What is cryptocurrency and why does it matter?

Getting Started

A cryptocurrency is a digital form of exchange that uses cryptography (encrypted code) to create units of the currency (coins) and carry out secure transactions. The encryption allows cryptocurrencies to work as a virtual store of value that’s practically impossible to counterfeit.

Cryptocurrencies are built on a technology known as the blockchain (or distributed ledger technology), where coins that are issued or used in transactions are approved by a peer-to-peer network rather than a centralised authority, like a central bank.

Cryptocurrency owners keep their digital coins in an encrypted wallet that they have control over – but it’s not attached to their physical identity. This affords cryptocurrency users a greater level of privacy than they get from card payments, which require names and billing addresses. A cryptocurrency uses the decentralised open ledger - the blockchain - to verify and publicly record all transactions that occur on its network. This ensures that all parties have the correct balance of the currency and that all transactions are genuine.

As cryptocurrencies become more popular in the business world, it's likely that more ways to use them will spring up, revolutionising the way we transact. Lots of businesses and individuals are already getting into cryptocurrencies - total cryptocurrency market capitalisation increased from $17.7 billion at the beginning of 2017 to over $300 billion in March 2018 - and dominating the landscape are two of the most popular cryptocurrencies: Bitcoin and Ethereum.

What is Bitcoin?
Bitcoin was the first cryptocurrency on the market. It’s now immensely popular and has succeeded due to its ease of use, its compatibility with online payments thanks to the sheer volume of merchants accepting the currency, and the growing number of eager investors.

What is Bitcoin used for?
Bitcoin is used for all sorts of online transactions, whether you want to buy a home or just a hamburger. Alternatively, you can just buy and sell your Bitcoins, depending on how much wealth you think you can amass as the market value changes. In 2017, a single Bitcoin was priced at $19,000, up from the previous year’s valuation of $1,000. With such a huge surge in pricing in its recent history, Bitcoin is likely to continue as the investor's crypto-coin of choice.

What is Ethereum?
Ethereum is a cryptocurrency platform that investors are taking very seriously. It’s grown rapidly over the past two years to forty times its original value.

What is Ethereum used for?
While Ether is the currency part of the Ethereum ecosystem, Ethereum itself is a Blockchain platform on which people can build applications, like ‘smart contracts’ – secure, self-executing agreements that don’t need third party servers or clouds to operate. Ether is used to pay for, or ‘power’, these activities, and so is traded as a currency as well as a utility.

Ethereum was the first platform in the market that enabled other developers to build on its Blockchain. This means people can use the Ethereum platform to create their own cryptocurrency, which is how many new crypto-coins started out. These features make Ethereum more than just a cryptocurrency, giving it the potential to far surpass its current value.

Why cryptocurrencies matter…to small businesses

For small businesses that embrace cryptocurrencies in their online transactions, it can change their business prospects for the better, from lowering business costs in the long run to expanding their customer base dramatically.

1. Low transaction costs
Cryptocurrencies have a very low transaction fee since there is no third party involved. In contrast, businesses that accept credit cards often require an intermediary service to process a payment. As a result, they’re charged fees for processing, equipment, and setup and monthly costs for the service.

2. Wide range of payment options
A wider range of payment options attracts more customers, so if a business decides to accept cryptocurrencies, it’s capable of increasing its customer base.

Some 187 online stores already accept Bitcoin. These businesses are reaching new customers through early adoption, particularly those that would like to use cryptocurrencies as their main mode of transacting but don’t currently have many options.

3. Reduced money to account time
Cryptocurrency transactions are fast. It takes approximately ten minutes for Bitcoin miners to process and verify a transaction from one individual’s wallet to another. By comparison, card transactions take roughly 2-3 days.

4. Resistance to fraud
Once registered on the Blockchain, a payment is recorded permanently. Not only are these transactions secure, but each user who comes into contact with the currency is identifiable by a string of letters and numbers known as a public key. This makes cryptocurrencies safer than traditional coins and notes while preserving each user’s privacy.

5. Reduced bank account fees
Even when used domestically, cryptocurrencies have lower transaction fees than other digital currency sources. This is particularly helpful for small businesses, who face numerous charges by offering credit card payments on small purchases.

6. Access to a global currency
Close to 2.2 billion people with mobile phones and an internet connection do not have access to formal banking facilities. These people can easily access cryptocurrency since they are purely online-based, providing them with a realistic alternative when traditional infrastructure is missing.

7. Prevents identity theft
Cryptocurrencies operate on a “push” mechanism that allows holders to send exact funds to a merchant with no further information. Credit cards, on the other hand, operate on a pull mechanism where the vendor initiates payments and pulls the designated amount from the account.

