CRYPTO EXPLAINED FOR A PURPOSE BLOG POST 1

CRYPTOCURRENCY EXPLAINED

 Introduction

Cryptocurrency is an online form of payment that can be traded

for goods or services, just like fiat money (government issued

currency).

There are many companies who have created their own tokens

which can be traded for their own goods and services, so there

are certainly a lot of cryptocurrencies out there—nearly 7,000

according to CoinMarketCap.com, a market research website!

According to Investopedia.com, the “crypto” in cryptocurrency

refers to “complicated cryptography which allows for the creation

and processing of digital currencies and their transactions across

decentralized systems.”

Cryptocurrencies are usually developed by teams who build in

various mechanisms for issuance, usually depending on that

decentralized system. Cryptocurrencies work by using something called blockchain,

which is a decentralized technology that is spread across a great

many different computers and records and manages transactions.

It’s very secure because it’s not all in one central location, and

once a transaction is chained, it’s recorded for posterity.

Entrepreneurs have begun to utilize cryptocurrency to further

their business and increase profits. In fact, since cryptocurrencies

are both investment opportunities and new financial instruments,

there has never been a better time to get started!

Are you ready to dive into the exciting and profitable world of

cryptocurrency and blockchain?

Let’s begin!

How Cryptocurrency Works

The most popular cryptocurrency is the Bitcoin. Cryptocurrencies

modeled after this one are often called “altcoins” and are often

less secure than the Bitcoin.

Bitcoin was created in 2009 (at present, nobody knows exactly

who created it). Investopedia says it offers “lower transaction fees

than traditional online payment mechanisms and, unlike

government-issued currencies, it is operated by a decentralized

agency.”

There aren’t any physical Bitcoins you can see or touch. Instead,

there is a totally public ledger that everybody on Earth has access

to. Bitcoins aren’t issued or backed by any government or bank,

and individual Bitcoins aren’t valuable as a commodity.

All Bitcoin transactions are verified by a huge amount of

computing power, though. The system consists of a collection of computers, referred to as “nodes” or “miners,” that all run the

Bitcoin code and store the blockchain record of all transactions.

Since every computer running this blockchain has the same lists of

blocks and transactions, and everyone can see the new blocks

being filled, it’s almost impossible to cheat the system.

As of January, 2021, Bitcoin has around 12,000 different nodes

(and that number is growing), so such an attack is highly unlikely.

Even if it did occur, the Bitcoin miners (the actual people involved

in the Bitcoin network with their computers) would notice the

change and simply “fork” to a new blockchain and make the

whole attack a waste of time.

Bitcoin mining is the process by which the bitcoins are released

into circulation. Investopedia explains that this mining “requires

the solving of computationally difficult puzzles to discover a new

block, which is added to the blockchain.”When a new block is added, miners are rewarded with a few

Bitcoins. This reward is halved after every 210,000 blocks, so the

50 Bitcoin reward in 2009 is now down to 6.25 Bitcoins.

You can use a variety of different hardware to mine Bitcoins.

Some will get you better results, of course, and these are called

“mining rigs.”

For example, certain computer chips (Application-Specific

Integrated Circuits, or ASIC) and more advanced processing units

(like Graphic Processing Units or GPU) will yield higher rewards

than other systems.

One Bitcoin can be divided into eight decimal places. The smallest

unit is called a Satoshi (0.00000001 of a Bitcoin) because the

mysterious entity who created the Bitcoin used the pseudonym

Satoshi Nakamoto. If participating miners agree, the Bitcoin may

be divided even further in the future.Bitcoin can be used as a means of payment for products or

services. Physical stores can accept Bitcoin in lieu of fiat money—

transactions would be handled with a special terminal or with QR

codes and touch screen apps.

An online business can easily accept Bitcoins along with its other

online payment options like credit cards or PayPal. There are also

job-site websites that will hook up prospective employees with

employers who pay in Bitcoin, like Cryptogrind, Coinality, or

Bitwage.

Many Bitcoin supporters feel that digital currency will become the

norm in the future. In 2014, the IRS proclaimed that all virtual

currencies, including Bitcoins, would be taxed as property instead

of currency. This means that gains or losses from Bitcoins held as

capital will be realized as capital gains or losses, while those held

as inventory will incur ordinary gains or losses.To purchase cryptocurrency like Bitcoins, you will need an online

“wallet,” an app that can hold your investments. Usually, you

create an account with an exchange, and then you can transfer

fiat money into cryptocurrencies.

One popular trading exchange is Coinbase, which allows you to

create a wallet and buy and sell cryptocurrencies. 

What You Need to Know:

The Risks

While cryptocurrency opens the doors to countless investment

and financial instruments, because of the lack of guaranteed

value, as well as its digital nature, there are risks involved that you

should know about before you get started.

Barry Sibert, CEO of Digital Currency Group (which builds and

invests in Bitcoins and blockchain companies) says “It is pretty

much the highest-risk, highest-return investment that you can

possibly make.”

