If you’ve seen the “price” of “Bitcoin” recently, it may have piqued your interest enough to make you want to begin “trading” crypto currencies.
If this is the case, there are a number of things you need to understand.
Firstly, “crypto” currencies are NOT currencies at all. They’re stores of transactional data, much akin to a cheque or standing order. Because “Bitcoin” and all the coins DO NOT hold “value” in themselves, they can NEVER “compete” with the likes of the USD, GBP etc.
Secondly, “trading” crypto currencies is NOT regulated nor even legal in many countries. Many people have seen their harmful potential to be a money laundering mechanism, the general consensus is that retail / home “traders” have spotted their potential for speculative trades and have been pushing the price up ever since.
Thirdly, and most importantly, the “role” that “crypto” currencies play in the world is nowhere near what some people would think. The main predicator to the price of “Bitcoin” has been that it *could* become a currency in its own right. Since this is incorrect, the smart investors have been looking at what role it *could* play in the world. Provider-less peer-to-peer payments in any country seems to be the consensus.
This tutorial is going to explain the core value (if anything) for the various cryptocurrencies in the world, as well as ensuring that any individuals who may wish to “trade” these securities are properly informed before doing so.
Please remember that this is NOT financial or legal advice. If you wish to trade commodities, you need to seek professional support from a regulated advisor…
What Are Cryptocurrencies?
Crypto currencies are a new type of tradeable commodity, designed by developers for use on the “blockchain” database infrastructure.
Regardless of which pundit you listen to, they all agree that blockchain is the real star of the show. Thus, in order to understand the potential “value” crypto currencies have in the world, you must first appreciate how “blockchain” works.
The reason so many people have become excited about “Bitcoin”, and by virtue “blockchain”, is that it’s got all the hallmarks of the next “wave” of the Internet.
- Web 1.0 brought information “online”…
- Web 2.0 brought people “online” (social)…
- Web 3.0 should bring stuff “online” (Internet of Things)…
The ideal behind Web 3.0 has been a completely integrated system whereby many of the elements of your life will not just be completely automated, but work seamlessly alongside each other.
For example, you may be driving in your Tesla and receive an alert that your house’s boiler has turned off and is unable to be restarted. You’re given an option to send the data dump to your plumber so they not only can give you a specific quote but can also be called out t come and fix it.
Whilst of this is pretty much possible today, the main issue is lack of integration.
To join millions of connected “devices” together requires a central framework (language) through which every sensor, pulse and notification needs to be sent. In an environment not dissimilar to the early “personal computer” market (where there were 1,000’s of brands all touting their own software), it took a company with the scope of vision of Microsoft to bring it all together.
This is where “blockchain” is meant to lie.
“Blockchain” is a decentralized database, stored on 100’s or 1000’s of servers around the world. On its own, it is not that important (very similar to the “BitTorrent” protocol) – what is important is how it can be used.
Data today needs to be managed through a central provider. Whether you’re using a service such as Twitter or Facebook, or are managing your bank account. This is known as the “client/server” paradigm, which basically means that in order to manage ANY data on your system, it HAS to go through a central system.
The reason why this is problem is because of how it restricts data access & use to only what those services were built to manage. This has lead to something called “data siloing” where we have many sources of data, but not many ways to manage it all.
This is where “blockchain” comes in. Blockchain promises to be an infrastructure layer for data, so that it can be stored, shared and edited without the need for a central provider.
The way it does this is by splitting data into “chains” and “blocks”. A “database” will be the equivalent of a “chain” (which can store any type of data – files and raw XML/JSON), an the data within the chain is managed by adding “blocks” to it.
The importance of this is that if you have a sensor in your home, instead of it having to send that data to some API online (which would then beam the data to other services), it’s simply able to create its own “chain” in its blockchain database and then add “blocks” of new data to it whenever required.
