A cryptocurrency defies a consensus definition. Since its first and most valuable version, Bitcoin was invented in 2009, the financial world has struggled to define it. It has been dismissed, called the currency of the dark web, a bubble, variously questioned. While it has endured all these, cryptocurrencies cannot be ignored.
In May, we wrote about the value of Bitcoin skyrocketing, one Bitcoin was worth $1,400. At the time of writing this, Bitcoins have smashed the $14,000 threshold and knocking towards $15,000, making the $1,400 worth of just seven months ago seem ancient. The word “skyrocketing” might no longer be sufficient.
What is a cryptocurrency? It is a digital asset that is stored independently of a central bank and exchanged peer-to-peer in an encrypted system that is nearly impossible to breach. It doesn’t make sense. But that is cryptocurrency for you. Think of cryptocurrency as paper currency. The cryptocurrency like paper money has value and can rise and fall in valuation.
Like paper money, cryptocurrency can be printed, that is new currencies brought into existence, just that for cryptocurrencies, this process is called mining. But unlike paper money, Bitcoin cannot be touched or felt or physically carried about; additionally, cryptocurrencies are not generally accepted as a medium of exchange…yet.
Or think of cryptocurrencies as a cheque. A cheque in itself is not money but a confirmation that you carry some form of value. Like a cheque, the cryptocurrency can be transferred from one person to another, and can only be cashed out by the person who fits the identity of the receiver. But the cryptocurrency is not like the cheque because it is all done online and unlike the cheque, you do not have to share give out everything at the same time. Perhaps it is the chequebook, just that a chequebook represents value stored elsewhere. A cryptocurrency has its value in its wallet.
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Then we can think of the cryptocurrency as a store of value–like gold. That is why the Bitcoin keeps rising and rising in value, every day, every second. Because it has value. But unlike gold, the cryptocurrency represents nothing. If you have gold stored, you can see your gold and can carry it, touch it and mold it into any ornament you desire, but you cannot see cryptocurrencies. It does not represent any tangible good you can touch. Sounds like pulling value out of a thin air? Perhaps, but not exactly.
Think of the cryptocurrency as an investment, like a share of a company. Think of one Bitcoin as one share of Dangote Sugar. You cannot see a share but you know you own stock because you have proof on your computer that is recognised by the system. You can sell your shares and get money in return.
A share can increase in value and fall in value depending on many forces. Just like a cryptocurrency. But the cryptocurrency is not an actual share because it doesn’t represent a physical asset that is serving an economic purpose. The value of a company can be overrated but the cryptocurrency has no asset that can be measured, so it cannot be said to be overrated, perhaps it shouldn’t be rated in the first place.
Think of the cryptocurrency as money in your bank app. Sometimes, you go a long time without touching naira notes but you spend money. You buy things online, you can pay for your cable TV subscription online, you can recharge your phone, you transfer money home, pay a debt and all online. You never touched paper money in all this. But you know you have money because you can check your account balance using your bank app; your bank knows you have so and so amount because it is in their database.
Once you log into your bank app, just like someone logs into her Bitcoin wallet, you will see your balance just as she sees her Bitcoin balance; you can transfer money, just as she can transfer her cryptocurrency. You can receive money, just as she can receive crypto coins. the difference is that there is no one with the access to your money in the crypto world. No account officer, no local bank, no central bank. No one can shut it down in the name of EFCC or court. Unlike your bank, you don’t need a passport, an ID card, an address or guarantors to open the account.
For the normal bank, ten thousand naira you have in your account last year will not have made any serious change except for hidden charges from your bank when you check it this morning; not so with Bitcoin, Litecoins, Ripples, and all other coins; they increase (or decrease) in value mostly in breathtaking versions. So, the cryptocurrency is not exactly your electronic money.
What then is a cryptocurrency? It is a little of all of the above comparisons. You should take any of the examples that suit you most and draw a line where cryptocurrency cannot go. These seven facts on Bitcoin biggest example can further help you understand the world of cryptocurrencies.
Seven Quick Facts About Bitcoins
1. Bitcoin is not the only Cryptocurrency
As of the time of writing, there are more than 1300 cryptocurrencies on earth. We have Ethereum, Ripples, Litecoins, Swiftcooins, Namecoins, Emercoin, Omni, Gridcoin, etc. The Bitcoin founded by Satoshi Nakamoto (he is a person, some say he is a group of people) is, however, the most popular one and the most valuable. Up to fifty percent of the money invested in cryptocurrency is invested in Bitcoins. One Bitcoin as of December 2017 is $14,500. The nearest competitor of Bitcoin is Ethereum valued at 430 dollars currently; the Litecoin is valued at 96 dollars. Countless others are worth less than one dollar.
2. Bitcoin operates off a wallet
A wallet is to the blockchain what a bank account is to a bank customer. The wallet is the store where you see your coins, the value and where you can make transactions. There are two broad types of wallet, the cold wallet (online) and the hot wallet (offline). The offline wallet is a USB-enabled device which has in store your Bitcoin information and private key. To access your information or carry out transactions, you would have to slot on your device on the computer.
