Blockchain technology is the foundation of the cryptocurrency movement. Without the blockchain, there’s no way for cryptocurrency to exist. Consider blockchain as the infrastructure through which crypto flows. If fiat money has centralized banks, crypto has the blockchain.
The “block” in the word blockchain refers to pieces of unique digital information. Meanwhile, the portmanteau’s “chain” points to the public database in which blocks are stored. Cryptography links these blocks to one another.
Each block in a blockchain contains the following:
- Transactional information (date, time, and value)
- Identities of those involved in the transaction
- A distinguishing code or hash unique to each block
Each time a transaction is made using cryptocurrency, a block is added to the chain. Upon verification of the exchange, a unique code is assigned to the transaction, which legitimates its existence within the blockchain infrastructure.
Blockchain records remain transparent to stakeholders. Cryptocurrency traders may even link their computers to a specific blockchain so that they can get updates on fresh transactions.
When discussing blockchain, it’s imperative not to skip the subject of cryptocurrency, which is the technology’s lifeline.
Why Crypto?
Cryptocurrency is an inevitable outcome of developments in financial technology (fintech). Given the continued rise of e-commerce, for example, it’s understandable how digital assets have become de rigueur. After all, online financial transactions pose certain risks that fiat money is most prone to.
Therefore, alternative modes of payment become the go-to option for those wary of such threats.
Another selling point of cryptocurrencies is how they afford stakeholders a certain level of anonymity.
That’s not something fiat money allows. For one, banks know everything about your dollar stash.
Lastly, cryptocurrency offers a legitimate opportunity to accumulate wealth via trading. If you buy at the right time and sell at the right time, you could easily increase the value of your digital assets exponentially.
However, it’s crucial to note that cryptocurrencies differ from one another. In fact, they may be classified into seven broad categories, which are as follows:
- Transaction Mechanism (Bitcoin, Litecoin)
- Distributed Computation Token (Ethereum, Tezos, EOS, Dfinity)
- Utility Token (Golem, Storj, Sia, FileCoin)
- Security Token (represents bonds, stocks, derivatives, and other financial products)
- Fungible Token (ERC-20)
- Non-Fungible Token (Decentraland, Cryptokitties)
- Stablecoins
Stablecoins cover four categories, including the following:
- Collateralized with fiat currency (Examples: Mongolia’s Candy, Venezuela’s Petro, U.S. Federal Reserve’s Fedcoin, European Central Bank’s Eurocoin)
- Collateralized with real assets (Examples: Digix Gold, TCX, Swiss Real Coin)
- Cryptocurrency collateralized (Example: MakerDao’s DAI)
- Uncollateralized (Example: Basis’s basecoin)
Keep in mind that these categories are by no means exhaustive. If anything, they only seek to provide points of reference to help you navigate through the oft-confusing crypto iterations out there. Facebook’s Libra, for example, does not fit into any of the aforementioned categories, and that’s perfectly fine.
The bottom line is that cryptocurrency continues to evolve. If you plan to join the crypto-rush, it pays to keep abreast of these many changes and updates that sometimes happen simultaneously.
It also won’t hurt to start with the most popular and reliable cryptocurrency in the market. Yes, by that we mean Bitcoin.
Bitcoin Economics
Once you’re ready to get into cryptocurrency via Bitcoin, make sure to go about the process as informed as you can be. Here are points to consider concerning Bitcoin economics.
Purchase
You may purchase Bitcoin from centralized exchange platforms, which charge fees for each transaction, ranging from 0.05% to 5.00%. Alternatively, you may acquire Bitcoin via over-the-counter trading desks, which offer lower fees and better liquidity.
Less popular routes for acquiring Bitcoin include payments for professional services and network participation. As for the latter, you need to be adept in mining and staking.
Storage
Hide your Bitcoin in a safe wallet to which only you have the key. Here, you have two options for storage.
The first is via third-party services. A cryptocurrency exchange platform will automatically give you a digital wallet. To apply, you will need to provide personal details, including your name and ID number. Also, you might have to link credit or debit card information from which to pay for the service.
Another option is storing your Bitcoin in a self-hosted wallet. That will allow you to bypass identity requirements imposed by third-party exchange platforms. This route calls for IT expertise. If you’re a newbie, this might not be a viable option for you.
