Looking to invest in Cryptocurrency? Read this.
2021 would forever be remembered as the time cryptocurrency bubbled into the mainstream. Just fresh out of the pandemic, markets boomed, and cryptocurrency was among the most talked about things on the internet.
Several experts touted it as a revolution against wealth inequality. Motions were pushed for financial regulators to adopt it as a financial asset, moving several investors to invest in it. The value of the Bitcoin peaked above $68,000 in November 2021, boosting investor confidence in the flagship cryptocurrency as a hedge against imminent inflation.
At the time of authoring this article, investor sentiments on cryptocurrency are bearish as the flagship cryptocurrency, Bitcoin, hovers at just under $24,000.
Maybe you have been a victim of the events or are looking to invest in cryptocurrency; here is what you should know about it.
Definition
A cryptocurrency is a digital or virtual currency meant to be a medium of exchange. Let’s say no more.
Brief History
Several attempts have been made across history to create digital currencies, but they all failed within half a year as problems were discovered along the way. These currencies were either not safe enough or they could be exploited.
It was not until 2009 that a paper titled “A Peer-To-Peer Electronic Cash System” was published under the pseudonym of Satoshi Nakamoto. This paper detailed a new kind of technology that could secure the transfer of funds through cryptography, hashing, and public key decryption.
In simpler terms, this new technology allowed users to move digital units between digital wallets securely and pseudonymously. Unlike digital files, these units would not be replicated. This kickstarted the invention of blockchain technology and, subsequently, the Bitcoin Protocol.
The project’s open-source nature attracted several programmers who deployed this technology towards solving several problems. Over the years, other cryptocurrencies such as Ethereum, Solana, and DOGE coin would appear, facilitating the evolution of a financial ecosystem with crypto exchanges and crypto organizations.
How it works
All cryptocurrencies use blockchain technology. To properly understand crypto, investors need to understand the basics of the blockchain.
“A blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking `assets in a network.”
A blockchain works by coding information, using complex mathematical techniques, and storing them in a digital ledger. Each entry into the ledger is given an identity called a public key. The public key of any entry influences the way information is coded in the one after it, therefore chaining these records together. Thus, a user cannot access the information in a ledger entry if the entry before it has been changed. These entries are then broadcast to every computer (called nodes) in the network. When each node verifies that it has the same information, the data is then packaged into a block and stored in a public ledger accessible to anyone with internet access. For the Bitcoin protocol, this happens every 10 minutes.
You can view every transaction on any blockchain right from the first block (the genesis block).
As the blockchain uses a lot of computing power to process and store transactions, several people contribute computing power to the network to solve these complex mathematical problems. They are rewarded with tokens each time a block is minted. These tokens can be exchanged for money. Contributors to this network are called miners.
Use cases
Blockchain technology has been deployed across several industries. It provides benefits that our current record-keeping system cannot offer.
As blockchain technology offers a public ledger system that cannot be tampered with, it allows two parties to conduct transactions without the presence of a third party to mediate the process. For instance, two people from anywhere can use bitcoin to send money to each other without the need for a bank. By facilitating peer-to-peer transactions anonymously, cryptocurrency has cheapened the cost of transacting with cash across borders and opened new opportunities for doing business.
Blockchain technology is also employed in storing public records such as land title transfers, supply chain monitoring, and digital copyright.
Cryptocurrency as a financial instrument
The status of cryptocurrency as a financial instrument is still undecided.
Firstly because it has no physical representation and no intrinsic value, it can be created by anybody and rise to prominence through effective marketing.
It also exists outside the regulations of our financial system and is deemed unsafe. Investors transacting in cryptocurrency often find themselves overexposed to market risk and are subject to the companies they deal with. They can be easily taken advantage of and lose their investment in a flash.
Governments across the globe have shown mixed reactions to the rising popularity of cryptocurrency. In Nigeria, banks have been banned from transacting with cryptocurrency. Same with the Chinese government, which embarked on a campaign against miners. The European Union and Japan accept cryptocurrency as legal property. As of August 2022, El Salvador is the only sovereign state to adopt bitcoin as legal tender.
As an investor, you should know that cryptocurrency carries a higher risk than regular investments and exercise the maximum amount of caution when handling it. Try to get a feel of the market before diving in, and most of all, do not be caught in the hype.
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Published on the Norren Blog.
