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CryptoCurrencies – The Good, the Bad, and the Ugly

Everyone’s now talking about CryptoCurrencies now for a variety of reasons. So I thought it would be great to do my own research and share this with anyone that’s interested in this topic.  To make it easier to understand, I have separated this article into sections.

What’s a CryptoCurrency?

Much like a normal currency, a cryptocurrency is a digital asset that works in a way similar to normal currency.  You can buy and sell it, make payments using it, or just keep it hoarded.  Transactions are secured using cryptography (encryption) which gives you a degree of secrecy and safety.

The primary interest in these, in addition to the cryptographic protection is the fact that currency is not controlled by a central authority such as a Central Bank.  Instead, it’s decentralised and controlled collectively by groups of mutually distrustful people who are known as miners.  They are the ones that invest in equipment that are capable of generating new units of a particular cryptocurrency, which process is known as mining.  Most cryptocurrencies have an algorithmic maximum value meaning that they cannot be just created, and this helps to ensure that their value would remain, since they are like rare metals with a limited supply.

Note that with each successful mining of a coin, the effort that is needed to mine another increases, thereby again helping to limit the supply.  This means that the effort and computing power that is required now is exponentially greater than what it was a few years ago.  This means you should not get caught to people that sell mining devices, cards, USB sticks etc on eBay and other sites as they lack the power to give you any return on your investment.

The first and the most popular cryptocurrency is the BitCoin.  However, now there are more than 900 different varieties of cryptocurrency available.

Advantages and Disadvantages of using a CryptoCurrency

First, the advantages:

  1. Ability to make payments anywhere in the world, where borders will not matter.
  2. Personal information is not tied to your account.  You can maintain anonymity as you wish.
  3. Since there is no central controlling authority, no one can seize your funds.
  4. The protocols (if properly designed) cannot be manipulated or controlled by anyone, due to the cryptographic nature of it
  5. Merchants are protected from fraud, since payments cannot be reversed.
  6. Currency exchanges that help convert CryptoCurrency to fiat money may have lesser commissions and fees compared to payment gateways and banks.
  7. Your coins cannot be stolen, unless someone has access to the physical computers.  However, there is an increasing threat from hackers.

Some of the disadvantages:

  1. Many people still do not know what cryptocurrencies are.  This means that there is limited opportunities to use them.
  2. There is a high volatility in the value, since it is driven by supply and demand.  However, this is true for any valuable including Gold.
  3. There is a lot of negative media about Exchanges that have been hacked, thereby scaring off some people.  However, the positives seem to outweigh the negatives

Which CryptoCurrencies are the most popular?

In terms of market capitalisation, the top 3 cryptocurrencies as at 4th August 2017 are:

CryptoCurrency Market Capitalisation Number of Coins Value per coin
BitCoin $46,522,850,928 16,487,175 BTC $2821.76
Ethereum $21,158,756,420 93,770,525 ETH $225.64
Ripple $6,692,495,818 38,343,841,883 XRP $0.174539

Considering that the initial coin offering was at a very low value, you can understand from the above as to why people who originally invested in BitCoins are now millionaires.

In April 2010, a single BitCoin was worth 0.003 USD.   In March 2010, one user tried to auction off 10,000 coins for 50 USD, but no one was interested in buying them.  Today, those same coins are worth 28,217,600 USD.

How does one buy a CryptoCurrency?

Your first step would be to create an account for yourself at an Exchange.  I’ll add on a few examples as this article grows.  Creating an account would be relatively easy and fast, and it’s what is generally referred to as a Digital Wallet.

You would then connect your bank account, debit card, or credit card so that you can exchange digital currency into and out of your local currency.

Then you simply purchase whatever the type of cryptocurrency that is supported by that exchange and fill your wallet.

Be careful though.  Since your personal details are not recorded, most wallets are controlled by a password only.  This means that if you lose your password, you may lose access to your wallet and your investment.

How does one make payments with a CryptoCurrency?

That’s the main issue right now, since a lot of physical places do not accept payments via CryptoCurrency.  There are however a growing number of online retailers that accept payments via digital currencies, thanks to various third party payment processors.  One example you could look at is BitPay.com

What’s an ICO?

An ICO is an Initial Coin Offering, which is how a new cryptocurrency gets crowdfunded.  If you’re interested in investing in cryptocurrencies, there are two main ways.  One is to do trading or speculation which is rather risky due to the volatile nature of the currency.  The other method would be to buy coins at an ICO, and then hold on to it for some time and then sell.

Recently there were a few incidents where the ICO itself was hacked, meaning that the coins people paid for didn’t actually end up in their own wallets but were diverted to the hacker.  Individuals did not lose out however, since the Exchanges covered this due to it being an issue on their side.

Any new CryptoCurrencies coming up?

One cryptocurrency that is being launched this month is PlexCoin.  Not a lot of information is known about them, but they are having a ICO and they offer bonuses for those that register in the intial round.  I have registered an account out of curiosity, and if you’re interested, the link is https://www.plexcoin.com/?ref=5Y7jMJnu09.  If you use this link and eventually make a purchase, both you and I will get 5% added on to our purchase.  That’s an additional incentive if you’re interested in foraying into this.

Update: Quebec (Canada) has asked PlexCoin not to market their ICO there.  You can read about that here.  Still, I’m thinking of putting in a small payment, just to see what happens.

Note (8/8/2017): It’s pretty much confirmed that PlexCoin is a scam.  Be careful with what you do with your money!

Conclusion

Buyer beware, is what can ultimately be said.  Don’t expect to make millions overnight, after being attracted by all the nice looking case studies.  Instead, if you’re looking to make small investments and grow it with time, cryptocurrencies will be a good area to look at.