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Is Bitcoin the new Oil? -A beginners guide to Cryptocurrency!

Hello Riters, Buckle-up your seat belts, today we are going on a Crypto Ride down that hill.

We will discuss the thing that Bankers hate – ‘Cryptocurrencies’!, What is it?, How can they be bought? Issues, types, the likely Future and finally about a coin of Shiba Inu dog. So lets dive in.

To understand Crypto let us first understand Currency

Currency is a form of payment, it is something (usually paper and coins) you exchange for goods & services. The conventional currency relies on network of mints, central banks and governments. Currently every transaction around the world involves exchange of currency of some kind. And the piece of paper, ‘fiat currency’ you have holds value because your government says so. if you take a note and read it you will see “I PROMISE TO PAY THE BEARER THE SUM OF XXXX RUPEES” written on it, that said its a promise by the Bank backed by the Central Government that the note holds XXXX Value.

Indian Currency

What is Cryptocurrency?

Cryptocurrency is a digital or virtual currency secured by Cryptography (a method of protecting the information).

The Underlying Technology

Underneath Cryptocurrency is a technology whose aim is to make it possible for two individuals to send and receive payment without revealing their identities and maintaining security of transaction with no involvement of a third party.

Blockchain is a major technology behind Cryptocurrencies (except a few like IOTA – a currency built on Tangle, read more here) Blockchain is essentially a list of blocks connected together and secured using Cryptography. Each Block stores data (transaction), a unique hash (mathematical code to identify the block), and the previous block hash. Blockchain can be thought of as a distributed public ledger with all transactional data.

A Blockchain

Attributes of Blockchain

  1. Immutable – Blockchain can’t be modified. Every time the data is modified the hash associated with the block is recalculated, and since every block contains the hash of previous block it causes the following blocks to become invalid making it obvious that the data is modified (here computational power is the limit, as long as you don’t have enough computational power to recalculate all the hashes).
  2. Consensus – Blockchain uses a peer-to-peer network, allowing peer to peer interactions. Each participant in the peer-to-peer network is known as node. And each time someone adds a block to the blockchain, that block is sent to every node and is verified by every node to establish consensus (to read more refer).
  3. Decentralized & Distributed Structure – Block chain is decentralized meaning the information is distributed to everyone on the network. Each peer has a copy of blockchain but no one can manipulate it.  

How is a Cryptocurrency like Bitcoin issued?

Currencies like Dollar & Rupee are issued by Central Banks, backed by government. The central bank more or less can issue new units of currency anytime they think so. With Bitcoin this is not the case (for those of you who don’t know Bitcoin is the first and most prominent cryptocurrency), Bitcoin is usually mined with the help of specialized computers in warehouses, which work to solve a cryptographic puzzle. Mining is not just about creating new money but also validating transaction. With Bitcoin miners are awarded new bitcoins every 10 minutes. The issuance rate is set, so miners cannot create bitcoins out of thin air by cheating the system. Miners have to use tools i.e. their computing power to generate the new coins. Imagine it like the Gold, instead of mining physically they are mined digitally.

Warehouse of Specialized Computers

Crypto vs Fiat

With Fiat Money the very nature of the system is its flaw, the ability of Central Bank and Government to be able to manipulate its value by changing the supply & demand, and causing inflation / deflation. Since the system is Centralized not everybody has a say in it. That is where Cryptocurrency (Crypto) comes into picture. Cryptocurrencies challenge the orthodoxy of Fiat Currency. Cryptocurrency is decentralized, distributed, and works in a peer-to-peer network which is difficult to cheat and manipulate.

