Just like every industry, the world of cryptocurrencies and blockchain certainly uses its own lingo, which can be confusing for everyone else who is not familiar with the industry or “in the know”.
How often has it happened that you read a cryptocurrency news website or went through Reddit and were left more confused than when you started? For most people, this is a common problem, especially for those who are new to cryptocurrencies or the blockchain.
Most Popular Cryptocurrency Glossary Terms
So, if you are just getting started in crypto, or merely intend to extend your vocabulary for new words in this industry, we have curated a short guide to help you effortlessly navigate the miasma of cryptocurrency terms and definitions
What Is Blockchain & Bitcoin Cryptocurrency?
For starters, let’s begin by defining what the blockchain actually is and how it works.
Blockchain & Nodes
The blockchain is the technology technology behind Bitcoin and Ethereum. A blockchain is a distributed ledger secured by cryptographic keys. Blockchains are also public databases and great repositories of information that anyone can get access to and read through the data. However, only the owners of the blockchain can modify the data, and sometimes, the data is immutable.
Compared to traditional databases that rest on a centralized server, data on the blockchain is spread across a distributed network of computers across the globe. Each computer has a copy of the blockchain and works to maintain, and each computer in this network is known as a node.
Bitcoin is the first and is perhaps the ‘gold standard’ of cryptocurrencies. This means that all other coins and tokens are compared to and measured against the value of Bitcoin. Another way of looking at it is when Bitcoin drops in value, all other coins drop in value, too; the reverse also applies.
To keep our cryptocurrencies and tokens safe from criminals and hackers, we use what’s called a wallet. There are different kinds of wallets made for different applications and security requirements. The most popular and basic kind of wallet is a software wallet. Software wallets exist as a computer file, and can be generated for free using a variety of online services.
To improve security of one’s coins, there are also hardware wallets. Hardware wallets are thought to be some of the safest ways to hold cryptocurrencies. Two popular options of hardware wallets are the Nano S and Trezor. Taking the idea of physical security a step further is known as cold storage, whereby one disconnects their cryptocurrency portfolio from the Internet entirely.
Popular Cryptocurrency Tokens
There are more than 1500 different cryptocurrencies available for purchase. Due to how long it would take to list each and every one, we won’t be going through them all.
However, the most popular cryptocurrencies with the largest market caps are the following:
- Ethereum (ETH)
- Bitcoin (BTC)
- Bitcoin Cash (BCH)
- Litecoin (LTC)
- Monero (XMR)
- Ripple (XRP)
- NEO (NEO)
- VeChain (VET)
- Dash (DASH)
- Zcash (ZEC)
- Ethereum Cash (ETC)
- Stellar Lumens (XLM)
- Eos (EOS)
- EomiseGo (OMG)
The good news is that when it comes to the terms and lingo of trading cryptocurrencies, each trade occurs on what’s called a marketplace for trading cryptocurrencies. Exchanges support fiat (e.g USD) to buy cryptocurrencies.
When trading cryptocurrencies, there are two ways that you can do this: limit or market orders.
A limit order (limit buy, limit sell) is placed by traders who want to buy or sell a cryptocurrency when the price is at a certain value.
While a market order (market buy, market sell) are straightforward purchases or sales on an exchange at the market price. To illustrate how a market buy works, the market could decide to purchase Ethereum at the cheapest price possible on the exchange’s order book and, while market sells transact the most expensive buy orders.
ROI simply means return on investment.
Arbitrate refers to the act of capitalizing on the price difference of the same currency between 2 different exchanges. This is often cited when one compares the value of cryptocurrencies on Korean exchanges versus US exchanges.
The market cap is the total value of a cryptocurrency. The market gets calculated through multiplying the total number of coins with the present value of a unit. The most popular method for calculating the value of a cryptocurrency is using a tool named CoinMarketCap.
TA is shorthand for Technical Analysis, which is known as the process for comparing price charts and trends to anticipate trends in the market.
Through the use of a depth chart, people can see the amount of limit of buy and sell points, which are sometimes referred to as sell walls and buy walls. Typically, the word Whale will often be used in conjunction with those terms, which refers to someone who owns a large amount of cryptocurrency.
Bullish charts means that the price of a cryptocurrency is likely to increase, while bearish gets used when prices are expected to lower in value.
ATH, which means All Time High, is something we’ve experienced a lot of over the last few months, with popular cryptocurrencies like Bitcoin, Litecoin, and Ethereum soaring to record heights.
Margin Trading is the process of increasing the intensity of your trades through putting the rest of your coins at risk.
Going long is a type of margin trade that profits if the price goes up in value, whilst going short is a type of margin trade that wins if the price lowers in value.
FOMO is known as Fear of Missing Out. FOMO can be described as the visceral sensation you feel when the price of something starts to sharply increase or decrease in value.
FUD means Fear, Uncertainty, and Doubt. FUD is often spread by well-meaning friends who advise you to not invest in cryptocurrency markets despite knowing nothing about them. Other times, the traditional media spreads FUD when it speaks out against cryptocurrency trading.
P&D otherwise known as Pump and Dump happens when an altcoin gains a huge amount of attention, which leads to a quick price increase, and then followed by a big crash, this process is repeated until the originators of the scam make their money or the altcoins is rendered worthless.
A smart contract is a computer applications used to verify, enforce, and facilitate the negotiation or performance of a specific contract. Smart contracts let you transfer money from A to B, on terms that condition C specifies. Solidity is the most common programming language that smart contracts are coded in.
The process of “solving” blocks is named cryptocurrency mining. Mining requires a huge amount of computer processing power to operate effectively, but miners who are the first to solve the mining “hash” are rewarded. A computer built made solely for processing proof-of-work blockchains like Ethereum is called a mining rig. Mining rigs are built with graphic processing units (GPUs) to churn through large amounts of data.
Proof-of-work (PoW) is the most common consensus algorithm. PoW is used by cryptocurrencies like Ethereum, but this is likely to change to Proof-of-Stake (PoS). This means that instead of mining, people who own Ethereum can tie up their Ether for a short while in exchange for the participation in the network consensus. ETH holders will be rewarded with Ethereum for doing so.
Sharding is one proposed scaling solution for the blockchain. Sharding lets nodes keep partial replications of the total blockchain to increase network performance and speed of consensus.
An ICO, or Initial Coin Offering works in the same way an IPO on the stockmarket. An ICO can be said to be the same as crowdfunding, except this crowdfunding process takes places on the Ethereum platform.
An Airdrop is the distribution of a token to the cryptocurrency community for free, or in return for a small favor. Airdrops are used to foster a community ad as a marketing strategy as part of an ICO phase.
Gas is the measurement of how much hashing (processing) power is needed by the Ethereum network to validate a transaction. Some simple transactions, like sending Ethereum to a different address, generally don’t need as much gas, whilst more complicated transactions, such as in the case of deploying smart contracts, necessitate higher amounts.
The gas price is the value of Ether needed for every gas unit for a transaction, while transactions with a higher gas price are generally prioritized by the network.
Wei is the smallest amount of Ether possible, while Gwei is the most popular amount.
A Fork happens when a blockchain is split into several different chains. Forks occur in the crypto world when additional governance rules get built into the blockchain’s code.
Other Important Terms
You may have seen the popular meme of a lambo on the moon. This inside joke refers to the anticipation of a particular cryptocurrency skyrocketing in value.
There are also some terms used exclusively by the crypto community, such as HODL, which means to hold a cryptocurrency over the long term. Shilling, means to pump or advertise a cryptocurrency in a deceptive way.
A Decentralized Autonomous Organization (DAO) is a type of venture capital fund coded on the Ethereum network and was hacked in June 2016. The hack resulted in around 1/3 of the DAO’s funds of the funds hard forked over the proceeding months.
To date, the DAO is often referred to as one of Ethereum’s biggest mistakes.
At one point Mt Gox was responsible processing more than 70% of Bitcoin’s transactions over a period between 2013 and 2014. This was before it was hacked and customers lost all of their funds. Mt. Gox was a hard lesson for people to learn, and educated people to keep their eyes on an exchange, and to also keep funds in a secure wallet; preferably in cold storage.
Lightning Network extends on the work done by Bitcoin and Litecoin to facilitate settlements that occur off the chain.
The Genesis block is the first block ever mined.
Satoshi Nakamoto is the founder of Bitcoin, whose real name is still a mystery.
Vitalik Buterin is there founder of Ethereum.
Charlie Lee is the founder of Litecoin.
What Is Cryptocurrency Guide: How To Understand Bitcoin & Blockchain?
Ultimate Guide To Bitcoin Cryptocurrency & Blockchain
This cryptocurrency guide is meant to assist you with the basics of each important aspect of the cryptocurrency world. It will help you to understand the different types of cryptocurrencies available to invest in, the different projects they support, and the way the history, new trends, and new technology can affect the market.
Ever since its creation in 2008, Bitcoin has occasionally appeared in mainstream media as a subject of interest. This usually occurs after it has had a spike in value. The general population typically believes that cryptocurrency is a scam, or at the very least simply does not understand how it has any value. It is only after a pattern has emerged that shows a consistently upward trend in the value of not just Bitcoin, but many other cryptocurrencies as well, that more people are gaining interest in these new opportunities.
If you’ve done your research, you should know by now that cryptocurrencies like Bitcoin are far from a get-rich-quick scheme. In reality, they are an advancement based on new blockchain technology that has incredible potential. While cryptocurrency does have an outrageous amount of hype surrounding it, that doesn’t necessarily mean that it’s all unfounded. Blockchain technology is poised to revolutionize a variety of industries like logistics, insurance, and the stock market. It can revolutionize the concept of ownership and create completely new economies that don’t even exist yet. These incredible possibilities are a large part of why so many people are majorly skeptical of cryptocurrency. After all, it can really seem too good to be true. But it is entirely possible. All that it takes is for the government, banks, and researchers to recognize this potential and take interest in working together with these new projects.
Unfortunately, this great potential is also a great magnet for real scammers and creates a breeding ground for bad investments that are trussed up to look golden. Because of the possibilities involved in a good cryptocurrency investment and the relative ease of investing, it’s far too easy to make a poor choice. The purpose of this guide is to help you learn to recognize the difference between the potential for a great opportunity and the prospect of a huge mistake.
Table Of Contents
- 1 Ultimate Guide To Bitcoin Cryptocurrency & Blockchain
- 2 Chapter 1: An Overview
- 3 Chapter 2: How It All Works
- 3.1 Types Of Consensus Methods
- 3.1.1 Proof of Work (PoW)
- 3.1.2 Proof Of Stake (PoS)
- 3.1.3 Proof Of Importance (PoI)
- 3.1.4 Delegated Byzantine Fault Tolerance (dBFT)
- 3.1.5 Delegated Proof Of Stake (dPoS)
- 3.1.6 Tangle
- 3.2 Smart Contracts
- 3.3 Dapps
- 3.4 Digital Assets
- 3.1 Types Of Consensus Methods
- 4 Chapter 3: Use Cases
- 5 Chapter 4: Most Popular Cryptos
- 5.1 Bitcoin (BTC)
- 5.2 Ethereum (ETH)
- 5.3 Ripple (XRP)
- 5.4 Bitcoin Cash (BCH)
- 5.5 LiteCoin (LTC)
- 5.6 NEM (XEM)
- 5.7 Dash (DASH)
- 5.8 IOTA (IOTA)
- 5.9 NEO (NEO)
- 5.10 Monero (XMR)
- 5.11 OmiseGo (OMG)
- 5.12 Stratis (STRAT)
- 5.13 QTUM (QTUM)
- 5.14 EOS
- 5.15 BitConnect (BCC)
- 5.16 BitShares (BTS)
- 5.17 Waves (WAVES)
- 5.18 ZCash (ZEC)
- 5.19 Tether (USDT)
- 6 Chapter 5: Getting Started
- 6.1 Exchanges
- 6.2 Changelly
- 6.3 Coinmama
- 6.4 LocalBitcoin
- 6.5 Bitcoin ATMs
- 6.6 Peer To Peer
- 6.7 Storing Your Cryptocurrency
- 6.8 What You Should Know About Scammers
- 6.9 How To Identify Good Investments
- 7 Chapter 6: A Brief History of Cryptos
- 8 Conclusion
Chapter 1: An Overview
What Is Cryptocurrency?
