Investing

Cryptocurrency: Understanding the New Face of Money

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 in Nigeria, cryptocurrency is gradually becoming their most preferred investment options when considering options for wealth creation.

In this post, you will get learn what cryptocurrencies are and how can invest in them and if you trace the evolution of money as means of exchange, you will begin to have an idea why cryptocurreny is said to be the future of money.

Then, lets first consider

How Money Evolved

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 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 digital money that can be used as a means of exchange.  That is, they can be used to settle obligations, buy commodities, pay for services as well as store value.  In other words, it is another form of money but unlike the normal currency that we see and feel, cryptocurrency is virtual – you cannot see it, you cannot feel it physically but you derive its value. Cryptocurrencies make use of cryptography and essentially are limited entries in a database that nobody can change until certain conditions are fulfilled.

Historical Background of Cryptocurrency

There have been numerous attempts at producing electronic money since the technology boom of the 90s. 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.

It was not until early 2009 that an anonymous programmer under an alias Satoshi Nakamoto activated the crypto world when he launched Bitcoin. Bitcoin became the first cryptocurrency and has remained the most popular ever since.  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 different shades and types of cryptocurrency.  Since it is independently mined there are as many cryptocurrencies in the market today as there are investors with the cash and technology to explore the blockchain. While the coinmarketcap provides the infrastructure for the listing of cryptocurrency there a good number of others which are primarily peer-to-peer, hence are not traded by exchangers.  A review of the coinmarketcap shows that there are about 1680 cryptos listed there. Some of the popular ones apart from bitcoin are: Etherium, bitcoin cash, monero, etherium classic, dash, ripple amongst plethora of others and more are yet to come. You can get the entire list of cryptocurrencies here.

What can you do with cryptocurrencies

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 great deals of 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 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

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.  Less than a dollar when it was introduced in 2009, bitcoin now exchanges for about US$9,0000 with a  market capitalization of about US#154 billion.

It is worth bearing in mind that cryptocurrencies are risky financial investments. Their market price fluctuates and is very volatile. It is practical has no country and is under threat of being banned in some countries because most central banking authorities are yet to develop framework for cryptocurrency as a financial asset.

Just like other financial investment, you have to pay attention to the cryptocurrencies' market price as well as to market information. Coinmarketcap is a platform for tracking cryptocurrency information with regards to price, volume traded, market capitalization etc. There are over 1600 crytocurrencies that are listed on coinmarketcap.

Mine it

The core of cryptocurrency is based on blockchain and those who follow the complex mathematical and computing process to derive encrypted transaction from the block are called miners.  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 crypto of your interest from amongst 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 derivative trading in other financial asset classes.

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.

How Legal Is Cryptocurrncy?

At the moment there is no legal framework on cryptocurrency as authorities around the world are yet to decide on how to fit it into the existing financial structure.  However, many admit that cryptos cannot be easily shoved away in the global financial systems as more businesses and prominent individuals continue to embrace it.

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, while government has not made any categorical statement on cryptocurrency, the financial authorities such as the Central Bank of Nigeria, and the Securities and Exchange Commission has at different times warned individuals to be cautious about bitcoin and other digital currencies because there is no regulatory framework guiding investment in these unconventional asset classes.

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 keep money with your bank.  Since it is stored digitally, your only access to it is your secret password which must kept secret at all times. As long as you remember your password you are able to have access to your asset. It is your responsibility therefore to ensure there is no unauthorized access to your wallet.

Final Word

There is a future for digital currency as the crypto universe is developing very fast inspite 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 ensure that you do your research thoroughly, find out if it is listed on coinmarketcap, find out if exchangers are trading on it and make sure you are buying from authentic sources.  And speaking quite frankly, if you do not have the apetite to take risk, if you are someone who will want to watch your money grow steadily and safely, please do not do cryptos. For safer investment classes you can do with peace of mind, read our article on the best investment options you can do in Nigeria

Good luck

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