It is undebatable – Cryptocurrency. Everyone wants to make money – “through what and by what?”- remains quite the question to be answered.
Risk is one characteristic of a money-minded individual universally accepted as the trunk of entrepreneurship. However, when does risk become too risky? Or should we take risks for the sake of taking risks?
The Cryptocurrency has become the rave of the moment in online earnings. Indeed, Cryptocurrencies had always been relegated to theoretical postulations and other boring gists before a practical implementation came about in 2008 by Satoshi Nakamoto.
Bitcoin’s popularity has stimulated interests from various quarters – including ‘money-finders’ – like you and I and even from the Nigerian Government – should this be of concern to us? You decide.
Not to worry, let us go together over the basics. This will enable you make an informed decision. It is recommended at least to take risks (if you want to) from a well-advised position.
Some Cryptocurrency Basics in Plain English
First things first, what is Cryptocurrency?
Cryptocurrency is a digital currency that uses encryption (cryptography) to generate money and to verify transactions. Transactions are then added to a public ledger – also called aTransaction Block Chain – and new coins are created through a process known as mining.
Never mind, all these jargons will be broken down.
What do we mean by encryption?
Encryption = a lock, a key.
Imagine a door, being the entrance to a room of course. You keep a lot of your belongings behind that door that you can access at any given time.
The thing is, can any other person access it without your permission? Yes. Errm, what do you call that person? A thief or a burglar. Apply that scenario too to something on a computer. You lock something up so that someone else won’t be able to access it. What if someone accesses it? You could call such person a…..hacker. That is the idea.
Cryptocurrencies deal with the idea that every transaction you make is locked to you and only you.
#1 Basic Public Ledgers
This is used for record-keeping, primarily. It is the ‘backend’ – administrative end of every transaction that needs verification. Remember encryption? The identity of every coin owner in this transaction is ‘locked’. Think of this as anonymity.
When you want to send money from your ‘normal’ bank account, how does your bank know when to or when not to approve such transaction? It uses something similar to this ‘Public Ledger’.
#2 Basic Transactions
An exchange of funds between two accounts (in this case, digital wallets) is called a transaction. Before a transaction is successful, it is first submitted to a public ledger and awaits confirmation, for obvious reasons.
#3 Basic Mining
We all know by now that every transaction needs to be confirmed before it is valid. The process by which transactions are confirmed is known as MINING. This process is made possible by ‘miners’ – crypto miners in this case and they conclude this process by adding these confirmed transactions to the ‘Public Ledger’.
This mining process is what actually gives value to the coins.
The “Block Chain” contains the history of all transactions performed in the system. So you could deduce that the Block chain is a chronological list of transactions.
So what factors make Bitcoin and other cryptocurrencies different from other financial systems?
1 Adaptive Scaling
Adaptive scaling typically means that some measures are put in place to ensure that cryptocurrencies work well in both large or small scales.
One of such measures put in place is to reducing or limiting supply overtime (to create scarcity).
The other is to reduce the reward of mining as more and more total coins are mined.
Cryptocurrency uses a system of cryptography (also called encryption – locking remember?) to control the creation of coins and to verify transactions.
In short, no single entity can affect apparently, the cryptocurrency. Given that most currencies in circulation are controlled by the Governement and thus can be regulated by a third party.
The relationship between you and your coin is pseudonymous rather than anonymous given that ledgers are open to the public. Therefore, the ledgers could be used to get information about those involved in a given network.
Therefore, your exact identity is not known (meaning you are anonymous), but because your information is resident in a Public Ledger, some information about you can still be gotten. This should send serious thoughts about the interference of Government.
If you made it thus far, you should probably hug yourself, take a selfie, whatever; you deserve some self-spoilage.
This is where it gets very interesting! Don’t miss this part.
Some of the things to note listed here will probably amaze you.
1. Cryptocurrencies may not function the way you think
From the foregoing, we have concluded that value is added to a cryptocurrency throught the process of ‘mining’. However, the resources required for such mining process is quite tremendous especially as the global pool of cryptocurrency users increase.
The fact that it is digital makes it easy to transport. “However, just like with almost any other currency, there are booms and busts which can take you by surprise”.
There is a likelihood that one day you could notice a significant drop in the value of your cryptocurrency. While there is a chance that it will stabilize, there is also a risk that it won’t.
Investment is a risk, but why place yours in the hands of ‘miners’?
2. Cryptocurrencies are not TOTALLY immune to Government interference
One of the loftiest fantasies resides in assuming that because cryptocurrencies are not centralized like other financial systems, it is beyond the long hands of Government interference.
A case in point was in May 15, 2013, when the US authorities got their hands on accounts in the Mt. Gox exchange (a major Bitcoin exchange) because the company did not register itself as a money transmitter. A bigger threat may evolve where major economies can decide to get into the ‘crypto’ market and manipulate the currency by buying and selling as they wish. For instance, in the case of Bitcoin, all the Government has to do is to buy up the entire supply and sell it until the price stabilises.
Even if there is no inherent flaw in the system, the Government sure knows how to spoil the party – your/our party.
3. It is not exactly IMMUNE TO hackers
The last thing you want is for your bitcoin wallet to be compromised. How is this possible?
Remember we talked about a lock – of a door, laying a foundation for encryption (a lock). We didn’t talk however about the intrinsic nature of such padlock – whether it is made up of plastic, of iron or steel. The same concept can be applied to Cryptocurriences. One of the natures of a cryptocurrency is MD-5, SHA-1, etc.
Most of these natures have been compromised and the one in use presently – the SHA-256 is also at risk of being compromised. Once this algorithm becomes obsolete, that may be the end of Cryptocurrencies, EXCEPT a newer alternative is implemented.
So, should you or should you not invest in bitcoins?
Investment in Bitcoins is done in of two ways: one of the simple and common methods is buying of Bitcoins and hoping for the value to increase.
Another way is through the process of mining. In the mining process, once the transaction has happened, it would be verified over the network by miners.
As was discovered in 2016, “Bitcoins in 2016“, one of the biggest risk or reward aspect is that the currency is relatively new with no inherent value causing instability and price changes. Therefore, it is predicted that the value will not go back to zero in the foreseeable future.
Mining is another significant risk or reward factor when it comes to investing. In the earlier days of Bitcoins, people were easily able to mine with their computers or laptops. However, since the number of people mining has increased tremendously, it gets difficult to mine as it requires more power. The maximum limitation with Bitcoins is 21 million, and as we get closer to this amount, the reward received by each miner gets smaller. Hence, the task for miners is getting difficult.
In case the miners want profitable returns then they need to invest in complex high-tech mining techniques, even though, there is no surety if it would be a profitable investment or not. It is also uncertain if they will get back their initial investment or not.
So in conclusion, before you plunge into the rave of the crypto currency market, you should understand that the market is HIGHLY volatile. This is not to say that you may not get some gains, but the probability of registering more losses than gains is on the very high side.
What are your views?
For further reading: