Everything You Need to Know About Cryptocurrency – Start Here
The buzz around the future of money is hard to miss these days. Sensational stories of how a teenager or a college drop-out have become millionaires overnight have been making news quite often… tempting people to start investing in digital money or what are more technically known as cryptocurrencies.
But the gurus of investing adhere to one rule: invest in what you understand.
Here is then a quick rundown on cryptocurrencies.
What is cryptocurrency?
Next, what exactly is cryptocurrency and how is it different from liquid money?
Cryptocurrencies are decentralized – they are not controlled by any one person or entity.
Cryptocurrencies are not printed, they are digital currency and are held in digital format.
Usually, they are mined by people or entities called miners.
Miners use computers to perform mathematical computations to put the transactions into a database and get rewarded with units of the cryptocurrency.
For example, Bitcoin miners get 25 BTC (Bitcoin) for each block of transactions they put to the database.
Miners compete with each other to win the block reward.
Cryptocurrency transactions need to be confirmed by the network of miners before the ownership of the tokens pass on to the receiver.
Should you invest in cryptocurrencies?
Recently, several cryptocurrencies experienced a massive increase in market share.
Ether, which facilitates companies, organizations, service providers, in general, anybody who has enough technical knowledge to conduct Initial Coin Offerings (ICOs), has grown massively and at one point surpassed Bitcoin in terms of market share. ICOs are much like IPOs, in that the company raises money through them.
But instead of giving you the company’s shares, it provides Ether-based tokens.
These can either be traded on the exchanges (once the exchanges feature them) or exchanged for some service that the company provides.
Also, most ICOs are pre-product – companies raise funds to develop their products, update products, pay salaries, etc.
ICOs have become the main mode of crowd-funding these days and have attracted the attention of a lot of people.
But there are dangers that investors should be aware of:
- Cryptocurrency prices are highly volatile. Many currency holders have made fortunes, but they didn’t do so overnight – nor is it possible to do so.
- Cryptocurrencies are not regulated by many countries – the threat of future regulation always looms over them affecting the price. China recently banned ICOs as an illegal fundraising method and the Bitcoin price took a dip from around $5000 to $4000. Following this, Russia’s central bank, The Bank of Russia, issued a warning on cryptocurrencies and ICOs. We can expect more such regulations and bans in the future.
- Cryptocurrencies may be forked or split into two or more. Bitcoin recently split into Bitcoin (BTC) and Bitcoin Cash (BCH). After an attack on one of the Ethereum-based projects, Ether was split into Ethereum and Ethereum Classic networks. A split may lead to a depreciation in value of one of the resultants and appreciation of the other – investors have to choose wisely which network they want to support.
- Hackers are always on the lookout for vulnerabilities that they can exploit to steal coins. Mt. Gox exchange hack is one of the biggest hacking scandals where hackers stole $460 Million and forced the exchange into filing for bankruptcy.
- Cryptocurrencies involve a steep learning curve during the initial stages of investments. You need to be tech savvy to be able to set up your wallets and handle your addresses properly and securely. Addresses are like your unique account number where you receive coins. There are multiple types of addresses.
- Also, there are various types of wallets like online web wallets (accessible through browsers or mobile apps), desktop wallets (connected directly to the network) and hardware wallets (since cryptocurrencies are nothing but 1s and 0s you can store them in hardware wallets that are off any network and are more secure because of that).
- The most popular rule for investing in cryptocurrencies is: only invest what you can afford to lose.
- Keep in mind that investments in cryptocurrencies may take a long time to give a good ROI. Don’t get overawed by news reports of people becoming millionaires – for every cryptocurrency millionaire, there are countless others who have lost majority or all of their investments in this highly volatile world.
- Stay away from websites and the so-called investment platforms that claim to be providing a high ROI in a short span. Such platforms are called High Yield Investment Programs and are scams or ponzi schemes. No legit investment platform will double your investments in 10 days!
Cryptocurrencies are no doubt the future of currencies. But read, learn, exercise caution and then dive in.