Investment Opportunities
There are different ways to invest in Bitcoin. Each best suits a particular kind of stakeholder.
If you want to be in the middle of the action, purchasing Bitcoin, as is, might be right up your alley. Meanwhile, if you wish for a roundabout way to participate in the movement, you may invest via Bitcoin trusts, Bitcoin mutual funds, or Blockchain stocks or ETFs.
Whichever route you take, make sure it’s one you comprehend adequately.
Transaction Opportunities
You can make payments using Bitcoin for an increasingly expanding range of consumer goods. Luxury brands, for starters, have been welcoming Bitcoin payments. Think Rolex. The same goes for high-end cars such as Tesla. Some insurance providers allow Bitcoin transactions, too, such as Swiss firm AXA.
Taxation
Countries differ on how they impose taxes on digital assets. For example, in some jurisdictions, crypto conversion is taxable. That means if you bought one type of crypto with Bitcoin or vice versa, you would pay taxes.
Even small-value purchases using Bitcoin might be taxable in certain states. Therefore, you must be doubly attentive to your record-keeping. Bought a coffee using Bitcoin? Keep tabs on the pertinent information on that purchase so that when the taxman comes to you, you’ve got documents to show.
Network Security
As with any new trend in whatever industry, another inevitable thing is the emergence of scams that try to ruin the whole project. As for cryptocurrency, the most common modus include fake websites touting generous gains from small investments, virtual Ponzi schemes, and fake celebrity endorsements.
These are just some of the challenges faced by the crypto world. On top of these scams, there are also network security concerns to deal with.
Vulnerabilities at Blockchain Endpoints
Enthusiasts dub blockchains as virtually “unhackable.” However, that cannot be entirely true for any digital infrastructure. There will always be vulnerable components that may compromise the whole system.
In terms of blockchain, those manifest in endpoints such as when acquisitions are stored in hot wallets. This exchange entails the participation of third-party stakeholders and technologies including payment processors and smart contracts, respectively. At those junctures, hackers might be able to penetrate the process and compromise its smooth completion.
Regulation Issues
Given how blockchain technology is still an emerging financial system, clear regulations have yet to crop up. Although the increasing popularity of cryptocurrency in recent years has led governments to look into the movement more closely, there’s still a long way to go for those representing official institutions to come up with policies and protocols to protect all stakeholders in the industry.
For now, enthusiasts try to take cues from mistakes committed by orders, if only for them to avoid making the same potentially implicating mishaps.
Scalability Issues
Current blockchain technologies are bigger than ever. And as more investors and stakeholders participate in the crypto movement, these digital infrastructures are only bound to get even more massive.
While growth is the end goal for any financial enterprise, it also poses undeniable risks. That risk is more pronounced in this aspect since blockchain of this magnitude has never been tested before. Nobody knows where security vulnerabilities might present themselves. No one can be sure for how long the system can sustain itself with its growth of exponential proportions.
Insufficient Testing
As of date, blockchain technology is no longer exclusive to cryptocurrency platforms. It has now penetrated organizational and corporate structures.
Businesses are exploring blockchain to streamline key processes. While this is another promising prospect for undeniably cutting-edge innovation, the lack of legitimate studies on how the system can deliver in other applications outside crypto might prove problematic. That is most true if you factor into the equation the presence of hackers who are ever ready to exploit vulnerabilities in emerging technologies and their varied applications.
All of these drawbacks can be mitigated by improved network security. And that’s another consideration you must take to heart when learning the ins and outs of cryptocurrency.
Wrapping Up
If you’re planning to get into cryptocurrency as a trader, you must understand how blockchain works. Without a good grasp of how the system operates, you might not be able to manage your digital assets as well as you should.
Meanwhile, if you are interested in blockchain technology as a tech hobbyist or professional developer, you also cannot not learn cryptocurrency basics. That knowledge will eventually inform how you navigate the different blockchain infrastructures out there.
Hopefully, this article could provide you with basic knowledge regarding the topics discussed. Ideally, what you learn here will suffice to further fuel your interest in cryptocurrency and blockchain technology. Rest assured that this could be a worthy project to pursue, whether you are considering becoming a trader or a developer.
Kimberly Maceda
Kimberly is a content writer for BSV Devcon and has been writing insightful content for a wide range of niches and platforms. She believes there’s a fine line between right and wrong, with the Oxford comma comfortably lying in the middle.
