Cryptocurrency: What Is It? What Can You Do With It?

cryptocurrency
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Cryptocurrency is gaining popularity as an asset class. Every day you hear people talk about bitcoin, litecoin, onecoin and so many more. In fact to most people, cryptocurrency is fast becoming their most preferred investment option when considering what investment to buy.

But what is a cryptocurrency?

That is what this post tries to explain.  If you are new to cryptocurrency, you will understand what it is and know why it is called the new face of money, after reading this post.  

Evolution of Money

Man used to exchange goods for goods in his early days in a system called barter.  Later, he discovered the convenience of using one commodity as a standard of measuring value in commercial exchange.  In his efforts to improve the means of exchange suitable for his economy at any point in time, man had used cowry, seashell, pearl, metal, silver and Gold as money. 

As economic activities become more complex, paper money or fiat currency was developed as the government took over the responsibility of producing and issuing currencies. Since then other forms of money has been introduced by the banking system to deal with increasing volume of commercial transactions. Some of these money types include cheques, bills of exchange, credit cards, etc.

Today we are at the technology age where everything has gone digital.  One area of life largely impacted by these developments is business including finance and banking.  Since business, economy and commerce are going digital, doesn’t it make some sense that digital money is available to facilitate transactions?

Herein lies the birth of cryptocurrency.

Now Cryptocurrency explained

Cryptocurrencies are money in digital form.  This means that you cannot see it.  But you can use it to do any thing you can do with money. Settle obligations, buy commodities, pay for services as well as store value.  In other words, though you cannot see it or feel it physically, you can derive value from its use. 

Cryptocurrencies make use of cryptography which essentially are limited entries in a database that nobody can change until certain conditions are fulfilled.

Historical Background 

There have been numerous attempts at producing electronic money since the technology boom of the 90’s. These attempts were largely unsuccessful for many reasons. Of particular interest was that all those systems made use of third party services which proved to be not so reliable.

But it was not until early 2009 that an anonymous computer programmer who goes under the pseudonym Satoshi Nakamoto activated the crypto world when he launched Bitcoin. Bitcoin became the first cryptocurrency and has since remained the most popular.  Satoshi defined it as a ‘peer-to-peer electronic cash system.’ It is entirely decentralized, implying there are no web servers involved and no central controlling authority. The concept closely appears like peer-to-peer networks for documents sharing.  

Within a cryptocurrency network, only miners could validate transactions by resolving a cryptographic puzzle. They take deals, mark them as genuine and spread them throughout the network. Basically, cryptocurrency network is based on the absolute agreement of all the participants regarding the authenticity of deals. If nodes of the network disagree on a single balance, the system would basically damage.

Coat of Many Colours

There are as many cryptocurrencies in the market today as there are investors with the cash and technology to explore the blockchain.

As at the time of writing this post, there are over 1680 crypto coins in the market. Some of the popular ones apart from bitcoin are: Etherium, bitcoin cash, monero, etherium classic, dash, ripple among plethora of others and more are yet to come.

You can get the entire list of cryptocurrencies here.

Uses of Cryptocurrency

Whatever you can do with fiat money, you can also do with cryptocurrencies such as bitcoin and the rest of them.  In other words, you could

Buy items

Many merchants and eCommerce websites now accept bitcoin and other cryptocurrencies for the payment for goods purchased on their platforms. A lot of eCommerce sites now accept bitcoin and some other cryptocurrencies.

Pay for services

There are a great deal vendors – both offline and also on the internet – that approve Bitcoin as mode of settlement. Various other electronic money like Litecoin, Ripple, Ethereum as well are increasingly being accepted as means of payment for goods and service.  

Bitcoin is increasingly being used for payment of hotel bills and reservations, flight tickets, apps and even school fees in some countries.

Store Value

Like money, cryptocurrencies are increasingly becoming assets that people be use to store value for future use.  There are highnetworth individuals and institutional investors who have created bitcoin as an investment class and have large percentage of their portfolio in it.

