Bitcoin, Crypto Currencies and Blockchain are some of the hottest topics currently. Investors and Traders are making millions and Venture Capitalists are hugely excited by the technology.
While at first glance these technologies might appear complex, when presented in small pieces, Crypto Currencies, like many of the best inventions, are surprisingly simple.
In this 8 part “Introduction to Crypto” series, we’re going break down and explain Crypto Currencies in easy to digest articles. Where there is more detail, we’ve split that out into separate articles to try and keep things as simple as possible.
So let’s dive in…
What is Bitcoin and crypto currency?
Bitcoin is the electronic equivalent of cash.
You can store Bitcoin in an electronic wallet, either locally on your phone or computer, or in the cloud using a web wallet, such as the wallet Solidi provides. Bitcoin is the first crypto currency. Since its invention in 2008, many alternative currencies (altcoins) have been created , all with slightly different features.
You can use Bitcoin to pay for things in the same way you’d use cash. Unlike cash, bitcoin is digital, so you can send it to anyone in the world, instantly and at virtually no cost. Like all currencies, it has its own value – it’s not tied 1:1 with British Pounds, Euros or Dollars – and that value can go up and down.
Like cash bitcoin doesn’t require a centralised bank or a credit card company to process transactions. Instead it uses an independent network of transaction processors (known as ‘miners’) to validate and process transactions (article on mining coming soon). This network is distributed with no centralised entity in control making it very reliable.
As you can see from the diagram above, a failure in the distributed network (3rd diagram) would have little consequence for the other participants when compared to centralised and even decentralised. For more information on Bitcoin, see our “What is Bitcoin?” article.
Alternative crypto currencies, known as “Altcoins” can do many different things – some are simply other currencies, but other allow for programmable features such as “Smart Contracts” For more information on Altcoins see our articles “What is an Altcoin?” and “What coins to invest in”.
What are Initial Coin Offerings (ICOs)?
Initial Coin Offerings (ICOs) are similar to traditional financial markets Initial Public Offerings (IPOs), where by a company offers its stocks and shares for sale to investors. In an ICO however, rather than selling stocks and shares, the company raises funds by selling its crypto token to investors. These tokens are usually designed to be used as part of a decentralised network (like Bitcoin), either immediately or at some point in the future. Sometimes they come with voting rights, new features on the platform they run on etc. For more information on ICOs, see our “What is an Initial Coin Offering (ICO)?”.
Where does the currency of a crypto currency come from?
This depends on the crypto currency. In Bitcoin, currency is created every 10 minutes by “mining”. In other crypto currencies, the units of currency may already exist (sometimes called a ‘pre-mine’) or have other ways of being created. This is a complex subject, which will be addressed in our mining article.
Who controls Bitcoin and other crypto currencies?
In short, there is no central controlling authority.
The day to day control / running of Bitcoin is performed by the miners – anyone can become a miner, there is no entry requirements or need to gain ‘permission’ to be a miner. Other crypto currencies operating similarly.
The rules for how the bitcoin software works were laid down in 2008 in the Bitcoin Whitepaper and the system has operated based on these rules ever since. The Bitcoin Core group maintain the software that runs Bitcoin and propose changes to the rules, but actually changing them requires the agreement of all the miners. Thus there is no central controlling authority and instead bitcoin runs by consensus.
What can I do with a Crypto Currency?
Some are useful for paying for things, just like cash. Unlike the traditional financial sector, crypto enables you to easily pay person to person by simply tapping. You don’t need to swap financially sensitive information such as bank details and then wait for hours (in the UK) or days (Europe, US, rest of world) for a payment to arrive. Additionally, crypto currencies are significantly cheaper to take payments from than Credit Cards, so for businesses they are ideal alternatives. Examples of crypto currencies for making payments would be Bitcoin, Bitcoin Cash, Litecoin and others.
Many are useful for protecting privacy. If you want to donate to a charity, a political party or pay for a medical procedure and ensure your privacy, crypto currencies with strong privacy focus are idea for this. This is particularly relevant with the rise of things such as OpenBanking which risk completely removing all financial privacy.
Many are used simply for investing. The technology (blockchain) underpinning crypto currencies is so revolutionary that many people buy crypto currencies not for their value now, but for their expected value in the future.
As a better bank. Many are investigating crypto currencies as a genuinely better alternative to banking. Smart Contracts, Timelocking, Multisig, Atomic Transactions and many other technologies, enable crypto currencies to perform financial tasks that the traditional banking sector cannot. This technology is like the web and email in 1994. Like the web and email revolutionised the communication sector, crypto and blockchain is going to revolutionise the financial sector over the coming decade.
And of course buying drugs. Like all great technologies, crypto currencies are not immune for abuse. But despite what you will read about in the press, crypto is still in second place behind the United States dollar and the traditional banking system (link to HSBC) as the drug cartels financial system of choice.
How can I get crypto currencies?
In the UK the easiest and cheapest way to purchase crypto currency is by bank transfer. Credit card options are available, but you will usually pay 3% to 5% more this way.
Solidi is one of the easiest places in the UK to get started and is rated 5 stars on Trustpilot. Alternatives include Bittylicious and QuickBitcoin. See our “How to get Crypto Currencies in the UK” article for a full rundown of how and where to purchase.
This is a big topic, so we’re in the process of writing a separate article on this – subscribe to our blog for updates.
So now you know the basics of Bitcoin, Altcoins and ICOs. You know what crypto can be used for and where to buy it. Ready to jump in? Then get started at Solidi.
Want to know more? Read our next article for a technical overview of Bitcoin and how it works. Or go straight to the third article on Altcoins (Alternative Coins).