Where did Cryptocurrencies like bitcoin come from? And other questions answered.

What is a cryptocurrency?

A Cryptocurrency is an online virtual currency that leverages on cryptography (which is the art of writing codes) as a form of security and to verify the transactions that are made. Imitating or counterfeiting a digital currency is almost impossible due to this security embedded behind it. As cryptocurrencies are not issued by any financial institutions nor the government, there is no intervention or control over it in terms of volatility and the risks that entails along.

 

How does cryptocurrency work?

Among the many digital currencies we see these days, such as ripple & ethereum. Bitcoin was the first virtual currency that made used of peer-to-peer technology to manage their online immediate payments. (Think of it like the peer-to-peer file sharing; torrent. Users will upload any file online, while there will be other users downloading it.) These Miners all over the world will participate in solving this tough mathematical puzzle to unlock new blocks that is being added into the blockchain. The winning miner will be awarded with digital currencies. These miners can be considered as the governing parties (decentralized authority with no servers involved) that upholds the reputation of this whole network and maintain its eminence.

As this network has no one governing it, every single person has a role to play. It is done via Blockchain, where a public ledger of accounts has records of every single transaction made in the network, which is also available to everyone. 100% transparency as everyone in that particular network is able to view all the account balances if they wish to.

Every single transaction made would generate a file that includes the sender and recipient’s virtual wallet address (public key) and the amount of coins transacted. This transaction has to be signed off by the sender with their own personalized key and being broadcasted into the blockchain. But in order for that to happen, only miners can confirm these transactions. By solving computationally tough puzzles in order to mark them as legitimate. Once a successful transaction has been confirmed, it cannot be erased, removed or deleted anymore.

 

What is bitcoin?

In recent years, there has been many different types of digital currency emerging in the market after people recognised the potential and capabilities of bitcoin; the first peer-to-peer electronic cashless system that was ever created. Back in 2008, Satoshi Nakamoto was a name that was made known to identify this programmer or collective group of programmers who work together to release the original Bitcoin software which was then released in the year 2009.

One of the key issues that these payment system has solved would be double-spending where people may be charged with the same amount twice (a unethical way of swindling money). These people wanted to enter a world where cashless payments are being made, without having to possess physical cash, let alone the withdrawal fees, transaction fees, etc that are being imposed by banks.

 

What is cryptocurrency’s closest comparison?

The next closest financial instrument we can use as a comparison between cryptocurrency would be forex. Assuming that we all know how Forex works, some of the Majors (Most commonly traded pairs) that are available (EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD) in the market.

These currency pairs correlates to each other, affecting the base price and the quoted price. Having formed that connection between each other, these currencies are also being regulated by the government so as to reassure overseas investors or businesses who are dealing with that particular currencies have a peace of mind. Supply and demand typically has a large influence over the price of everything today.

For instance, if a business were to import disposable plastic bags from china at a wholesale price of $1.00/1000 bags. What if there were to be a low supply of plastic due to some natural disaster? The next step that any supplier would naturally take is to increase the price of disposable plastic bags to $2.00 or even $3.00/1000 bags.

This is a typical example of how supply and demand can sway and affect prices all over the world.

Difference between cryptocurrencies and forex?

Digital currencies are not regulated by any government/financial institutions/banks, no official financial institution can intervene with the volatility or its price. It is not correlated to any other major currencies around the world. Cryptocurrencies are just units of exchange for people like you and me to store our virtual currencies on without going through third party banks to impose and slap us with processing fees, transaction fees, wiring fees, so on and so forth. The value of cryptocurrencies are given through human perceptions because we think that it is worth a certain value and use it as a form of exchange.

Every financial instrument or investment would have their own pros & cons, benefits and drawbacks. Below are a couple of factors that gave cryptocurrency the edge as opposed to forex.

 

Source: The Bitcoin Volatility Index

 

 

Cryptocurrency Pros & Cons

• The Ease of Trading/Investing in a Virtual Currency

• Limited or Lower Transaction Costs

• Volatility index is always above 5%, hence creating ideal scenarios for daily trades to be conducted

• Fluctuation of prices are not the same as compared to the conventional forex stimuli

• Cryptocurrency prices ≠ Geopolitical News or local economic performance at all

• Prone to hacking may occur as there are already past cases where people have lost millions of dollars

• Virtual currency may be affected if there is any interference to the blockchain or unforeseen online glitches

• These digital coins are available for direct purchase and marginal trading cannot be done

 

Forex Pros & Cons

• Diversity in terms of the major, minor and exotic pairings

• Forex currencies are quite stable most of the time, radical fluctuations are rarely seen due to the large volumes that are being traded day in day out

• Bokerages usually offer leverage as high as 200:1 to personal traders/investors

• Costs such as transactional fees, bid/ask spread, rollover can be quite hefty

• There can be discrepancies from time to time when realising profits due to the lack of pricing volatility

• Government, financial institutions, and banks, or investment firms can manipulate the price and be prejudice towards retail traders like you and me

 

End of the day, with the current tech boom, insane valuation, and high volatility fluctuations, Cryptocurrencies would be an ideal alternative for current forex traders to venture into, and pique the interests of many. The level of transparency that these virtual currencies offer has always been a dream to many retail traders. But there are ALWAYS risks when it comes to trading or investing. Know what you are in for, before taking that leap of faith to invest in cryptocurrencies.

Though these digital currencies are fairly new to the market, offering consumers a new way to store their money via blockchain and spending it anonymously, it has not been widely accepted or understood by many as a mode of payment yet. Many giant conglomerates are monitoring it progress thus far, as it may very well be the next mode of payment, as we transit into a smarter, cashless world.

 

Read our other related articles on Cryptocurrency:

Strategies For Trading Bitcoin In Volatile Markets

Will Bitcoin replace Gold? Here’s what we think.

 

(By Gwyneth Yeo)

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