How Does Cryptocurrency Work?
BLOCKCHAINS, BITCOINS and ETHEREUM
For the past years, the economists have continuously been studying how people behave and how society works to make everything in order. Economists are very keen in observing and understanding how people make decisions, how they act individually and in groups including their way of exchanging value. Economist even studied institutions that facilitators trade like corporations, legal systems, market places, but there is a new technological institution that will fundamentally change how people make transactions. This technology is called the Blockchain.
Blockchain, as it is defined is a digitized, decentralized, public ledger of all cryptocurrency transactions. Constantly growing as ‘completed’ blocks, the most recent transactions are recorded and added to it in chronological order. It allows market participants to keep track of digital currency transactions without central recordkeeping and each node (a computer connected to the network) gets a copy of the blockchain, which is downloaded in an instant.
Blockchain is originally developed as the accounting method for the virtual currency Bitcoin. It uses distributed ledger technology (DLT) appearing in a variety of commercial applications at present. Currently, the technology is primarily used to verify transactions within digital currencies. It is possible to digitize code and insert practically any document into the blockchain allowing it to create an indelible record that cannot be tampered; furthermore, the record’s authenticity can be verified by the entire community using the blockchain instead of a single centralized authority.
What is a cryptocurrency exchange?
Cryptocurrency exchanges are websites where you can buy, sell or exchange cryptocurrencies for other digital currency or traditional currency like US dollars or Euros. Those who wish to trade professionally and gain access to trading tools will most likely need to use an exchange that requires them to verify an ID and open an account. If they are just want to make the occasional, straightforward trade, There are also platforms that can be used that do not require an account.
Types of exchanges
- Trading Platforms are websites that connect buyers and sellers and take a fee from each transaction.
- Direct Trading are platforms that offer direct person to person trading where individuals from different countries can exchange currency. Direct trading exchanges don’t have a fixed market price, instead, each seller sets their own exchange rate.
- Brokers are websites that anyone can visit to buy cryptocurrencies at a price set by the broker. Cryptocurrency brokers are similar to foreign exchange dealers.
Which characteristics qualify a good cryptocurrency exchange?
Venturing into the cryptocurrency can both be exciting and scary at the same time. Don’t worry, it’s just a matter of time till you finally get to love this new trade. To help you dissect the matter further, here are the most important signs to look out for when choosing an exchange:
- Commissions and Fees
Getting your money’s worth is everybody’s objective especially when you enter into a new business venture. Paying the most reasonable fee is very important. Some exchanges can be very transparent about the financial aspects involved in the trade, some are not. The trick here is to always keep track of the current market value and be able to compare it from the previous ones.
Here are some fees you want to take a closer look at:
- Monthly “wallet fees” that are intended for keeping cryptocurrency on the exchange.
It is a fact that there is no incremental cost to managing a bitcoin address – regardless of how much it contains. Imagine if restaurants decided to charge people hourly fees for using their chairs and tables.
- Excessively large bitcoin withdrawal fees.
Be mindful of the operators trying to justify such fees with terms like “transaction backlogs”, “blockchain bloat”, or “mempool overload”
- Verification admin charge. You do not actually have to pay to get your ID verified. Exchanges are obliged to submit everyone to vetting.
- Excessive deposit fees. Exchanges get charged by their banks anywhere between 1 – 10 USD when you deposit money (less for SEPA transactions) in their accounts.
Most of the sites generate their revenue by having a small margin on the buy or sell rate. Always check commissions before you deposit money anywhere.
- Payment method
Why would deposit methods influence the ranking of an exchange? Simply because when customers have decided to trust a certain place, they tend to stick to the same site.
The ranking of an exchange can also be affected by the deposit methods. The effect is on the customer’s preferences and trust. When a customer feels comfortable in a certain system or procedure, he will more likely become loyal to that site. Such behavior means that customers prefer to have a range of choice for depositing and withdrawing fiat/crypto. If there is not enough options, the customers would then research alternative sites which would definitely take time.
