Crypto Finance 101
Introducing you to the world of cryptocurrencies
If you read my story where I talked about 5 things you need to know about cryptocurrency, some of what I will say today will shed more light on digital currencies and provide you with the basic knowledge you need to become active in the space.
It is important to note that knowledge is power, and this also applies to the cryptocurrency space. Also, ensure to do your own research and never take what anyone says as the truth.
What are cryptocurrencies?
Cryptocurrencies are digital currencies which are secured by cryptography — a technology used by the military in World War II to securely transmit secret messages — making it impossible to double-spend or replicate. Most have a decentralized structure, making it immune to external control factors like governments or central authorities because no single entity has total control unlike fiat currencies such as your naira which has a central bank that controls its circulation.
The most popular cryptocurrency is Bitcoin. It was created in 2009 by an anonymous person with the alias name, Satoshi Nakamoto. Since its creation bitcoin has become one of the most interesting assets in the world today and currently holds status as a store of value. Such status is assigned to assets that beat inflation and preserves the wealth of its owner. Real estate, Gold, Bonds are perceived as a store of value assets and Bitcoin appears to have fallen into that classification over the years although it is still debatable.
Over the years bitcoin has outperformed other asset classes despite its high volatility and this has attracted interest from big-money players like wall street even though it lacks certain regulatory framework largely due to the fact that the government theoretically has no control over it.
Types of cryptocurrencies
There are 3 major types of cryptocurrencies. Bitcoin, Altcoins, and Tokens. With over 5,000 different cryptocurrencies in existence today, it’s important that you know what types currently exist.
Bitcoin
The first blockchain-based cryptocurrency. Bitcoin started this massive technological movement we are witnessing today. It is a digital currency that runs on a distributed ledger — blockchain — and is therefore run by multiple individuals and companies enabling the ability to perform transactions without needing a third party like a bank.
Bitcoin transactions happen directly between users- a peer to peer network that leverages on the interconnectedness of computers. A transaction initiated on the network is verified by the nodes (interconnected computers) and these nodes are rewarded with transaction fees.
Bitcoin is stored on the blockchain where everyone can see because the blockchain is an open ledger but only the owner has access to it through its private keys.
The access to your bitcoin lies in your private keys and if anyone has their hands on your private keys they have access to your bitcoin hence the importance of storing your keys securely by using a secure wallet or on a hard wallet like a Trezor.
Altcoins
These are alternative versions of Bitcoin. These coins are mainly adjustments to the original bitcoin blockchain while some have blockchains that were built from scratch by their developers. Examples of altcoins include Litecoin, Ethereum, Zcash, and Neo.
Some altcoins are quite similar to bitcoin, such as Litecoin and Zcash. These coins operate through the same proof of work system that blockchain uses.
Altcoins like Ethereum and Neo, on the other hand, were not created to be used primarily as payment coins but rather as an infrastructure where decentralized applications (dApps) can be built on. Just like you have applications on your phone which are built by companies e.g your banking app, dApps are applications that can be designed to perform various functions but in a decentralized manner. This means there is no central authority storing your information like personal details you input in your banking app. An advantage of this is that there is no central authority that can be hacked for your login passwords, personal information, and so on. A disadvantage is that because blockchains are decentralized, there is no customer support to call if you encounter a problem like losing your private keys.
Tokens
Tokens are cryptocurrencies that do not have their own blockchain. They are used on dApps to build smart contracts. They have value which is why some people buy them to sell at a higher price. Tokens utilize the blockchain where its dApp is built on. A dApp on the Ethereum blockchain will have a token that is verified on the Ethereum blockchain. This use case has given rise to decentralized finance (DeFi), an ecosystem comprised of financial applications that are being developed on top of blockchain systems.
Are there risks involved in cryptocurrency?
The cryptocurrency space is not without its risks as with any other investment. The risks are mainly attributable to its high volatility.
- The decentralized and anonymous nature of cryptocurrencies make them targets for criminals. If your funds get stolen from you, it would be difficult to retrieve them back.
- They are still speculative. If governments decide to ban the trading of cryptocurrencies, people will be forced to dump their holdings or keep them in secret making its usage and value to decline.
- Cryptocurrencies are not regulated or insured by any government making it a high-risk environment to invest in. There is no insurance policy that insures your deposits like your regular bank account.
- Cryptocurrencies are relatively new and have a lot of new projects being built. Failure of a project could result in a failed investment.
It is worthy to note that despite these risks, cryptocurrencies have a lot of potential in transforming our world. The financial sector is yet to witness a huge technological disruption and digital currencies have shown the potential to disrupt the banking system.
How do I invest in cryptocurrency?
There are 3 major types of investors. There are day traders, swing traders, and long term investors.
Day traders: These types of traders trade every day. They are always watching the price of their assets looking for chances to buy and sell to take advantage of the volatility.
Swing traders: These traders attempt to capture gains over a few days or several weeks. Most people who trade cryptocurrencies are swing traders.
Long term Investors: Some people who either do not like the idea of trading regularly, opt in to buy cryptocurrencies they find attractive and hold for a long period of time to make great gains.
To invest in cryptocurrency you need to identify what type of trader you are. The more the frequency of your trade, the more technical you need to be. This involves staying up to date information about the environment and developing the ability to read technical charts.
Now that you’ve identified what type of trader you want to be, the next step is to purchase cryptocurrency on an exchange or over-the-counter (OTC). Popular exchanges include Binance, Coinbase, CashApp, and many more. In Nigeria, Luno and Patricia are currently one of the most convenient ways of purchasing bitcoin. Buying over-the-counter involves buying from an existing dealer network.
After purchasing bitcoin, you can easily access other cryptocurrencies by simply sending BTC to an exchange where they are traded.
What are your long term views on cryptocurrencies?
I have my long term views and you should have yours. There are various views on cryptos, both positive and negative. The consistent growth in the value of bitcoin despite its volatility has attracted a lot of interest around the world. According to Google’s search results, underdeveloped countries with weak economies have shown the most interest in Bitcoin as more and more people believe it is a solution to weak/corrupt governments and central authorities.
I also believe mass adoption is the major barrier to the growth of cryptos and the easier it is to access and utilise cryptos in day to day activities, the higher the probability of cryptos to witness significant growth in value.
The more you learn about this asset class, the more you shape your own view which will enable you to determine your investment strategy if you find it worth investing in.
