There is no question that in the last decade one of the most talked about parts of the Fintech world has been virtual or cryptocurrencies. They’ve only been in existence since the explosion of online technology and they have largely caught the established investment players out; most bankers, consultants and developers have very limited knowledge as to how cryptocurrencies actually work.
So, here is a quick run through the basic concepts.
What is Blockchain?
The single innovation that allowed cryptocurrencies to exist was ‘blockchain’. Devised in 2008 by the anonymous Satoshi Nakamoto, blockchain allows for a continuous list of records (called blocks) to be linked and secured permanently. So every transaction or record is inherently resistant to modification; it is permanent. Hence, a list of financial transactions can now exist outside of a secure server and be a lasting record of them. Bitcoin as born on the premise that transactors don’t have to rely on trust in a mediator
How transactions are confirmed?
When a transaction is made it is known by the whole network, but only after a set period of time during which it is confirmed – and this is critical. Only when a transaction is confirmed can it become part of permanent record – the ‘blockchain’.
Who are the miners? How do they make money?
The completion of a transaction requires the investor to have their transaction confirmed by a miner; these people get rewarded for confirming transactions. Miners own hardware and software, which gives them the computational power to answer the complex mathematical questions required for confirmation. Once confirmed, the transaction becomes part of the blockchain.
What is there apart from Bitcoin that you might consider investing with?
The leader and the original is Bitcoin; the one that started it all and still the most popular. Others to consider are Ethereum (far more complex and volatile than Bitcoin, and offering apps which could potentially be its undoing – nevertheless, it has made some investors a lot of money). Litecoin is a more conservative bet and its value is more likely to be derived from solid user adoption.
However, just because these larger players are most often heard of in the news and undeniably have an advantage over smaller rivals by virtue of being the largest, most widespread and most valuable; these coins also have the least potential for growth. A cryptocoin worth only 2 cents today and 2 dollars by this time next year equates to a value growth of 9900%, if that happened to Bitcoin each coin would be worth 600,000 dollars which is unlikely to happen.
So, instead of the first cryptocurrency investors looking to still capitalize on the current boom should look at the best, the most functional or most secure alternatives that improve on the approaches of their forebears. A great example of this is Dash, or Digital Cash, which has been around since 2014 in different guises and has now managed to nestle itself among the crypto giants. The coin offers better speed and anonymity than its rivals because it is built a two tier architecture with miners that help the network perform advanced functions such as near instant transactions (something Bitcoin struggles with) and ‘coin-mixing’ to provide additional privacy. It is no surprise its value has been steadily rising and that it is one of the most discussed Altcoins on the web. Popular online trading platforms now even offer the Dash as a tradable commodity.
So, how do people make money from cryptocurrencies?
There are three main ways: trading, mining and investing.
Cryptocurrency trading is like trading any other commodity; there are a lot of other influences that can move the price – anything from hype to politics and technological developments – so be aware.
If you want to be a miner then you simply need to invest in the correct hardware, download the free software and start confirming transactions – for which you get cryptocurrency in return. However, if you take the cost of the hardware and the related costs of running it, then it might be hard to actually make any money. This is especially the case with the larger currencies.
The simple way to approach investing in cryptocurrencies is to accept that it is a growing market and you just might make some good money from being part of it. All you have to do is choose your preferred currency, set up a wallet and buy the currency through an exchange. There are, of course, plenty of currencies to choose from (like there would be shares in an equity market) and they will grow at different rates. The investment process isn’t that difficult, but don’t be persuaded merely by the hype; yes, some people have made a lot of money quickly but they did so in the dot-com boom before 2001.
So if you’re a personal investor or a small business wanting to leverage cash positions, alt-coins can be a lucrative investment. However, be aware that, like all investments, knowledge is power but other influences outside of your control can have both positive and negative influences on your choice of investment.