Not so long ago, all of a given government’s currency was printed. This meant that every unit exchanged was represented in a physical form in one way or another. Unfortunately, this method was very susceptible to under or overprinting, which can lead to a plethora of economic issues such as inflation.
Today, around 90% of the world’s money supply in entirely digital. It has no physical representation and only exists in the form of coding found on a bank’s internal servers. This is far easier to replicate and control than the older methods of printing. If you need to add or remove currency from a country’s pool of resources in order to balance the economy, all it takes is a digital adjustment.
The problem with a digital system is that any information that isn’t physically represented can be vulnerable to being corrupted. If everything from credit card records to presidential elections can be hacked and manipulated, how long might it be before the same thing happens to the servers which store currency data?
This thought was a core seed which led to the invention of Bitcoin. The blockchain is invulnerable to hacking and unaffected by inflation. For nearly 10 years now, the developers who got this project rolling have been researching its potential and improving its abilities. Little by little, they have started to realize that what they have created can do so much more than what it was originally intended for. In Chapter 3, we will discuss the many Use Cases for the blockchain so that you can see everything this technology is already able to do and what some of the possibilities may be for the future.
The term ‘cryptocurrency’ encompasses a broad spectrum of technologies, and it can be a bit difficult to pin down a simple definition that fully explains all of these different areas. If we were to attempt to do so, the result may look a little something like this:
A cryptocurrency is a digital asset which uses encryption techniques to control the creation of each new unit of currency and to accurately verify any transfer of funds from one user or location to another, and which operates completely independently of any central government or bank.
While it is true to every cryptocurrency makes use of tokens in some form or another, it would not be accurate to say that all of them were created to serve as currencies. Some of them represent assets, such as stock in a company, some support platforms or program which use their blockchains to operate, and some hold up the entire internal structures of certain businesses.
Aside from the added security, there is a lot more to what cryptocurrencies and blockchain technology have to offer. Keep reading to find out more about the true value that can be found in cryptocurrencies.
Why Are They Important?
How important something is, whether it is on an individual basis or for society as a whole, is directly correlated to how valuable it is. Sometimes this value is created by a shared agreement that something holds value or by an illusion of rarity, such as with gold and diamonds. However, the majority of the time true value is derived by how useful something is. Bitcoin has often been referred to as “Digital Gold”, and the analogy does certainly serve its purpose, but in reality, Bitcoin is actually far more useful than gold ever has been.
There are a variety of different cryptocurrencies in existence, and each new one that is created often springs from a desire to address a specific problem or adjust a feature that is found to need improvement, but all of them share a simple core set of values. These values are namely immutability, accessibility, transparency, security, speed, and price. All cryptocurrencies on the market are defined by these characteristics and differentiated by how they address or value each characteristic in accordance with the whole. Almost every meaningful cryptocurrency created after the invention of Bitcoin was founded because of a desire for some variation in one or more of these core characteristics.
The blockchain technology that makes cryptocurrencies possible is fully decentralized. This means that all of the information is stored individually by every user, making it impossible to manipulate any information by hacking and corrupting a single copy. Blockchains are also not editable, and once a transaction is completed there is no way to edit or delete it. This allows cryptocurrencies to be virtually immutable, so there is no need at all to trust in a third party to verify or secure any transaction.
Sending and receiving cryptocurrency is easily and equally accessible to anyone who has a stable internet connection. No matter where you are in the world or what the quality of your connection is, the speed and cost of your transaction should be the same.
The level of transparency is a key characteristic for any cryptocurrency, but they don’t all agree on what level is actually best. Most cryptocurrencies are open source, which means that the source code that the blockchain runs on is available where anyone can see it. This means that anyone who understands programming can look at the inner workings and processes involved in making the system work. It’s all completely transparent. It’s a lot easier to trust a system when you know everything about it. There are also tools called explorers that allow any user to view every transaction that has ever happened using a particular blockchain.
However, there are some cryptocurrencies whose creators and users do not agree that this level of transparency is best. They find it much more important to protect the anonymity of users and make it impossible to trace user transactions. These blockchains are built in such a way that they give up some transparency in return for the anonymity that they find more valuable.
Any currencies or assets that are centrally created or controlled, like securities, bonds, title deeds, and all kinds of FIAT currencies. Any central bank can make changes to the flow and supply of currency. Any government, especially a corrupt one, can lose or change records. Even records that are stored digitally can have their data corrupted or their physical certificates damaged in a fire or flood, rendering them useless.
The nature of cryptocurrencies makes them fully decentralized. All of the records on a blockchain are not stored in any one location and instead are stored by every user all around the world. The only way to corrupt or compromise a network like Bitcoin is to control at least 51% of all the servers and to use all of them in a direct attack. This method of attacking is economically impossible and becomes farther and farther out of reach with each new user who becomes a server for storing the information. It is in the best interest of all of the users who are part of this system to protect it and not meddle with the security of the network.
Speed & Price
As you probably already know, making transfers between traditional banks often takes and long as 3-5 days. Many banks also often offer very poor exchange rates between different types of FIAT currency. With cryptocurrency, transactions can be instant or take up to an hour at most. There is no need to worry about dealing with different currencies when users involved in a transaction are in different countries, and the fees related to transactions are small and often even free.
What Does This Mean For You?
The fact that every cryptocurrency is designed around these core characteristics means that there are some pretty impressive implications for you as a user. Because of the nature of blockchain technology, you will never have to trust a third party to vouch for the security of your transactions. This allows you to safely conduct transactions all over the world with other users that you don’t need to know or trust in any way. This creates an entirely unique global market that offers much lower transaction fees and eliminates the obstacles of government laws a currency exchange.
This is pretty impressive, but it’s really just the beginning of the virtually unlimited potential of blockchain technology. Cryptocurrencies are popping up left and right, and many of them are designed to use the blockchain to do more than just transact tokens exchange. Many of them can settle future trade deals automatically, track the completion of contracts and deliver compensation on their own, make automatic orders and deliveries to manage inventories and supply lines, give software and machines the parameters needed to make purchases on their own, and much more.
Chapter 2: How It All Works
This chapter will help you get a basic idea of exactly how cryptocurrencies and the blockchain work. If you’re not really interested in the technical aspect of how these systems actually function, then you are welcome to skip forward to the section later in the chapter titled “Smart Contracts”. However, I would recommend that you read this section at least once to get a basic understanding of the type of technology you’re going to be investing in.
In Chapter 1 we discussed the core characteristics of every cryptocurrency, two of which are immutability and security. So how exactly are they able to do that? Any organization that is centralized, like banks and governments, spend tons of money to manage their security. Even after all the time, effort, and money expended, they are still far more vulnerable than most cryptocurrencies. This is because they are susceptible to outside attacks, and even more so from inside forces who may choose to abuse their authority over security keys, access codes, or other sensitive information. In all reality, they only thing truly protecting the security of these centralized agencies is the moral decisions of those in charge or at least the fear of whatever consequences may come with being caught. With cryptocurrencies, this need for trust is completely eradicated. No one has the keys, and no individual person can mount an attack on the system. Hundreds and thousands of users collectively store the data and each effectively holds an infinitely tiny piece of the keys, which won’t work without participation from at least 51% of the network. These users are rewarded for following the rules and protecting the data they store, and they are penalized for any minor attempt at breaking them.
In order to understand how this system works to protect the security of every user and the immutability of each transaction, imagine a typical bank like the one you probably have an account at in your hometown. This bank tracks every transaction that occurs in a simple ledger so that it can accurately account for each exchange and track how much money each member has. Because they use just one record, it wouldn’t be that difficult for a good thief to break in and make changes to it. In this way, someone can adjust how much money they have in their account, and they could also add transactions that never happened or delete transactions they do not want to be tracked. After doing this, the bank will check their ledger which has been altered and see nothing out of order.
Now, imagine that your bank does not operate on its own but instead has 10 different branch locations. Each of these locations does not trust the other 9, so they decide that each branch will keep a record of their own transactions and also keep copies of all of the transaction records from the other locations. In this way, there are 10 different copies of every branch’s transaction ledger, so if there is ever any question of the validity of a certain record, each branch can check their ledger to determine whether the record is correct. In this way, the thief will not be able to pull off the same trick without individually corrupting the ledger at each of 10 different locations.
Unfortunately, even this more secure method isn’t perfect. If he does succeed in changing the records of at least 6 locations, then the majority will agree that the fraudulent data is correct. To guard against this possibility, the bank decides to take an extra step. Each branch totals the values from each page of the ledger at the bottom of that page and represents that total using a complex equation that is difficult to decipher. This is done cumulatively so that any change on a given page will not only change the total for that page but for every page after it. Using this method, it would take any thief a ridiculous amount of time to make any changes. This is because they would have to make sure that any change they make still causes the same total after being run through the incredibly complex equation, which they will have to decipher. This can take the thief several weeks to figure out, by which time the bank will have obviously noticed that something’s off. This is a pretty complicated system, but it makes the bank a lot more secure than the bank in our first scenario, doesn’t it?
Well, that’s actually not all there is to it. There’s one more step that the bank can take to make sure their system is even more secure. To avoid corruption among bank officials, each time the ledgers are checked there is also compensation awarded based on the results. If a branch’s ledger matches the majority of other ledgers, that branch receives a reward. If it doesn’t, the branch is fined. This makes it significantly beneficial for the branches to want their ledger to be accurate and for officials to follow the system to their utmost ability.
When dealing with cryptocurrency, the system of ledgers in this analogy directly relate to the blockchain, and there are a variety of different consensus methods used to ensure that each copy matches all of the others. In the next section, we discuss exactly what these consensus methods are and how they work to provide immutability and security to a cryptocurrency transaction.
Types Of Consensus Methods
In the analogy we presented, there were different branches which each kept an ongoing copy of the ledger. For cryptocurrencies, these branches equate to the different nodes that are used to process each transaction. Every node has access to the exact same information at any given moment in time, and each time a node completes a page on their ledger, or in this case a block on the blockchain, it cross-references that block against the other nodes. The complication equation which contains the value of all of the transactions is known as a hash, and hashing is significantly harder to decipher than it is to original calculate. This makes it an excellent method for encryption.
So, why would anyone want to operate a node?
Every transaction that is completed needs to be processed and checked to ensure security, and this is completed by the nodes. The nodes receive a fee payment for each transaction that they help to complete. The fines discussed in the analogy are also in place, and what they might be are dependent upon which type of consensus method is used.
