Everything You Need to Know About Cryptocurrency

Cryptocurrency is a major buzzword these days, thanks to skyrocketing prices for Bitcoin, Etherium, and even Dogecoin.

Although they’ve been around for about a decade now, demand is shooting up, and it seems like everyone’s trying to jump on the bandwagon.

Whether or not crypto is a smart investment depends on how you play it. There are several options, not just in currencies, but in exchanges, mining companies, and blockchain technology.

First let’s discuss the underlying blockchain technology that powers cryptocurrencies.

What is the blockchain?

The blockchain is a distributed digital ledger. That means it’s decentralized and, more often than not, public. Each transaction in cryptocurrency is a block, and the sum of transactions is the chain.

So, if you buy bitcoin from your friend (or sell it to him), that block is added to the chain. The public ledger will show the exact amount transferred from one person’s “wallet” to another.

While the transaction is public, the identities of the people involved in the exchange is often anonymous.

This process is much faster than the typical private verification process used by banks, stock brokers, and other financial institutions today. It’s instant, versus a three-five day turnaround you’ll typically see when depositing money, purchasing stock, etc.

That’s why supporters of crypto believe it’s the future of banking.

It’s not so much the value of the actual currency that made Ethereum the second most valuable cryptocurrency behind Bitcoin. It’s the underlying blockchain ledger technology.

Ethereum is a platform for applications and smart contracts, which extends beyond the simple currency.

Think about how Ethereum’s blockchain can redefine the legal industry. You and I could enter into a contract that’s instantly verifiable through the public blockchain. Mortgages, insurance, and so many other industries could benefit from this.

Although it’s not perfected yet, the blockchain could revolutionize businesses across every sector.

Of course, we’re currently experiencing a cryptocurrency bubble. Some of this is due to overinflated prices of actual currencies, but another part is the deluge of cryptocurrencies being released onto the market.

Available cryptocurrencies

According to Coinmarketcap, there are currently nearly 1500 different and unique cryptocurrencies on the market.

Here’s a chart of the top 10 by market cap:

The market cap is determined by multiplying the price of one individual unit of currency by the volume of currency available on the market.

You’ll see two different strategies in this chart for creating a strong market cap.

  1. Circulating a large volume, i.e. Ripple, which has nearly 39 billion “coins” in existence.
  2. Raising the value of each coin, i.e. Bitcoin, which is a much longer road.

There are several factors involved in the value of a cryptocurrency. Supply and demand is only one of them. Energy required to mine, ease of storage, scams, investors, security, and the ease of exchanging for fiat currency are the major ones.

All of this combines to alter public perception, which ultimately defines the market value.

Still, just because a Bitcoin is worth over $11,000 doesn’t mean you can pay your rent with it. There are a few online retailers that accept Bitcoin, like NewEgg, Expedia, and Overstock. But you’ll be hard pressed convincing your landlord or electric company to accept it. And you certainly can’t give it to a stripper.

And Bitcoin is the most well known cryptocurrency in popular culture. If you think it’ll be hard spending that, imagine trying to buy groceries with BananaCoin or PotCoin.

You’d have a better chance of spending a Schrutebuck.

Perhaps you can exchange your Schrutebucks for a Bison Dollar.

Like any peer-to-peer system, the more people involved, the stronger and more efficient the system is.

Bitcoin is strong because it’s the poster child for cryptocurrency. Hesitant investors are more likely to support it than another currency they’ve never heard of.

Etherium is strong because of enterprise support in the underlying ledger technology.

Many of the rest of these cryptocurrencies are simply jumping on the bandwagon, and a large percentage are going to inevitably flop. There are only 180 currencies in the world recognized by the United Nations.

That’s only 12 percent of the available cryptocurrencies available today. Something is definitely going to pop and collapse.

Mining cryptocurrencies

You’ve likely heard the term “mining” cryptocurrencies. Bitcoin mining was the catalyst in a recent episode of The Big Bang Theory and has permeated pop culture.

Back in 2010 and early 2011, it was possible to mine a Bitcoin using your home desktop computer. These days, it’s mathematically impossible to mine one using anything other than an ASIC machine specifically developed for that exact purpose.

