Bitcoin and Cryptocurrencies: An introduction


 

 

 

 

 

 

 

By Avinash Shenoy, UK


In response to reader feedback to previous articles, this article aims to introduce cryptocurrencies in a simple way.

What is a Cryptocurrency?

Bitcoin and the other 1,100+ Coins listed on the site Cryptocurrency Market Capitalizations are digital forms of currency known as a cryptocurrency. They have been created for the same purpose as the currency used in the physical world, e.g. $, £, INR, that is, as a medium of exchange.

Where they differ from regular currency is that they are designed to use the principles of cryptography to exchange information over the internet to enable secure transactions, and to create new currency which are commonly called coins.

In 2009 Bitcoin was the first cryptocurrency created and is by far the most widely known. The other Coins that came after it is generally called Altcoins as they are Bitcoin Alternatives due to the fact that they either claim to improve upon or change a Bitcoin feature.

An important feature of a cryptocurrency is that they are Decentralised. This means that to use them there is no central authority such as a Bank involved. Also, no central authority such as a Government controls a cryptocurrency.
All cryptocurrencies run on a public distributed ledger system called the Blockchain, which keeps a record of which coins have been spent and which have not. All transactions on the Blockchain are recorded in chronological order and made publicly known.

In addition, the Blockchain solves what is known as the double spending problem. Because a cryptocurrency is digital you could make multiple copies and spend it many times. However, because every transaction is recorded on every computer on the network across the globe it ensures that this problem is avoided.

It is important to note that due to its Decentralised nature, cryptocurrencies are largely unregulated. This has been welcomed and is considered the future by many. However, it does have a downside in the form of scams, tax evasion, and money laundering. With this in mind, proposals for the regulation of matters surrounding the technology by various nations such as India and Abu Dhabi have recently featured in the news after Japan’s recent success. A comprehensive report was recently released by Axon Partners in conjunction with ForkLog Consulting which details the state of global cryptocurrency Regulation. 

In other news countries such as Dubai and Russia have gone down the path to creating their own Government issued cryptocurrencies.

For a visual history of the two most well-known and important cryptocurrencies, follow these links: Bitcoin and Ethereum.

This is an Infographic which compares features of the most well-known cryptocurrencies.


The Cryptocurrency and Traditional Market Exchanges

Traditional Markets primarily deal with forex, stocks, futures, bonds, and commodities.

Cryptocurrencies have also created their own markets and the most comparable market to this one can be said to be the forex. However, there is still debate among regulators about what they actually are.


Description of Traditional Markets:


Please note: to run these accounts you would usually need the services of a broker and in addition to the minimum deposits there would be an associated fee with them.


Comparison of Cryptocurrency and Traditional Markets:


Blockchain technology can always be applied to in the traditional markets. For a visual on how this technology can impact the stock market, this Infographic provides a useful insight.


What’s next?

This article has covered the basics - What a Cryptocurrency is and how it compares to a Traditional Market.
The article to follow soon intends to explore areas like how to get, store and look at ways to trade cryptocurrencies.

 

 

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Comment on this article

  • Ben, Mangalore

    Sat, Nov 11 2017

    In very very simple sense Bitcoin is nothing but a payment wallet... just like PAYTM.

    DisAgree [5] Agree Reply Report Abuse

  • Avinash Shenoy, UK

    Sat, Nov 11 2017

    Dear Ben,

    It is definitely an interesting topic for discussion.

    I found the following article very informative on the subject:
    https://medium.com/krown/the-difference-between-paytm-and-bitcoin-a9084163a76e

    Best Wishes,
    Avinash

    DisAgree Agree [7] Reply Report Abuse

  • Ben, Mangalore

    Sun, Nov 12 2017

    I agree that both are different companies, scope, way of doing things etc.. but as I understand both of these don't have any existence unless there is any recognized currency like USD INR EURO.. etc., To start trade on these both you must spend or covert your legal currency.

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  • Avinash Shenoy, UK

    Sun, Nov 12 2017

    Thank you for the interesting observation.