Here are the most common and important consensus methods:
Proof of Work (PoW)
Proof of Work is the method that was used when Bitcoin was created, and as such is the first method developed for consensus. It is still the most commonly used method today. Using the Proof of Work method, a node will need to complete an overly complex equation in order to complete a block. This equation is only used to ensure that the node has to work hard enough to use a certain amount of electricity. When the block is completed, the node is awarded a block reward along with any transaction fees. This process takes a pretty good amount of computing power and is known as mining. Any node in a Proof of Work system can choose to become a miner, and it is always within their best interest to follow the system correctly in order to receive their reward, thus protecting its accuracy. If a mining node completes an equation and presents a different answer than all of the other nodes working on that same block, then that node’s answer will be rejected. Nodes do not get paid for incorrect answers, but they still have to utilize the electricity to operate which incurs a cost. In this way, a fine of sorts is imposed and miners are actively incentivized to produce only the correct answers.
Using this consensus method, the only way to corrupt the system is to control 51% or more of the mining nodes. Even with this control, it would be extremely hard to change any past transactions and completely impossible to change any transaction after multiple blocks have been added after it. A miner who does control 51% of the nodes would have the ability to prevent a transaction from occurring and could possibly reverse a transaction, but there is almost no conceivable benefit to doing so which is worth incurring the immense cost of acquiring and operating such a high percentage of the total mining power. It simply doesn’t make any sense economically for anyone to even want to try.
As a miner, it is beneficial for your node to have excellent computing power, as the nodes which can complete hashing faster are more likely to receive the reward. They can also complete more blocks in the same amount of time and use the same amount of electricity, making them more profitable. It is not uncommon for multiple users to combine their nodes and to work together to be able to perform hashing more efficiently. This forms what is known as a mining pool and allows each user to receive a reward more consistently, providing a more reliable income.
The Block Difficulty of a given cryptocurrency refers to how difficult it is to solve the mathematic equation needed to complete a block. If developers find that it takes too long for nodes to be completed, they may choose to reduce the block difficulty. Alternatively, if blocks are solved too quickly then their difficulty can be increased to avoid inflation of the specific token. Block Timing refers to how often the ledger flips to the next page, or rather how often a new block is created. If there are a good number of transactions occurring then it is better to have a block time that is lower. Unfortunately, if you don’t have enough transactions occurring to support the current block time it can cause security risks.
Benefits Of The Proof Of Work Method
The Proof of Work method requires a fairly high capital investment to participate in as a miner. This provides a good incentive to complete each block correctly without trying to cheat the system so that you are sure to receive the reward.
Mining provides a financial reward, which provides a good enough incentive that PoW methods usually have a large amount of computing power and a large number of nodes. This makes it harder for any one person or group to control 51% of the mining power, which makes the network more secure.
Downsides Of The Proof Of Work Method
This method requires a lot of electricity and computing power. One transaction for some PoW currencies can take as much energy as an entire household requires for a full day.
The PoW method takes longer to complete than many other methods, so it takes longer for transactions to be confirmed and completed. This also means that the capacity for how many transactions can be completed in a given time is lower. This is evident from the 7 transactions per second limit that can be seen with Bitcoin.
Another downside of the PoW method is that mining is more profitable in areas of the world where electricity is cheaper, so we tend to see mining pools spring up in these regions which somewhat centralizes the blockchain’s mining power.
Cryptocurrencies That Use The Proof Of Work Method
- Bitcoin Cash
Proof Of Stake (PoS)
In the Proof of Stake method does not require mining and does not utilize any complex mathematic equations. When a transaction needs to be processed, a node is chosen to complete the processing and all of the other nodes check to verify the block. Instead of requiring electricity costs, the node chosen to process a transaction has to lock away a portion of its currency, which will be forfeited if the system detects any fraudulent activity or attempt the cheat the system. This process is called staking and is equivalent to the mining system found in PoW methods, but it doesn’t cause your computer to rack up a huge electricity bill. Instead, the only real “cost” required is in how much of your currency you choose to stake. The higher value you have staked, the more likely it is that the system will choose your block to process a transaction and the more you have to lose if you try to cheat the system.
Benefits Of The Proof Of Stake Method
The Proof of Stake method allows for much faster transaction times and can handle more transactions every second.
Downsides Of The Proof Of Stake Method
Many users are concerned with exactly how secure Proof of Stake methods are, and node users who participate in staking also have to consider the possible effects of game theory on their overall success and profit.
Cryptocurrencies That Use The Proof Of Stake Method
- Ethereum will soon be using a PoS method
Proof Of Importance (PoI)
The Proof of Importance method is similar to the Proof of Stake method, with the caveat being the exact method of how nodes are selected. In a Proof of Importance system, everyone who wants to operate as a processing node must stake the same fixed amount. Nodes are then chosen based on how often users actually use the system, with those who send money often or in larger amounts being more likely to be chosen than those who do not. This likelihood is represented by the user’s Importance Score.
Benefits Of The Proof Of Importance Method
Proof of Importance systems are secure and very scalable, and they operate very efficiently. They are designed to reward users who are more actively utilizing their currency, and it encourages more users to use that specific currency more often.
Downsides Of The Proof Of Importance Method
Establishing a good Importance Score can be intimidating, and the criteria used to determine what you score is can be complicated and difficult to understand, especially for newer investors.
Cryptocurrencies That Use The Proof Of Importance Method
Delegated Byzantine Fault Tolerance (dBFT)
In the systems which utilize delegated byzantine fault tolerance, the pool of nodes which are used to process transactions are each elected by shareholders. In order to be available to be elected, a node has to stake part of its currency. In this way, it’s very similar to a Proof of Stake system. With this method, however, the amount that a node stakes does not affect how likely it is to be elected. Every node that is up for election has equal weight, and the election is determined instead by the shareholders. A minimum amount has to be staked by each node that wishes to be up for election, so it becomes more and more expensive if you wish to control multiple staked nodes. The way this system works also causes it to be increasingly less likely for a node to be voted in as you increase the number of nodes that you control.
Since it is the shareholders who vote on the nodes which are to complete transaction processing, it only makes sense that they are likely to vote for the nodes that bring them the most benefit. In this case, that is usually the node with the lowest transaction fee. The fact that getting the vote requires low transaction fees is a compelling deterrent that makes it less appealing to attempt to create a monopoly on available nodes. Much like the Proof of Stake method, this method does not involve any mining and any transaction fee is simply awarded to the node which completes the processing.
Benefits Of Delegated Byzantine Fault Tolerance
A blockchain that runs on the dBFT method will automatically shut itself down before a fork is allowed to occur in the blockchain. This means that being live is not held at a higher value than being consistent, which is a vital feature when you are dealing with the exchange of important assets.
This method allows for a very high transaction speed. It can handle thousands of transactions per second. This is largely due to its very fast confirmation times. This system also causes nodes to carry very low transaction fees, and often transactions are completely free.
Downsides Of Delegated Byzantine Fault Tolerance
It is not yet known how scalable this method might be because it has not been tested yet on any larger scale.
Cryptocurrencies That Use Delegated Byzantine Fault Tolerance
Delegated Proof Of Stake (dPoS)
The Delegated Proof of Stake method is a system which has two different branches. There are some nodes, called Witnesses, which process and confirm the transactions and which are paid using the transaction fees. Other nodes, known as Delegates, actively vote to decide what the transaction fees should be, along with block size, block times, and many other things. Both branches of nodes are selected using a majority vote of all users.
Benefits Of the Delegated Proof Of Stake Method
All of the Witnesses and Delegates used in this method are elected by the users, and each election is held separately. This helps to eliminate conflicts of interest that could potentially cause Delegates to vote in a manner that will bring them personal gain.
This method makes for a blockchain that is more adaptable than other methods. The features and parameters of blockchains that use this method can be changed rather quickly to suit the needs of the users as decided by the Delegates.
Downsides Of The Delegated Proof Of Stake Method
Proper representation of users in this method requires that the users actively participate in the voting process. Unfortunately, for users to make informed decisions they must first keep themselves educated on the nature of the blockchain and also with the overall behaviors of all of the Witnesses and Delegates. This requires a vast majority of users to take the time and initiative to stay informed and to vote actively.
The adaptability of this method means that changes can be made quickly and efficiently, but this may actually repel some users who prefer more stability.
Cryptocurrencies That Use Delegated Proof Of Stake Method
This particular consensus method is unique, and one reason for this is that it’s the only major method that isn’t a blockchain at all. The Tangle method is a network in which every user acts as a node when they actually use the system. Any transaction cannot be confirmed until the user validates a few transactions that were started previously. Once you’ve done that, another user will come along wanting to confirm a transaction, and they will be the one to validate yours. This method allows the system to run not using a chain of blocks but instead spreading out through a net of transactions. This method allows users to complete transactions instantly without any fees. It also scales excellently because the number of nodes available for transactions scales directly with the number of transactions that need to be processed. The major concern with this method is a matter of security, and in order to counteract this, oracle nodes serve as a way of policing the activity.
Benefits Of The Tangle Method
The Tangle method allows for free transactions that can be processed instantly. This also allows users to make tiny microtransactions without there being any loss due to transaction fees. This method was designed to be efficiently run on devices that don’t have a lot of computing power.
Downsides OfThe Tangle Method
The Tangle method seems to have a bit less security that some other consensus methods. The network currently requires a helper system known as a Coordinator, which keeps the system running until it becomes large enough to sustain itself without any help. It’s impossible to be sure exactly how the method will run once this program is finally removed.
Cryptocurrencies That Use the Tangle Method
One of the newest advancements in blockchain technology is the creation of Smart Contracts and Dapps. These terms are well known in the cryptocurrency world, but many people who have heard them still don’t know what they mean.
I any standard contract, there are two or more parties that are agreeing to a set of terms. Each party agrees to uphold their end of the agreement on the grounds that the contract will be void if the other party doesn’t pull through. Contracts are legally binding, meaning that if any party breaks faith they can be called to court and prosecuted.
Smart Contracts allow this entire process to be carried out in a much easier and more effective manner. There is no need for the terms to be legally binding and enforced by a court of law because instead they are bound by the immutability of the blockchain. Once a contract is signed and agreed on, the terms that the parties set out will be carried out automatically by the blockchain.
The term Dapps stands for Decentralized Apps. These applications are designed to work directly with smart contracts and serve in the capacity of middleman, performing the tasks that you may normally see presided over by a third party like a broker.
Imagine that you wanted to create an options contract. This process typically involves using a broker as a middleman to match your request with the best bid and then ensure that both parties honor their agreements when the contract is completed. Using a Dapp, the matching process can be completed automatically by the blockchain without the need for any human brokerage. The Smart Contract then enforces the terms to ensure the contract goes off without a hitch. After you set up your request and click buy, everything else is automated and there is no need to trust in a third party at all or to pay their administration fees.
This is only one of the many applications that can be created in the world of Dapps. More startups are popping up every day, and each one utilizes a new possibility of this cutting-edge technology. They allow for advertisers to directly pay content creators in order to get in front of their fans, sciences to be crowdfunded, and many other revolutionary ideas to become viable businesses.
So far, everything we’ve talked about can only be applied to purely digital components. Dapps and Smart Contracts alone don’t have the ability to reach out into the real world. However, there are some projects out there which are already working to create ties between physical real-world products and the digital world of blockchain technology. These projects have figured out how to assign a digital certificate to commodities and title deeds so that they can be put on the blockchain, and in this way, they have made it possible to perform legally binding transactions which affect the exchange and ownership of these physical assets.
