WTF is cryptocurrency?

Cryptocurrency is the buzzword of the day it seems and I as a writer have been asked to get involved. Even while I have been working in the field for a few months, my partner still hasn’t a clue what I’m on about when I refer to ‘Bitcoin’, ‘cryptocurrency’ and ‘blockchain’. Here is a fairly simple explanation of the system.

Originally released in 2009, Bitcoin (BTC) led the way for cryptocurrencies. Over the last couple of years they have become quite mainstream, and you can even invest some of your retirement fund in them in the USA.

BTC is not the only player in the cryptocurrency market, though it is by far the most mature and established of more than 100 others. While we will focus on BTC, we will touch on other cryptocurrencies of note later in this piece.

What is ‘blockchain’?

Blockchain is a form of database that everyone with an interest in that database shares. Each ‘block’ has around 1000 transactions (in the case of Bitcoin) and everyone has an identical copy of the chain of blocks up to and including the block where their transaction is. Since everyone has an identical copy, if someone wanted to change history and commit fraud they would have to change 51% of those blocks simultaneously.

Blocks are 256 bit encrypted. This is the toughest standard of encryption and the same level as GCHQ and the NSA use to encrypt their messages to spies and generals in the field. To crack an encrypted block you would have to use an enormous amount of computing power. Then, if there were two million copies of the blockchain you would have to crack not just that single block, but a million more at the same time. A pretty tough nut to crack!

Anyone can see what transactions have taken place, but no one can change them. Because of this you have a world where everyone can spot fraud so no one can commit it by changing history.

Bitcoin Mining

A very good explanation of ‘Mining’ and how the blockchain is created is on Investopedia: “Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the block chain, and also the means through which new bitcoin are released.  Anyone with access to the internet and suitable hardware can participate in mining.  The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle.  The participant who first solves the puzzle gets to place the next block on the block chain and claim the rewards.  The rewards, which incentivize mining, are both the transaction fees associated with the transactions compiled in the block as well as newly released bitcoin.”

Thefts?

There are thefts that take place. There have been recent reports into cryptocurrency being stolen from exchanges due to their poor security and even one case where someone went in and locked everyone (including themselves) out of around $150 million of that money. I would be pretty paranoid if I was that guy as $150 million would hurt most people, dodgy or not!

If you buy cryptocurrency it is advised you buy and use a ‘wallet’. This is a very tough computer programme that is almost impossible to hack that ‘stores’ your currency. Once more you can have that wallet on a data stick, turn the computer off and keep your cryptocurrency in your pocket where no one can hack it.  

You don’t need to buy whole Bitcoins!

It is important to note that while the current value of one BTC in USD is $6396.01 you do not need multiples of $6396.01 to buy into BTC in the same way as you do not to buy US dollars in whole dollars. You may wish to buy $1000 worth of BTC, roughly equating to BTC0.15634747. That is acceptable too.

One Bitcoin is minted by a miner every 10 minutes, 24/7/365. You cannot have Quantitative Easing or any other inflationary pressures – no government or private individual can monkey with it by ‘printing more money’. This is one of the major differences between cryptocurrencies and national currencies that make trading in them different.

Market volatility

While you may have seen that the market capitalisation of BTC has hit new highs (currently sitting at more than $100 billion), it should only be considered a high risk investment where you put money in that you can afford to lose due to high market volatility. Today valued at around $100bn, only in August it was valued at $73.5bn – climbing 26.5% in just two months! As with traditional capital markets, where there are boom times there are also bust times. If everyone got twitchy in the belief that $100bn was too high a valuation and got out together the market capitalisation could plunge. It has done in the past, too.

That being said, cryptocurrencies are here to stay and are a worthy investment for those who like to spread their portfolios between low, medium and high risk investments. Investors tend to look at the longer term and while there have been booms and busts the overall trend is toward a higher value.

Learn the ropes – hedge your bets

Investment experts suggest that the newbie to BTC should start with a relatively small investment, perhaps $1000 or so, to learn how the different systems work. Cryptocurrency trading differs greatly from traditional currency trading and it pays to get an education before you start moving large sums around. This is a lower risk approach than suddenly buying $100,000 worth with no idea how the system works and potentially making mistakes with volumes of currency that you can’t afford to lose. In a later section we will look at how to buy BTC, and show you the basics of buying, trading and selling in the currency. This will teach you how to walk, and it is for you to learn how to run from there.

Bitcoin is not the only cryptocurrency

Since they were first released in January 2009, Bitcoins have drifted towards the mainstream. You can even buy soaps and toiletries with BTC! That said it isn’t the only one out there. I work with an alt coin that is ranked in the low 200’s – that is to say there are 200 and something more valuable alt coins on the market than those my client produces.

All cryptocurrencies that are not Bitcoin are sometimes called ‘alt coins’. This is just a word you will have learned and may be asking…

Ethereum (ETH) is the second most popular cryptocurrency in the world, with a current market capitalisation of $29.5 billion, just under a third of that of BTC. It is mostly used by developers, though now in the United States it is possible to set up an ETH IRA pension investment as you can a BTC IRA.