It is quite hard to find a site that accepts all four of the commonly-used payment methods.
- Bank transfer – 75 % of exchanges accept SEPA or wire transfers
- Credit card – 15 % of exchanges accept Visa/Mastercard/AmEx
- PayPal – 2 % of exchanges accept PayPal
- Cash – 10 % of exchanges facilitate cash purchases through WesternUnion, p2p meetups, Payoneer and other mediums
- Ease of Use
Surprisingly, with all the advanced domains and website developers available everywhere, some sites still could not deliver a user-friendly interface. This is perhaps the reason why some sites garner more frequent bitcoin traders than others. It is really important to start off simple. Don’t try use a decentralized exchange if this is your first day on bitcoin. Choose a site which could conveniently accommodate beginners.
First time users should try to avoid trading sites that have multiple & extended down-times because there is no point in signing up if you can’t readily access the web server. They should also check for non-intuitive user-interfaces. Having to look up support for each trade will quickly get traders frustrated. Also, the site should at least have a non-automated withdraw process. Unlike regular banks, bitcoins are a lot more secure so there is actually no need for users to ask for permission to take out their money.
Some of the leading exchange sites are actually very easy to use, but also offer more advanced features for experts. It all depends on the user and his preference of doing the business.
Some of the basic security practices that an exchange is following is to provide proof of coins in cold storage. All new users are also required to verify their identity and location before they can deposit. The exchange offers and encourages people to use two-factor authentication as well. The operators resist and justify with regulator demands on how to run the exchange efficiently.
There are various ways to determine if an exchange may have compromised its security.
- If there is a long & persistent backlog of bitcoin withdrawals or when users wait for days to receive their withdrawals
- If there is an increasingly large difference in the quoted price of bitcoin compared to other exchanges
- Media allegations of theft. If you want to keep track of the daily events, Coindesk.com is a reputable source for bitcoin news.
- When operators stopped responding to community questions/allegations being thrown at them
Most people prefer to withdraw their coins to an offline wallet once purchased. This eases their worry about how safe the exchange is.
- Customer Service
It is advisable to research a site’s customer service records before you deposit. Some sites are very dependable when it comes to customer queries while others may take days to get back to you. Interacting with tech support will be necessary at some stage as most sites now require ID vetting. This stage usually involves number of emails, so it is important that the site has enough customer service representatives to respond to users in time.
As exchanges get more sophisticated and secure, some have developed account-flagging systems which may temporarily freeze the funds of users. Flags can be set off for different reasons, but it usually gets filtered once you reach out to a customer support representative.
- Community Interaction
Since the bitcoin community is a thriving ecosystem, community interaction should be given more attention. Exchanges do not exist in a void, and those that are harvesting all the rewards without giving something in return deserves less of your custom.
Community interaction could be done in various ways including participating & solving queries on bitcoin forums, notably the /r/bitcoin sub-Reddit. Localbitcoins & CEX are very active in this area. You can also contribute to bitcoin-events, hackathons, and sponsoring cryptocurrency education initiatives. To widen your network, you can also consider sharing and taking innovation from the community.
How to Buy Bitcoins
Bitcoin, a digital currency created in 2009 uses decentralized technology for secure payments and storing money that doesn’t require banks or people’s names, created by a person using an alias Satoshi Nakamoto. Through bitcoin, transactions are made without middlemen, which mean that no bank of financial institutions is involved in the transaction.
There is no need for a transaction fee and you are not required to divulge any personal information, not even your real name. From the time that it was introduced to the market, more merchants are beginning to accept it and began using it to enter into transactions.
The Bitcoin can be used to buy merchandise or pay for services anonymously. It is a new way of making a trade as it can be used for international payments. It is easy and cheap and is not tied to any country that is subject to complicated regulations.
Acquiring Bitcoins is not as complicated as the traditional way of acquiring money or stocks, you can buy Bitcoins on an “Exchange”. Some marketplaces calls it “bitcoin exchanges” where it allows people to buy or sell bitcoins using different currencies.