Using the current methods, you need lawyers and often real estate agents to complete the purchase of a home, and it is often a long and frustrating process. By turning the title deed into a digital asset and then using smart contracts, it would be entirely possible to purchase a home as quickly and easily as you can order a pizza. This method also makes it possible to easily divide assets like property, cars, art, or intellectual property among multiple owners.
Chapter 3: Use Cases
Now that we know exactly what cryptocurrency is and how it works, let’s take a look at what it could possibly be used for.
Storage Of Value
One of the most common uses for cryptocurrency is as a method for storing wealth. This is also the most common use for Bitcoin, the most popular cryptocurrency. Many have called Bitcoin “digital gold”, and it has become a very common piece in any good investment portfolio. Bitcoin itself does not have an infinite supply, and the blockchain is programmed to never allow more than just below 21,000,000 BTC to exist. Because of this, the ever-increasing demand can lead to nothing else but an increase in value. In fact, the actual supply of BTC that is in circulation is much lower than the allotted maximum, as there are people who lose their wallet keys and some Bitcoin is digitally burned to remove it from circulation.
Currency is an interesting social mechanic. With the exception of some of the first currencies which were valued based on the materials from which they were made, every currency in the world is purely valued based on the social structure it relies on. Currency holds value only because of the faith that people have in it, either because of the Federal Reserve, the economy, or just the overall value that a significant percentage of people have placed on it. In this way, there really isn’t that much difference between traditional FIAT currencies and cryptocurrencies like Bitcoin, except that cryptocurrencies are the first form of truly global currency and do not depend in any way on any country’s Federal Reserve or economy.
Because cryptocurrency is so new, most of them are fairly volatile in nature and their value can fluctuate greatly over time. Some cryptocurrencies such as TetherUSD combat this by locking their value with that of a specified FIAT currency. Most of them simply recognize the fact that stabilization will take some time, and the longer the currency is in use and the higher the demand becomes, the more stable and valuable it will be. This creates a sort of feedback loop where the stability of the currency makes it more viable for use, so more people use it and this decreases its volatility even further.
Crowdfunding is the most recent use for cryptocurrencies, and it has really taken off. In the past year or so, thousands of new cryptocurrency ICOs (Initial Coin Offerings) have been implemented. The idea behind an ICO is that you as the investor will purchase the first units of a brand new cryptocurrency, and usually this currency represents stock in a startup company. The success or failure of the company is directly tied to the value of and stability of their cryptocurrency.
Many of the ICOs being introduced are purely legitimate and they offer a fair return for their investors. They also support a company that has a good chance at being successful, revolutionizing an industry, or doing something good in the world, all of which have the potential to provide a massive return on investment for token holders. However, there a vastly higher number of ICOs which over-promise on what they are able to do, mislead investors regarding what will be done with their money, or even operate off of thinly veiled pyramid schemes. A good portion of the new coins on the market are also just clones of Bitcoin that aren’t worth nearly as much and show no potential to increase or hold value.
On the one hand, an ICO is a quick, simple, and cost-effective method for crowdfunding a startup or implementing a new idea. On the other hand, it’s a completely unregulated arena and therefore acts as a breeding ground for scammers. Investing in these ICOs can be a legitimate and highly lucrative endeavor, but it does require a lot of research, due diligence, and outright investing sense to do well.
The possibility for decentralized services moves us away from currency tokens and towards the extensive possibilities of blockchain technology. Blockchain technology has the ability to decentralize service provision for nearly anything you can think of. It can allow for applications that can leverage empty hard drive space on a large pool of computers, make use of unused computing power, crowdsource IP addresses, and decentralize advertising opportunities. The blockchain’s ability to do this can increase productivity, tighten security, reduce the possibility of a monopoly, lower costs, and even eliminate the barriers to entry for service providers.
Internet Of Value
You’ve probably figured out by now that most digital industries stand to be revolutionized by blockchain technology in the coming years, but what you may not realize is that it’s not only those fields of interest that are directly related to the web which are likely to see the effects. Thanks to Dapps and Smart Contracts, the physical realm of assets, products, and live services can also be represented, traded, and owned on the blockchain. There is virtually no aspect of our lives as consumers that cannot be touched by this technology.
It’s entirely possible for it to become commonplace for physical purchases to be bound to a digital certificate on the blockchain, which would make buying and selling much more liquid, lower costs, and decrease the number of legal disputes. It would also bring major advancements to logistics and inventory management, make it easier to find buyers or purchase goods from a global market, and make it possible for there to be multiple owners of items that it is currently not possible to divide ownership of. This will all allow us to see data on a level that is currently impossible and analyze it to continuously improve on every aspect of these systems.
IOTA is a cryptocurrency that is designed for a unique purpose. It was created in order to allow for a system in which machines could easily talk to each other and complete transactions autonomously. It may not seem obvious to you, but this ability has some pretty amazing applications.
It won’t be long now before self-driving cars are fairly common. If one such electric car was in use for Uber trips, this type of machine economy could make all of the processes needed to keep it running fully automated. Customers could pay the automated vehicle directly using IOTA, and when not in use the car itself could autonomously pay for its own maintenance. Between trips, imagine the car was to park in an autonomous parking lot and pay for the time it spent there using IOTA. This would be a transaction in which only 2 machines were involved, and they would be able to communicate with each other to complete the transaction without assistance or interference. In the same way, this car could recharge itself at a charging station, take itself to an automated mechanic station for repairs, and even contact security drones if it gets broken into.
The insurance company for this vehicle would also use the blockchain. The security drone can send footage automatically to the insurance company, and the automated mechanic shop can do the same when it’s applicable. Compensation from the insurance company would be paid directly to the car using IOTA. All of this can be done completely automatically and without any human interference.
This may seem too good to be true, but the world’s most advanced technological leaders are already working on advancements that can do all of these things on their own. They believe that Ai and robotics truly are the future, and the blockchain is a big part of how that future will work.
Chapter 4: Most Popular Cryptos
There are literally thousands of different cryptocurrencies currently in existence, and it stands to reason that many of them aren’t worth the time it would take to research them. The most popular and widely used cryptocurrencies, at least, are definitely worth looking into. Here we’ve given a quick overview on the cryptocurrencies that currently have the largest market use, including how they are different from each other and what issues each one was designed to deal with. It is worth noting that any extremely new cryptocurrency which has not been a viable store of value for at least 5 years at the time of this writing has not been included.
Bitcoin was the first ever cryptocurrency created, and it was the creators of Bitcoin who invented blockchain technology. All other forms of cryptocurrency that have been created since are piggybacking on that advancement.
Most people consider Bitcoin to be the most secure form of cryptocurrency. This is either because it is the oldest form and has the longest-running proof of value and security or because it has the largest number of users and the largest number of nodes which are protecting its security and processing its transactions. Bitcoin recently released a new software update which is designed to increase block size using a system called SegWit2x. The block size with this update went from 1MB to 2MB, and it also makes it possible for the blockchain to create something known as side chains. These side chains make it possible to leave more room on the main blockchain, so they allow for more functionality for things like instant transactions, smart contracts, and easily trading between different forms of cryptocurrency.
Bitcoin uses a Proof of Work consensus method. It was created for use as a currency and is currently being used both as a currency and as a store of value. In the future, Bitcoin has the potential to be used for implementing smart contracts.
What Are The Risks?
As the first and largest cryptocurrency, Bitcoin spends a lot of time in the political spotlight. It is possible that one day the governments of various countries could start the impose sanctions and regulations on the use of Bitcoin, especially where it concerns trading with FIAT currencies. However, it’s just as likely that these regulations, if imposed, will be imposed in a broad spectrum across all cryptocurrencies.
Mining is a major piece of the Bitcoin ecosystem, so any major fluctuation in the number or efficiency of miners could disrupt the stability of the system. This could be caused by fluctuations in the cost of equipment, increases in the cost of electricity, or even disagreements between miners in a large mining pool. There is also a concern as Bitcoin becomes less profitable to mine that miners will begin moving in mass the other PoW cryptocurrencies which are more profitable to mine. This would cause block times to be longer, backlogs to build up, and overall uncertainty in the future of the system.
What Are The Advantages?
Those who embraced the potential of cryptocurrency and invested in Bitcoin early are reaping incredible rewards. It seems that the value of Bitcoin is on an upward trend that does not appear to be stopping anytime soon. Bitcoin also has the advantage of offering the largest network of users, which reflects in the most due diligence for needed changes because there are more people invested and each unit is worth more than any other cryptocurrency currently available.
The popularity of Ethereum is almost entirely due to the potential surrounding smart contracts. There have been a large number of ICOs on Ethereum’s platform recently, and they are bringing in investors who are developers that are very interested in what the Ethereum blockchain will be able to do. Ethereum uses a programming language of its own known as Solidity, which is a Turing Complete language that just about any new form of program can be written in. This is designed to be a platform that smart contracts and dapps can be created in and in which they can run smoothly.
Ethereum currently uses a Proof of Work consensus method, but there are plans to move to a Proof of Stake method soon. It was created for use as a method to create smart contracts, run dapps, and manage ICOs, and that is exactly what it is currently being used for.
What Are The Risks?
Ethereum uses a new and unique programming language that is unfamiliar to most programmers. This allows for a margin of error that could cause major issues with software that is developed on the platform. This unique programming language could also lead to slower advancements due to the time needed to learn how everything works.
Right now, Ethereum is some of the most advanced technology in its sector, but it is possible that newer and more advanced technology could come along to replace it.
There is a fundamental divide in the cryptocurrency community regarding whether Proof of Work or Proof of Stake is the better consensus method. Making a shift to Proof of Stake after initially starting out as a Proof of Work system is a cause for some uncertainty.
What Are The Advantages?
The fact that Solidity is a Turing Complete programming language means that there are almost limitless possibilities for the Dapps that can be written using the platform. Among developers who work on the blockchain or want to stay informed on its advances, Ethereum has the largest following. It is easy to assert that Ethereum has the best set of tools available for developers, and it also has extensive support from corporate sponsors through a program known as the Ethereum Enterprise Alliance (EEA).
Ripple is the first cryptocurrency that has been backed by the banking system. It was created for a singular purpose, which is to be used for more liquid trading between banks on the Forex market. Ripple doesn’t replace the Forex market at all. It simply makes trading on it run a little more smoothly.
Ripple uses its own unique consensus method, which is called the Ripple Consensus Protocol Algorithm, or RCPA. This method utilizes a small number of trusted nodes that are controlled by the banks. This system isn’t trustless in the way that other consensus methods are, but it doesn’t need to be because Ripple is only intended to be used by the banks in order to facilitate transactions between them.
It is currently used for the purpose it was intended for, and is providing liquidity for the Forex market.
What Are The Risks?
Because the nodes that complete transactions are controlled by the banks, the entire system is reliant on them. This makes for a method that is very centralized, which is the opposite of most operational cryptocurrencies.
What Are The Advantages?
The good thing about Ripple is that it has a perfectly clear use case. It was designed for a singular purpose and is currently being used for it. For the specific purpose of trading on the Forex market, Ripple is ideal because it is legally compliant with all of the regulation of the market.
Bitcoin Cash (BCH)
To understand Bitcoin Cash, it’s important that you first know what a hard fork is in the cryptocurrency world. A hard fork is a change to the way a cryptocurrency works that is so drastic that it can completely change the nature of the cryptocurrency and make transactions processed on the previous versions invalid, meaning that every user will have to update their version of the blockchain before they are able to continue using it.