Because “blockchain” is decentralized, any newly added data will be automatically shared with the 100’s or 1000’s of servers (known as “nodes”) in the respective blockchain network that it’s a part of.
Ultimately, this means that ANY data source is now able to add and edit its own data without having to rely on third party services.
The point where “crypto” currencies come in is that it’s often the case that this data needs to be encrypted (especially for personal data). As such, shortly after the “introduction” of blockchain in 2008, a Japanese developer created “Bitcoin” in 2009 as a way to store a “decentralized public ledger of financial transactions”.
In other words, the world’s first digital cheque book.
The problem for this is that storing financial information in ANY data repository has to be taken with as much care as possible… not least if the data is openly shared with 1000’s of servers. To solve this problem, the developer of Bitcoin designed an “encryption algorithm” which scrambles the data so that you cannot see it without the correct “decryption” token.
These tokens were called “coins”, which gave rise to the idea that crypto “currencies” are currencies (they are not). This is important…
How Do They Have A Price?
The most important point to consider about “crypto” currencies is that their “prices” have been allocated by the market. The market – in this case – is a secondary market of sellers who are trying to “profit” from the fluctuating price of each “coin”.
The reality is that “crypto” coins are not coins at all, but decryption tokens.
The “price”allocated to these tokens should be based on the level of transaction they can facilitate. For example, if “Bitcoin” gave us the opportunity to deal with experts in China (where we couldn’t before), the “value” of each “coin” would be representative of the value of the products/services derived from those deals.
Unfortunately, there is no basis for the current “price” of “Bitcoin” apart from the speculation that it will someday “replace the Internet”. This is almost certainly never going to happen, as its ability to “replace government issued money” will not occur either.
In fact, one of the biggest misunderstandings underpinning the whole “crypto” fad has been due to its “real world” application. Most people who’ve even bothered to look into the technology behind the system have been duped into thinking the “currencies” will replace many of the most powerful fiat currencies of the world (namely the USD, GBP, EUR).
The problem is that “Bitcoin” etc will NOT replace fiat currencies. In fact, they need fiat in order to actually do anything. If you want to trade with someone in China, you have to buy a USD equivalent of “Bitcoin” to send him. Where does that price for each “Bitcoin” come from? This is the question most institutional investors have a problem with.
Ultimately, the big problem with “Bitcoin” and the like is that – at present – NONE of them hold value. Whilst many critics would suggest that “paper” currency doesn’t hold value either, the vital difference is that fiat currency is backed by real world assets (governments, military power, economic influence etc)… NONE of the “crypto” currencies can claim this.
As such, the “coins” themselves are said to have very little intrinsic value – the predicator of a price in a marketplace. The hype surrounding the coins is very similar to that surrounding many tech “IPO’s” when they launch. The difference is that at least tech stocks (mostly) have a balance sheet to compare their price against. Crypto currencies? Not so much.
How To Trade Them…
If you’re sitting on “Bitcoin”, or are looking to trade it, the way it works is actually very simple.
Firstly, we need to be clear that a “bitcoin” is a file. There’s no physical exchange of goods – all that’s happening is a virtual exchange which happens with the transfer of a file from one party to another. That’s it.
As such, the most important thing to consider when “trading” crypto currency is to use a “digital asset exchange” which is not just open but reliable. The most popular currently is “Coinbase”, although there are others, most notably “Gemini” by the Winkelvoss twins (of Facebook fame).
To “trade” with one of these exchanges, you need to first open an account there. With Coinbase, you will need to validate your identity. I’m not sure about the others.
Once you have an account, you need to transfer your Bitcoin files into the exchange’s wallet. This allows you to “sell” the coins, or buy more. The price you receive for your coins is going to be determined by the market, so you’ll need to ensure you have double-checked the price to get the best trade.
From here, it’s just a case of issuing buy or sell orders to the exchange, who’ll automatically transfer your coins, or deposit money into your account, depending on which type of transaction you’ve undertaken.