Mt. Gox for instance, is the largest bitcoin exchange in existence. People can also send bitcoins to each other through a mobile app. This is similar to wiring or sending cash virtually. They are stored in a digital wallet which can be done either through Cloud or on a user’s computer. It is like a virtual bank account that makes transactions similar to how they do it in normal banks but unlike physical banks, Bitcoins are not insured by the FDIC.
According to the Bitcoin protocol, the database of the blockchain is shared by all nodes participating in a system. Once you joined the network, each connected computer receives a copy of the blockchain containing records which serves as proof of every transaction entered into. It can even provide insights about facts like how much value belonged to a particular address at any point in the past.
The Bitcoin Market Value
The market value of Bitcoins at present is over $68B. Currently, there are already over 16M Bitcoin tokens issued and in active circulation. The price of a single Bitcoin today is over $4,000 which is surprisingly high considering that it is just new in existence. This is the reason why thousands of millennials are investing in “virtual currencies”.
Aside from Bitcoin, there is also a new alternative virtual currency introduced in the market which is somewhat similar to Bitcoin. Ethereum – an open-source, public, blockchain-based distributed computing platform featuring smart contract (scripting) functionality. The difference between the two is that Bitcoin cryptocurrency ticker is BTC, while Ethereum’s cryptocurrency ticker is ETH. People are actually hooked in buying Bitcoin and Ethereum IRAs, to help with their overall retirement plans. This is a brilliant method to diversify your portfolio and allow you to expose your portfolio to adequate levels of risk that will present good, healthy, profits and rewards in the medium term.
What to look out for before joining an exchange
It’s important to do a little homework before you start trading. Here are a few things you should check before making your first trade.
- Reputation – The best way to find out about an exchange is to search through reviews from individual users and well-known industry websites. You can ask any questions you might have on forums like BitcoinTalk or Reddit.
- Fees – Most exchanges should have fee-related information on their websites. Before joining, make sure you understand deposit, transaction and withdrawal fees. Fees can differ substantially depending on the exchange you use.
- Payment Methods – What payment methods are available on the exchange? Credit & debit card? wire transfer? PayPal? If an exchange has limited payment options then it may not be convenient for you to use it. Remember that purchasing cryptocurrencies with a credit card will always require identity verification and come with a premium price as there is a higher risk of fraud and higher transaction and processing fees. Purchasing cryptocurrency via wire transfer will take significantly longer as it takes time for banks to process.
- Verification Requirements – The vast majority of the Bitcoin trading platforms both in the US and the UK require some sort of ID verification in order to make deposits & withdrawals. Some exchanges will allow you to remain anonymous. Although verification, which can take up to a few days, might seem like a pain, it protects the exchange against all kinds of scams and money laundering.
- Geographical Restrictions – Some specific user functions offered by exchanges are only accessible from certain countries. Make sure the exchange you want to join allows full access to all platform tools and functions in the country you currently live in.
- Exchange Rate – Different exchanges have different rates. You will be surprised how much you can save if you shop around. It’s not uncommon for rates to fluctuate up to 10% and even higher in some instances.
How do you buy these currencies?
The overwhelming number of bitcoin exchanges makes it hard to narrow down to only the best options out there. From there being only six major trading sites in 2014 to more than two hundred in 2017 – it’s no surprise that new bitcoiners get lost when researching where to get their first bitcoins.
Coinbase is one of the most popular and well-known brokers and trading platforms in the market. It is a platform that easily secure, buy, use, store and trade digital currencies. Users can purchase bitcoins, Ether and now Litecoin from Coinbase through a digital wallet available on Android smart phones & iPhone or through trading with other users on the company’s Global Digital Asset Exchange (GDAX) subsidiary.
GDAX currently operates in countries including US, Europe, UK, Canada, Australia, and Singapore. At present, GDAX does not charge any transfer fees for moving funds from your Coinbase account to a GDAX account. The selection of tradable currencies will, however, depend on the country you live in.
Pros: Good reputation, security, reasonable fees, beginner friendly, stored currency is covered by Coinbase insurance.