Not only does this limit the opportunity for theft of personal and financial details, it transfers the control and duty of trust to the buyer.

8. More control over the money
Cryptocurrencies are managed by their network and not any central authority. It uses a peer-to-peer technology, so it’s the companies or individuals who own the governing computing power and participate in cryptocurrency mining that ultimately oversee the currency, ensuring that control is distributed.

Why cryptocurrencies matter…to individuals

Cryptocurrencies offer a number of opportunities to individuals, which they don’t get from traditional payments and investments, to improve both their everyday transactions and long-term saving.

1. It’s a chance to make money
Individuals can make money by buying and storing cryptocurrency, and exchanging it for regular currencies, such as dollars, pounds or euros, when the potential gains are highest. Bitcoin, in particular, allows users to purchase fractions of a coin, making them a more affordable investment.

Of course, the future value of cryptocurrency is uncertain; the value of your investment can go down as well as up, so there is risk involved.

2. The opportunity for quick returns on investment
In 2017, cryptocurrencies outperformed the global stock market by over 3,300%. This means cryptocurrencies offer a remarkable investment vehicle for fast growth, however their volatility raises questions about how sustained that growth will be.

3. An easy, low-cost means of transaction
It’s not a costly or complex process to exchange cryptocurrency. All you need to complete a successful transaction is a basic knowledge of cryptocurrency exchange platforms and an internet connection.

4. A way to avoid identity theft
Since recipients and senders of cryptocurrency don’t use credit cards as a form of money transfer, there’s no need to provide alternative authentication, so you have control over what you share.

5. The ability to send money quickly and easily
Using a money transfer company, like Western Union for example, dramatically reduces the final amount received by the person you’re sending funds to. It can cost as much as £20 to send £100 to many South American and African countries. Sending cryptocurrencies from one wallet to another, anywhere in the world, occurs at a fraction of the cost and can be received in minutes.

What to watch out for…

While offering many financial and structural solutions to businesses and individuals, it’s important to remember there are few factors that still hold cryptocurrencies back from large-scale adoption.

1. The unregulated arena
The fact that cryptocurrencies are unregulated is one of the main reasons that greater investment and adoption hasn’t yet occurred. While the blockchain is designed to be a secure network, it’s still possible for fraud to take place. And since cryptocurrencies are unregulated, defrauded individuals may not receive compensation or see any legal consequence for the perpetrators.

2. Market volatility
Since cryptocurrencies are relatively new, they are very volatile. For example, individual Bitcoins were valued at nearly $20,000 towards the end of 2017 but have since dropped to under $9,000. This is one of the main reasons mass adoption is taking longer than expected.

3. Poor background research
Again, since cryptocurrencies are quite new to the market, there’s a lack of general knowledge around how to use them, which can make them susceptible to opportunist hackers. Since cryptocurrencies are built on fairly complex technology, users need to be familiar with how they work before investing, to ensure their investment is secure.

Also, many people rush to invest in alternative coins and Initial Coin Offerings (ICOs) without doing the necessary research beforehand. As with any other form of investment, it’s a good idea to examine the company’s vision, its management team, the solutions it offers to the market and its ability to adapt to future technologies.

4. Not widely accepted
While more companies are waking up to the advantages of offering cryptocurrency payment options, these are still in the minority, making cryptocurrencies largely impractical for daily use. This is why, for the moment, cryptocurrency is used largely as a commodity by investors, to store value as they would with gold rather than use it as a medium of exchange.

Despite a few teething problems in their early stages, cryptocurrencies look here to stay and have the potential to change the world of personal and global finance. Investment expert Michael Novogratz predicts that by the end of 2018 one Bitcoin will reach a value of $40,000, and the market capitalisation of all cryptocurrencies will be worth $2 trillion. The road ahead for cryptocurrencies is uncertain, but as adoption continues to spread, they present an exciting investment opportunity.

*Bio
Boomy Tokan, Cryptocurrency Consultant

Boomy has over 20 years of experience in the start-up arena, which includes supporting entrepreneurs with business planning, raising seed capital and setting strategic objectives. He has several years of experience as a business workshop creator and has written numerous books on the subject of starting a business. Boomy has a BA in Business and Finance from the University of Greenwich and serves over 50,000 students on his Udemy.com page. He has also worked as a lecturer at City University and as a Business Advisor at Portobello Business Centre London.
Boomy owns small amounts of Bitcoin and other cryptocurrencies and is very much involved in the space. He regularly holds live ‘Meetups’ and workshops and is consulted by numerous cryptocurrency traders for his expertise. Boomy’s personal goal? “To empower SMEs to get involved in this dynamic cryptocurrency movement”.*

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