Beginner’s Guide to Cryptocurrency

The Los Angeles Lakers’ Christmas home game against the Brooklyn Nets will be the exit party for the Crypto.com Arena, the new name for the facility formerly known as the Staples Center. The essence of the renaming deal, which will reportedly cost the Singaporean company over $700 million – promote Crypto.com as the best way to buy and sell cryptocurrencies and related digital goods.

Today, however, only a small fraction of TV viewers could explain the difference between bitcoin and Amazon gift cards, or between non-fungible tokens and Chuck E. Cheese tokens. The hype around cryptocurrencies may be inevitable, but that doesn’t mean people understand how they work or why some of their values ​​fluctuate so dramatically.

Here are some of the basics to help you get started. Do not interpret this as an endorsement of cryptocurrencies, which today are not particularly useful as a currency and are not reliable as investments.

What is a cryptocurrency?

To understand cryptocurrency, it is useful to consider that bitcoin rose from the ashes of the global financial crisis of 2007-2008.

Created by an individual or group under a pseudonym Satoshi Nakamoto, bitcoin – the first cryptocurrency to gain a foothold on a global level – was positioned as a digital version of money, independent of banks and immune to government intervention. Anyone can exchange bitcoins with anyone at any time and for any reason.

But cryptocurrency is only the first use of a technology called “blockchain”, which is slowly spreading (and potentially shaking) in other areas such as real estate, Music as well as games. The Bitcoin blockchain exists solely to keep track of bitcoins, but Ethereum and later initiatives use blockchains to run “smart contracts” – applications that can be run on demand. As a result, blockchains offer an alternative not only to banks and government registrars, but also to computer servers.

Blockchains rely on an extensive network of computers to store and update a permanent digital record of every transaction, eliminating the need for a centralized ledger or record keeper. They use cryptography — mathematical techniques that turn information into a virtually indestructible code — to make sure the people who exchange bitcoins are who they say they are, so that computers on the network can keep identical, immutable records. This prevents bitcoins or any other asset tracked by the blockchain from being duplicated or spent more than once, although they can still be lost or stolen (more on this later).

Entries on a public blockchain like bitcoin are open to everyone; anyone can view the list of transactions (even how they happenthough it’s like trying to read labels on boxes rush along the conveyor belt) or track the activity of any individual account holder. But the identities of the account holders are encrypted, so you cannot tell who is behind the accounts making these transactions.

But what is it worth?

Cryptocurrencies are worth exactly as much as the market says. Investors have poured over $2 trillion into bitcoin and other cryptocurrencies, presumably in the expectation that future investors will be willing to pay more for them.

You might argue that this is all a scam, money-making out of thin air. Technically, each bitcoin began as a payment that some person awarded himself for doing the computer cryptographic work needed to record transactions on the blockchain (an activity called “mining”). But their value depends on how much people are willing to pay for them, which in turn depends on how people expect the price to change over time.

The bulls point out that the supply of bitcoin is capped at a level that ensures scarcity; there will never be more than 21 million bitcoins while the world population is 7.9 billion and growing. In their opinion, the more widely Bitcoin is used, the greater the demand for it will drive prices up.

Bears Claim Wild Price Fluctuations – Bitcoin Saw two boom-and-bust swings only in 2021 will keep most people from jumping on the cryptocurrency bandwagon. It could also be the vulnerability of cryptography to price manipulation and on a whim impulsive investors.

In an article summarizing the economics of bitcoin, Parthajit Kayal and Purnima Rohilla of the Madras School of Economics in India. warned that the price of bitcoin could drop to zero if the benefits that bitcoin offers “are taken away by the government or the coins are stopped by fraudulent activities, or if a better alternative comes into the market.” There is certainly no shortage of alternatives; Exist over 7500 Cryptocurrencies are in circulation now, according to Statista.com.

Is it even a currency?

As a medium of exchange, cryptocurrency leaves much to be desired. For beginners, several enterprises accept these coins as payment today.

The list of places where you can spend bitcoins includes several tech companies, a couple of sports franchises, and surface retailers and restaurants around the world. There are workarounds like Walletwhich allows you to exchange bitcoins for Amazon gift cards, but the need for such services highlights how a poor substitute for dollar bills is currently cryptocurrency.

