by Des Nnochiri
Invented in 2008 by the enigmatic Satoshi Nakamoto, partly in response to the global financial crises, cryptocurrency has found its way into the public consciousness through stories of its wildly fluctuating value, its potential to harness the power of the dark web in an anonymous way, and urban myths of celebrities who had been paid in cryptocurrency, only to discover years later the payment is now worth a fortune.
What is Cryptocurrency?
No crash course on cryptocurrency would be complete without first discussing the technology which underpins it – block chain.
Blockchain allows for secure exchanges of information between two or more parties without the need for a centralized organization (such as a bank) to authorize the process. Each time a new transaction is carried out, it creates a new block of data in a public ledger, containing encrypted information about the nature of the exchange, the date and time, public and private keys, and something called the hash.
Each time a new block of data is created, it’s added to the preceding one, creating a chain.
The hash is an alphanumeric sequence which contains encoded information about the present and previous transactions. Any manipulation of the hash by an outside agent results in a severe distortion of the sequence, which would be immediately flagged as an error.
For example, look below and see the impact simply changing a single character from upper to lowercase, or a letter to a number, has on the hash sequence.
It’s this transparency which provides blockchain technology with the security usually provided by the centralized organization and makes information exchanges, such as cryptocurrency payments, possible.
How Does a Cryptocurrency Transaction Work?
In practice, cryptocurrency payments operate in much the same way as any other financial exchange. When an agent wishes to receive reimbursement in cryptocurrency, they first send a payment request to the person making the purchase.
The system will then check the payer’s cryptocurrency wallet for available funds and confirm which of the various brands (Bitcoin, Ethereum, etc.) of finance they wish to pay with.
Once the funds and the payment have been confirmed, the record of the payment becomes a new block, and is added to the chain for those two users. Once the payment has been authorized and completed, it cannot be amended, as it would mean the whole blockchain would have to be altered. If the payer requires a refund for any reason, it will have to be carried out as new transaction between them and the other party.
Cryptocurrency payments do not, therefore, have the safety nets one may expect when using a traditional payment service such as VISA or PayPal.
What About Trading Cryptocurrency?
The easiest and safest method of trading cryptocurrency is through a reputable exchange site. Using a trusted exchange site such as Coinbase or Gemini Exchange ensures your transactions are secure and protected.
Once you have set up an account, all you need to do is select how much of your cryptocurrency you are looking to sell and at what price. Once your sale request has been submitted, the exchange will find a buyer who is willing to meet your terms and complete the transaction on your behalf.
You will see the balance leave your wallet and be replaced by the currency you have opted to sell it for – traditional or cryptocurrency – minus the exchange’s commission.
A less reliable way of selling your cryptocurrency is through forums, where enthusiasts congregate and negotiate deals on their own terms. While this has the benefit of allowing you to handle your own business, it lacks the security of using an exchange site. Therefore, if you do choose this avenue for trading your cryptocurrency, make sure you only deal with sellers who have several positive references from previous transactions.
And don’t be lured in by all those clickbait articles at the bottom of webpages, promising you’ll make millions in your sleep. You won’t.
Is it Safe?
By its very name, you would expect it to be, and most cryptocurrency has several layers of security which help ensure your money is as secure as it can be.
The public/private key system means one of the keys can only be decrypted by the other, making it highly unlikely that your funds will be compromised through this route. In fact, the main threat to you losing the currency in your wallet is yourself. If you lose your private key, there is no comeback and your money is gone. The transparency of the public ledger and the difficulty in manipulating the hash sequence also serves to make cryptocurrency more secure.
Carelessness aside, the biggest threat to cryptocurrency comes from hackers. They may attempt a phishing campaign to gather data on a potential victim or use malware to access their private keys. There is also the threat of a nation state attack, such as the ones perpetrated by the North Korea-linked Lazarus Group since 2009, although these have tended to target large corporations rather than individuals.
And remember, with cryptocurrency, there is no insurance against losses by cyber crime such as a traditional bank would provide. If your cryptocurrency is stolen, there’s very little comeback in the present legal framework.
Is it the Future?
Many supporters of cryptocurrency will tell you it absolutely is the future and the model which all financial transactions should use due to its security, speed, ease of use, and the elimination of centralized authority.
However, many financial experts caution against its volatility, the ease in which it enables nefarious activities (such as the now defunct Silk Road marketplace) in the dark web to be facilitated, and the potential security risks, not from the currency itself, but the exchanges where transactions are carried out.
The lack of centralized authority also poses problems for the value of cryptocurrency. As the finance is only of value to those using it, the currency could quite easily become as worthless as a bad stock option, practically overnight.
There’s little doubt of a bright future for block chain technology. However, it’s less clear if cryptocurrency will turn out to be the future of finance some claim it to be or simply a passing fad to be speculated upon to make a quick buck (or Bitcoin, or Ethereum, or Litecoin…).