Bitcoin experienced a hard fork in August of 2017 that was so drastic that it didn’t just require a hefty update, it created an entirely different version of cryptocurrency. There was a controversial debate on how to properly scale the blockchain, and this caused factions within the Bitcoin community that simply could not agree. They solved this problem by hard forking the blockchain and creating Bitcoin Cash. This new cryptocurrency has one fundamental difference from Bitcoin, which is that it immediately increased the block size from 1 MB to 8 MB. This helps to alleviate blockages in the blockchain, though it doesn’t help in any way to speed up transactions. Those who agreed with this method were able to start using Bitcoin Cash, while those who did not could continue using Bitcoin.
Bitcoin Cash also has the ability to make emergency adjustments to the block difficulty much faster than Bitcoin, which came in very helpful in the first few weeks it was created while dealing with an immense difference in computing power that was available on the network.
Bitcoin Cash uses a Proof of Work consensus method. It was created for use as a currency and as a store of value, because it’s creators knew that Bitcoin was already being used primarily for these 2 purposes.
What Are The Risks?
Bitcoin Cash is newer and slightly more volatile than Bitcoin even though it was born directly from it. It also isn’t quite as popular. Bitcoin Cash was created to solve a very specific problem, so it doesn’t have any interest or intentions to integrate more functionality into its blockchain like what you would find with something like Ethereum. Bitcoin Cash is also very heavily used in China more so than any other country, which could pose a threat to decentralization.
The emergency adjustments that Bitcoin Cash can make to its block difficulty may cause miners to abuse the system. Whenever block difficulty is lower, it’s likely to see more miners hopping in to take advantage of the higher profits brought about by lower electricity needs. When the block difficulty gets higher, these miners will simply switch back to a different cryptocurrency. This causes the system to be less stable and can cause massive fluctuations in block timing and in how profitable it is to mine Bitcoin Cash.
What Are The Advantages?
All of the benefits of Bitcoin at the time the hard fork occurred can be found in Bitcoin Cash, with the added benefit that block size and therefore transaction capacity was immediately improved. Many people also see Bitcoin Cash as a viable backup to the original Bitcoin.
Litecoin is extremely similar to Bitcoin and runs in much the same way. The major difference between the two is mostly just that Litecoin is not in the spotlight as much, so there is less pressure on Litecoin to be stable and secure. This allows Litecoin to implement new changes and improvements much faster than Bitcoin, as it doesn’t require as many users to agree to any changes. Litecoin is extremely popular in China.
Litecoin uses a Proof of Work consensus method. It was created for use as both a currency and a store of value.
What Are The Risks?
It’s possible that Litecoin may become completely obsolete due to its overwhelming similarity to Bitcoin. This will become especially true if Bitcoin ever finds a way to be more efficient at implementing improvements.
What Are The Advantages?
The speed of transactions is much better with Litecoin than it is with Bitcoin, and confirmations can occur about 4 times faster. Litecoin has the ability to synergize well with Bitcoin in any investment portfolio and is often referred to as the silver standard to Bitcoin’s digital gold.
Bitcoin was created by Satoshi, a mostly anonymous individual or group who no one really knows anything about. Litecoin, on the other hand, has a public face. Charlie Lee allows the company to be more decisive and to more firmly control its direction, another benefit that makes implementing new adjustments easier and more efficient.
Litecoin is very popular in China and has a good amount of support, and in recent months it has been the most stable cryptocurrency on the market.
NEM is another cryptocurrency that has a unique method for consensus, which we talked about in Chapter 2. Proof of Importance incentivizes network usage and rewards transaction fees to nodes that use the system most regularly. The method is complicated, but it’s an excellent way to make sure the currency is used more often by more people, which inherently makes the system more efficient and more secure. NEM has a number of updates currently in the works that are designed to allow more functionality on the network. They also allow wallets which are multi-signature, which is a great way to protect accounts that require more than one person to verify that a transaction is allowed.
What Are The Risks?
The Proof of Importance consensus method is a bit complex, so it may be harder for users to understand its values and how it works, which could cause fewer potential users to invest in the network.
What Are The Advantages?
The Proof of Importance system naturally encourages more use of the network. The ability to have multi-signature wallets allows for added security of joint assets and those which require multiple levels of verification. NEM is fairly consistent with how often they update their technology, which is good for users who want to stay abreast of the latest advancements.
The term Dash means Digital Cash, and it was created to provide a cryptocurrency that could easily be integrated into the consumer market. Dash is one of the best options for cryptocurrency use in the retail industry. DASH also uses a system where 10% of all transaction fees are pooled into a treasury that is used to fund further development.
Dash uses a two-tier system of consensus methods, in which the first tier uses the Proof of Work method and run off of miners and the second tier of nodes uses the Proof of Stake method. These master nodes provide an upgraded level of services, such as additional privacy and instant transactions. As of this writing, nodes must stake at least 1,000 Dash to become a master node.
The primary use for Dash is to provide a cryptocurrency that allows for very fast payments and which can be effectively used in standard consumer purchases.
What Are The Risks?
Dash is very competitive and has to compete not only with other cryptocurrencies but also with various forms of payment using FIAT currency. While there are many claims that Dash is completely anonymous, this is not actually the case.
What Are The Advantages?
As was intended, Dash allows for very fast transactions that are often instant. It has very low fees and has a primary focus on being user-friendly.
IOTA is the only true cryptocurrency that does not operate using a blockchain. Instead, IOTA uses the Tangle Network. This network uses each new transaction as a means of completing those before it, and this allows it to offer transactions that are instant and completely free. The goal of this type of network is to create a machine economy in which IOTA will serve as a primary currency used by machines to interact with other machines without any need for human interference. It won’t be long before our world is full of more and more machines that have the ability to communicate directly with each other and determine what their needs are and how to fill them without humans having to help. With IOTA, these machines can pay each other for the products and services that are required to keep themselves running. However, because of the system using the Tangle Network and not a blockchain, there are concerns about the network’s security.
What Are The Risks?
The IOTA network currently uses a Coordinator, which is a helper program that keeps the system in a sort of training stage until it is large enough to sustain itself without assistance. Because IOTA is designed to be used by machines, it requires a specific type of special hardware. Unfortunately, there is no guarantee that the creators of new technology will choose to include this hardware when designing and building their machines. After all, the market that IOTA was designed to operate in doesn’t even exist yet.
What Are The Advantages?
The Tangle Network allows for completely free and instant transactions and the entire IOTA system is a completely new and unique technology. If the market of autonomous machines truly does take off, IOTA has positioned itself perfectly to be extremely successful. Although the market it was designed for doesn’t exist yet, the potential for this market is massive.
NEO is often called the Ethereum of China, and like Ethereum it is designed to be a platform for Smart Contracts and Dapps. The primary difference between Ethereum and NEO is that NEO supports many different programming languages that are more common than Solidity, such as Python and Java. This allows for a much lower barrier of entry so that more developers can write programs on the NEO blockchain.
NEO is unique in the cryptocurrency community because each unit of NEO is not able to be divided into smaller parts. Each NEO is intended to act as a share that gives voting rights to the users and pays dividends which can be used to pay for transactions and additional services.
NEO uses the Delegated Byzantine Fault Tolerance consensus method and is currently primarily used for ICOs. However, it was intended to be used for asset digitization and for digital trading of physical goods and services.
What Are The Risks?
The dBFT consensus method is larger untested, and it is not known how it will perform under pressure. In addition, the initial supply of GAS tokens which are used to pay for transactions and additional services is pretty low, and this could cause the prices for these tokens to become volatile. This could cause problem because businesses need to know how much they should expect to pay when it comes to transaction fees.
What Are The Advantages?
NEO is able to handle transactions at a great rate and can process 1,000 transactions per second. The fees for transactions are currently low and often free. The system also supports multiple common programming languages, and there are plans to introduce more in the future.
Many cryptocurrencies aren’t legally compliant for businesses to use, and NEO addresses that need. NEO focuses on how consistent and stable it is more than being live, which makes it almost impossible for it to experience a hard fork. The community developers proved great support for the community, which is also good to see.
Monero is a cryptocurrency that prioritizes privacy and works hard to remain completely decentralized. The Monero developers have worried less about making it user-friendly and marketing it to the masses, and instead, have focused on improving their technology to provide the highest possible level of privacy and anonymity. This will obviously make Monero a favorite for those who wish to complete illegal transactions, but there are many perfectly legitimate users who consider privacy to be a high priority as well. The protocol that Monero uses is designed to allow the computers of everyday users to be viable for mining, whereas Bitcoin requires advanced computing power and special builds to mine profitably. On the other hand, a transaction with Monero is 25 times the size of a Bitcoin transaction, and this may cause issues when it comes to scaling. Monero’s block size scales with the needs placed on it, but regardless of block size, there will eventually be issues with users not having enough bandwidth.
Monero uses a Proof of Work consensus method, and it was created in order to allow for truly untraceable transactions.
What Are The Risks?
The size of the legitimate market for Monero isn’t massive. While there are those who prioritize privacy, it’s not a large enough group to allow a lot of room for growth. Because of this, it currently isn’t very scalable.
What Are The Advantages?
Monero transactions are completely anonymous, and they are the most untraceable transactions currently available on the blockchain. Monero is also impressively decentralized and doesn’t rely on any one region of the world to provide the majority of its users. Monero runs on strong technology and has developers who have created a strong community.
OmiseGo is itself a Dapp that is built using the Ethereum blockchain. Omise is a payment gateway that is attempting to bring the mobile phone based payment systems that are so popular in China into the markets of Southeast Asia. OmiseGo is designed to include cryptocurrency in that system. The OmiseGo system can provide people access to a secure account for their funds without them needing to have a bank account. This is especially important for Southeast Asia, where only about 27% of the inhabitants actually have a bank account. OmiseGo plans to be able to allow payments with FIAT currency in the future so that users can choose between FIAT currency and cryptocurrency on the platform.
OmiseGo is built of the Ethereum blockchain, so it’s consensus method and other functional characteristics are the same.
What Are The Risks?
OmiseGo is very new and is in the early stages of development, so there isn’t much history yet to allow for confidence in how it will work.
OmiseGo has been putting out excellent marketing efforts which have created a lot of hype around the project. It’s possible that this may backfire and cause the project to be overvalued.
What Are The Advantages?
OmiseGo has access to a great cabinet of advisors who have high profile projects of their own which have been very successful. They are currently in negotiations with the Thai government to help implement the system, and they are unique in their positioning in and around Southeast Asia.
Stratis was created so that businesses could have a platform on which they can build out customized blockchain solutions to help solve common problems like publishing transparent research findings and managing effective supply chains. Because the blockchain is transparent and immutable, it allows for programs that can provide minute control over massive and complicated systems.
Stratis uses a Proof of Stake consensus method.
What Are The Risks?
There are currently multiple different cryptocurrencies that can provide these custom business solutions, and Stratis is less well known than many others.
What Are The Advantages?
This platform is built on the Bitcoin blockchain and provides the security and scale that come along with it. Many other similar cryptocurrencies are built on Ethereum or other blockchains, which offer different benefits and downsides.
QTUM is a competitor with Ethereum that is based in Singapore. It was built from the core code of the Bitcoin blockchain and has an extra layer added to it so that it can utilize virtual machines like Dapps and Smart Contracts. QTUM was created to be the bridge between the limitless potential of Ethereum and the incredible security of Bitcoin.
QTUM uses a Proof of Stake consensus method and was designed to be used by businesses for specialized solutions that utilize smart contracts.
What Are The Risks?
