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Exploring The World of Cryptocurrencies
Cryptocurrencies have taken up a large space in the financial sector globally. According to CoinMarketCap, a market research website, over 10,000 cryptocurrencies are being traded in the crypto exchange market. With a global market capitalization of over $1.34 Trillion as of June 2021, Cryptocurrencies are one of the largest financial asset classes. Many experts believe that blockchain and related technology will disrupt many industries in the coming future, including finance and law. While venturing into crypto trading or investing is a good decision, we at Financial Education believe that it is important to first understand what cryptocurrencies are and how their operation flows. So, let’s get started!
What are Cryptocurrencies?
Cryptocurrency called crypto for short is an unregulated virtual or digital currency used for online trading, investing, and other purposes. What this means is that cryptocurrencies are not controlled by any central authority nor are its operations regulated by any government. It makes use of an online ledger that is secured with cryptography, which makes it difficult to be counterfeited or double-spent.
Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems. When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.
Companies offer their unique virtual currencies to help in the smooth trade of their goods and services, the virtual currencies are called “tokens”. But then, to have possession of those goods or services – you would have to exchange the cryptocurrency for a fiat currency, i.e. a real currency. To operate transactions, cryptocurrencies make use of a technology called Blockchain.
What is Blockchain?
Blockchain is a system by which the crypto market transactions are recorded in blocks and codes. The blocks of transactions are linked to the chain of transactions done over time. The outcome of the blockchain is represented in an encrypted online ledger making it difficult for hackers to access. To avoid fraudulent occurrence, each transaction is screened through any of these validation techniques; proof of stake or proof of work.
Blockchain.com was established by Ben Reeves in 2011. He launched a website called Blockchain.info, which could be used to track bitcoin transactions. The website was a block explorer, a website that allowed bitcoin users to see the details of public cryptocurrency transactions if they have the identifying hash code for the transaction.
Blockchain is complemented with software that helps in automatic updates of new transactions, making it easy for cryptocurrency traders to keep up with new trends and activities in the market. Each crypto trader has a copy of the blockchain which sums up a unified, identical, accurate, and updated transaction record.
History & Origination of Cryptocurrencies
The very first Cryptocurrency, Bitcoin precisely, was created by a mysterious cryptographer known as Satoshi Nakamoto in 2009, although he was not the originator of the idea. The idea of cryptocurrency was first conceived in 1998 by Wei Dai, who was bent on developing a novel payment gateway that was systematized by cryptography and decentralized in nature which would not be subject to the interference of financial institution regulation.
But then, cryptocurrencies would not have been a success without the cryptography system created by David Chaim. David in 1983 developed the first cryptographic online transaction gateway called eCash, and in 1995 he developed another one called DigiCash.
The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.
Types of Cryptocurrencies
There are about 10000 cryptocurrencies in the market currently, but then the most common currencies are Bitcoin, Ethereum, Litecoin, Tether, Binance coin, Cardano, Dogecoin, XRP, Polkadot, etc. Let us explore a few of them in detail –
Bitcoin was created in 2009 by an individual known as Satoshi Nakamoto. Bitcoin is a digital currency that is decentralized in its operations and is used for online transactions. It has no physical form but its transactions and balances are displayed in a virtual public ledger, which can be accessed by everyone.
Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services, but the real-world value of the coin is extremely volatile. Research produced by the University of Cambridge estimated that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.
Although Bitcoin is not a legal tender accepted by all, it still has gained recognition in financial institutions and is used by some companies for the trade of their services and products. Aside from the fact that it is used as an investment platform for investors, the current market cap for Bitcoin is $674.25B.
Ethereum like Bitcoin is a decentralized platform that permits the workings of smart contracts and decentralized applications, known as DApps, for smooth operational flow, with little or no concern about fraud or intrusion of a third party. The purpose of its creation is for easy trade of financial products across the globe.
Ethereum was proposed in 2013 by programmer Vitalik Buterin. In 2014, development was crowdfunded, and the network went live with an initial supply of 72 million coins on 30 July 2015. The platform allows developers to build and operate decentralized applications that users can interact with.
Ethereum makes use of a cryptographic token called “ether”. It is used by developers and investors for transactions within the Ethereum platform. Ether was launched in 2015, although a test run sales were down in 2014, which motivated the creators to proceed with the official launch. Ethereum’s current market capitalization is $258.49B.
Litecoin, which is considered as “silver to Bitcoin gold” was created by Charlie Lee, who once worked with Google as an engineer. Litecoin operates through an open-source universal payment network that is unregulated by a central governing board or authority. Through the use of consumer-grade CPU, “script” Litecoin’s proof of work is decoded.
In May 2017, Litecoin became the first of the top 5 (by market cap) cryptocurrencies to adopt Segregated Witness. Later in May of the same year, the first Lightning Network transaction was completed through Litecoin, transferring 0.00000001 LTC from Zürich to San Francisco in under one second.
Litecoin has the advantage of speedy transaction confirmation time, this is because its block generation rate is fast as compared to other cryptos like Bitcoin. Litecoin was launched in 2011 and now has a market cap of $10.44B.
To access a cryptocurrency, a fiat (real) currency will be exchanged for it. The platform where it is done is known as the Exchange market, while the operators are called Exchangers.
