This is not the first introduction to cryptocurrencies, and most probably won’t be the last. Ever since this software product first hit the market back in 2008, it has grasped the fevered imagination of everyone, and been perceived either as a global economic savior, or a global economic trap. What can be stated about cryptocurrencies is that they are not currencies and they are not money. Cryptocurrency is actually a bit of code that represents whatever the market decides it represents since it is neither a regulated currency nor is it a stock, bond or any other financial tool. Essentially, cryptocurrencies are valued at perception level only, and there is no real link to any physical value or benefit that these software bits can provide. Now, with this stated, let’s take a closer look at a market driven by misconception, misunderstanding, and misdirection.
In 2008, Satoshi Nakamoto, either a real or fictitious person, published the first peer to peer (P2P) electronic cash system. This was already a misdirection of reality since it did not deliver cash at all, it delivered bits of data that was “mined” by computers in a blockchain system that performed complex calculations called “hashing” to confirm a transaction in the blockchain.
OK, now I am completely baffled. So, let’s simplify this down to basics:
The blockchain is the name of the software platform that is decentralized. This means that every computer that wants to connect to the blockchain system has to have a copy of the blockchain system on its hard drive. It not only has a copy of the system, but it also has a full copy of the data too. This means that if ten computers (servers) link up to the blockchain, they will all have identical updated blockchain platforms and data.
The blockchain is an electronic ledger or database of “blocks” that are stored on nodes, and each block is time stamped. The electronic ledger is essentially one large database of information that is constantly being updated.
What does this mean?
It means that when one person transacts with another, the transaction is secured on all ten servers, and one of those servers will be “hashing” the transaction code, to confirm the deal. This transaction, when confirmed creates a “block” which is time stamped. This means that you cannot erase, change or move the block. It is set, and all you can do is move onto the next block. The reason why you cannot change a block is that it exists on all ten servers simultaneously.
Now, the server that hashed the transaction receives a bit of code called a “bitcoin,” this is like a token of payment, but without any relation to currencies or assets of any kind. The more transactions that are processed, the more bitcoins are mined. However, this is not an infinite system. There is a catch in the algorithm, that states that for every increment of creation, fewer bits of code are mined. So, over time, you will need to perform more hashing to generate smaller amounts of code.
How does this affect the bitcoin value?
Well, consider that there is a finite number of coins to be hashed in a system, this will place a greater demand on the bits in place, making them more collectible. It also means that you will eventually decimalize these bits, and start dealing with percentages of bits rather than whole ones.
So where does the value come in?
Now, this is the funny thing. Bitcoin value comes in from people that want to buy the bitcoin using hard currency, real currency. Essentially, there is no value other than that which you place on the item. This is like trading gold, where the value of gold is based on supply and demand. The value of bitcoin is based on supply and demand, and like gold, there are deltas between the value of bitcoin per USD to the value of bitcoin per other currencies and even other coins. Essentially, an intelligent trader will be able to determine where there are discrepancies in the trading values and create profit by trading in bitcoin over multiple platforms.
Now back to the Blockchain
There are many blockchains; these are platforms for managing systems, a blockchain is a software platform that can be used to manage many time-stamped transactions, as such, there are many blockchain derivatives today. However, not to confuse ourselves let’s concentrate on only three options.
There is the original bitcoin blockchain, a derivative called Ethereum, and a private one called Ripple. There are many like Ripple, but I will explain what Ripple is, so you understand why I singled it out.
The bitcoin blockchain was created to be a standalone decentralized currency replacement, and it sits on thousands if not millions of servers around the world. It is a self-serving system that provides absolutely no purpose than to fulfill its own existence, as such, it is a selfish system that disregards productivity for the purpose, its only purpose is to mine more bitcoin for use in trading bitcoin. Basically, there is no difference to bitcoin than an electronic board game such as Monopoly. It is a self-contained “game like” trading system.
There are public blockchains, and there are a private one. The public ones are free to use, and you don’t need permission to join in and hash or trade. However, private ones are private, just like any private system owned by a company.
