Cryptocurrencies: what are they, where to get them free and where to trade them?
In the tech era, an answer to central banks
Cryptocurrencies, as the name implies, are digital or virtual currencies. Perhaps one of their advantages is that they can be used on a business-to-business or on an individual-to-individual basis. We are talking, in other words about point-to-point -or direct- payments, without the help of an intermediary, such as a bank
Why were cryptocurrencies created in the first place?
Very simply put, to allow digital transactions from, as we saw earlier on, point to point. Between two parties who wish to transact directly, without a third party involved, not dissimilar to the use of cash, although it can be argued that cash needs a central bank (third party) to come into existence.
An example to keep it simple: You have some fish that I would like, I have cash, so I give you a certain number of “cash units” in exchange for that fish. Later, the fishmonger goes to a store where they sell shoes, and he gives some of the “cash units” he got in exchange for his fish, to acquire some lovely leather shoes.
Cryptocurrencies function in a similar way.
So, if we take the previous example and we “go digital”, I might decide that I wish to pay for that fish by using an online transaction of the traditional kind, using a bank. I will do so, either through my bank’s app on the phone or by accessing their website through a web browser. In this case, the international clearing system and my bank are vital players in this transaction: they need to make sure that the exact amount gets taken from my account and delivered to the fishmonger.
Therefore, banks have a vital role to play in guaranteeing that money leaves safely and arrives safely, without anyone being able to interfere in the process by, for example a process known as hacking. Hackers could, potentially, try to replicate the same payment while diverting funds to themselves in what is known as the “double spending” or “double spend” transactions.
With cryptocurrencies, transactions move directly from person to person. In the case of our previous example, from me to the fishmonger, without the use of an intermediary such as a bank. So, how does cryptocurrency solve the problem of double spending?
The infrastructure of “crypto”, as it is also referred to, is such that all sorts of “checks and balances” are in place, making sure the transaction is safe. One of these “checks and balances” is distributed ledger technology. In simple terms, this means that for accounting purposes, there is a ledger that is shared, meaning that fraud becomes basically impossible. Now, enter the concept of blockchain.
Blockchain-based ledgers are very much like traditional ones, with one big difference. Instead of being centralized they tend to be public and decentralized. There are no central servers, rather, those computing entities that make up the network are the ones that take care of all the “checks and balances”, making sure transactions are completed correctly and, just as importantly, safely. On the other hand, when I move “traditional” money from my bank account to the fishmonger, most of the transaction happens within and through the servers of the bank I work with. There is also the whole data transmission infrastructure that plays a major role, however that is beyond the scope of this article.
So, going back to our example, if I agree with the fishmonger that the transaction will take place with crypto, then something like this will happen. Bear in mind this is, again, the simplified version.
I would need to know the details of my fishmonger’s crypto “wallet”. In a way, it’s not dissimilar to when you wish to contact someone through whatsapp: you need their phone number in order to be able to text them. Also, like with “traditional” currency, I need to know how much crypto we have agreed on for his fish.
Once I have the details of their wallet, I can access my own wallet and send them to the address the fishmonger gave me. That’s all on my side. What happens on the technical side is slightly different. A specific transaction number is being generated within the crypto currency ledger. And now, things get very interesting and substantially different than with traditional currencies. This transaction gets approved by the people who are enthusiastic about this particular crypto currency and, in exchange for their commitment, time and dedication, they get some crypto currency themselves; the latter process being referred to as “mining”. If more than half (when writing this article, the figure had to be more than 51%) of the participants are agreed that this transaction is fine, then it gets approved and validated and the transaction will show up in my fishmonger’s wallet, meaning also, just as importantly, that the transaction can’t be undone or duplicated and that it is, by now, part of the historical transactions.
Let me go a little deeper into the security aspect of crypto. It’s a global system, not based in any country. Transactions travel across the network and are approved by the community, so called network peers, usually within minutes. Again, these network peers are spread across the globe, making the system very secure. And as we are touching on the subject of security, let’s briefly look at the technology aspect of the transaction: this is guaranteed by public key cryptography systems, basically, a private key held by the owner of the wallet. This entails that private keys can’t be forged, hence, funds are safe.
Now, a quick look at some crypto currencies, some of which you might have heard of already.
Quoted directly from litecoin.org’s website: “Litecoin is a peer-to-peer Internet currency that enables instant, near-zero cost payments to anyone in the world. Litecoin is an open source, global payment network that is fully decentralized without any central authorities. Mathematics secures the network and empowers individuals to control their own finances. Litecoin features faster transaction confirmation times and improved storage efficiency than the leading math-based currency. With substantial industry support, trade volume and liquidity, Litecoin is a proven medium of commerce complementary to Bitcoin.”
Taken directly from Bitcoin.org’s website: “Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part.
Ethereum builds on Bitcoin's innovation, with some big differences.
Both Ethereum and Bitcoinlet you use digital money without payment providers or banks. But Ethereum is programmable, so you can also use it for lots of different digital assets – even Bitcoin!
This also means Ethereum is for more than payments. It's a marketplace of financial services,
“RippleNet makes it easier than it's ever been to run a high-performance payments business.
With the most advanced blockchain technology for global payments, financial institutions are able to expand into new markets around the world and even eliminate pre-funding by leveraging the power of XRP through RippleNet’s On-Demand Liquidity service.
Together with our customers, we are building a more inclusive financial system where more people and SMEs have access to better financial services.
Bitcoin Cash is a peer-to-peer electronic cash system. It's a permissionless, decentralized cryptocurrency that requires no trusted third parties and no central bank. In 2017, the Bitcoin project and its community split in two. Perhaps the least controversial way to refer to each side is simply by their respective ticker symbols, BTC and BCH. Bitcoin Cash is usually represented by the BCH ticker symbol and is considered by its supporters to be the legitimate continuation of the Bitcoin project as peer-to-peer digital cash”
A web browser based on Chrome was released, that mines cryptocurrency. If you run it on your computer, it will mine and make you participate in the gains, at absolutely no cost to you. I have started using it and am very happy with it. Basically, you are making money while you do other things on your computer. Highly recommended having a look at it, which you can do by following this link.
If you would like to know more about cryptocurrencies, there is an e-book called “Understanding, buying & trading cryptocurrencies made easy”, which you can buy by clicking here.
If you’re interested in trading cryptocurrencies, there are many options. However, if you are looking for an “execution only” broker -meaning, basically, you know what you are doing and you just need an online partner to realize the transaction, then you can access Bitvavo by clicking here.