The CEO of QTUM is not very popular in the cryptocurrency world because he was connected to some bad dealings while working with a company called Bitbay. This could negatively affect QTUM’s potential for adoption among users. It has not yet been proven that QTUM’s marriage of virtual machines and the Bitcoin blockchain will actually work as intended.
What Are The Advantages?
Singapore is currently a great location for blockchain technology and there are many programs showing promise out of this region. QTUM is focused on targeting both the eastern and western markets. While they are both similar, QTUM does not have to be in direct competition with other cryptocurrencies like NEO and Ethereum, and they can all coexist while providing tailored solutions that differ enough to appeal to different markets.
EOS is a cryptocurrency with a unique purpose. It was designed to provide an easy to use platform that other blockchain technology can be built on. The CEO of EOS has founded multiple projects which have been very successful. He believes that EOS will make it easier for developers to build programs and platforms that are like the ones he’s created before, and to help them communicate with each other more easily.
Unfortunately, there has been a lot of confusion surrounding many of the technical aspects of how EOS should work, and many potential users consider the information they have released to be misleading. The ICO which is currently open does not inspire confidence because the way it is structured and the legal disclaimers it carries are disconcerting. The CEO claims that this all simply surrounds the need to avoid letting any one person own too much of the total supply of EOS due to the fact that it uses a Delegated Proof of Stake consensus method.
What Are The Risks?
EOS has an oddly suspicious ICO and does not yet have an active product. Unfortunately, the information they have put out if very difficult to understand and convoluted, which makes it difficult for potential investors to trust.
What Are The Advantages?
EOS has prepared itself for the potential needs of a network designed around building blockchains, and it has a fairly high bandwidth with a confirmation time of 1.5 seconds. They claim to be able to provide many other new advancements in blockchain technology, though there is no proof to back up these claims.
BitConnect is becoming popular among less experienced investors, and this is mainly because it offers a guaranteed return to investors. BitConnect requires that you stake an amount of BCC for 15 days or more, after which they will return it to you plus a profit. Unfortunately, there is no information released on how they do this and the entire process is very sketchy. There is only one obvious method that they could be using to produce these returns, and that it by using a pyramid scheme. Anyone who gets in early enough is likely to make money and may even make a good bit of it, but those who hop on the bandwagon too late are likely to lose everything. If any new information is released that explains how BitConnect provides these guaranteed returns on investment, then this assessment may be proven incorrect. In the meantime, it is far safer to avoid this cryptocurrency.
The consensus method that this system claims to use is a Leased Proof of Stake system, which s really just a trussed up way of saying it is a pyramid scheme. The only current use for this cryptocurrency is as some sort of magic money maker and get rich quick scheme.
What Are The Risks?
Getting involved in a pyramid scheme is a bad idea no matter when you get in. There is no need to tell you that you should honestly just run the other way.
What Are The Advantages?
If for some reason you have no qualms about using a pyramid scheme to benefit from the misery of others by getting in early, then you may be able to make some quick profits using this coin. The choice is yours whether you wish to make that gamble.
BitShares was founded by the CEO of EOS and is designed to be used for trading. It is more decentralized than many other cryptocurrencies, has tighter security, and does not play favorites when it comes to different market orders. There are digital tokens on this platform that can represent physical assets, but the actual assets do not need to be staked to back these tokens as they do in many other platforms.
BitShares uses a Delegated Proof of Stake consensus method and is currently used entirely for decentralized global exchange.
What Are The Risks?
There does not appear to be any legal backing to secure digital assets on this platform, so any exchange of these asset tokens relies on little more than a glorified honor system.
What Are The Advantages?
BitShares can process 100,000 transactions per second at a very fast rate. It offers low fees and provides investors with a fully decentralized exchange that does not require users to trust each other or any third party when it comes to exchanging coins.
Waves is a platform that was designed to make it easier for organizations and agencies to create their own cryptocurrency tokens and to allow for these tokens to be traded openly on decentralized cryptocurrency markets. Waves uses a Leased Proof of Stake system, which is not a great sign, but there isn’t any other visible reason not to trust the platform. It is primarily designed to help facilitate crowdfunding for startups and major projects.
What Are The Risks?
Waves virtually eliminates the barriers to entry when it comes to creating your own cryptocurrency. This may cause the market to become oversaturated and could also make it easier for scammers to open up ICOs.
What Are The Advantages?
Waves is user-friendly and you do not need a lot of technical knowledge to use it to create your very own cryptocurrency.
ZCash is another cryptocurrency which prioritizes anonymity over everything else. It uses a system called zk-SNARKS to achieve this, but it is still not invulnerable. Professional analysts can still trace back and collect enough data to discover the identities of specific users.
ZCash uses a Proof of Work consensus method.
What Are The Risks?
As with Monero, the size of the legitimate market for ZCash is fairly limited. They will have to upgrade to more advanced technology that cannot be navigated by analysts if they wish to continue to be considered truly anonymous.
What Are The Advantages?
ZCash does not directly compete with similar currencies on the market, and coins like Monero can coexist with it without much issue.
Tether (USDT) is a system which allows cryptocurrencies to be directly attached to the value of FIAT currencies like the Euro and USD. This allows traders and investors who wish to use blockchain technology to trade in a market that is more similar to the Forex market. Every USDT coin is back by actual FIAT currency that is held in a reserve.
Tether uses a Proof of Work consensus method and it is used primarily to trade and store FIAT currency on the blockchain.
What Are The Risks?
There are many questions about exactly how each USDT is backed. If every Tether user were to simultaneously withdraw all of their coins, would there be enough in the reserve to cover it all without causing total network collapse?
What Are The Advantages?
Tether is useful as a method of storing FIAT currency in an investment that will not fluctuate independently of FIAT exchange rates.
Chapter 5: Getting Started
Here we take a closer look at how to buy and sell cryptocurrency.
Once you’ve finished researching the cryptocurrencies that you’re interested in and you’re ready to invest, how do you actually go about it?
The most common method currently used to buy and sell cryptocurrency is via an online exchange. There are dozens of popular cryptocurrency exchanges online, and you can set up an account with one in much the same way you would sign up for any online service. Most exchanges will require you to provide your ID and verify your address before you can deposit any FIAT currency into your account. It will often take a few days to process your application when verification is needed. If you are going to deposit one form of cryptocurrency to exchange it for another, you will often be able to do so without the need for verification.
After you’ve finished making a new account, it is strongly advised that you also set up two-factor authentication. Two-factor authentication is a method that utilizes 2 separate layers of security to make your account exponentially more secure. If you are not familiar with this process, one very simple and effective two-factor authenticator is the Google Authenticator app that can be found online in the Google Play Store. It is not uncommon for hackers to attack personal exchange account, so please be careful not to forget this important security step.
After you have set up your account and secured it with two-factor authentication, you will then be ready to add some FIAT currency to your account balance. You can do this using a bank transfer, your credit card, or your Paypal balance, depending on your preference and on what the exchange you are using accepts.
Let’s take a look at how you would go about adding to your account balance if you were using Bittrex, a popular cryptocurrency exchange website:
The first page you should see after logging in is the home page. In order to deposit new funds, click on Wallet. Most other exchange websites have some variation of this button, and it may say Wallet, Deposit, or Account.
In the case of Bittrex, there will be a + symbol inside your Wallet page next to each FIAT or cryptocurrency on a list. You can click on this to deposit the corresponding currency into your wallet. This will take you to the deposit window.
On this page, you will be able to see your wallet address and a QR code that corresponds to it. If you use your phone as a wallet location, you can scan the QR code using your phone. If not, you will need to enter the wallet address manually.
After you initiate the deposit, you should be able to see the amount in a column titled Pending. If you have deposited FIAT currency this process can take a few minutes or a few days so you may have to be patient. Once the process is complete, the amount deposited will move from the Pending column to the Available column.
Once the money is available in your wallet, you can go to the market pages to exchange it. You’ll need to select the relevant page depending on what currencies you want to trade. Let’s say, for example, that you want to buy some Bitcoin and you have US Dollars in your account. You can go to the page for BTC/USD exchange and you will find a chart which lists the prices, and order book where you can buy, and other information that may be relevant to your trade.
The easiest way to buy on this exchange is to place an order and set the price to the Ask price. Select how much Bitcoin you want to buy, check to see how much USD it will cost you, and then place your order. If you are successful in placing your order, a confirmation will appear that tells you the order is done processing and then you will see the Bitcoin you purchased appearing in your wallet.
If you are making a purchase using this method, you will most likely want to select the option for “Immediate or Cancel”. This way if your order isn’t filled immediately it will be automatically canceled.
The process is pretty similar if you want to sell Bitcoin that you already own. There is a different box used to complete a sell order, and you can set the price for what you would like to get into the Bid price. You’ll need to indicate how much Bitcoin you want to sell at this price, and as soon as the order is completed the USD will appear in your wallet.
Using the exchange is a major piece of trading and dealing with cryptocurrency, and it wouldn’t be hard to write an entire book on that topic alone. However, this overview should suffice to get you started on your first trip to an online exchange. It is also important to note that there are typically fees related to exchange transactions and also with withdrawal.
Changelly is a service that allows you to bypass traditional exchange platforms and simply buy cryptocurrencies directly using either FIAT or cryptocurrencies. It does charge a premium for providing this service.
Coinmama is another service that allows you to buy cryptocurrencies directly using your credit card.
LocalBitcoin is one of the many websites that are available to match users with others who are interested in buying or selling Bitcoin in person in their local area. These purchases can be made via deposits, bank transfer, or cash delivered in person, among a few other options. There are some banks that don’t allow deposits to online exchanges, and when that is the case this local trade option may be a good alternative. It important to remember to be very cautious when you use this method, as you are engaging in an in-person financial exchange with someone you do not know. This is slightly counteracted by point based grading systems on the website that allow you to see how trustworthy a given buyer or seller has been in the past. If you are meeting this person face to face, make sure that you choose somewhere public to meet and you wait for there to be at least 6 confirmations of the transfer before you consider the transaction complete.
There are websites you can check to determine if there are any Bitcoin ATM locations near you. There are a good number of different Bitcoin ATM models, but the process of using them is usually very similar and intuitive.
To start, you simply need to press the corresponding area on the screen. It will ask you to scan the QR code that corresponds to your wallet address. When the ATM has successfully read the QR code and you have inserted the cash you wish to spend, you can then press confirm and the screen will give you information on how much BTC will be sent to your wallet. Some of these ATMs also allow you to use Bitcoin in your wallet to withdraw FIAT currency, but they charge a significant fee for this option.
Peer To Peer
Peer to peer trading was originally the most popular way to exchange cryptocurrency. This works in much the same way as websites like Localbitcoins, except that instead of using a website to link up with potential exchange partners, you simply meet them naturally. Friends, contacts, or acquaintances could all potentially fill this space, but remember to be just as cautious when using the trade method as you are when you trade with strangers.
Storing Your Cryptocurrency
Every type of cryptocurrency is stored in a digital folder known as a wallet. Wallets can be stored locally on your computer or phone, on a specific piece on hardware specially designed for it, online, written down on a piece of paper, or even just memorized in your head (though we don’t recommend this). Online exchanges store your cryptocurrency in their own online wallets.
Wallets can be considered similar to either physical wallets or traditional bank accounts. A wallet stores the data necessary to represent your owned cryptocurrency at its own representative number, or address. It is pretty easy to set p a wallet and use it to send and receive cryptocurrencies, and in fact, it’s something you’ll have to do to accomplish this, but it’s important to you remember the address and keep it secure.