Since blockchain is a revolutionary system that has some amazing software characteristics that can benefit many commercial applications, it was evident that such systems would spring up to become useful to society. Ethereum is a blockchain derivative that creates “tokens” and not “bitcoins,” and this means you can run any application and not just a self-serving bitcoin.
These are two totally different environments, but they operate with the same basic construct, they are decentralized blockchain platforms. However, there is another advantage to Ethereum, in that it can compartmentalize itself. This means that you can maintain a decentralized ledger, but you will not need to have every node involved in every transaction, you can focus transactional nodes to two or more servers, rather than all the servers all the time.
Back to Ethereum token, this is called Ether, and Ether has a value, similar to the way Bitcoin has value. It is the token used to pay for transactions, where transactions are not limited to trading in bitcoin but can involve any application, such as managing databases, sharing stories and even used in playing MMORPG’s.
Today there are more ERC20 tokens being traded then there are bitcoin style cryptocurrencies.
Ripple is a hashing platform (not blockchain) that is used to manage the transaction for banks and other financial institutions. Ripple is not a bitcoin or a cryptocurrency, and it is neither a token. It is a con, a scam, it is a digital “coin” created by the owner of the site, and traded online as a cryptocurrency, but in fact is not mined, and what Ripple succeeded to do, is cash in on the confusion and make billions without actually supplying anything by a bit of code traded online for other crypto and hard currencies. It is such a success, and also a red flag that no other such coins have been allowed to succeed after the Ripple effect on the market.
Summary of the Coin/Token Section
As you can see, there are two blockchain derivatives, these are cryptocurrencies like bitcoin, and tokens like Ethereum. Both are software platforms, where bitcoin platforms are purely about trading in the coin they create. Ethereum platforms are actual software development sites that offer blockchain protocols for managing many different systems, ranging from logistics to medical records, trading to blogging.
Why are blockchain platforms so successful?
Well, apart from securing transactions in a way that you cannot erase, delete or reverse. They are anonymous, which means you cannot really trace the transactions back to a specific individual. They are also instantaneous, where a transaction can be completed in a matter of seconds, and since they are global, distance doesn’t matter.
They are also secure since the cryptographic keys used to secure the codes and coins are so complex, you cannot successfully hack them. However, as I mentioned earlier, they are irreversible. So if you make a transaction, it’s in the system, and you have to accept whatever happens to it when the system processes it. In regard to security will discuss this issue in further details when discussing wallets.
Finally, you don’t need permission to perform a transaction, it’s a free platform, and you can use it to trade as much as you want, but only if you can afford it. Unless you are working on a closed and private platform.
The last amazing feature is that you can work simultaneously on the same contract or transaction, which is not a possibility in today’s software platforms. Imagine you are working for a company and you want to edit a field, the file is currently open on another computer. You cannot access it and work on it at the same time. With blockchain, you can, and this is why they are so fast. Imagine negotiating a contract and being able to edit it together, and seeing the new file change before your eyes. This one of the main advantages of a blockchain based environment.
You heard of it, but what is it?
Well, and ICO is an Initial Coin Offering in the Ethereum network, which is the crypto version of an IPO. This is where you offer the public a chance to get a acquire the token you intend to create at a cheaper rate. The rate is linked to a hard currency value, and this is what gives the token its initial value. ICO’s do not offer you stock or shares, they only offer you that glorious bit of code called an ERC20 token, and it’s up to you take the chance in hoping the value of the token will trade up.
What are Wallets?
Its 8 years down the line and cryptos and tokens are being traded by millions over exchanges that pop up every day. To be able to trade you need a digital wallet that holds your coins and tokens, and since each coin and token is unique, you need a wallet that is intelligent enough to hold more than one type of coin or token. Essentially, a bitcoin derivative wallet might enable you to contain a few derivatives, so you might need more than one wallet. With Ethereum based tokens, you can get one wallet, and it will hold all the ERC20 traded items.