Types of Crypto and differences

  • Bitcoin (BTC) – Launched in 2008, The gold standard within the Cryptocurrency space. It is the first and most prominent cryptocurrency. It has a coin limit of 21 million and uses ‘SHA-256’ algorithm for hashing.
  • Litecoin (LTC)- Launched in 2011, It is referred to as Silver standard and is believed to feature faster transaction times. Litecoin like other currencies is an open source, global payment network that is completely decentralized. It has a coin limit of 84 million and uses ‘scrypt’ algorithm as proof of work.
  • Ether (ETH)- Ether is the cryptocurrency built on top of the open source Ethereum blockchain, which runs smart contracts. Launched in 2015, it is currently the second-largest digital currency by market cap, 1/10 the size of bitcoin. Ether supply is not capped like Bitcoin and its supply schedule is determined by members of Ethereum community. 
  • Ripple (XRP)– Launched in 2012, it enables banks to settle cross-border payments in real time, offering instant low cost international payment with end-to-end transparency. Ripple doesn’t require mining like Bitcoin reducing the usage of computation power & minimizing network latency. All of Ripple Tokens are pre-mined before launch, only the introduction & removal of XRP from the market supply happens according to the network’s guideline.
  • Bitcoin Cash (BCH)– Introduced in August 2017, as fork of Bitcoin Classic. It is created for the purpose of bigger transaction blocks of ~8MB compared to original Bitcoin block size of ~1MB. Advantage? Faster processing speed for the users.
  • IOTA (MIOTA)– A cryptocurrency without blockchain Instead of a blockchain, IOTA uses “tangle,” which is based on a mathematical concept called a directed acyclic graph, as it is a cheaper alternative compared to blockchain. It is referred to as the Oil Tanker in the Cryptocurrency world, to read more click here.

Above are some major Cryptocurrencies, the number of Cryptocurrencies available today is 1000+ with a overall value close to ~$250 Billion. Check out more here.

Promise of Crypto

Cryptocurrency is currently in its infancy and early adoption phase, nevertheless crypto has potential to revolutionize the FinTech space. The Banking system is old, and nothing much has changed since its inception. Cryptocurrency can help change the face of banking, it can take the power from a few elite and distribute it back to many. Also the technology behind Cryptocurrency has far reaching potential in Finance & other fields, It can help transform the payment ecosystem making it more secure, efficient and affordable. An interesting read on the applications of Cryptocurrency is the article here.   

How to purchase?

Now in case you are wondering where and how to buy/invest in Cryptocurrency then Binance, Coinbase, Huobi Global, Zebpay (available in India), WazirX (available in India) are a few exchanges where you can change your Money for Crypto.

Based on your country some may or may not be available to you. To read more on how to buy Cryptocurrency in India, you may like to read the article here.

Source: Google

Issues with Cryptocurrency

As the saying goes ‘All that glitters is not Gold’, the Cryptocurrency also has its drawbacks. Let us understand some of these –

  1. Volatility – Cryptocurrencies are very volatile and the price may fluctuate a lot in few hours. For example in just 2 weeks in December 2017, Bitcoin lost 25% of its value.  
  2. As a method of Payment– Cryptocurrency still lack the infrastructure and mechanism to be viable for acceptance in exchange of goods and services. Couple this with world price fluctuations, it becomes almost impractical to use.
  3. Difficult to Understand – The underlying technology behind Bitcoin that makes it secure also makes it difficult to understand for a non-techie, making it confusing and less widely accepted for the consumers.
  4. Easy to be used as means of illegal trades – The fact that Cryptocurrency is not fully legal or regularized everywhere it becomes an easy tool for people performing illegal trades like sex offenders, drug dealers etc. According to a data, around $70 Billion in Bitcoin are spend in illegal activities.
  5. Storage Security – Yes, the very thing that make Cryptocurrency safe can be a problem for the user. A Cryptocurrency is stored in a digital wallet and if a user forgets his wallet password, it is near impossible to recover the lost data due to strict integration and encrypted blockchain.

Opinion Alert – All said, given the potential of Cryptocurrency for future it seems like fair but a riskier investment to make. You should not hold more than 10% of your wealth in digital asset like Cryptocurrency and use it as a hedge against the Market Volatility. (you can ignore this section, as it is just an Opinion).

Fun Fact – Dogecoin (DOGE) emerged in December, 2013 as a joke to satirize the growth of Altcoins via meme. It has immensely grown in popularity since and is now among top 25 Crypto assets. It is a derivative of LuckyCoin which is forged from Litecoin (LTC) and uses Scrypt Algorithm. It can be considered as a penny stock of Crypto world, currently valued at $0.0031 i.e. ~20 paisa in Indian Currency.

Thank you for reading, let us know in comments below what is your favorite Cryptocurrency. #KeepLearning