3. Central Banks have mixed perceptions of Bitcoins
To get an online wallet, the easiest one, recommended for beginners, you need to register with one of the Bitcoin exchanges such as blockchain.info, coinbase.com, BTC.com etc. For a Nigerian willing to pay Bitcoin directly using naira, paxful.com and luno.com are sites you should consider. After creating this wallet, you will have login details just like a username and password. This is important but not the whole package. To buy Bitcoin, you have to click on request, copy the wallet address and sent this to the sender. For the sake of security, your wallet address changes after you get money with it. For another transaction, you will copy a new wallet.
4. Bitcoin is generated through a process called mining
Bitcoins come into being via a process called mining. Mining is to Bitcoin what printing of money is to banks. It is a process that involves the collection, verification, and confirmation of transactions in the blockchain. When you send money from your wallet to another, it passes through this process in which the first person to confirm the deal gets the transaction fee.
People who employ their computer and solve difficult mathematics in the fastest-fingers-first fashion do not do this for just the transaction fee. They do it for the coins. Every ten minutes someone solves the puzzle and get rewarded with a Bitcoin. The process continues.
Wow, you feel like mining already? Wait a moment, relax, the power that is used to mine Bitcoin is insanely outrageous. According to Extreme Tech, the total power used to mine Bitcoin exceeds those in use in 159 countries put together. You are in Nigeria, you cannot afford to think about this. Just dream.
5. Bitcoin has a finite end
Unlike money, Bitcoin is not infinite. There are a total of 21 million Bitcoins to be mined. At the rate in which they are mined, it is believed that by the year 2140, the 21st million coin will be mined. What happens after that is a subject of debate. Many believe that Bitcoin miners with no more reward except transaction fees will leave the blockchain. Some believe that this will steady the value of Bitcoin. No one is sure. It is 120 years away, the world might have ended before then. One thing is sure, you won’t be around then.
Bitcoins: More Facts About The Cryptocurrency
6. Bitcoin is highly volatile
This is one reason must financial people do not see it as a prudent investment. It is $14,500 today, there is no guarantee that it would remain so and grow tomorrow. It might dip deeply. In mid-November, for instance, a Bitcoin fell from close to $8,000 to the borders of $5,000. In late November, after going past the psychological barrier of $10,000, it tumbled over the next three days, kissing $9,000 in the process. In cryptocurrency lingo, they call this “correction”. Its present value is not assured, it is expected to correct before steadying. For all it’s worth, it might even crash down to as low as $2000. Or rise to as much as $50,000
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In January, the Central Bank of Nigeria released a directive warning banks and customers about the “risk” of “virtual currency exchangers”. The US Federal Reserve investigations are still in its early days but are concerned about privacy issues.
The Chinese authorities have banned and cracked down on Bitcoin traders in their country. They believe that cryptocurrency is the future of effective payment but want to have full control of it. China is expected to create their own cryptocurrency.
For the United Kingdom, the Bank of England views cryptocurrency as a form of payment that can cause a revolution in the financial system.
The Russian Central Bank says: “We are totally opposed to private money, no matter if it is in physical or virtual form”.
The German Central Bank views virtual currencies as “a speculative plaything”.
The Turkish Central Bank said cryptocurrency might contribute to financial stability if better designed. For the Australian apex bank, they are on the stage of studying it but believe Bitcoins have the potential for “widespread use in the financial sector”.
The South Korean government are working to prevent cryptocurrencies from being utilized by criminals. The Canadian Banks’ bank states that: “This is really an asset or a security, and so it should be treated that way.”
For the United Arab Emirates, their intent is to make Dubai the first cryptocurrency-run city on earth.
7. Only 0.95% people on earth use cryptocurrency
This is a plus and a curse. Since less than one percent of the populace use cryptocurrency, it is a plus as the value is expected to increase with increasingly new users. But if less than one percent of the world use it, the number might not be enough to really move the market. One major quality of money is general acceptability.
Bonus fact: Bitcoin security is not as foolproof as it was designed to be. Hackers have stolen million dollars worth of Bitcoin since its inception, this was so bad that in 2014, the then largest Bitcoin exchange, MT.Gox closed shop after criminals stole a majority of the funds in its wallets. Customers lost what could be billions of dollars worth of coins. No one was reimbursed. There is no regulator or insurance safety net.
The existing Bitcoin exchanges have donated considerable resources to securing their coins.
Bitcoins, to buy or not to buy?
Remember that thing in cryptocurrency circle called “FOMO–the fear of missing out”. Imagine for a second you bought five Bitcoins in 2010 for the price of moi-moi, at the rate of 5.5 million naira per coin today, how rich will you be? Imagine that. For a second. It is still morning in the life of cryptocurrency. This moment, N50,000 would get you around 0.009 Bitcoin. In a few months’ time, that could be worth hundreds of thousands.
Are you worried about the security of Bitcoin? It is doubtful anyone would crack your wallet just to steal your peanuts. Hackers from North Korea and elsewhere go for the big kill.
Ultimately, follow your heart. It might turn out well, it might not but if you buy it as the German “plaything” you would have taken care of your fear of missing out while standing a chance of making a profit.
Update: By the end of this article a Bitcoin goes for $15,332.