Are you considering investing in cryptocurrency as your New Year’s resolution for 2020? Is your problem that cryptocurrencies are too confusing? Some of your friends and colleagues may be ecstatic about Bitcoin and Ethereum, while others might be telling you to stay away. But most people do keep an eye on the current events in the crypto markets. Quite often, you might hear terms commonly used in the crypto community but have no idea what any of them mean. This post is a guide for anyone who wants to know more about the virtual currency space.
Investing in cryptos or trading comes later. The first step for any crypto beginner is to get some fundamental knowledge. After that comes the next phase of staying up to date on the latest events and cryptoanalysis. Maybe then you’ll be ready to track and interpret the news every day. Eventually, you may want to find a strategic time to enter the crypto trading sphere. In the meantime, don’t let FOMO rule your decision-making.
How do stock market leaders and gurus feel about cryptos?
Some stock market veterans are totally against the concept of crypto. Famed Berkshire Hathaway CEO Warren Buffett has always been a staunch critic of Bitcoin. Buffett has earned the nickname the “Oracle of Omaha.” Some Wall Street analysts even treat his stock picks as if they’re Nostradamus’s prophecies for the modern world (metaphorically speaking, of course!).
A report by CNBC published in May discussed Buffett’s views on Bitcoin and the technology that powers it. Buffett has berated Bitcoin as “a gambling device” and “rat poison squared,” and he’s also said that some people use it for fraud. Charlie Munger, the vice chair of Berkshire Hathaway, also shared his opinion about trading in virtual currencies. The CNBC report went on to say that Munger feels “dementia” is fueling crypto trading.
On the other hand, Facebook (FB) CEO Mark Zuckerberg has tried hard to leverage the crypto wave. Facebook’s plans to launch its cryptocurrency, Libra, have faced a lot of headwinds. Initially, Facebook roped in many significant players, but things started falling apart when regulators flagged the project. It wasn’t long before many prominent members moved out of Zuckerberg’s crypto venture, starting with PayPal (PYPL). The exits of Mastercard and Visa followed PayPal’s decision to abandon Libra. Ideally, Zuckerberg’s idea for Libra’s design was that international assets would back it. That way, Zuckerberg could reach out to global audiences—sort of like Bitcoin.
Millennials and cryptocurrency
Many new age netizens and Millennials who are part of cyber communities might disagree with Buffett’s view on cryptocurrencies. A Forbes article in January 2019 talked in-depth about how cryptocurrencies are becoming common among Millennials. On the other hand, Cointelegraph quoted a Bankrate survey in the US to say that Generation Y is almost three times more keen than Generation X to invest in crypto. I guess it’s natural that people who are comfortable with modern tech would gradually be more inclined toward digital assets.
Generally used terms in the cryptocurrency realm
For a layperson, stock exchange terminologies might sound like Greek. Words such as “margin lending,” “yield curve,” “leverage,” “buybacks,” and “repo rates” could drive a person crazy with confusion. It’s the same case for someone who’s new to the digital domain. Cryptocurrencies aren’t very different from stocks. It’s just that stock markets have been functional for ages, whereas cryptocurrencies only started gaining momentum in 2008. The stock market crash in 2008 was a global tragedy, and in a way, it paved the way for the rise of Bitcoin and digital currencies. Keeping this mind, here’s a list of standard terms used in the crypto markets and what they mean for beginners.
What is cryptocurrency?
The name “cryptocurrency” says it all. It’s a virtual currency that’s in a cryptic format. Virtual currencies can act as a digital medium of exchange in a network. Cryptocurrencies work on a peer-to-peer transfer system. In this system, one user can send cryptocurrencies to another user directly through the Web. No intermediary parties take part in the transaction. An audit trail for all transactions forms part of the network, and all records are encrypted using private and public keys. There are no transaction fees or bank charges for cryptocurrencies. Due to the lack of mediators, the transaction is almost instantaneous. The data storage is in a decentralized form, using distributed ledger technology.
Now you might wonder, how does it derive value? Let’s be clear about this: cryptocurrencies have perceived value. A positive perception will increase the perceived value of a digital currency, and vice versa. Interestingly, it’s very similar to how stock prices are determined—a favorable impression can drive a stock up for the day.
Cryptocurrency: Perception versus reality
But why buy a cryptocurrency if it’s based on market perception—especially if it doesn’t have any physicality or tangibility to it? There are two main reasons. The first is that cryptocurrencies have enormous potential to generate monetary returns—way higher than stocks. There are also substantial risks involved (hence the word of advice given above). The second is that it can be used as an alternative currency for crypto-backed services. Yes, there are many instances in which service providers accept cryptocurrencies for goods and services. For example, PotCoin (POT) is a cryptocurrency used to buy legalized marijuana. PotCoin has a market cap of over $1 million and a maximum supply limit of 420 million coins. According to CoinMarketCap, the value of 1 PotCoin is $0.004779.
