With Bitcoin and cryptocurrency on a lot of people's radar recently, I thought I'd put together a short overview of what cryptocurrency is, and how you can invest.
What is Cryptocurrency?
Basically, a cryptocurrency is a digital token, designed to work as a medium of exchange, or a method of record keeping. However, it uses cryptographic algorithms to secure and verify transactions across it's network and to control the creation of new tokens (inflation).
Bitcoin was the first decentralized cryptocurrency, created in 2009 by the as yet unidentified Satoshi Nakamura. Bitcoin uses Peer-to-Peer transactions, with no middleman or financial institution involved. Records of each transaction are cryptographically verified by other nodes on the Bitcoin network, then those transactions combined into a 'block' and added to Bitcoin's ledger, otherwise knows as the blockchain. The blockchain holds details of every single transaction on the Bitcoin network, and as the blockchain is simultaneously held on multiple nodes throughout the blockchain network, it is unable to be changed, disrupted, censored, or hacked. Nodes on the network, commonly known as 'Miners' collect a small fee from each Bitcoin transaction, as an incentive for keeping the network online.
Since Bitcoin was released, there have been hundreds of new cryptocurrencies created, which all serve their own individual purpose. Ethereum is arguably the most successful platform after Bitcoin. Ethereum enables users to attach 'Smart Contracts' to their transactions, which execute without any possibility of downtime, censorship, fraud, or third-party interference. Most other "Alt-coins" have piggybacked off the design of the Bitcoin or Ethereum code, and each have made their own improvements or features added to those codebases. Some may be more privacy orientated, others more focused on the speed of transactions, and more commonly these days, a lot of coins are being launched to fund new projects in place of seeking venture capital.
What is the potential?
Satoshi Nakamoto's blockchain concept is revolutionizing the tech industry, in way I don't thing even (s)he imagined. Without a doubt, this is Internet-v2.0, and it comes with the same, (or more!) potential for growth and revolution throughout the world.Bitcoin, and most other cryptocurrencies are decentralized, meaning they're hosted by the network users themselves. This allows Bitcoin etc to work outside of the over-regulated world of the banking and finance sector, and it can not be controlled or regulated by any government.
Cryptocurrencies can work cross-boarders, in a timely and efficient manor, with extremely low transaction fees. For example, many people in impoverished regions either have no access to traditional banking, or it is too unsafe to carry carry cash in/out of a bank for fear of being robbed. Bitcoin is giving these people the opportunity for some financial freedom and safety, as well as being able to access micro-loans to establish enterprise in their region.
Cryptocurrency and blockchain technology has uses in everything from humanitarianism, commercial banking, insurance, personal finance, venture funding, healthcare, manufacturing, and pretty much every other industry you can think of.There are a lot of incredible projects which are being funded by ICO's (Initial Coin Offerings, like a Float of the stock market) instead of having to seek Venture Capital arrangements. This means that for the first time in history, the average investor has access to invest in potentially groundbreaking projects and businesses at a very early stage. Imagine having the opportunity to invest in Google or Facebook in their early days! There are so many start-ups developing incredible blockchain projects, which are set to revolutionize their respective industries, who are offering you and I the chance to invest at the ground level via their cryptocurrencies.
What sort of projects are involved?
There is already a huge number of projects officially launched, or under development. There are dozens of projects being developed on the Ethereum codebase in order to take advantage of these 'Smart Contracts'. Everything from insurance policies to gambling. Other projects include 'Privacy Coins' which allow completely anonymous transactions using Zero Knowledge verifications. Ripple is a platform which is revolutionizing inter-bank transactions, and could make the current SWIFT system entirely redundant. Then there are other projects which have marketplaces, or social media platforms built in. The possibilities are endless!
What are the risks?
As with any investment, there are risks. However, due to the nature and relative adolescence of the cryptocurrency industry, the risks are far higher than traditional investments like stocks or property. There is a lot of profit to be made, but investors must do their homework on the coin itself, and the general political climate surrounding these kinds of investments. Recently, some negative comments from Chinese and Indian Govt press officers have cause a huge dump in prices across the board. With this in mind though, Bitcoin was actually less volatile than crude oil last year.There is also large risks of an individual project failing to realize it's goals, and an ever larger risk of unintentionally investing in so-called Scam-coins, which have been created purely for the profit of the developer, and offer no long term potential.
How can I invest?
Firstly, do your homework. Spend some time on the Bitcoin forums, Crypto message boards and reddit. Research as many projects as you can, and try to find a reason NOT to invest your hard earned. I always recommend people invest only in projects which they believe offer industry leading technology, and real value to the greater community. It's it's unethical, or isn't 'best in class', forget about it.Most Cryptocurrencies are purchased on an exchange, in much the same way you'd buy stocks, bonds or forex. Depending on the exchange however, most of the Alt-coins only trade against Bitcoin. So generally it is necessary to purchase Bitcoin in order to invest in these other coins and projects.Traditional investing rules apply regarding buying and selling, and these should suit your personal investment style, and your personal level of acceptable risk. Use common sense and leave fear and greed at the door. Never regret a missed opportunity, it's always better to err' on the side of caution rather than to face a big loss.
I hope this has given some of you a better idea of this exciting investment landscape. This is my first ever blog post, so please feel free to leave questions, comments and feedback.
With love,
N