“If the cryptocurrency market overall or a digital asset is solving a problem, it’s going to drive some value“
Crypto- currencies have been all the buzz lately that I felt I had to get my hands dirty in research just so I can educate myself on this speculative investment vehicle. I know I am coming in late in the day, but hey, better late than never.
To understand crypto-currencies and the lingo around crypto trading it is important to get some definitions out of the way. Let’s call this introduction to Cryptocurrency 101. As time allows, I will delve deeper into the mechanics of trading in it.
To offer some perspective, according to a report by MarketWatch.com dated December 2021, the Crypto market is projected for a Compounded Annual Growth Rate of 30.32% by 2030. The Global Cryptocurrency market is poised to grow from USD. 842M in December 2020 to more than USD. 3.4743B by 2030. My curiosity is definitely piqued by this.
Crypto currencies are digital assets. Which means that they can only be stored online. They are unlike conventional currencies which are physical in nature i.e., notes and coins. The security comfort for crypto currencies, is the blockchain technology, which in conventional currencies is provided by the issuing Central Banks. The notes and coins will have security features
Crypto currency relies on block-chain technology. Wikipedia defines a block chain as a growing list of records called blocks, that are linked together using cryptography.
It further describes that each block contains information about the block prior to it forming a chain. Block chains are therefore resistant to modification of their data because once recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.
Cryptography is simply described as a secure communication, where a message is encrypted and to decode you would need some type of “secret key”. This is important to be aware of because in the event you lose the secret key you cannot access your currency. Loosely translated, if say you had your valuables secured in a vault, and you are the only one with the key. With no spare or master key, if you lost that it you would need to go to great lengths to access your valuables. In the case of cryptos you would need to decode the same exact block again.
To trade in Crypto currency, you need to have a crypto wallet. I would equate the wallet to the Central Depository System (CDS) account that you open for you to trade at the Nairobi Securities Exchange. The Crypto currency wallet stores your digital currency. You could store the currency either until you need to trade or for it appreciate in value.
Crypto currencies take 2 forms, they can be coins or tokens. Coins require an elaborate network and use extensive infrastructure to create them. Coins are generally more secure than tokens. Examples of digital currencies are Bitcoin and Dogecoin.
On the flipside tokens require less infrastructure and the networks required to create them are not very elaborate. Because they are easy to create they tend to be easier to manipulate, these are mostly a preserve of sophisticated investors. Examples of digital tokens is Non-Fungible Tokens (NFT), which are digital assets that could take the form of online artwork, domain names etc or real assets such as real estate, concert tickets etc.
There are two ways of acquiring the digital currency, through buying and selling at Crypto-exchange websites or through Crypto mining.
A crypto exchange is a website where selling and buying of crypto currencies using other cryptocurrencies or mainstream currencies such as Eur and USD.
In my books the least painful way of getting your feet wet in the game is going the exchange route. Here you will exchange your USD or any acceptable currency for the digital currency of your choice. Like any financial exchange, the Crypto-currency exchanges determine the going market rate of the currencies.
Crypto Mining involves trying to find the code of a block. Once you own the code which is the secret key, then you own the currencies in that block. This process is tedious and consumes a lot of electricity intensive, but very rewarding once you decode the block. Understandably crypto mining is sort of a preserve of the more sophisticated and committed crypto enthusiasts.
Locally, the Central Bank of Kenya has started discussion on the viability of the use of a digital currency. This is through their discussion paper. It will be interesting to see how the discussion pans out.
Let me leave it here for now, but as you can see crypto study is very interesting, my question to you is would you venture into it? And those who are firmly in it, what are the does and don’ts? Let me here all those views from you in the comment section below…