Did you know that people who owned Bitcoin 10–12 years ago felt it was useless? There are rumors that some ended up trading bitcoins for slices of pizza, while others bought illegal products from underground markets. If they had even a fraction of those bitcoins today, they could have owned the pizza place!
Where can I buy the cryptocurrency?
Don’t get too excited thinking about owning a pizza shop of your own using cryptocurrency. It’s better to stay grounded and focus on the fundamentals.
Like stocks, cryptocurrencies are tradeable on exchanges—crypto exchanges. Some famous crypto exchanges are BitForex, P2PB2B, Binance, Bittrex, and many more. With the emergence of global ventures, the list of exchanges could keep going. Each crypto exchange has a website and mobile apps for crypto trading. But that isn’t a cause for concern. It’s possible to transfer and store all your crypto holdings safely in your wallet—not your physical wallet, but a digital one that’s accessible from anywhere in the world. Crypto buying and selling rates are determined based on the volume of transactions and market perception. So theoretically, there’s the possibility of an aribitrage, or a rate difference between two exchanges. But in practice, the spread charged by the exchanges could negate the arbitrage opportunity.
A decentralized unregulated exchange
But who’s the overlord of the cryptocurrency realm? Who regulates and governs them? Who safeguards the investors? This is the part where you need to pay more attention. Regulatory oversight is one area in which cryptocurrency trading and stock trading are worlds apart. Stock exchanges have to function according to the guidance of the Securities and Exchange Commission and federal regulations.
National stock exchanges are typically located at the center of the business hubs somewhere within a country, but a crypto exchange could have an office anywhere in the world. A crypto exchange is generally set up by individuals as a venture into the crypto market. For instance, BitForex is headquartered in Hong Kong but registered in the Republic of Seychelles. It has offices in Germany, Estonia, Singapore, and Malaysia and clients all over the world.
Bakkt is the first regulated cryptocurrency exchange. It will support Bitcoin futures trading with the option of a cash settlement. Bakkt has backing by the ICE (Intercontinental Exchange). The ICE purchased NYSE Euronext for over $8 billion back in 2012, according to CNBC. Bakkt’s digital asset ecosystem portal hopes to attract more institutional investors to crypto futures trading.
How does a cryptocurrency raise funds?
Startups issue the majority of virtual currencies. The fundraising process is very similar to an IPO issuance in stock exchanges. But for cryptocurrencies, instead of an IPO, the process is called an ICO (initial coin offering). ICOs have quite a lot of similarities to crowdfunding. Investors funding an ICO receive crypto tokens in return (compared to shares in an IPO). The token issuer will deposit the cryptocurrencies in the investor’s wallet, and the wallet is secured using encryption. Without the decryption keys for online storage, the coins are locked away forever with absolutely no way to reclaim them. Unlike stock investments, cryptocurrency investments don’t provide investors with physical or tangible assets but digital assets. It’s the primary responsibility of the investor to carefully save passwords, encryption keys, and decryption keys.
How to decide if you should invest in an ICO
Your decision to invest in an ICO is a crucial one. A good ICO could fetch you a lot of money, but a poor choice could make you lose faith in cryptocurrencies. Let’s not forget that ICO scams are far too common. Limited governance makes it easy for people to launch their own cryptocurrencies. As a matter of fact, it’s effortless to create a digital currency. Almost every coder or developer could make one with online tools. But let’s not get off track.
During a share issuance, a company issues a red herring prospectus. This prospectus includes details about the company, its core business values, underwriters, issue price, and other pertinent information. In the case of an ICO, the startup issues a white paper. A white paper contains exhaustive information, such as the services backed by the cryptocurrency, the denomination, the fractions of the token, and details about coin supply. Reading the white paper and doing your due diligence is paramount. If you have even an iota of doubt, you should investigate it thoroughly before investing. If the doubt persists, stay away from the ICO. It’s the only way to ensure you’re safe and don’t get scammed.
Blockchain and cryptocurrencies
Blockchain is the technology that powers virtual currencies. Many people feel that the technology is synonymous with cryptocurrencies. However, in addition to cryptocurrencies, this technology has many practical applications for enterprise solutions as well. In my opinion, blockchain could be a potential disrupter among tech stocks in 2020. A blockchain network operates on the concept of a distributed ledger system, in which all transactions stored in a network are in an encrypted form. There are two types of blockchain networks—a private blockchain network and a public blockchain network. Both have different benefits in sectors such as e-commerce, healthcare, insurance, financial services, supply chain management, and other business verticals.
To summarize, cryptocurrencies are still evolving. Regulators in many countries are still figuring out how to safeguard crypto investors. Some countries are open to the idea of adopting cryptocurrencies, whereas others have banned them. Bitcoin is legal in the US, Canada, Australia, and some countries in the European Union, such as Germany, the United Kingdom, Belgium, and others. On the other hand, countries such as China, Russia, India, and some South American countries are against the use of Bitcoin.
This post is the first of a three-part series in which we’ll explore many more cryptocurrency-related concepts.