Ripple and Bitcoin Cash are currently capitalized at $8bn each and are other worthwhile investments, though as with any other cryptocurrency you really need to assess and learn how they work before diving in. Not everyone enjoys losing their shirt in a misplaced gamble.

Litecoin (LTC) was once described as the ‘silver to BTC gold’. Released in 2011 by MIT graduate and ex-Google engineer Charlie Lee, LTC is a global open source payment network with no central controlling authority. LTC was once the most popular alternative to BTC and is increasingly being used by merchants as well as developers. That said, even in the current boom LTC’s market capitalisation is just under $3 billion while BTC sits at close to $100bn.

How to buy BTC

Different cryptocurrencies have different trading methods. Since BTC is the biggest and the most traded of all of them, we will focus on BTC here. The safest way to buy BTC using a national currency is through an exchange or broker. These offer some protection and if you use one with an established reputation you shouldn’t run into the problems of people running away with your money or a hacker getting their hands on your credit card / personal ID details when you go through the transaction process. We will discuss some of the biggest players in this later in this article.

You should consider the following before selecting an exchange:

–       What is the exchange rate offered? This differs between exchanges, and should be compared with an index such as Cryptocoins News.

–      Fees. Higher value transactions can incur as little as a 0.25% fee by the exchange, while lower value transactions can incur a 1% fee. Shop around!

–      Different payment methods incur different fees. If you want to use a credit card then this could cost up to 10% of your transaction, while a bank transfer such as SEPA or ACH can cost just the exchange fee of around 1%.

–      How long will the transfer take? Some exchanges can take several days to complete the transaction. Other systems can take just hours.

–       What about security? If you wish to remain reasonably anonymous then it may pay to look for an exchange with a lower security level than others. Hackers could steal your identity from exchanges that require lots of ID, though there could be much lower initial limits on those that allow less identity checks. Another point to consider is that regulators require that credit card and bank transfers are recorded by exchanges. The alternative is that you can pay for BTC by cash through abra.com, LocalBitcoins or Bitcoin ATM, without revealing your identity.

–      Is the exchange regulated? There are different reasons for being regulated or otherwise but for the newbie to BTC it really helps to go for one that is regulated by a national authority as this means that you should be able to trust them not to run away with your money.

–       While not always necessary, consider buying a Wallet from a supplier such as bitcoin.com or abra.com. This is a way to keep your BTCs in your sole possession and should the exchange go bust you will not lose that money. Consider a ‘hot wallet’ where you can make payments from multiple devices from the same BTCs, particularly if you make a lot of transactions.

Some brokers and exchanges to consider

There are literally hundreds of BTC exchanges around the world. Here are a select few to consider that may appeal to the newbie BTC trader.

Coinbase is one of the largest brokers out there and is licensed to operate in 32 countries. You are often given a high buying limit and can purchase using credit / debit card for an ‘instant buy’. It is a reliable and big exchange that has its faults. You may have to wait five days for the BTCs to be put in your name, and while their flat fee of 1.49% may be competitive at lower quantities of bitcoin, it isn’t very competitive as you reach higher numbers.

GDAX is owned by Coinbase and is regarded as one of the leading BTC exchanges. Transactions can be made in SEPA or in ACH. It isn’t the most user friendly system and can close down transactions that it believes are with un-trustworthy customers.

BitPanda only takes online bank transfers, SEPA and SOFORT. They are one of the most trustworthy brokers and charge a lower fee than many competitors for credit / debit card transfers. Their fees are included in their exchange rate so it may be more difficult to compare their final price against that of competitors.

CEX is one of those companies where you have a trade-off of a lower fee (0.2%) in return for a very involved identification and verification process.

Buying bitcoins in different currencies

As with other currency trades, there will be different regulatory frameworks in different countries where you buy Bitcoin. We highlight these differences in this section.

The United States is where most cryptocurrencies originated. While you can buy them through a credit or debit card, or even cash you can do the transaction for the least cost via an Automated Clearinghouse (ACH) transfer. ACH is only open to US citizens. It is important to note that in the US you can take out a BTC or ETC IRA as part of your pension plan, though there will be tax penalties should you take your money out of that fund before you turn 59 ½. 

The European Union, Switzerland and UK accept the Single Euro Payment Area (SEPA) system. This can only be used by people living in European countries including the UK. 12 countries that are not in the Eurozone are eligible to use SEPA transfers. A list of them can be found here.

Canada has no international bank transfer system like that of the US and EU where you can buy BTC for a lower fee, though you can use the international banking protocol IBAN for transactions. However you can buy BTCs via direct debit from your bank, via a bill payment using online banking or cash via mail. Finally, in Ottawa only you can do an over the counter transaction to buy BTC.

Trading in cryptocurrencies: the takeaway

Trading in cryptocurrency isn’t as baffling as you may have thought before reading this article. There are a number of relatively simple ways to buy them and you can purchase them through one of a number of exchanges and brokers for a small fee. Bitcoin may be the biggest currency but is by no means the sole player in the market. You don’t need to be a rocket scientist to get into cryptocurrency trading, but it pays to take a baby step into it before you start making large transactions.

Richard Shrubb