Reading time: 6th Minutes
Bitcoin and other cryptocurrencies have become popular again. Bitcoin behaves like gold to investors in that in times of volatility and uncertainty in the world, people generally rush to safe havens. Gold (and to some extent silver) has been one of those safe havens for centuries. Bitcoin is now seen the same way.
At the end of November 2020, the price of Bitcoin almost reached the highs it had reached in the glory days of 2017. On November 30, a bitcoin was worth $ 19,850.11 (or £ 14,880), according to CoinDesk, a bitcoin price index. After that, it gradually slipped and could fall significantly again (in fact it probably will), but the fact that it got that high brought it back to the media.
So what is all the fuss about? What is Bitcoin and what about other cryptocurrencies like Ethereum, Bitcoin Cash and XRP? What’s that cryptocurrency thing? Read on to find out!
What is bitcoin
Bitcoin is a cryptocurrency – actually the original cryptocurrency – that works in the opposite way to normal or “fiat” currencies.
In the case of sterling, for example, we have a central authority – the Bank of England – that makes and ratifies all the notes and coins we use. This also applies to pounds sterling in digital form.
With Bitcoin, however, there is no central authority that says how much a Bitcoin costs or where the Bitcoins are in the world. All of this is happening across millions of computers around the world – decentralizing the whole process. Every Bitcoin transaction is recorded on every computer involved in the project, which means that no one can erase or reverse a transaction as they would have to do on millions of computers around the world simultaneously.
In fact, bitcoins are not something that you can hold in your hand or see on the screen. It’s just numbers. You keep them in a virtual “wallet” on your computer or on a USB device and can use them to buy and sell things online.
Bitcoin and other cryptocurrencies have “crypto” in their name due to the complicated cryptography that protects all transactions from prying eyes and stealing fingers. Instead of creating the “money” through a central bank or government, cryptocurrencies are developed as codes by groups of IT staff who build in such a way that the money can be produced. With Bitcoin, for example, people all over the world can “mine” for them (online). It does this by using your computer – or multiple computers – to unlock the cryptography to enable transactions.
it runs on the ‘blockchain’
Blockchain is the decentralized technology on which cryptocurrencies like Bitcoin run, but it is also the platform for all types of transactions. Blockchain can be used in various areas of life such as voting, art ownership, health, education, real estate transactions, and much more.
The blockchain is a decentralized online ledger that stores information on millions of PCs around the world and records transactions in real time. With the blockchain, you cannot erase or reverse transactions, you can only add new ones. So if you want to cancel a transaction, you have to do it again, but in reverse order. It’s all completely transparent (which is what makes it so good for voting systems, for example). Everyone can see what is being done, making it impossible to commit fraud (at least in theory).
What other cryptocurrencies are there?
There are currently well over 2,000 cryptocurrencies (!). As you can imagine, most of them are tiny and very dark. Some are actively fraudulent and are only created by people who want to steal from the unsuspecting. So be very careful before buying into any of the smaller cryptocurrencies. It’s best to stick with the most popular and only buy them through a reputable cryptocurrency exchange.
The currencies modeled on Bitcoin are collectively referred to as Altcoins and have often tried to present themselves as modified or improved versions of Bitcoin. While some of these currencies are easier to mine than Bitcoin, none is as valuable as Bitcoin right now, and most have both their critics and supporters.
Here is a list of the most popular right now:
ether
Ethereum is the second largest cryptocurrency platform after Bitcoin. The coin that works on this platform is known as ether. Although ether is the second largest decentralized currency, it lags behind Bitcoin at around a tenth of its value. However, it is widely used in the ‘alt-coins’ field, so it is useful to have some of them on hand.
Ripple (xrp)
Ripple is often pooped by crypto enthusiasts. They say it is not a proper cryptocurrency as it is not completely decentralized. However, it’s popular and has a real-world use, largely because it works like SWIFT and helps transfer money around the world.
Litecoin
Litecoin is closest to Bitcoin in its functionality and is often referred to as “silver” after Bitcoin’s “gold”.
Tether
Tether is known as the “stable coin” because it has “pegged” itself to the dollar. The reason for this is to make them less volatile than the other cryptocurrencies and thus make them more attractive to potential investors and users.
Bitcoin cash
Bitcoin Cash is the product of what is known in development circles as a “hard fork”. Essentially, a group of developers didn’t like the direction Bitcoin was heading and came up with a different plan for it. That meant that they broke away from the other developers and created something different from the original.
Libra
Libra was founded by Facebook and hasn’t even hit the market yet, but has been talked about as much as if it has been around for years!
currency
Monero is a secure, private and undetectable currency produced by a developer community. It’s donation based and doesn’t seem to have a particularly commercial focus at the moment.
Cryptocurrency exchanges
You can buy and sell cryptocurrencies through specialized exchanges. Like the cryptocurrency itself, the stock exchanges already have an eventful history. Some have folded without warning and taken people’s money.
However, there are some who survived and improved their level of security.
The best known is Coinbase. It’s not the cheapest. It’s pretty safe, however, and has been around long enough to be trusted.
Another well-known one that is safe is Binance.
Should I get into Bitcoin mining?
Once you are familiar with Bitcoin – and some other cryptocurrencies – and invested in some of them, you might consider becoming a Bitcoin miner and making money by “digging up” Bitcoin.
However, this is not easy in this country as it takes a lot of computing power to mine Bitcoin and our energy prices are higher than in many other parts of the world. Since the price of Bitcoin is very volatile, the value of the “coins” you receive can sometimes be worth much less than it costs you to mine.
We have an in-depth article on Bitcoin mining and what the pros and cons (and costs) are, so see if it might be for you.
Can I buy things with cryptocurrencies?
Yes you can. In fact, an IT guy named Laszlo Hanyecz bought two pizzas using Bitcoin a little over a year after Bitcoin started. He bought them for 10,000 bitcoin which is currently around £ 480,000,000. Seriously expensive pizzas!
And that’s part of the problem with using Bitcoin as a currency right now. Lots of people – myself included – don’t want to use the bitcoins (or parts of bitcoin) they own as their value could increase over the next few years. Why waste valuable assets on everyday purchases?
However, there are various companies around the world that accept Bitcoin. Places like Starbucks and WholeFoods take them for example. I also met a florist in South Africa and a number of art dealers who take them away.
Overall, ether is only used to buy other alt coins and services in the cryptocurrency space, but a growing number of online retailers are now taking it.
Should I invest in Bitcoin or other cryptocurrencies?
You could do it. I have!
However, I wouldn’t invest any money until you have some decent investments in safer products like annuities and stock exchange funds. Cryptocurrencies are very new and very volatile. They’re up one day and down the next, so you need to make sure you have solid investments to fall back on elsewhere.
If you want to invest in them, I suggest that you only put a very small percentage of your free money there. Make sure you are ready to lose money because the chances are you will lose it!
Jasmine Birtles owns a small amount of Bitcoin, Litecoin, XRP and Ethereum.
* This is not financial or investment advice. Make sure to do your own research and speak to a professional advisor before parting with money.