Here are some of the risks you can incur:

Regulatory Risks: Bitcoins are a digital rival to government

currency and, thus, may be used for illegal activities, black market

transactions, money laundering, or tax evasion. Governments, therefore, might seek to regulate, restrict, or ban

the use of such currency (some already have). Other governments

are coming up with various rules concerning cryptocurrency.

Security Risks: Most people who own and use Bitcoins have

obtained their currency through any of many popular online

markets, called Bitcoin exchanges. These are entirely digital, so as

with any other virtual system, are at risk from hackers, malware,

and even operational glitches.

Hackers may target these exchanges and gain access to thousands

of accounts and digital “wallets” where Bitcoins are stored.

Users can only prevent these risks by storing their currency on a

computer not connected to the internet or by choosing to use a

“paper wallet” where they print out the Bitcoin private keys and

addresses without keeping them in a computer at all.

Insurance Risk: Currently, cryptocurrency exchanges and accounts

are not insured by any federal or government program.

In 2019, one dealer and trading platform (SFOX) did announce

they’d provide Bitcoin investors with FDIC insurance, but only for

those transactions involving cash.

Fraud Risk: Bitcoin does use private-key encryption to verify

owners and register transactions, but scammers might try to sell

fake Bitcoins. There have also been documented cases of price

manipulation, which is another common form of fraud.

Market Risk: As with any other investment, Bitcoin prices can

fluctuate. In fact, Bitcoin value has seen wild swings since 2009.

There is also plenty of competition for Bitcoin, and a technical

breakthrough in the form of a better virtual coin is always a

threat.If you’re looking to invest in cryptocurrency in an ICO (Initial Coin

Offering), you should ask yourself the following questions:

• Who owns the company? Is it a recognizable name or an

identifiable owner?

• Are there other major investors already in?

• Will you own a stake in the company or just currency or

tokens? The former means you’re an actual owner in the

company, while the latter just gives you cryptocurrency to

buy or sell.

• Is the currency already developed or is the company trying

to raise money to develop it? The further along the product

is, the less risky it will be.

Cryptocurrency for

Entrepreneurs

Every digital currency on the market can be classified as one of

five types. The distinctions between them are important because

they tell you what exactly you’re investing in and who can invest

in them.

Coins vs Tokens: This is the biggest distinction between

cryptocurrencies. Each digital currency must be one or the other,

and here’s the difference—coins have their own blockchain and

tokens don’t.

A blockchain is a decentralized, peer-to-peer network that records

transactions on a digital ledger.

Most of the big-name currencies are coins. 

On the other hand, tokens must be created from a blockchain

already in existence like Ethereum. Their protocol exists on top of

that blockchain.

Coins function as currency; tokens represent access to “stock” or

a product. The value of a token is a little complicated, too.

Tokens are usually released in Initial Coin Offerings (ICOs), which

give the investor access to tokenized services or products, or

represent a stake in a cryptocurrency company.

Tokens also fall under different SEC regulations depending on

whether they represent a utility or a security.

Utility Tokens vs Security Tokens: It’s almost essential that an

entrepreneur understand the difference between these two types

of cryptocurrency. The SEC has much stricter regulations for security tokens than it

does for utility.

This is because the former, as the name says, act as digital

securities.

If you can buy or trade a token on a cryptocurrency exchange

without being an accredited investor, then it’s a utility token.

In the most basic terms, a utility token gives an investor access to

a product or service. It can represent a discounted rate or

early/exclusive access.

If you’re looking at Smart Contracts or DApps, you’re looking at

utility tokens.

Security tokens are different. They’re securities that exist on a

blockchain and represent part-ownership in a real-world,

tradeable asset that is external to that blockchain. Because they’re regulated by the SEC like securities, you must be

an accredited investor to trade them. The SEC decides which

tokens are security tokens by determining whether or not an

investor will make money based on a third party’s labor.

Stablecoins: Distinctions between the different types of

cryptocurrency can be a little obscure. Some companies will try to

pass off their security tokens as utility tokens.

And then there’s the debate over whether or not tokens can

represent currency (like coins) rather than just access to a service.

To make things even more confusing, stablecoins are often

technically “stabletokens.” Stablecoins are a type of

cryptocurrency that is “pegged” to traditional assets like

government-backed currency or gold. The advantage with this is that during a “bear” market, investors

can move their money from volatile cryptocurrencies to

stablecoins (which are theoretically more stable) instead of

converting back and forth to USD, which will involve transaction

fees.

Then, during a “bull” market, the investor can convert the

stablecoins back into more volatile cryptocurrency without much

of a cost.

Despite being called coins, however, most stablecoins are actually

tokens because they don’t have their own blockchains.

Why should you care whether something is a coin, a token, a

security or a utility?

As a potential investor, you need to know the value of the

cryptocurrency you’re considering and how current and future

SEC regulations will affect it. And the distinction between coins and tokens marks the two forks

in cryptocurrency’s evolution: cryptocurrency as a payment

method and as a tokenized security.

The question is: can cryptocurrency replace the US dollar or the

stock market—or both?