Have you ever heard of digital currency and wonders, ‘what is this even all about?’
Many people hear of CRYPTOCURRENCY but what it is and how it functions seems foggy to understand. I was once like that as many things as regards to its operations was hazy to me. I encourage you to patiently follow through this publication and the subsequent ones I’ll publish, as I’ll be explaining in an easy to understand way, an in depth comprehensive guide to cryptocurrency operations.
First of all, what is cryptocurrency?
A cryptocurrency is a (money) medium of exchange like normal currencies such as USD, Naira, Pound etc but designed for the purpose of exchanging digital information through a process made possible by certain principles of cryptography. Cryptography is used to secure the transactions and to control the creation of new coins.
Good to Know!
Cryptocurrency is an encrypted decentralized digital currency transferred between peers and confirmed in a public ledger via a process known as mining. In Order to understand how it works, you will need to know the meaning of some basic terms used in crypto operations. Below are the basic terms you need to know;
Public Ledgers: All confirmed transactions from the start of a crypto currency’s creation are stored in a public ledger. The identities of the coin owners are encrypted, and the system uses other cryptographic techniques to ensure the legitimacy of record keeping. The ledger ensures that corresponding “digital wallets” can calculate an accurate spendable balance. Also, new transactions can be checked to ensure that each transaction uses only coins currently owned by the spender.
Transactions: A transfer of funds between two digital wallets is called a transaction. That transaction gets submitted to a public ledger and awaits confirmation. When a transaction is made, wallets use an encrypted electronic signature (an encrypted piece of data called a cryptographic signature) to provide a mathematical proof that the transaction is coming from the owner of the wallet. The confirmation process takes a bit of time (ten minutes for bitcoin) while “miners” mine (ie. confirm transactions and add them to the public ledger).
Mining: In simple terms, mining is the process of confirming transactions and adding them to a public ledger. In order to add a transaction to the ledger, the “miner” must solve an increasingly-complex computational problem (sort of like a mathematical puzzle). Mining is open source, so anyone can confirm the transaction. The first “miner” to solve the puzzle adds a “block” of transactions to the ledger. The way in which transactions, blocks, and the public blockchain ledger work together ensures that no one individual can easily add or change a block at will. Once a block is added to the ledger, all correlating transactions are permanent and a small transaction fee is added to the miner’s wallet (along with newly created coins). The mining process is what gives value to the coins and is known as “a proof-of-work system”.
How To Trade On Crypto Currency
- Identify your cryptocurrency of interest and a relevant exchange.
Cryptocurrencies are traded on their own exchanges. Not every exchange will offer every cryptocurrency. It is a good practice to stick to the larger exchanges with higher volume to maximize the chance that your trades will go through. Large exchanges like GDAX, Kraken, Bitfinex, and Gemini will offer good volume to trade Bitcoin and ethereum with USD through bank transfer or credit cards. The main difference between these exchanges are fees and user interfaces. Many websites will point newer investors toward Coinbase, which provides a better UI as well as a wallet in exchange for higher fees. Personally, I use Coinbase which the reason is as earlier italicized above.
For the many other “altcoins” out there, it gets trickier — you can check out Poloniex, a diverse exchange offering over 80 crypto coins, but you can only fund your account with Bitcoins or other altcoins.
After you’ve selected your exchange of choice, you’ll typically go through a somewhat onerous process to verify your account. You’ll be asked for identification documents such as your driver’s license or passport, and usually you’ll be verified within 1–3 business days. Since transactions on these exchanges cannot be cancelled or refunded due to the nature of blockchain, exchanges are very concerned about fraud. You might wonder why personal information needs to be provided to buy currency that is decentralized. The answer is that while the cryptocurrency exchange is anonymous, the trade of fiat to crypto is not! It is important to exchanges to verify your financial information and identity so that scammers can’t buy a ton of tokens with fake credit cards.
After you’re approved, you’re all set and can begin trading! Typically exchanges will have fee waivers or discounts if you trade at high volume or act as a market maker. After your buy order is filled, the tokens will be held in the exchange for you. At this point, unless you are a day trader, you should immediately transfer your currency into “cold storage”.
2. Choose a wallet, or “cold storage” solution.
Rightfully so, one of the greatest concerns about cryptocurrency is security. While the exchanges are far more secure than 3–5 years ago, it is foolish to believe they are impervious. As long as your tokens sit in the exchange, you don’t fully control them yourself. Let’s quickly talk about how cryptocurrency ownership works to better understand this, every time you buy X quantity of cryptocurrency on an exchange, that quantity is linked to a public key, or digital code indicating that amount. This is the bread and butter of the transparency of blockchain — everyone can see all public keys and the amounts of cryptocurrency to which they are linked. On the exchange side, they also own a private key that indicates ownership of that public key. If a hacker obtains that private key, your investment is gone.
This might be a weird concept, but the tokens themselves are not actually in your wallet. When you “transfer” your cryptocurrency in a wallet, you are actually storing that private key, a unique digital code that’s known only by you. This private key acts as a ledger and allows you to transfer coins that you own on the public key. If this is too much of a head scratcher, let your main take away be that as long as the exchange holds your cryptocurrency, you do not have full ownership of it. As such, you should store your cryptocurrency in a wallet to mitigate security risk, particularly if you are a long-term holder.
There are several types of wallets,
1) Hardware — these are typically USB devices that can access the blockchain. Ledger Nano S appears to be the most acclaimed.
2) Desktop — typically an installed application on your computer that will connect to the blockchain. Exodus, Jaxx, Parity
3) Web-based — convenient as you can access from anywhere. Ironically, your private keys are stored on a central server, which may prove to be a security risk. MyEtherWallet, or MEW, is very popular.
While there are definite differences in the design of the wallets out there, the general principle is the same: they house your private key such that only you can access the tokens you own. No one will be able to touch your currency unless you’ve engraved this key onto your cold, dead hands. Be aware that this is a double-edged sword — if you lose your private key and your wallet recovery phrase, your cryptocurrency is gone forever!
Wallets such as Jaxx are pretty user-friendly and will have plentiful setup documentation — I would recommend it if you just want a simple wallet.
3. Create and confirm a smart contract in the wallet to transfer and receive funds.
Now that you have your wallet, token transfers should be pretty easy. If you’re moving cryptocurrency out of the exchange, simply paste your wallet’s public key into the exchange website and send. If you’re doing the reverse, paste the exchange’s public key into your wallet’s transaction contract and confirm. On mobile wallet apps, it is possible to scan a QR code as well. Each transaction from your wallet will cost a fraction of a BTC/ETH/etc.
Investing in cryptocurrency simply requires getting verified on an exchange that includes your coin of choice. Keep your tokens safe by storing your private key in a wallet. Use the public keys between the exchange and your wallet to seamlessly transfer your cryptocurrency.
Accessibility remains a huge problem in bringing new investors into cryptocurrency. The process described above, while not exceedingly complex, is nonetheless not very intuitive or easy to explain in 25 words or less.
Remember, never invest money you can’t afford to lose and best of luck in this extremely volatile and exciting market.
Cryptocurrency have severally been referred to as ‘the future currency’ and every wise investor targets the future. Don’t let unfamiliar terminologies, jargons and cryptocurrency registers scare you off! If you want to go more digital in your investments, start thinking CRYPTOcurrency!