Your wallet is designed to digitally sign off on any transactions that you complete, and it does this using a private key. This key is also a means of identifying your wallet. If you can’t access your wallet and need to get into it again, using the private key is usually the only way. When you create a new wallet, it will show you your private key, and often it will also display a 12-word key phrase. It is important that you find a reliable way to record both the key and the phrase somewhere that is safe.
In addition to your private key, your wallet also has a public address which can be given to other users, and this is how other users will identify your wallet to send you funds. It is extremely important that you do not mix up your private key and your public address, and giving out your private key would give other users the ability to access your account and potentially clean out your wallet.
It is not possible for any other user to guess what your private key is, and there are not currently any computers who have the capacity to do so either. However, if someone does know your private key they will be able to access your wallet. For this reason, it’s important for you to be very guarded about who you allow to have this knowledge. If someone who has your private key chooses to send your funds to their own wallet, there will be no way to have this reversed.
When you are storing cryptocurrency, there are 3 important points that you need to remember:
- Whenever you store cryptocurrency in a wallet that is on an exchange website, you are putting trust is that website to keep your currency safe. It is not outside of the realm of possibility for that website to get hacked, and if that does happen it is possible that you may lose your funds.
- If you store your cryptocurrency in a private wallet that is not connected to a website, your access is entirely dependent on your private key. You should not reveal the private key to anyone.
- It’s vital that you keep your private key backed up somehow. It is best for this back up to be stored somehow offline, such as on a piece of paper that is kept in a safe or on a hard drive that you do not keep connected to the internet. If you lose access to your wallet and you can’t find your private key, you will lose access to those funds and they could be lost permanently.
What You Should Know About Scammers
The cryptocurrency world is often referred to as the Wild West of the internet, and this is largely due to the fact that there is such a high potential for users to be scammed, and there are very few service guarantees or regulations that can stop this from happening or help you recoup your losses after it does.
This technology is new and complicated, which means there are a ton of people in this space who can easily take advantage of how unfamiliar many users are. If you don’t want to end up being a victim yourself, it’s important for you to stay informed. This guide is one way to get a handle on the basics, and we can help you to get an overall understanding of what red flags you should be looking out for.
It’s important that you do your research about any new cryptocurrency you are interested in investing in, even if you feel like you already know everything there is to know. This will help you to have the information that you need to make the right decisions in the cryptocurrency West.
Unless you are a developer and fully understand the coding that makes a given cryptocurrency work, then you can never fully be certain that something is safe and the founders of a given startup are being honest. Luckily, there are some key points and red flags that will help you get about 99% of the way to absolutely sure.
Any cryptocurrency that is worth your time should be able to provide you with a link to their corresponding GitHub repository. This is a location where they have uploaded the code they are using so that anyone who can understand the coding language can review it. It’s not necessarily super important that you yourself can read this code and understand what it means, as long as there are updates on a regular basis and you can see that it is there. If there haven’t been any updates in the last 3 years, that’s a pretty big red flag. If you find that there is only one person publishing the updates, that’s also a red flag. It goes without saying that if a cryptocurrency won’t release a link to their GitHub, you should run away as fast as you can. They’re definitely hiding something.
Chaincoin is one example of a cryptocurrency that is a very obvious scam. The only updates on GitHub that can be found from the past 3 years were made to change the name and logo. This coin is an obvious Bitcoin clone that’s worthless on its own.
Any cryptocurrency that guaranteed a specific minimum return on investment or that offers you an incentive to sign up new users is almost certainly a pyramid scheme. These scam coins usually grow very quickly and then just as quickly crash and burn.
It’s important that you take a look at the team who is behind a given cryptocurrency. Check out who is working on the project and what their experience is. For developers, you should be able to take a look at their GitHub profile. Otherwise, a simple search on Google should provide you with the information needed to determine if they have legitimate experience for the project they are working on or if they are just a career scammer.
Initial Coin Offerings
Once you’ve got some experience with investing in Cryptocurrency, you may choose to start investing in ICOs. When determining the potential of a given ICO, you should ask yourself how the offering is structured. What is the actual value of the tokens that you will be receiving or your investment? Be sure that you read the terms and conditions so that you are fully aware of how the coin offering will work.
EOS provides a good example of an Initial Coin offering that puts up a lot of red flags. Another good reason to carefully review everything about an ICO, even when you think you know everything about it, is the potential for a good and genuine opportunity to get hacked. There have been cases in the past in which an ICO’s web address has been hacked and rerouted to a scam website. Blockchains typically have very good security, but the websites that offer ICOs are still not invulnerable to attack.
This is not usually a scam so to speak, but you can often be blindsided by fees if you are not careful to be fully informed. It is important to be sure about whether the fees for a transaction will be included in the amount you are offering to pay or if it will be added on top of that.
Get 6 Confirmations
It is important to remember that you need to get 6 separate confirmations for your transaction on the blockchain before you can consider the transaction complete. This is especially important to be sure of if you ever buy cryptocurrencies using a Peer to Peer method.
Many scammers are able to lure people in by offering a beautiful and deceptively professional looking website. These projects spend a lot of time and money making sure that they look good, and they succeed in drawing in inexperienced investors who don’t do their research. Always make sure that you look into the actual technology behind an offer and you aren’t sucked in by the business with a pretty face, or shall we say home page.
How To Identify Good Investments
This guide is by no means the end all be all of cryptocurrency investment, but it can be hoped that it will provide you with the basic first steps to ensuring you know how to do your research and decide for yourself whether a potential investment is to be trusted.
If you see that there is an involved community that is interested in contributing to the project, that is a good sign. If there is an active forum, channel, or subreddit that is actively talking about the project on a level that is deeper than just discussing price fluctuations, it is a sign that there are developers and coders who see enough value in the potential of the project that they are willing to help it succeed.
It is a good sign if the team that is involved with the project actually has a clear idea of where they would like it to go and an estimated time for when it should be completed.
The project should have a very clear direction for what it’s trying to do or a problem that it’s trying to solve. You should compare this project with other pre-existing ones to decide whether there is already another project that solves the problem or tackles it in the same way. For example, if there are two different projects written on Ethereum that provide smart contracts for the same use or purpose, the newer one may not end up being successful unless it offers something that is different from or better than the first.
Solves A Real Problem
This is something that it can something be difficult to figure out, and it is largely dependent on personal values and priorities. It is a good sign if a project sets out to solve a problem that is serious enough for a significant number of people to want to invest in it and be willing to trust in a totally new solution.
Room For Growth
Even if a startup has hit the nail on the head in every other area, it can still come up against difficulties if the market for it is simply too small. Bitcoin, for example, has a goal to become a truly global currency. This means that its room for growth is incredibly high. Can the same be said about a currency that can only be used to purchase products from a small retail website? Obviously not. This is an important point to consider before investing in a new ICO.
Is It Truly A Currency?
It is important to remember that not every cryptocurrency platform is strictly a currency.
Currencies on the blockchain have the biggest potential market cap because they are not usually restricted to a specific industry. However, they also have to deal with a lot of competition and may even have to face anti-crypto legislation in the future.
Platforms, on the other hand, such as NEO and Ethereum, have the second biggest potential market caps. They are the most likely home for digital assets and tokens, which can often be used just like currencies even if they aren’t a currency n the strictest sense. These platforms face competition with other similar platforms and must offer a unique selling point if they don’t want to be overshadowed by one or two predominant options.
Digital assets are a unique method and are used to represent physical real-world assets. These assets hold whatever value their real-world counterparts do, but they are likely to be traded using cryptocurrencies just as their physical components have their value defined most often by their worth in FIAT currency.
Tokens are a very specific form of cryptocurrency that is created by companies who want to offer their value to a very specific niche or solve a very specific problem. There are many tokens which are built on their own individual blockchain, but those are likely to fall to those that are built more wisely on major blockchains. The potential market cap for tokens can vary just as widely as the potential market for any businesses.
At the moment, the lowest risk and highest return can be found in currencies and platforms, but for long-term investments, the returns may not be as grand. The return that can be expected from tokens will vary and they will be much like stocks in this way.
The biggest threat looming over the promising potential of cryptocurrency is the possibility of government regulations. Many governments have shown overwhelming support for cryptocurrency, and specifically for Bitcoin. However, there is no way to be sure how things will pan out as use and awareness of cryptocurrency grows. In reality, it’s quite unlikely that the majority of governments will do nothing as cryptocurrency becomes more widely used and starts to slowly displace the use of FIAT currencies. There is also concern that some cryptocurrencies which prioritize anonymity will see use within the black market and other illegal industries. Bitcoin has a place as a global storage of value, and many cryptocurrencies work really hard to ensure they comply with possible future regulations, but the vast majority of cryptocurrency in on thin ice in this area.
The area that is most likely to soon have to deal with government regulation and sanctions is the online exchange. If the exchange takes payment in FIAT currency in any form, banks and governments can block the use of these exchanges and choose not to allow these purchases. This is a huge issue that will need to be resolved if we don’t want to see a wall spring up between FIAT and cryptocurrencies.
For new investors who are not used to the cryptocurrency arena, it is easy to get blindsided by the amount of volatility that can be found in many cryptocurrencies. It is not uncommon for many cryptos to fluctuate in value by as much as 30% from one day to the next.
This volatility is likely to stabilize as cryptocurrency becomes more widely used and accepted as a viable investment by more users. Right now, it’s still possible for a single user to influence a currency’s value simply by buying up a large portion or by dumping a huge amount of coins at one time. As the market volume increases, the more difficult it will be to do this and the more stable the value will be.
While it may be tempting to wait until cryptocurrency becomes more stable to get into the market, it’s important to note that those who do will likely miss out of the big profits.
Time On The Market
Many people who are first getting into cryptocurrency fail to remember just how new the entire market really is. The very existence of cryptocurrency and blockchain technology is still less than 10 years old. The major advancements already being made can often give the illusion that these assets are well developed, but in reality, they are just getting started.
Chapter 6: A Brief History of Cryptos
One of the most important things for anyone who wants to get a good idea of where cryptocurrency is going in the future needs to first understand its past. In this chapter, we’ll take a look at a few of the most important milestones that serve to outline the history that brought cryptocurrency to life.
Before Bitcoin and the blockchain, there were many technologies that had to be created first in order to lay the foundation. The first of these developments that began to actually resemble today’s cryptocurrency was BitGold. Nick Szabo, the creator of BitGold, was one of the first people to talk about the concepts and ideas that would one day become the foundation for Bitcoin, the world’s first cryptocurrency. He discussed the possible benefits of blockchain technology that is decentralized when compared to current FIAT currencies, and he suggested doing so by combining the Proof of Work system with ledgers and algorithms that are stored across multiple servers. From the very beginning, Nick was talking about unique ideas in 1995 that would one day become what we know as smart contracts and digital assets.
The dream on which BitGold was founded is focused mostly on the idea of a currency that is truly free from regulation and manipulation by various governments, and which is truly global so that governments and separate FIAT currencies could not divide the market. This is a point in history that it is vital to remember if we want to attempt to predict what the reaction of the government will be as cryptocurrency continues to grow.
In 2008, a person or group of people using the name Satoshi Nakamoto revolutionized the world with a whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System”. In January of 2009, the whitepaper was brought to life and the Bitcoin client was made available online to be downloaded. The first block ever mined was personally mined by Satoshi and is no commonly known as the Genesis Block.
