What are Cryptocurrencies?
Cryptocurrency is sometimes referred to as the “money of the future”. A Cryptocurrency holds value like other currencies, such as the Dollar, Euro, or Yen. They can be used to buy things or exchanged for other currencies (crypto and non-crypto). The major difference is that a Cryptocurrency is completely digital. They also use encryption to help regulate the creation of more currency units and verify fund transfers. This happens on a decentralized network (Blockchain), meaning there is no central bank to control or influence the currency.
Important Note!Not all Cryptocurrencies are created equal and they are specific to their particular Blockchain. As an example, Bitcoin cannot be used on the Ethereum Blockchain. A Cryptocurrency created on the Ethereum Blockchain cannot be used on the Waves Blockchain. There are companies currently looking into ways of allowing cross-chain (if that’s a word) transactions though! Multiple Cryptocurrencies can also exist on the same Blockchain.
3 major benefits of using Cryptocurrency
- Counterfeit Proof – The distributed nature of a Blockchain means all transactions are stored on each full node connected to the network. It is not possible to simply create a new unit of a particular Cryptocurrency and submit it through the network. The only potential ‘counterfeit’ would be a double spend attack, but that goes beyond the scope of this post. All you need to know is a double spend attack would require a huge amount of computer power. This could save millions when you think about the amount of counterfeit money that goes into circulation every year.
- Flexibility – Cryptocurrency is traded 24/7. Transfers to other parts of the world can be made whenever it is needed and for almost no cost. This is fantastic when compared to the current process of converting funds and filling out wire transfer papers!
- Personal Security of Funds – Typically, a hacker only needs your username and password to access your bank account. Some banks will have stricter security, but generally that is all that is needed. Cryptocurrency wallet transfers need the account address, password, and private key file. This is a great layer of security because the private key file can be stored on a flash drive. Even if someone grabbed your username and password they would need to steal the flash drive as well! The potential downside is that you lose the flash drive, so make sure you remember where you put it! There is also an unencrypted key that can be used without the password, so be very careful if you choose to store this.
How many Cryptocurrencies are there?
A LOT. Bitcoin is considered the first, created back in 2009 by a pseudonymous developer called Satoshi Makamoto. Since then an explosion of new Cryptocurrencies has taken place. Note that you will see different terms for these such as Tokens, Coins, Alt Coins, and just Crypto. Alt Coins are generally considered any Cryptocurrency that is not Bitcoin, such as Litecoin, Dogecoin, and Namecoin. There are hundreds though! For a really good list, along with charts and other information, check out –Coin Marketcap– .
Where can I get some of these ultra-hip Coins?
There is an easy way and hard way to obtain Cryptocurrencies. The hard way is through the process of ‘mining’ coins using your computer. The easy way is to use a Cryptocurrency exchange. I consider Mining hard because it is a lot more technical than just using an exchange. It is also beyond the scope of this article, but will be covered at a later date! For now, let’s look at the easy way.
The easy way is to use any of the major Cryptocurrency exchanges. I will be doing more in-depth write-ups on these exchanges, but here is a quick list to get you started:
- CoinBase – This is where I made my first purchase and the process was very simple. CoinBase has a great reputation and an extremely user friendly layout. They only offer Bitcoin and Ethereum (aka Ether), so it is an easy on-ramp into the Cryptocurrency world. If you want a familiar and safe way to start buying Cryptocurrency please consider using my referral link: https://www.coinbase.com/join/578bf19e11cf061f73000512 . If you buy or sell $100 worth we will each get $10 worth of Bitcoin!
- Bittrex – This is another personal favorite. Bittrex has a lot of Alt Coins to trade, so you can make a pretty well rounded Cryptocurrency Portfolio. They have been around for a while and have a great reputation, so you can feel safe trading here. Be aware that some Cryptocurrency wallets will occasionally go down for maintenance. This means you cannot withdrawal/deposit that coin during this time. This has been pretty rare and normally they are not down for long, just don’t put your life savings into 1 wallet.
- Poloniex – I have traded a few times on here and always had a good experience. This seems to be geared more for people looking to trade often for profits. Like Bittrex, they have been around for a while and provide a large choice when it comes to Alt Coins.
- Kraken – To me, this is a mix of the above exchanges. They have a few more choices when compared to CoinBase, but a less than Bittrex or Poloniex. Kraken tends to only add Coins that it deems trustworthy and believes in for the long-haul. If a Coin is not on Kraken that does not mean it is a scam though, and it may be coming to Kraken at a later date.
I am leaving a lot of exchanges out, but these are the ones I have used and felt safe using. All of the exchanges above are also based in the United States, so there may be some limitations if you reside outside of the US. However, here are some non-US exchanges that have great reviews: BitStamp, ShapeShift, Yobit, Bitcoin.de, and OKCoin. There are also decentralized exchanges, which are outside the scope of this post and will be covered in a later post.
Important Note!Like any investment, there is risk! Just because I have used the above exchanges and had a near fairy-tale experience does not mean you will. As mentioned in the “What is a Blockchain?” post, transactions are 24/7. This is very different from the stock market because it means the price could fluctuate wildly during all hours of the day. Only invest what you are comfortable investing!
Where can a Cryptocurrency be used?
This will depend on which Coin you want to use. Bitcoin is the most widely accepted of all of the Cryptocurrency coins. Although I have not personally used it yet, bitpay provides a Visa debit card that turns your Bitcoins into dollars. This means you can withdraw cash from an ATM or any Merchant that accepts Visa cards (almost everywhere). More and more places are accepting Bitcoin and even Yelp allows businesses to mark if they accept Bitcoin, which is a step in the right direction! Obviously they can be transferred to other people as gifts, tips :), etc. if that person is willing to accept it.
Some Coins are treated as ‘shares’ of a company. The Ethereum Blockchain has made this extremely popular and brought about a new way for start-ups to raise money. The company will create their own Coin on their Blockchain of choice and ask people to send in Bitcoin, Ether, Waves, or any other Coin they can quickly change for fiat money. These are generally referred to as ICOs (Initial Coin Offerings) and some of the most successful ones have raised over $10 million US dollars!
The company can also code their Coins to have benefits (like the 10% discount mentioned earlier). An excellent example of this is the vSlice token created by the vDice team. Not only can you trade vSlice on some exchanges, but you actually get a share of profits from their games based on how many you hold. If you are familiar with Stocks, then you can almost think of it as receiving dividends.
Important Note!Owning a bunch of a company’s Coins does not mean you own part of the company. It really depends on how the company codes them. Some treat them as voting rights, in which case you would be able to vote on certain issues. Others have used a minimum investment amount. After buying the minimum, you can provide input and help with the decision making of how to grow the business. Before buying a company’s Coin, check out their site and see what it offers!
I agree that Cryptocurrencies are the future of money. While we will probably always have fiat money, Cryptocurrency is becoming more mainstream. A Visa debit card that converts your Bitcoin to dollars and lets you spend it almost anywhere is a great sign. This post does not go over the more technical aspects of Cryptocurrencies, such as mining and the different ‘Proofs’. These will be covered later in a more technical article. If you have read the introduction to Blockchains, be sure to check out the What is a Smart Contract? post to round off your knowledge of the Blockchain universe!
For discussion, what are your favorite Cryptocurrencies? What cool features do you think could be implemented in a Coin?