What Is Cryptocurrency? A Beginners Guide

Overview

What is cryptocurrency, and why is it taking the world by storm?

We can define cryptocurrency as a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Cryptocurrency is also simply called crypto.

We can break it down even further, and say that cryptocurrencies are merely a medium of exchange. Cryptocurrency are a means of carrying out a transaction, digitally. Cryptocurrencies are virtual currencies independent of government control or any central authority, however not all cryptocurrencies are truly decentralised.

For a cryptocurrency to maintain trust and securely validate transactions, it needs some sort of an accounting system or advanced database. This is where the blockchain comes in. Cryptocurrency cannot truly function without the blockchain. The blockchain is a public or private ledger of all transactions that have ever occurred on a cryptocurrencie’s peer-to-peer network. It is like one long record book, which dates back to the first few transactions which occurred for whichever particular cryptocurrency. As transactions are continuing to be to be processed, the ledger will continue to grow and build on itself. Hence the reason why we call it a chain.

Origin Of Cryptocurrency

I am positive that you have heard about Bitcoin (BTC). Everyone is talking about Bitcoin (BTC). Well it all started way back in the 1980s by an American cryptographer named David Chaum. He invented the first form of Internet money known as “DigiCash”. It was an extension to the popular algorithm RSA. His project ended up in bankruptcy in 1998.

When the financial crisis hit parts of the United States of America back in 2008, the world was in a dying need to have something reliable and decentralized in power. In 2008, Bitcoin (BTC) was first stated in a white paper entitled “Bitcoin — A Peer to Peer Electronic Cash System” under the pseudonym name “Satoshi Nakamoto”.

Satoshi Nakamoto, could be a single person or a group of individuals. This is still a mystery.

With Bitcoin’s gaining popularity many people saw the potential for a new monetary system. Other cryptocurrencies were released which are also known as “Altcoins” collectively. These altcoins are basically developed with the purpose to eliminate the remaining loopholes of bitcoin. The first ever altcoin is believed to be “Litecoin”. There are more than 2000+ cryptocurrencies in circulation today, some popular names are Ethereum, Litecoin, Ripple, NEO, Monero, etc.

Types Of Cryptocurrencies

Cryptocurrencies today come in three main types, namely; Coins, Security Tokens and Utility Tokens.

Coins: Alternative Cryptocurrency Coins (Altcoins). These are mainly used for transactional purposes, examples include; Bitcoin (BTC) and XRP.

Utility Tokens: a digital token of cryptocurrency that is issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency sold utility tokens as a method of fund raising for the project.

Security Tokens: A crypto token that passes the Howey Test is deemed a security token. These usually derive their value from an external, tradable asset. Anything that is of value may be tokenized. Because the tokens are deemed a security, they are subject to regulation.

What Can You Do With Cryptocurrencies?

As mentioned in the previous section, there are different types of cryptocurrencies, and each type serves a unique purpose. Coins most notably, for example, Bitcoin (BTC) is used for transactional purposes. It is a store of value. It gets this value by being the first successful cryptocurrency, and because only only 21 million Bitcoins (BTC) will ever come into circulation. This gives Bitcoin (BTC) an advantage over Fiat currencies, like the Rand (ZAR) because the Rand (ZAR) is subject to inflation.

So what can you do with cryptocurrencies?

HODL: HODL or HODLING refers to holding holding a particular cryptocurrency, in the hopes that it may increase in value in the future, whether it be short term or long term.

Loans: You can loan cryptocurrency. You might need to put up some of your own cryptocurrency for collateral. But it is something that many cryptocurrency traders and cryptocurrency miners do, so that they do not use their own funds. The benefits of taking a loan out in cryptocurrency, is that anyone can get a loan, as long as collateral is provided. Meaning you do not need to wait days or have to have to wait days to be approved for a loan, with traditional banks and fiat currencies.

Purchase goods: Mainstream media is quick to point out that cryptocurrency is used to purchase illicit goods on the dark web. This was the case in the beginning, back when Bitcoin was first discovered. However today you can buy anything with cryptocurrency, as long as the vendor accepts it as a form of payment. Many online retailers are moving over to accept cryptocurrency as a form of payment, due to demand and lower fees.

Transfer of funds instantly, and with low fees: A simple transfer of funds from Standard Bank to FNB could take up to 3 days to be processed. While this based off of SWIFT Technology, with the capabilities to have funds transferred instantly, banks choose to have a delay on bank to bank transfers in order to monitor transactions, and stop fraudulent activity.