How Can You Make Money With Cryptocurrency

There are many ways you can make money from cryptocurrencies.  Lets examine a few of them here:

Invest in it

Cryptocurrency is fast becoming a profitable investment asset class to so many people and more and more platforms are emerging to provide access to these investment. Bitcoin is the most common today, and  has made so many investors rich. It was less than a dollar when it was introduced in 2009.    Today, one bitcoin is worth over USD50,000.

It is worth bearing in mind that cryptocurrencies are risky financial instruments.

They are very volatile due to price fluctuations. It is not under the control of any central authority.  And it is illegal to trade in cryptos in some countries of the world.

Just like other financial investment, you have to pay attention to the cryptocurrencies’ market price and market information. Coinmarketcap is a platform for tracking cryptocurrency information with regards to price, volume traded, market capitalization etc.

There are over 1600 cryptocurrency listing on coinmarketcap 

Mine it

Crypto mining is the complex mathematical and computing process that derives encrypted transaction from the block chain.  Mining is perhaps, the single most important aspect of the cryptocurrency network.  Due to cost and complexity, the best way to begin mining cryptocurrency is to join mining pools.

Trade it

Rather than buy and keep over time, you may choose to trade on coins.  Decide on the crypto of your interest from among the over 1000 in the market and buy and sell as you do with stocks or currencies.  There are a lot of online platforms existing for speculative trades on cryptos in the same way they exist for the trading of other derivatives such as forex and binary options.

How to Buy Cryptocurrency

The first step is to set up a wallet and thereafter buy through peer-to-peer or through an exchanger.   Exchangers are private companies who have the resources and systems to exchange digital currency of your choice to other digital currencies or cash. There are so many of them now but you have to be careful of scammers who are also as many.

Is Cryptocurrency Legal?

At the moment there is no legal framework on cryptocurrency.  But it doesn’t mean that cryptocurrency is illegal. As matter of fact, authorities around the world are looking for the best way to fit it into the existing financial structure.

Ofcourse, there concerns particularly as it relates to its decentralized nature.  And this is what is working against its wide adoption by governments all over the world.

While it is gaining prominence as a means of payment in most countries; some other countries are actually discouraging its use. Countries like China, Russia and South Korea are considering to ban digital currencies while Bangladesh, Bolivia, Ecuador, Kyrgyzstan and Vietnam have banned bitcoin and other digital currencies. 

In Nigeria, the Central Bank instructed banks and other financial institutions to close accounts of customers who trade in cryptocurrencies.

Keeping Your Crypto money

Unlike typical money, cryptocurolrencies are electronic, which involves an entirely different method when it comes to keeping it as a store of value.  It is a digital asset, hence you do not keep it the way you keep money with your bank. Unlike your bank account, the only way you can access your crypto wallet is through your password. So you must keep it secret.

It is your responsibility therefore to ensure that unauthorize persons don’t get hold of your password.

Final Word

There is a future for digital currency as the crypto universe is developing very fast in spite of the lack of regulatory framework.  In fact the inability of government to interfere is one unique driving force pushing the development of cryptocurrency.    As a result it may remain an unconventional asset for a long time. 

It is highly speculative, volatile and risky, hence requires that you trade cautiously by investing within your level risk acceptance criteria. Cryptos can be good way to have a diversified portfolio and if done properly can make you rich in a short while like other high risk high return investment classes.

And very importantly, before you buy any cryptocurrency; do your research thoroughly.  Find out if it is listed on coinmarketcap and whether exchangers are trading on it. 

Make sure you are buying from authentic sources. 

And speaking quite frankly, if you do not have the appetite to take risk or you are someone who will rather want to watch your money grow steadily and safely, please do not do cryptos. 

Good luck

Buchi creates content and leads the Team at Kobotalk Management Services; a business development and investment consultancy firm. He provides strategic advisory to help SME's, small business owners and HNI's grow profitable business and make informed investing decisions.

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