Crypto Currency Basics Overview
Table of contents
This guide will give you a basic overview of all the main aspects of the cryptocurrency space including Bitcoin and Blockchain technology.
What is a crypto coin?
- A virtual currency that is native to its own blockchain.
- Only a limited number of coins exist
- Used for transactions within its own blockchain.
Bitcoin, the original cryptocurrency, is the best example of a cryptocurrency coin. It exists as a unit of value on its own independent ledger.
Thousands of other cryptocurrencies exist including Litecoin, Ethereum and Ripple – all of which have different value propositions. Read more about Cryptocurencies.
Bitcoin (BTC) a unit of value ?
Bitcoin is seen as a store of value because it is a finite resource. The source code was released in 2008 by satoshi nakamoto, the creator of bitcoin, stipulates that no more than 21 million BTC can be “mined”. To-date 19 million have been. The closer “miners” get to 21 million, the longer it takes to create each new coin. This is known as “inelastic supply” meaning its supply is locked and does not change based on supply and demand. Read more about Bitcoin.
What is blockchain?
Blockchain is the technology followed by many cryptocurrencies to verify that a payee is the legitimate owner of the coin. It does this by keeping a ledger of each coins movements when being passed to a new owner. Each transaction is approved ensuring that movements meet the networks protocols. Read more about Blockchain.
BTC Decentralised System
Like the Australian dollar (USD), sterling and other currencies Bitcoin is a fiat currency, meaning it has no intrinsic value and its price moves in relation to supply and demand.
Unlike paper currencies, which are monitored by the worlds central banks to certify their authenticity BTC relies on a decentralised system of digital signatures and digital coins where all transactions are kept on the blockchain.
The system relies on miners, a collective of independent individuals who volunteer their own computing power (nodes) to monitor, review and approve transactions.
Being outside the current financial system and being limited to 21 million BTC means it cannot be debased by central bank policies or debt-fuelled spending by governments.
Some thoughts on the future of BTC
- Recently some major corporations have invested in BTC thus adding to its credibility. The demand from this sector has also pushed up the BTC price.
- If BTC became more widely accepted as a payments system this would also add to its credibility. For this activity to expand BTC will need smaller denominations to be readily available to facilitate everyday purchases. Just as there are 100 cents in each dollar so there are 100 million satoshis in each BTC. If Statoshis’ were to become more widely held and were priced in the marketplace this would enhance BTC’s position as a means of exchange.
As an example of how BTC is entering the payments space, Paypal has unveiled a feature called “checkout with crypto” in a bid to gain traction in this space. This feature allows customers to convert their crypto-currency holdings seamlessly into fiat currency at the checkout.
How to participate in the cryptocurrency space?
Like owning any asset, the owner is speculating, that in the future, the price of the item will rise.
You may wish to own a cryptocurrency for several reasons:
- Hold it as a source of wealth for the long term.
- Use it as a method of payment.
- Trade the item on an exchange for short term profit/loss.
If you decide to enter this space you should be aware of the following:
- Cryptocurrencies are highly volatile instruments that are subject to unpredictable swings in their price.it is difficult to determine or predict the exact causes of this volatility.
- It may be advisable to invest in several cryptocurrencies to spread your risk.
- It may be advisable to have a risk management strategy in place before you invest.
- Remember BTC is priced in us dollars (USD). When you buy and sell in Australian dollars (AUD) you are exposing yourself to currency exchange risk.
- Ensure that you deal with an established exchange, as they hold your asset on your behalf. See our Australian Exchanges Comparison Table to find one that meets your needs.
- Most financial advisers advise that owners commit only a small portion of their portfolio (say 2-3%) to cryptocurrencies.
- You must understand the tax implications of your transactions – See our Australian Bitcoin and cryptocurrency Tax Guide.
If you decide to go ahead the following may be helpful:
|Bitcoin (BTC)||A store of value||Limited to 21 million BTC & held on a decentralized ledger.|
|Ethereum (ETH)||Its key feature is enabling smart contracts||ETH is not a currency. Its blockchain network allows other developers to build applications using its features.|
|Ripple (XRP)||Designed to make processing real-time international transactions easier||Payments do not require clearance or real-time international centralized counter-party approval.|