Understanding Cryptocurrency

It is virtually impossible to sit down today and have a discussion with people and not broach the subject of cryptocurrency. Questions such as: should we buy it, how much should be bought, what types of coins should be bought, from which exchange should you buy them, what security measures should be undertaken and so on. Certainly, all valid questions and with the continued escalation of Bitcoin and other alternative coins throughout 2017, cryptocurrencies have now most definitely achieved a global phenomenon status, that have demanded everyone’s attention. By Daniele Lima

Despite this high level of broad awareness about the existence of bitcoin and digital currencies, there remains a surprising level of misinformation around these issues and currently there also appears to be an information war being waged between the groups that are pro cryptocurrencies and those that oppose it.

This ongoing battle has provided an enormous level of noise through the saturation of information being provided by both sides has tended to confuse, overwhelm and in many cases, scare off potential investors. However, before any logical decision can be made an understanding of the key underlying principles is a necessary first step.

WHAT ARE CRYPTOCURRENCIES?

Fundamentally it is a digital medium of exchange that is stored electronically in the blockchain and requires an encryption system to both create coins and validate exchanges that take place within the network.

Crypto-currencies first came out in late 2008 when Satoshi Nakamoto, the fictional name for the unknown inventor of Bitcoin, developed “a peer-to-peer, electronic cash system.” In so doing he pioneered the first digital currency that was decentralised, requiring no third party to facilitate the payment.

How do cryptocurrencies work?

For cryptocurrencies to operate effectively the system requires an environment with accounts, balances and transactions that are totally transparent and visible to all. With this form of decentralised system, there is no central server that records all transactions, but rather each participant in the network to have access to all transactions being made to assess that all transactions are valid and no attempts to double spend have been made.

Blockchain provides a robust database that accurately records all transactions with strict protocols ensuring that these entries can only be altered when very selective conditions are met, thereby ensuring the integrity of the data. So, in this way it is like a standard fiat currency where transactions are recorded (albeit) on a centralised database.

HOW ARE TRANSACTIONS MADE AND RECORDED?

Cryptocurrencies such as: Bitcoin, Ethereum, Neo, Iota and Monero, are made of a network of users of that coin. Every member or peer has a record of the complete history of all transactions from that network and consequently can see the balance of all the accounts within the network.

After any given transaction occurs, the details of that exchange shared with the network, sent from one user to each other network member.

Being that the nature of the transaction is known instantly as it occurs, and the confirmation occurs soon after. Once a transaction is confirmed, it can no longer be copied and becomes part of the permanent record of network transactions or blockchain as it is better known as.

Miners that have mined or earnt coins can also then through the same blockchain process confirm their coins within the network. Following each transaction, each node within the network adds it to the network database and it becomes part of the blockchain.

KEY PROPERTIES OF CRYPTOCURRENCY ACCOUNTS

a. Permanent. Once a transaction is confirmed within the blockchain it cannot be changed.

b. Anonymity. There are no actual names given to the accounts, so no one can know what you are doing in your account. As such it is impossible to know what addresses are connected to which people. The addresses themselves are randomly generated 30 alphanumeric character strings.

c. Real Time. Transaction are processed nearly instantly within the network and are confirmed in a matter of minutes anywhere in the world.

d. Safe. Digital currency funds are woven in a public key cryptography system. Each account holder has a private key that only they know to send cryptocurrency. The system has a high level of security and when combines with double authentication methods using apps like Google Authenticator, make it virtually impervious to crack.

e. No Third Party. Unlike traditional financial systems, there is no third-party permission required with cryptocurrency. Good or bad, there are no external gatekeepers.

f. Finite Supply. Cryptocurrencies generally limit how many of each coin will be made available for circulation. For example, with Bitcoin, the supply will decrease over time and will reach its final number of around 21 million coins by around the year 2140. The amount for each coin is predetermined along with a schedule of how the coins will be issued over time and written into the code. This provides an exact number of each coin that will be available at point in the future.

Function of Cryptocurrencies

Cryptocurrencies have multiple functionality. Firstly, they are an obvious store of value in the same way that gold is a store of value with a globally accepted price per ounce usually expressed in US dollars. In this way an investor can park their money into cryptocurrencies and take advantage of appreciation that may occur as the price of the coin hopefully rises over time. Bitcoin for example experienced a 1700 percent growth in 2017 for example hitting a record high of over US$19,000 during December 2017.