This not always beneficial, and sometimes we want to have funds processed instantly. XRP a top 5 market cap cryptocurrency, which is headed by the company Ripple, has a near-instant transaction time. Transactions never take longer than 5 seconds. And this does not matter where in the world you are, or where in the world you are sending your funds to.

Betting: You can bet on live events such as sports, or gamble your cryptocurrency, and walk away with either a loss or massive gains. From buying collectible digital assets to playing poker, there are 100s of things you can bet your cryptocurrency on.

Gaming: Gaming is a growing industry, especially in the blockchain environment.. Play games to win crypto, or collect and use it in game. Collect and trade CryptoKitties in one of the world’s first blockchain games. Blockchain will create a new era for gaming.

Legality Of Cryptocurrencies

Now, you might be wondering to yourself…

How legal is this crypto thing.

Cryptocurrency and blockchain regulation is constantly being introduced and updated. Cryptocurrency and blockchain is still in its infancy. Adoption of cryptocurrency has mainly been caused by hype. Real adoption will occur when its benefits are realised. Cryptocurrency can be tracked and traced. If you plan to cash out your cryptocurrency for fiat, it is best to declare your returns.

Where Can You Get Your Hands On Cryptocurrencies?

Cryptocurrencies can be bought at fiat to crypto exchanges like; Luno.com, Ice3x.com and Bitfund.co.za. You can also mine cryptocurrency, or earn it by doing simple tasks, such as searching the internet like you would with google, except that you will be rewarded in cryptocurrency for doing so.

How To Store Cryptocurrency

Best practices are to store store your cryptocurrency with an exchange or wallet, which has insurance to cover losses, or on a hardware wallet. You can also store cryptocurrency on your computer, or cellphone. A variety of different wallet options exist. Do in-depth research on your storage method, as there will be no one to call if you lose your cryptocurrency.

Stay Safe And Don’t Get Hacked

1 billion USD worth of cryptocurrency was stolen in the first half of 2018. Centralised cryptocurrency exchanges are prone to being hacked and cannot guarantee safety for your cryptocurrency holdings. Make sure you only visit trusted cryptocurrency websites, and preferably store your cryptocurrrency on a hardware wallet. Trade on decentralized exchanges if you can, as you will be trading from your wallet, and do not even need to sign up for an account.

Future Of Cryptocurrencies

Cryptocurrency has a future, exactly what it is is unknown. Token Securities are the latest when it comes to cryptocurrencies. Token Securities came about mid 2018, and seems to have the interest of many financial institutions, due to better regulation. ETFs ( Exchange-Traded Fund) are in the works, with the world’s first crypto Exchange-Traded Fund (ETF) getting listed on SIX Swiss Exchange, Europe’s fourth-biggest traditional stock exchange.

Cryptocurrency and ICO ( Initial Coin Offerings ) have also seen a lot of scams since inception. The SEC (The U.S. Securities and Exchange Commission ) has been cracking down on illegal activity in this space. “Pipcoin”, South Africa’s first apparent cryptocurrency was one such scam, that saw many South Africans lose their money. Another suspicious coin, “SAFCOIN” is the latest cryptocurrency to claim itself to be South Africa’s first cryptocurrency. In order for cryptocurrencies to foster a better future, less scams need to take place.

Conclusion

Cryptocurrency has a role to play in society. Whether it is to provide an alternative to fiat currencies like the Rand (ZAR) or to tokenize assets. Blockchain and cryptocurrency is definitely overhyped, however it is not going away. There are to many brilliant minds solving world problems using blockchain technology, such as decentralized social media networks, search engines that reward users for searching the Internet, and free basic healthcare.

Investing in digital assets is highly risky and speculative. A qualified professional should always be consulted before making any financial decisions. CryptoLive makes no representations or warranties as to the accuracy or timeliness of the information contained on the site. None of the information you read on CryptoLive should be taken as investment advice. Buying and trading cryptocurrencies should be considered a high-risk activity. Please do your own diligence before making any investment decisions. CryptoLive is not accountable, directly or indirectly, for any damage or loss incurred, alleged or otherwise, in connection to the use or reliance of any content you read on the site.

Get started with just R10

Trade the largest selection of cryptocurrencies available in South Africa by signing up to VALR, and receive a 10% rebate on your trading costs, up to a total of R1,500 using our link. Sign up to VALR