Cryptocurrency mining serves two purposes.

  1. Because the blockchain is constantly growing, it needs a mesh network of computers constantly processing it as fast as possible. Offering coins to computers dedicated to processing the algorithms incentivizes people to contribute to the mesh network.
  2. Mining allows for a slow, steady amount of currency to be released into the market. This helps stabilize the value to an extent.

Mining is used in Bitcoin, Ethereum, and several other popular cryptocurrencies, but it’s not true of all of them.

Ripple is notable for being the highest-valued cryptocurrency that can’t be mined.

Instead of depending on a public ledger distributed across a mesh network, Ripple’s ledger is centralized in its servers.

Ripple Labs have already created 100 billion Ripple, and 39 billion have been distributed to the public market. The creators of Ripple kept 20 billion to themselves, the company holds 6.25 billion, and the remaining Ripple are held in an escrow account held by the company.

I’ve been very outspoken about how major banks abuse escrow accounts because of my experience working in the industry. Allowing this centralized control destroys the entire concept of cryptocurrency and public ledgers.

And Ripple isn’t the only company doing this. More than half of the cryptocurrencies available on the market are privately held and do not allow mining. This is what makes the market so ripe for fraudulent activity.

Companies play on the public perception that all cryptocurrencies can be mined like Bitcoin. It’s becoming a penny stock bubble worthy of the Wolf of Wall Street.

Which is why it’s so important to understand cryptocurrency before investing in the next big get-rich-quick scheme you’re pitched.

Not all that glitters is gold.

How to invest in cryptocurrency

If you’re looking to buy a cryptocurrency, it can be done at a cryptocurrency exchange. There are quite a few on the market, and Coinbase is easily the most popular.

Of course, the influx of crypto users has put a strain on the Coinbase servers, and others are rising up to fill in the gaps.

Cryptocurrency exchanges have made headlines for being shut down and seized by governments for money laundering and other serious crimes. The U.S. government also seized around $10 million in Bitcoin and Bitcoin Cash from its shutdown of Silk Road.

You have to trust the cryptocurrency exchange, as 650,000 Bitcoins were “lost” during the shutdown of the Mt. Gox exchange. This is why most cannabis cryptocurrencies are a bad investment. It’s only a matter of time before the companies running them are shut down for money laundering, and you can bet they’ll make a ton off naive investors before then.

Most privately owned cryptocurrencies like Ripple can be purchased directly from the company.

When investing, it’s important to understand how your government regulates cryptocurrency. It’s viewed as a commodity by U.S. regulators, including the SEC, IRS, CFTC, and several states.

Investing the currency itself is more of a short-term investment, however. This is especially true of emerging cryptos.

The smarter long-term investment is in the blockchain companies. Blockchain technology and smart contracts are how Ethereum surpassed all other Bitcoin clones. IBM and Maersk are forming a blockchain company.

MasterCard is already deeply involved in blockchain, and Bank of America currently holds the most blockchain patents in the U.S. Shell recently invested in a startup called Applied Blockchain too.

Determining the best blockchain companies is, in my opinion, the smartest investment in cryptocurrency.

Conclusion

Cryptocurrencies are most definitely a bubble, but that doesn’t mean every currency (nor the entire industry) is going to crash.

Many investors will lose money investing in obscure cryptocurrencies or fraudulent exchanges. Like in any market, clones pop up every day, and not all of them are high quality.

Because cryptocurrency is difficult to understand, it’s a high-risk investment meant only for those who can afford to lose money.

However, the rise in popularity of cryptocurrency is helping it become more prolific in our society. A single Bitcoin is worth more than any other currency on the planet.

That’s definitely a reason for more people to consider bearing the risk.

But don’t just focus on the value of the currencies themselves. The blockchain technology behind cryptocurrency is where the real value is. A distributed ledger (even if centralized and privately owned) can speed up operations in every industry, from retail to shipping, law, insurance, real estate, and more.

Just make sure you understand the risks involved with your investment before betting your retirement in this market.

Versability

Brian Penny is a former Business Analyst and Operations Manager at Bank of America turned whistleblower, troll, and freelance writer.

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