(There is more than one type of token, ERC20 is one of them, the most popular, I will not confuse the issue by discussing every single type of coin and token on the market.)
Essentially, a wallet is a software package that can hold your coins and tokens in one place, and it has a number of security features that secure it from theft. These codes are called public and private keys, which are used in unison to execute transactions (contracts).
There is a different type of wallet’s, so let’s look at them and try to understand their differences:
These are local wallet’s downloaded onto your PC and can only be accessed via your PC. These are considered to be highly secured wallet’s, but only if you maintain a good anti-virus program, since if your PC gets hacked, you could lose your wallet, and this means you lose all the coins in it. Think of this as your bank safe at home, once it’s gone, so are your funds.
These are identical to PC wallet’s but stored in servers owned by a third party. This means your private key is also stored in the cloud, and you rely on the third party’s integrity to keep your currency safe.
Mobile wallets are usually smaller versions of either online or PC based wallet and provide fewer features and functionality. They can be used for online trading and for retail store shopping when that store accepts the coin in your wallet.
These are the most secure option since they started your data in a key (USB usually) and as such, when not connected to the internet are secure from hacking. A hardware wallet is the only way to secure your funds when you trade in large amounts; this option is mandatory when holding millions.
These are usually wallet’s that generate a printed key, two keys actually, and you can only access these wallets by keying in the printed keys. These are high-security wallet’s, but less secure than the hardware version. Essentially, you need to transfer your funds from your main wallet to a paper wallet, and back again. A paper wallet is more like a personal safe than a wallet.
Are wallet’s secure?
To be brutally honest, no. The only “wallet” that is secure is the hardware wallet, and only securing you have two, one with the main funds stored in it, and a second one with trading funds that you use on a daily basis. Every time you plug in your wallet for use, you are exposing it to theft. However, if we are less paranoid, then most wallet’s are secure, and third-party wallet’s do invest a lot of capital in cyber security features.
Bottom line: split your funds into different wallet’s, don’t keep them in the same place and make sure you have a hardware wallet with a backup a copy for your main funds.
Are wallet’s anonymous?
No, since signing up you have to give your name and e-mail address, you can be traced, unless you create a fictitious name and e-mail address, in that case, yes, but only if you use a VPN and manage to confuse any would-be investigators.
Bottom line: No, and if you think you can perform illegal acts using cryptos, well you can, but you will be caught and dealt with severely.
Trading in multi-currency or observing single use?
Just as you trade in hard currencies such as dollars, yen, and euros, you can trade in ay number of cryptocurrencies and tokens. There are many exchanges online; some offer comprehensive trading platforms, others are a simple coin to coin trades. Today, some platforms provide binary options and trades between different coins and tokens.
My say on this issue is this: if you know how to trade, and understand the key principles in trading, then you can apply these mechanics to currency trading as well. However, remember this, there are amazing differences between each exchange, and between different trading sets.
Let me make this simple:
- Each exchange has a different price for each currency.
- Each exchange offers a different trade between currency pairs.
- Each exchange takes a different fee per trade.
OK, now that you have understood these three principles, go seek out the differences, and create a bot that will trade your coins, based on these differences. You will never lose. On the other hand, you will need to make sure the bot is fast and furious, and you will need to set personal margins.
What is the Best Wallet
This is the question of questions, and in some instances, it can be based on personal choice. However, there are some considerations when deliberating which wallet to choose from.
- How often will you use the wallet and for what purposes?
- Which coins or tokens will you be using it for?
- How accessible do you want your wallet to be?
Let’s take a look at some of the more popular wallet’s. Take note that popularity is not necessarily quality, it can also mean the system is convenient and easy to use.
I will present a series of articles discussing different wallet’s and exchanges for you to enjoy in the coming days, don’t go away for too long, the world is changing at a radical rate.
The Best Exchanges
The Best Wallet’s
- Ledger Nano S
- Mist Wallet
There are many more exchanges and wallet’s, and I hope to present them to you in the future, for now, this list will do.