Satoshi is a modern mystery, as no one truly knows who he is, or even if he is one person or a group of people. He mined roughly 1 million BTC in the very beginning when it was first released, an amount which at the time was worth around $80,000 USD. Today, it is worth well over 15 billion. Satoshi has since disappeared from actively having a hand in the development of Bitcoin unless of course, he is now using a different pseudonym.
The closest thing to a business leader or public face that Bitcoin has is lead developer Gavin Andreson. He is the person who is most well known among the many developers who actively work on Bitcoin’s code.
When Bitcoin was first introduced, one user is rumored to have used 10,000 BTC to purchase two large pizzas. Today, less than 10 years later, this amount would be worth more than 150 million.
The first and only hack that has ever occurred to the Bitcoin network was achieved on August 6, 2010. A hacker was able to locate vulnerability in the network protocol that allowed him to create 184 billion BTC that was not intended to be put into the economy at that time. The transactions were quickly found and erased, and the bug was dealt with as well. This resulted in a fork within the blockchain, and there has never been another hack on the network since.
In 2011, just two years after Bitcoin was originally released, other forms of cryptocurrency began to take hold. Bitcoin retained the vast majority of the market, but it was no longer standing alone. RipplePay had been in existence since 2004, but in 2011 they saw the awesome potential of blockchain technology and redesigned their system. They focused less on decentralization and more so on using the blockchain to allow for easier and more liquid Forex trading, and soon they became the second biggest cryptocurrency on the market.
In 2013, Vitalik Buterin created Ethereum. Bitcoin had little interest in exploring the applications of blockchain technology beyond its application as a currency, but Buterin knew that there was much more potential left untapped. Ethereum was designed to put this potential to use with smart contracts, and in the beginning of 2017, it had replaced Ripply and the second largest cryptocurrency by market cap.
Over time, many different cryptocurrencies have cropped up, and each one determined that their adjustments are an improvement on the original. So far, Bitcoin retains control as the top cryptocurrency on the market.
Real World Transactions
As of October 2012, over 1,000 merchants were set up to accept Bitcoin as payment to real-world retail items. Soon after in 2013, Coinbase sold over 1 million USD worth of Bitcoin in just one month.
There was a brief period of time during which the blockchain was split, and there were two different copies of the ledger which did not agree with one another. Major exchange site Mt. Gox stopped all trading during this time in order to wait until the fork could be resolved, and this resulted in a massive move to sell out. The Financial Crimes Enforcement Network soon declared that miners were qualified as Money Service Businesses and should, therefore, be held to a certain set of regulations, which forced the US Government to start paying more attention to cryptocurrency. By April of 2013, the transaction volumes caused by the rush to sell were causing Mt. Gox to have trouble keeping up, which caused delays that brought about an even more severe price swing. A mere month later, FinCEN seized Mt. Gox accounts and stated that they had not followed regulations or registered themselves as a money transmitter.
All of this pressure on the market finally came to a head in February, 2014. After all of the issues of the past year, Mt. Gox was forced to file for bankruptcy protection. After all was said and done, 744,000 Bitcoins has been stolen from them.
The largest European exchange in 2015 was Bitstamp, and it was felt globally when they went offline with no notice in an atmosphere of fear surrounding possible security concerns. Many feared that they had been hacked. In reality, they were simply upgrading their security measures and soon returned to trading as usual.
In August of 2016, the next major hack occurred. Bitfinex was hacked for a massive 120,000 BTC loss, which at the time equated to about $60 million.
All of this history should teach us one lesson: if you aren’t planning on trading it actively, don’t store your funds in an exchange’s online wallet.
Governments Start Taking Notice
July 2013 marked the moment that governments worldwide started to notice the cryptocurrency world. It was then that Thailand chose to completely ban the use of Bitcoin due to the fact that they asserted that it had no legal backing. Many other governments started to chime in, and while some agreed with Thailand, many more were surprisingly accepting and supportive of cryptocurrency. UAE, Japan, and Singapore, in particular, are very favorable towards blockchain technology, and since 2013 even Thailand has changed its tune about cryptocurrency. It is currently illegal to purchase any real-world goods in China using cryptocurrency, and financial institutions are completely banned from using blockchain technology for anything. However, in other areas around the world developers are building a diverse community around the blockchain. Perhaps if there is ever a major cryptocurrency that works fluidly and intuitively with FIAT currency, China too will change their minds.
Bitcoin ATMs And Merchants
The first ever Bitcoin ATMs were introduced in Vancouver, Canada in 2013. Within the next 3 years, 771 Bitcoin ATMs had been introduced worldwide. In November of 2016, all of the ticket machines of SBB, a Swiss Railway operator, had been upgraded to Bitcoin ATMs.
The University of Nicosia became the first university to accept cryptocurrency when they began accepting Bitcoin for tuition payments, and around the same time ,Overstock began accepting Bitcoin on their website. Zynga is a virtual giant in the mobile gaming industry, and in 2014 they began accepting Bitcoin for in-game microtransactions. It wasn’t long before major companies like Microsoft, Steam, and the Golden Gate Hotel began accepting Bitcoin for payments as well. By August of 2015, there were at least 160,000 merchants willing to accept Bitcoin as a standard form of payment.
Nick Szabo first talked about smart contracts in the 1990s, but it wasn’t until 2015 that Vitalik Buterin brought Ethereum to the cryptocurrency market and the first smart contracts came to life. This was a major milestone for cryptocurrency. It brought cryptocurrency out of the realm of odd, obscure currency and into the world of innovative utility. It wasn’t long at all before other cryptocurrencies popped onto the scene with new and different ideas about the best ways to put smart contracts to work. It is still early, and developers have a long way to go and many obstacles along the way.
The DAO Hack
The Decentralized Autonomous Organization, or DAO, was one of the first Dapps every built on the Ethereum blockchain. In its initial crowdfunding campaign it raised around $150 million, but in June of 2016 and anonymous hacker stole $50 million of it. The community was asked to decide whether or not to reverse the fraudulent transactions, and this cause a good deal of controversy amongst users. Many users agreed that the hacker should not be allowed to get away with the attack, while many others cared more about upholding the inherent immutability of the blockchain. In the end the transactions were reversed and a hard fork was created which caused a split between Ethereum and Ethereum classic, now 2 separate currencies.
The major lesson which should be learned from this is that it is extremely difficult and painstaking work to properly write Dapps or smart contracts, and even the tiniest of bugs or glitches can cause major damage both the financial security and to user trust. Ethereum is constantly working to ensure the tightest possible security so that nothing like the DAO hack ever happens again. Whether there are future hacks on the road ahead, the biggest thing to be learned is that uncertainty and wrong turns come hand in hand with progress and cutting-edge technology.
The Scaling Debate
As Bitcoin grows in popularity, the number of transactions that place demands on the system only continues to go up. The block size of Bitcoin, however, has by and large remained the same. This has caused an overwhelming backlog in transactions that have to wait longer and longer to be confirmed.
The current way of dealing with this backlog is that priority is given to the transactions that can pay higher transactions fees, and these transactions get bumped to the front of the line. This has a combined effect of increasing both costs and wait times.
When it comes to the issue of scale, there are two primary suggestions currently being debated as a means of solving the issue. One way of doing this is to simply increase the block size, which would immediately resolve the issue. The other option is to implement a system called SegWit, or Segregated Witness, which would allow the blockchain to create side chains to accommodate smaller transactions.
Both of the proposed options carry their own benefits and downsides. Increasing the block size might immediately fix the problem, but it also increases the storage space that is required and might prevent some people from being able to set up a node. This would centralize the power of Bitcoin into the control of only the largest and most affluent miners. SegWit, on the other hand, relies on new technology to move some of the transactions onto side chains and allow for more functionality, but it will take more time to solve the original problem at hand. There was a lot of tension among Bitcoin shareholders and disagreements sprang up between miners and developers, which was the original cause for the hard fork that split Bitcoin and Bitcoin Cash. In the end, the original Bitcoin chain chose to increase block size from 1MB to 2MB and implement SegWit, as well.
In Chapter 2 we discussed the blockchain using the analogy of a branch of banking institutions. Using that same analogy, we can imagine that a group of branches has decided to split off from the rest and make some adjustment to the rules that they use for daily operations. Although they are now 2 different banking institutions, each set of branches still has identical records up until the time that one group split off from the rest. This is exactly what happens when there is a hard fork in the blockchain.
Because the records of both banks are the same and they now operate as two separate institutions, this means that anyone who had an account at the first bank now has an account at both banks and effectively has twice the amount of money they started with. However, the newer institution is rarely valued at the same rate as the original, so it must be kept in mind that this can affect the equivalent values of the funds these users control.
The first half of 2017 saw a huge growth in the use and popularity of Ethereum, mostly due to the ever-increasing popularity of smart contracts. Riding on the coattails of this success, a wave of Initial Coin offerings spent the cryptocurrency scene. Savvy investors could make a lot of profit by simply backing to right ones, but it is a very risky investment because there is no regulation or accountability in the market when it comes to ICOs.
The first formula offering ICOs was simple. A fixed number of the ICO’s token could be purchased at a fixed price, and at the end of the sale, any unsold tokens would be burned. This created a deficit in supply when compared to the demand caused by ICO hype, so investors could expect a quick return once the ICO ended and the value of the tokens went up overnight.
Unfortunately, many of the companies offering these ICO began to get greedy or simply didn’t understand the economics behind how these ICOs were working, and they began to offer ICOs that did not limit the number of tokens that were available for purchase. This caused the token to fail to increase in value after the ICO ended, making it a poor investment.
Though there are currently no regulations governing ICOs, the SEC and some other government organizations want to step in.
The Current State Of Affairs
In only the last year or so, the use of cryptocurrency has increased exponentially. More and more people are using it not only as to store value but as an actual currency. In Japan, the number of stores that accept Bitcoin as a form of payment has increased by 4.6 times only in the past year.
As of the time this was written, the volume of daily transactions has gone up to $6.5 billion in the past year in comparison to the previous $82 million. That means that daily transactions have increased by 80 times in just one year. It’s hard to deny the cryptocurrencies are set to become more and more integrated into daily consumer life, and soon.
It’s important to note that although the current rate of growth is impressive, it cannot go on forever. Bitcoin has grown to 50,000 times the size it was in 2011. Given the current market cap of Bitcoin, it would only take 4 or 5 years at the current rate for the value of Bitcoin to equal the sum of the entire world’s supply of money. This obviously isn’t going to happen; it simply means that the current rate of growth clearly can’t continue for that amount of time. It’s still completely reasonable to expect exponential growth to continue at a good rate for at least 2-5 years, at which point the growth should slow down as we approach complete market saturation.
In less than 10 years, the world of cryptocurrency has gone from a distant dream to massive, complex, and beautiful reality. There are now hundreds, if not thousands, of different variations of cryptocurrency, and each one serves a unique purpose. There are cryptocurrencies that were created to adjust and improve on preexisting methods, and there are still others that were designed to solve a specific real-world problem. There are even cryptocurrencies currently holding ICOs to help plant trees in stripped rainforest and provide sand as a cheap building material in developing countries. Whether the need is for a new type of currency that runs on a new and improved system, a unique crowdsourcing method to fund a revolutionary new startup, or a virtual machine to control supply chains for a major logistics company, blockchain technology has something that can help with all of these needs.
If this is your first research into the world of cryptocurrency, you should now have the basic knowledge you need to decide which types of crypto technology you are most interested in and find it for yourself. Always remember to do your research before you invest in any form of cryptocurrency, and keep your eyes open. We are living in a time when there could be a new opportunity around any corner.