Cons: Customer support, limited payment methods, limited countries supported, non-uniform rollout of services worldwide, GDAX suitable for technical traders only.
Kraken is the largest Bitcoin exchange in Euro volume and liquidity and is a partner in the first cryptocurrency bank. Kraken allows you to buy and sell bitcoins and trade between bitcoins and Euros, US Dollars, Canadian Dollars, British Pounds and Japanese Yen. It is also possible to trade digital currencies other than Bitcoin like Ethereum, Monero, Ethereum Classic, Augur REP tokens, ICONOMI, Zcash, Litecoin, Dogecoin, Ripple and Stellar/Lumens. Kraken is recommended to be used by more experienced traders.
Pros: Good reputation, decent exchange rates, low transaction fees, minimal deposit fees, feature rich, great user support, secure, supported worldwide.
Cons: Limited payment methods, not suitable for beginners, intuitive user interface.
Below is a table that summarizes all the best places to buy bitcoin. We have compiled everything for you to help you pick and choose which cryptocurrency exchange you should sign up for this decision will be driven by a multitude of factors including: safety and reliability, convenience, and accessibility.
|Site||Trading Pair||Daily Volume||Web address|
Bitcoin Cash (BCH)
Santiment Network Token (SAN)
Bitcoin Unlimited Futures (BCU)
Bitcoin Cash (BCH)
Santiment Network Token (SAN)
DECENT (DCT) STATUS (SNT) Bytecoin (BCN) Etheroll (DICE) MaidSafeCoin (MAID)
InsureX (IXT), Bitquence (BQX), Pillar (PLR), Dent (DENT), Lisk (LSK), BitAsean (BAS), Mothership (MSP), Nimiq (NET), STOX (STX), SunContract (SNC), Steem (STEEM), Ardor (ARDR), Civic (CVC), TaaS (TAAS), TokenCard (TKN), FirstBlood (1ST), Synereo (AMP), WeTrust (TRST), Matchpool (GUP), DigixDAO (DGD), Gnosis (GNO), and Swarm City (SWT)
|Local Bitcoins||Bitcoin (BTC)||$100M||https://localbitcoins.com/US?ch=5fvp|
|Virtual World Exchange||https://www.virwox.com/?r=129075|
|Ledger||Compatible with multiple cryptocurrencies including Bitcoin (BTC), Ethereum (ETH), Stratis (STRAT), ARK (ARK), and many more||https://www.ledgerwallet.com/r/ef0d?path=/products/ledger-nano-s|
Now that you are more familiar with Bitcoins, let me discuss a more advanced platform for aspiring traders.
Ethereum – an open software platform based on blockchain technology enables developers to build and deploy decentralized applications. It is said to be somewhat similar to Bitcoins because it is also a distributed public blockchain network.
Although there are some significant technical differences between the two, the most important distinction to keep in mind is that they differ primarily in purpose and capability.
Bitcoin offers one particular application of blockchain technology, a peer to peer electronic cash system that enables Bitcoin payments or transactions online. While the Bitcoin blockchain is used to track ownership of digital currency (bitcoins), the Ethereum blockchain is more focused on running the programming code of any decentralized application.
In the Ethereum blockchain, instead of mining for bitcoins, traders (miners) work to earn Ether which is a type of crypto token that runs the whole network. Beyond a tradeable cryptocurrency, Ether is also used by app developers to pay for transaction fees and services on the Ethereum network.
Which is the best Ethereum exchange?
If you are wondering if there is a recommended exchange for ETH, you may have to do your own research to see which one is best for you based on where you live and the payment method you are more comfortable with. Some exchanges only work in specific countries, for example, so you’ll have to make sure that the exchange you have works in your country.
What can Ethereum be used for?
Ethereum enables developers to build and deploy decentralized applications. This decentralized application or more commonly known as Dapp serves a special purpose to users. Bitcoin, for instance, is a Dapp that provides its users with a peer to peer electronic cash system which enables online Bitcoin payments. The Dapp is not controlled by any individual or central entity because they are made up of codes that run on a blockchain network.