    DisAgree Agree Report Abuse

  • khalid, mangalore

    Sat, Nov 11 2017

    Dear Sir,

    Can you clarify on One-coin concept and risk associated ; there is lot debate is when it is launched to market the prices will go up

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  • Avinash Shenoy, UK

    Sat, Nov 11 2017

    Dear Khalid,

    OneCoin has been shown to be a Ponzi/Pyramid Scheme and is currently being clamped down by many Governments across the world (Including India).
    Due to the unregulated nature of the cryptocurrency marketplace, these type of scams can operate with impunity and unfortunately, people can lose a great deal of money.

    Here is an article on the world of Cryptocurrencies and Ponzi schemes:
    https://www.theatlantic.com/technology/archive/2017/05/cryptocurrency-ponzi-schemes/528624/

    Here are a few important links on this topic which mentions OneCoin Crackdown or warnings by various countries:
    https://cointelegraph.com/news/onecoin-is-much-ponzi-indian-police-chief-confirms-clear-ponzi-scheme
    https://www.coindesk.com/german-regulators-order-onecoin-dismantle-trading-system/
    https://news.bitcoin.com/nigerian-sec-associates-shady-mlm-schemes-like-onecoin-with-bitcoin/

    Interestingly another coin that is on the cryptocurrency communities radar as a potential Ponzi scheme is BitConnect and here is why:
    https://steemit.com/scam/@thegrinder/the-bitconnect-scam-exposed

    I hope this helps!

    Best Regards,
    Avinash

    DisAgree Agree [6] Reply Report Abuse

  • Kareem, Manipal

    Sat, Nov 11 2017

    Thank you Sir Avinash for throwing light on these aspects. I found the links about the Tulip bubble truly interesting (was never aware of such a scenario). Also the link from forbes totally cleared my confusion about the intrinsic value with even established economists like Paul Krugman being sceptics about this.
    I think we have to really reflect whether bitcoin is a mere fad for speculators looking to make quick bucks and thereby reflects the skyrocketing value; without any true intrinsic value and backing from any regulator/government I am really sceptical about the future of bitcoin as a cryptocurrency. It would be amazing as a technology with unlimited and unrestricted uses, but not so much as a currency.
    Would be eagerly waiting for your next article. Thank you for considering my inputs.

    DisAgree Agree [6] Reply Report Abuse

  • Avinash Shenoy, UK

    Sat, Nov 11 2017

    I am glad the links were helpful in answering your questions. Thank you again for providing further feedback.

    DisAgree [1] Agree [1] Reply Report Abuse

  • Nagesh, Mangalore

    Fri, Nov 10 2017

    Very nice article. Easy to understand with good external links. I look forward to reading the next part.

    DisAgree Agree [4] Reply Report Abuse

  • Avinash Shenoy, UK

    Sat, Nov 11 2017

    Dear Nagesh,

    Thank you for your kind words.

    Best Regards
    Avinash

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  • Sandesh, Dubai

    Fri, Nov 10 2017

    Is now a good time to buy XMR ? What you recommend bitcoin,eth or monero

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  • Avinash Shenoy, UK

    Fri, Nov 10 2017

    Dear Sandesh,

    I normally stay away from giving investment advice due to the high volatility and unregulated nature of cryptocurrencies.

    What I can say is, that because Segwit2x has been cancelled I would be very hesitant to make any major investment decisions in any of the cryptocurrencies until a healthy correction has taken place. This is the latest news regarding the Segwit2x cancellation and the impact it has had on Bitcoin Price: https://www.cnbc.com/2017/11/10/bitcoin-falls-after-developers-call-off-segwit2x-bitcoin-cash-surges.html

    The above article by cnbc.com mentions ‘Bitcoin Cash’ appreciating in value. A lot of my friends have messaged me today regarding this currency, asking whether they should invest immediately.
    My observation is as follows: When Bitcoin (BTC) starts falling or in other words ‘correcting’, it usually tends to drag all the other Altcoins (e.g. ETH, DASH, XMR, LTC, etc) down with it. Bitcoin Cash is not necessarily an exception to this rule either.