The only place you won’t be able to spend cryptocurrencies today is the Crypto.com Arena. Stephen Kalifowitz, CMO of Crypto.com, said the company is working on how to integrate its cryptocurrency-based payment app and other products into the marketplace and other partnerships.

Just as importantly, bitcoin does not retain its value in the short term, which is a key property of any currency. The value of the US dollar creeps up and down against the currencies of other countries, and its purchasing power decreases over time due to inflation. But it doesn’t jump 33% in a week like bitcoin did in the first week of October, nor does it lose almost a quarter of its value in a week like bitcoin did in mid-May. BUT 2017 study found that bitcoin prices are 30 times more volatile than the dollar, euro or yuan.

In addition, you must pay a fee in order for your cryptocurrency payments or other transactions to be added to the blockchain. These fees are typically a small percentage of the transaction value, less than what merchants pay to credit card processors. But if you want your transaction to be processed quickly, you may have to pay a large fee. Otherwise, the wait can stretch for hours or even days.

Given wild price fluctuations and other disadvantages, why would anyone use bitcoin or similar technologies as a medium of exchange? Perhaps because crypto coins can be spent anonymously, just like cash, but at a distance. This may explain why digital coins are the payment of choice in ransomware schemes as well as smuggled purchases on the dark web.

For those who really want to use their cybercoins as a currency, there is a class of tokens called stablecoins whose value is pegged to the value of the dollar or some other non-cryptographic asset. The most popular one is called leash; its creators promise that each Tether token is backed by $1 in cash and other reserves (although the value of these reserves was challenged), and its price remained at or close to $1 per much of its history.

Then what is it?

For most people who buy cryptocurrency, it is an investment. But how roller coaster nature crypto markets indicates that this is not a regular market.

Cryptocurrencies are not stocks of corporate stocks, the value of which is at least nominally tied to something specific (namely, the growth prospects and profitability of the company). They are also not like goods whose supply and demand can be predicted.

Instead, they are more like collectibles, such as stamps, whose value is largely determined by their rarity. There is no analysis or quarterly reports, production forecasts or fundamentals such as earnings per share to guide investors. Instead, they have to rely more on whatever evidence they can find about which cryptocurrencies have momentum in the market.

According to Kayala and Rohilla’s paper, the researchers noted a number of factors that appear to be correlated with the value of bitcoin. One of them is geopolitical risks around the world; Bitcoin prices become more volatile as the index of these risks rises. Meanwhile, post-inflation and tax burden interest rates are “significantly impacting bitcoin prices,” they write. The researchers also found that bitcoin prices rose as stock trading volume increased, but declined as stock prices rose, Kayal and Rohilla reported.

And the last factor indicating that cryptocurrency trading is an insider game: studies show substantial evidence of bitcoin price manipulation. For example, one study 2018 doomed Japanese bitcoin trading floor Mt. Gox found that “Bitcoin prices rose on approximately 80% of the days when suspicious trading activity was recorded, while they rose on a comparatively smaller number of days, 55%, when no such suspicious activity was observed,” Kayal and Rohilla wrote. . .

How to start?

Most cryptocurrencies are available for purchase by anyone. All you need is a way to submit your order on the blockchain for the currency in question.

The easiest way to do this is to use exchange, such as those operated by Binance and Coinbase. It is the cryptocurrency equivalent of a mall offering access to many cryptocurrencies. Typically, these sites provide a digital wallet that is much like a checking account, except that it is secured with a private cryptographic key rather than a PIN. You deposit cash or cryptocurrency into the wallet and it funds your purchases, keeps track of your holdings, and stores digital receipts that keep track of what you bought and sold.

This is called a “custodial” wallet, which means it is stored in the cloud and maintained by a third party who can help you recover your password. One disadvantage is that it uses centralized servers that can be attacked by hackers, as happened with the BitMart exchange this month, which leads to $150 million or more in cryptocurrency losses. Such losses can be covered by insurance, as, for example, in the case of BitMart. But sometimes they don’t.

If this threat bothers you, you can make another transaction on your exchange to transfer your assets to a “non-custodial” wallet that is in your possession. This could be a software application on your computer or phone, such as Metamaskor a dedicated high security USB flash drive (called “hardware wallet“). In any case, it is maintained only by you, and if you lose your password, you lost my cryptocurrency.

If you jump into the crypto pond, beware of the sharks. According to Chainanalysis, cryptocurrency users lost more than $7.7 billion. to fraud and other cryptographic crimes only in 2021.