Are cryptocurrencies the future?
My girlfriend recently told me that she wanted to invest in Bitcoins because one her friends had invested some. You can imagine how shocked I was to find out that Bitcoins were trading at $4000 per coin at one time. I first came to know of Bitcoin in 2014-2015 talking to a friend when it was only a few hundred dollars per coin. I didn’t really understood the purpose Bitcoins served other than financing illegal activities from drug sites like silkroad. So I brushed Bitcoin off as just another virtual currency, similar to virtual currencies from games like World of Warcraft or MapleStory. The main difference being that Bitcoins were to purchase drugs instead of in-game items. BUT, i was wrong. In order to really understand Bitcoins and Ethereum, we first need to understand Block Chain Technology.
Block Chain Technology
The technical aspects of block chain technology is kind of complicated. To explain it simply, it is a digital ledger managed by the public, normal people like you and me, on a peer-to-peer basis. Everybody in the network gets a new copy of this ledger whenever any new transaction occurs. The new transaction is then automatically added to the ledger as well. This prevents any possibility of tempering as the system cross references between the different ledgers. Each entry or block is stacked on top of another block, forming a chain. Something like Lego blocks. You can’t make changes to the previous entries without controlling or modifying the entire structure.
How the system is Maintained
A network of public computers maintains the whole system. Bitcoins are given out as rewards to computers that provides the computing power needed to maintain the system. These nodes are also known as “miners”. Miners add new transactions or “blocks” to the existing ledger by solving complex cryptographic algorithms that requires a large amount of computing power. The transactions fees act as incentive for the miners to provide their computing power and electricity to the network. These miners are also responsible for adding new Bitcoins into circulation. Only 21 million Bitcoins would eventually be created, resulting in some comparisons to gold or precious metals. If you are thinking of becoming a miner, forget it. Mining will not work unless you have access to free electricity as the reward rarely compensates sufficiently for the cost.
What about Ethereum and other Cryptocurrencies ?
There are hundreds of cryptocurrencies out there largely based on the principles of Block Chain Technology. The closest rival to Bitcoin is Ethereum, or Ether. While Bitcoin attempts to replace conventional paper currencies. Ethereum serves as a platform and fuel for decentralized applications (Dapps) and smart contracts.
Smart Contracts and Decentralized Applications
We first need to know what are smart contracts, which is the unique selling point of Ethereum. Traditional contracts exist because you do not trust the counter-party and hope that the law can uphold the promise on your behalf. But this legal process is sometimes limited due to various reasons. Which is why we value trust and integrity when dealing with others. With smart contracts, this promise is upheld and witnessed by thousands of other people. As long as the conditions are met, the smart contracts are automatically fulfilled. For example, releasing the payments to the seller once the second-hand car you bought has been driven for a certain mileage or after certain number of days without any breakdowns. Basically, an automatic “If this then that” contract system.
Decentralized applications make use of these smart contracts. Currently, there are a few existing dapps centered around gambling. However, I feel that the smart contract technology is still in its infancy and has some problems to iron out. In order for the smart contract system to work, the whole ecosystem first has to be functional. For example, the technology to record the car mileage automatically on to the block chain.
Investing in Cryptocurrencies
Investing in these currencies is extremely risky because of the daily volatility in its price, a 10% -15% change in price is not uncommon for some of the cryptocurrencies. There are a few exchanges that you can use to buy Bitcoins and Ethereum, such as coinbase (the largest exchange with the largest selection of coins) and coinhako (Bitcoin and Ethereum). I have made a tiny investment into Ethereum because I believe that the trend of decentralization will likely continue in the future. It just makes natural sense to eventually cut out the middle man. I use CoinHako instead of CoinBase as I was unable to verify my account with CoinBase. The whole verification process with CoinHako only took a day or two. After transferring the funds via internet banking, I can start buying Bitcoins and Ethereum within the day itself.
I am not recommending anyone to invest in cryptocurrencies because it is an extremely high risk investment. You should only invest what you are willing to lose. Please read up more on your own and make your own decisions.
If you really wish to invest in Bitcoins or Ethereum. Please use this referral link with CoinHako so that both of us will get $5 when you trade above $100. I signed up without a referral link and I lost out on the free $5. Free money leh.