    Therefore, until the market has settled and until the pattern becomes clearer, caution is needed in any investment decision one makes.

    Hope this helps you in making an informed decision!

    Best Regards,
    Avinash

    DisAgree Agree [5] Reply Report Abuse

  • sense, Mangalore

    Fri, Nov 10 2017

    Block chain is the way to go ..I am not sure how much cryptocurrencies like block chain will be accepted by govts world wide. .It is believed that a lot of black money is already pumped into buying bitcoins.
    .but the underlying block chain technology can go a long way in preventing corruption and changing the way value is transacted.. Block chain can also be used as general ledger of transactions .be it money ,land or any other transaction.
    I am sure local govts will have their own version of crypto currencies which binds with local laws and regulations and is in sync with the broader vision of the country. Crypto currencies will change the way banking is done ..as the bank which is intermediary in our current transactions will become redundant when currencies are adapted world wide.

    DisAgree Agree [2] Reply Report Abuse

  • Avinash Shenoy, UK

    Fri, Nov 10 2017

    Dear Sense,

    I agree with the important observations you have made.
    I believe there are already Blockchain projects underway involving Land Registry and other interesting and innovative areas as you rightly mentioned.

    Thanks again,
    Avinash

    DisAgree Agree [2] Reply Report Abuse

  • Vincent Desouza, Mangalore

    Fri, Nov 10 2017

    Nice informative article with links to other great articles too. Thanks for sharing your knowledge

    DisAgree Agree [7] Reply Report Abuse

  • Avinash Shenoy, UK

    Fri, Nov 10 2017

    Dear Mr Desouza,

    Your feedback is much appreciated, thank you.

    Best Regards,
    Avinash

    DisAgree Agree [5] Reply Report Abuse

  • Kareem, Manipal

    Fri, Nov 10 2017

    Always a pleasure to read your well researched articles Mr Avinash. Also, Thank you for the links to the infographics. I have a few doubts about cryptocurrencies which i dont seem to be able to clear. What creates the underlying value for the cryptocurrency? Its price is merely determined by demand? (Can it not be compared to value of diamonds, they are the commonest gemstones on earth, but because their supply is curtailed by a monopoly , the price of diamond is controlled, a day may come in future when alternate methods to mine/make diamonds in a economically feasible way may be discovered and it will burst the diamond value bubble). Similarly, cryptocurrencies like bitcoin can be currently mined but are not economically feasible to do so. Is there any underlying value which provides intrinisic value to the cryptocurrency? or is it just a bubble created by demand?

    DisAgree Agree [9] Reply Report Abuse

  • Avinash Shenoy, UK

    Fri, Nov 10 2017

    Dear Kareem Sir,

    Thank you for your professional feedback and the highly relevant question.

    I totally agree with the comparison of Cryptocurrencies to Diamonds mentioned by you, which I feel is a perfect example.

    Obviously, the price of the asset is fuelled by the public perception, and therefore affects the demand side. Equally, the supply side is also a significant factor and is used as a tool in this unregulated market to fuel runaway speculation.

    Taking Bitcoin as our example, because only 21 Million will ever be mined, with estimates suggesting 99% by 2032 and the final 1% by 2140. This has resulted in a great deal of hoarding, which has made it rare and illiquid and has seen the runaway pricing based upon speculative price projections. It is very much comparable to the ‘Tulip Bubble Mania and Crash’ of 1636-1637 (http://www.thebubblebubble.com/tulip-mania).

    The question of intrinsic value surrounding cryptocurrencies is one that has caused great debate in various financial and technological communities. I found the following article by Forbes to be very informative: https://www.forbes.com/sites/jasonbloomberg/2017/06/26/what-is-bitcoins-elusive-intrinsic-value/#3899f51b7194

    I would like to acknowledge here that your feedback has inspired me to incorporate this subject into my next article on this topic.

    Best Regards,
    Avinash

    DisAgree Agree [8] Reply Report Abuse


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