Any services that are centralized can be decentralized through Ethereum. Even intermediary services across hundreds of different industries can be decentralized. This includes loans provided by banks, title registries, voting systems, regulatory compliance and other services you can think of.
Ethereum can also be used in building Decentralized Autonomous Organizations (DAO) which is fully autonomous, decentralized organization with no prime leader. These are run by programming code, on a collection of smart contracts written on the Ethereum blockchain. Codes here are designed to replace the rules and structure of a traditional organization, eliminating the need for people and centralized control. DAO is owned by everyone who purchase tokens, but instead of each token equating to equity shares & ownership, tokens act as contributions that give people their voting rights. Talk about equality.
Benefits of Ethereum decentralized platform
Since decentralized applications run on the blockchain, they benefit from it in many ways. A third party cannot make or tamper changes to the data and since the apps are based on a network formed around principle of consensus, it is considered safe and corruption-free. It is also very secure because apps are well protected against hackers and are guarded from any fraudulent activities or transactions. Not to mention a zero downtime on the site since apps can not be switched off.
However, just like any other systems, decentralized apps also has its limitations. All apps no matter how they are carefully programmed still has a human factor attached to it, making it somehow vulnerable to mismatch. Since smart contract code is made by humans, smart contracts are only as good as the people who made them. Code bugs or oversights can lead to unintended glitches.However, if a mistake in the code is exposed, there is always a way to reprogram it without compromising security. Developers will be able to obtain a network consensus and rewrite the underlying code. It can be quite tedious for developers to perfect the system, but this is actually something they can work on to ensure traders a very reliable platform.
What apps are currently being developed on Ethereum?
The Ethereum platform is being used to create applications into a broad range of services and industries. This will not only make transactions easier but will also hasten the process for all.
- Weifund – provides an open platform for crowdfunding campaigns that leverages smart contracts. It enables contributions to be turned into contractually backed digital assets that can be used, traded or sold within the Ethereum trade.
- Uport – provides users with a secure and convenient way to take complete control of their identity and personal information. Instead of relying on government institutions and surrendering their identities to third parties, users control who can access and use their data and personal information.
- BlockApps – is looking to provide the easiest way for enterprises to build, manage and deploy blockchain applications. From the proof of concept to full production systems and integration with legacy systems, Blockapps provides all the tools necessary to create private, semi-private and public industry-specific blockchain applications.
- Provenance – is using Ethereum to make opaque supply chains more transparent. By tracing the origins and histories of products, the project aims to build an open & accessible framework of information so consumers can make informed decisions when they buy products.
- Augur – is an open-source prediction & forecasting market platform that allows anyone to forecast events and get rewarded for predicting them correctly. Predictions on future real world events, like who will win the next US election, are carried out by trading virtual shares. If a person buys shares in a winning prediction, they receive monetary rewards.
Ethereum is moving forward and looking to a bright future. By providing a user-friendly platform that enables people to harness the power of blockchain technology, Ethereum is speeding up the decentralization of the world economy. Decentralized applications have the potential to profoundly disrupt hundreds of industries including finance, real estate, academia, insurance, healthcare and the public sector amongst many others.
A future of countless possibilities for Cryptocurrencies
Investors of cryptocurrency believe that this new system will soon be integrated into the everyday economy. A recent survey conducted by blockchain platform, Waves, says that 51% of the cryptocurrency investors believe that this will happen in the next coming years.
The price of cryptocurrencies fluctuates a lot. In the survey, the cost of bitcoin alone increase into 19 fold in 2017. The price of Ethereum however, increased to 9,000%, exceeding $700 per coin.
Because cryptocurrencies are not regulated by any central bank, it is deemed to be very volatile. Economists today believe that bitcoins remain to be a gamble. Experts advise people who are interested in this venture to invest only the amount that they are willing to lose. It is also best to make a thorough research and have a wide knowledge about this new currency including the factors that contributes in the rise and fall of its value.