seconds.

Investments in Cryptocurrency can generate profits. Cryptocurrency markets have skyrocketed in value over the past decade, reaching a $2trillion peak at some point. By May 2022, Bitcoin was valued at over $550 billion in crypto-markets.

Cryptocurrencies can serve as intermediate currencies that can be utilised in cross-border remittances. Therefore, a fiat currency is converted to Bitcoin (or other Cryptocurrency), transferred across borders, and eventually converted to the destination fiat currency. This process streamlines the money transfer and makes it cheaper.

Disadvantages of Cryptocurrency

Despite the fact that cryptocurrencies claim to be an anonymous form of transaction, the currencies are actually pseudonymous. This means they leave a digital trail that agencies like the FBI can follow. This makes it possible for governments and federal agencies to track the financial transactions of ordinary citizens.

Cryptocurrencies have fostered money laundering activities, for example, in the case of Dread Pirate Roberts, who essentially ran a marketplace to sell drugs on the dark web.

Theoretically, cryptocurrencies should be decentralised, with their wealth distributed between many parties on a blockchain. However, the reality is that their ownership is highly decentralised and concentrated in the hands of a few. For instance, a recent MIT study revealed that only 11,000 investors collectively hold up to 45% of Bitcoin’s rising value.

One of the fundamental misconceptions about Bitcoin is that anyone can mine them using a computer with an internet connection. However, in truth, mining popular cryptocurrencies requires tons of energy. When combined with the unpredictability of mining, the energy costs have resulted in the process being done mostly by large firms with billions of dollars in revenue. According to an MIT study, 10% of miners make up 90% of its mining capacity.

Despite the fact that blockchains are extremely secure, other crypto repositories like exchanges and wallets have been hacked. The hacking of exchanges and wallets has resulted in millions of dollars worth of losses.

Cryptocurrencies traded in public markets are highly volatile. Bitcoin has experienced rapid rises and crashes in value, soaring as high as $17,738 in December 2017, then dropping to $7,575 in the following months.

How to buy Cryptocurrency

You’ve probably wondered how you can get in on all the action surrounding crypto, and there are usually three steps involved for those that want to purchase a cryptocurrency.

Step 1: Choose a platform

The first step when deciding to invest in Cryptocurrency is to select a platform. Generally, the choice is between a traditional broker or a dedicated cryptocurrency exchange;

  • Traditional brokers. On top of offering regular investment options such as stocks, bonds and mutual funds, these are online brokers who also offer channels to invest in Cryptocurrency. These platforms typically offer lower trading costs but with fewer crypto features.
  • Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options and much more.

The rules followed when investing in other financial assets also apply to cryptocurrencies, be sure to consider; which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options.

Step 2: Funding your account.

After you’ve decided on a cryptocurrency broker or exchange, you can sign-up and open the account. Depending on the platform and the amount you intend to buy, you may have to verify your identity. This step is essential, and a precaution against fraud and meets federal regulatory requirements.

Step 3: Deposit cash to invest

In order to buy crypto, you need to make sure you have funds in your account. You might choose to deposit money into your crypto account by linking your bank account, authorizing a wire transfer, or you could make a payment with a debit and credit card. Whichever method you choose to use, it’s important to note that depositing money from a credit card is extremely risky and expensive.

Step 4: Place your cryptocurrency order

With money in your account, you’re ready to place your first crypto currency order. There are hundreds of cryptocurrencies, ranging from popular names like Bitcoin and Ethereum to lesser-known cryptos, Theta Fuel or Holo.

Once you decide which Cryptocurrency to purchase, you enter its ticker symbol and how many coins you’d like to purchase. Most exchanges and brokers can allow you to purchase fractional cryptocurrency shares, allowing you to own a small part of high-priced tokens like Bitcoin or Ethereum that would otherwise cost a lot more.

The biggest Cryptocurrencies by current market capitalisation are;

Bitcoin (BTC)

Ethereum (ETH)

Tether (USDT)

Binance Coin (BNB)

Cardano (ADA)

Dogecoin (DOGE)

XRP (XRP)

USD Coin (USDC)

Polkadot (DOT)

Uniswap (UNI)

Step 5: Select a storage method

Cryptocurrencies are not backed by protections such as the Federal Deposit Insurance Corp (FDIC) and are at risk of theft or hacking. The possibility of losing your investment after you’ve forgotten or lost the codes to access your account is also high. This is why it’s important to have secure storage for your cryptocurrencies.

Supposing you’re buying Cryptocurrency via a broker, you might not have a choice regarding how your crypto is stored. However, if you purchase Cryptocurrency through a broker, you will have more options;

First, you could opt to leave the crypto on the exchange. Cryptocurrency is typically stored in a wallet attached to the exchange. If it turns out that you don’t like the provider your exchange partners with, you are at liberty to move it to a more secure location.

Hot wallets are crypto wallets stored online and run on internet-enabled devices such as tablets, computers or phones. Hot wallets are convenient but also carry a higher risk of theft since they remain connected to the internet.

Unlike hot wallets, cold wallets aren’t connected to the internet, making them the most secure way to store Cryptocurrency. External devices like USB and hard drives are a secure way to hold crypto. As can be imagined, the main challenge with cold wallets is the fact that there’s always they can get lost or stolen. With cold wallets there is also the potential that the device could break, or that you could forget your key code.

Other ways to invest in Cryptocurrency

Exchange-Traded Funds (ETFs)

Through exchange-traded funds, you can invest in hundreds of individual companies and financial securities at a go. ETFs provide a level of diversification that would be otherwise expensive to replicate on your own, they also help diversify your investment.

There is a huge market for Cryptocurrency ETFs which would allow you to invest in many cryptocurrencies at once. Although there aren’t Cryptocurrency ETFs at the moment, it is believed that the SEC is in the process of reviewing three cryptocurrency ETF applications from Kryptcoin, VanEck and Wisdom Tree.

Invest in companies tied to Cryptocurrency

Supposing you would rather invest in companies with tangible products and services but are also interested in taking part in the cryptocurrency game, you could buy stocks of companies that use or own cryptocurrencies. You could buy shares in public companies like Nvidia, PayPal, and Square.

Amidst the excitement and hype around cryptocurrencies, it is important to remember that they are still a relatively new form of investment and are highly volatile. Any decision taken to invest in them must be tempered with reason and the awareness that you are investing in a highly risky financial asset.