A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Exchanges may accept credit card payments, wire transfers, or other forms of payment in exchange for digital currencies or cryptocurrencies. A cryptocurrency exchange can be a market maker that typically takes the bid-ask spreads as a transaction commission for its service or, as a matching platform, simply charges fees.
Cryptocurrencies can be traded through the following exchange platforms; Binance, Coinbase exchange, Huobi global, Bitfinex, Kranken, KuCoin, Gate.io, Bithumb, Bitstamp, Coinone, etc.
Should you Invest in Crypto?
We at Financial Education believe that crypto is one of the fastest-growing investment asset classes. It is also considered to be the future of currencies. Amidst this, it is believed by some positive analysts to have a higher recuperating capacity in the case of a market crash or an economic crisis than some other financial bodies, such as the case of the 2008 financial market crash. Although this line of thought is opposed by crypto critics.
Before thinking of investing in crypto, it is necessary to know the kind of investment portfolio mix you want to sustain; is it one that is 50:50 risk oriented or one that is dominated with minimal risk or high risk? This is necessary because crypto investments are quite risky since it is a new asset class with high price volatility that swings easily. When compared to traditional investment asset classes, the crypto market offers attractive and high returns, but simultaneously, the risk is also high.
When you decide to invest in crypto or any other asset class, never put all your eggs in a single basket. Maintaining a well-diversified portfolio with investments in several different cryptocurrencies is a great way to minimize risk and add high potential investments to your portfolio. There are several different cryptocurrencies out there that hold tremendous potential. All you need to do is focus on your research and analysis in order to find the perfect investment opportunity.
Advantages of Cryptocurrencies
Trading or investing in cryptocurrencies is considered to be quite risky. However, there are several benefits and advantages that cryptocurrencies have to offer. Some of them are –
Freedom of Time
The cryptocurrency market is designed to be active 24/7, unlike other investment markets or platforms. So, there are no time restrictions on when investors or traders can participate in the crypto market. This allows people to trade/invest at their own convenience.
Cryptocurrencies are highly liquid, which means that it is quite easy to convert your cryptocurrency into real or fiat currency at any time. The market is programmed in such a way that trading is done 24/7, and as such there are always traders ready to either buy or sell your assets. Some crypto trading features like buy and sell limits also help in the smooth flow of operation, making trading transactions easy and swift.
With well-analyzed strategies and market research, you can make massive profits from cryptocurrency trading or investing. Due to high level of volatility in its pricing, the swift swings in price allow strategic investors to make a large profit from trades.
You Own Your Money
In the cryptocurrency exchange market, investors have the liberty to access their assets at any time they desire without much protocol. This is possible based on the unregulated and decentralized system of the exchange market.
Easy Operational Flow
Crypto operations are easy to operate and relate with. Opening an account and starting up trading or investing in cryptos is not as complicated when compared to other financial processes like opening a bank account or a Demat account. All trading or investing activities can be done from the comfort of your home via a laptop or mobile and an internet connection.
Cryptocurrencies are seen to have the potential of preserving the value of assets against inflation or other unfavorable economic conditions. In many ways, bitcoin can be seen as the safest way to preserve your capital, for its limited supply and the technology of blockchain that make it safe and secure for all its users.
Disadvantages of Cryptocurrencies
While cryptocurrencies have several advantages and benefits, there are a few drawbacks and cons of this asset class that you should be aware of –
Investing or trading in cryptocurrencies is highly volatile and speculative. Therefore, if proper analysis is not done before any trade is executed, there are high chances of incurring heavy losses.
Since cryptocurrencies are virtual currencies that cannot be touched or handled, they are generally not accepted as legal tender in most countries and markets. So, its chances of being exchanged for goods and services in the wide stream markets are quite slim.
Store of Value challenge
Due to the high degree of volatility in crypto trading, the chances of the real currency invested maintaining the same measure of value are slim over a long period of time. The value, when converted from cryptocurrency to fiat currency after investment or trading, could either increase to the investor’s favor or decrease to his loss.
Lack of Regulation and Backing
Since crypto is unregulated and is not backed by a governmental organization, the currency can be used by individuals for exploitation and other dubious acts which are not legal.
Loss of Wallet Password equates to a loss of assets
Based on the efforts of cryptocurrency creators to secure the assets of every trader and investor, a password is given to them to keep their account details personal to them with no further backup file archived, not even in a mail. So, if the investor or trader mistakenly forgets that password, the individual automatically loses the assets in that account with no chance of recovery.
Prone to Hacking
Although cryptocurrencies are seen to be well-secured assets, they are still vulnerable to hackers in several ways. Since a password is given to market participants to access their accounts, the password can be oftentimes be hacked and tampered with.
Investing in cryptocurrencies can be a great way to create huge wealth and achieve financial freedom. While cryptocurrencies are a high-risk asset class, they offer attractive and high potential investment opportunities. With careful analysis and proper market research, securing profitable investment opportunities in the crypto market is quite possible. However, before making any investment decision, always check the current market conditions and other factors that might affect the value of an asset class, as investments in the financial market are subject to market risk. If you liked this article, make sure to visit Jeremy Lefebvre’s YouTube channel “Financial Education” for more such informative content! Happy investing!