Secondly digital currencies such as Bitcoin can be used as a means of exchange where you can purchase goods and services with them in the same way you would normal currency. Recently for example Dallas Mavericks Owner Mark Cuban announced that from

now on and Dallas Mavericks product could be bought with Bitcoin. Microsoft products can also be purchased in the same way and as a leading cryptocurrency nation, Japan already has over 25,000 businesses that are registered as being set up to receive payment with cryptocurrencies such as Bitcoin.

HOW DO I BUY CRYPTOCURRENCIES?

Cryptocurrencies can be purchased on any number of reputable exchanges such as: Coinspot, Binance and Bittrex to mention three. These exchanges and many others have excellent features available and allow simple buying and selling processes that allow any interested party to begin their journey into these digital currencies.

Understanding that Bitcoin continues to be the dominant player in the market at present, investors and users should however continue to study the other less known cryptocurrency options which in some cases present equally strong potential for growth. Below is a table of some of the most popular of the current cryptocurrency options.

BITCOIN

Bitcoin certainly needs no introduction. It is the pioneer and remains to this day the standard in the market that still has the power to pull the market up and down with its own fluctuations in price. Widely accepted as a means of payment in many countries. From its initial release with a zero value it recently achieved a peak value of US$19,343 on December 16, 2017.

ETHEREUM

Ethereum has quickly risen to second place behind Bitcoin since its release in 2017. It is widely known for a blockchain that not only can validate a set of transactions but can also process detailed contracts and programs.

This added functionality means Ethereum is an ideal tool for blockchain practical applications.

Following the hack of the DAO, which was an Ethereum smart contract, the developers came out with Ethereum Classic. Additionally, there are other Ethereum offshoots, where even Ethereum hosts various coins including Augur and DigixDao, making it more of a hybrid digital currency.

RIPPLE

Ripple remains controversial and disliked option as it is widely adopted by banks as part of a centralised network that serves as a medium to neither store and exchange value, but merely as a coin that aims to protect the network from spam.

MASTERNODES

Perhaps the least understood aspect of investing in Cryptocurrencies and one that holds the largest potential for financial gains is that presented by master nodes and here’s how they work. Understandably every cybercurrency network wants to encourage its peers to hold the coins long term to provide the network with a greater level of stability. What they do is offer daily rewards for doing this. An example of this is the ALQO cryptocurrency that supports masternodes. In this example the user buys 10,000 coins currently valued at US$2.21 for US$22,100.

To incentivise the buyer to hold the coins, each day apart from the expected increase in coin value per se, the network rewards the buyer with 37.5 complementary coins per day, every day as a passive income on top any increases in the coins value. To achieve this, you would simply buy the required number of coins via trading and set up the master node on their website, while buying a 12-month hosting. Although with master nodes, you can pull the plug and retrieve the funds at any time if you so choose.

Payouts as reward for running the masternode should arrive roughly every 24hrs at a credit of 37.5 ALQO. Over time this reward will decrease as ALQO scales and more masternodes come online. The first reward will usually come after about 2-3 days and if the hosting for the masternode goes offline and/or restarts then this waiting period starts again.

LOOKING IN TO THE CRYSTAL BALL FOR 2018 AND BEYOND

There is little if any real doubt that Cryptocurrencies as a group are here to stay. The technology that underpins their use is real and their advantages over traditional currencies, well documented.

Equally certain is the fact that many of the coins that come out almost daily, will do little and die. While the more valuable coins with greater utility and functionality, will consolidate, grow and become part of the financial landscape in 2018 and beyond.

Ultimately cryptocurrencies will change the currency landscape and the status quo that financial institutions are  understandably so keen to keep. Perhaps Harold Abraham said best in the film classic Chariots of Fire when he said, “the corridors of power are guarded jealously.”

The battle I spoke of earlier between the pro faction and the negative faction who daily attempt to fill the media with doom and gloom stories of the inevitable fall of cryptocurrencies, are doing little other than temporarily slowing the cyber express, as people globally continue to invest in Bitcoin, Ethereum and in Master nodes.

As a final step as Governments and banks accept the inevitable, they begin to understand the question is how they best approach it moving forward to ensure that they are part of the natural evolution to digitally based, cryptocurrencies. BFM

Daniele Lima is Managing Director Road Scholars Training, Business Coaching & Strategic Consultancy.



Business First is a peer-to-peer magazine: written by CEOs and other high level executives, with interviews with some of the country’s best leaders.


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