A Mothers Ramblings: Bitcoin and Cryptocurrencies explained for the curious and the nervous!

Monday, 22 January 2018

Bitcoin and Cryptocurrencies explained for the curious and the nervous!

Hello! Pippa here! If you are like me and keep hearing about Bitcoin and Cryptocurrencies but having no clue what they really are, then this is the blog post for you. Here is Flyfour's not so quick, hopefully, easy to digest guide to Bitcoin, and other Cryptocurrencies, which should be enough for you to make your mind up if this is for you and if you could make any money!

Bitcoin logo

Over to you Flyfour!

What is a Cryptocurrency?

Bitcoin is just one of a number of Cryptocurrencies - it was the first and is by far the largest (38% of the market) but is not necessarily the best. Cryptocurrencies are just like normal currencies - Pound Sterling, Euro, Dollar etc - the difference being they are not backed by any country or bank. They exist solely online - they are records in a database, managed by software - they are not tangible assets. They can be traded, bought, spent and even withdrawn back as cash. The website CoinMarketCap lists over 1,300 different currencies - although the top 10 account for 80% of the market.

How are they managed?

The backbone of most Cryptocurrencies is a technology called Blockchain - in simple terms think of the Blockchain as a database of all the currency transactions - every time the currency is earned, spent, transferred or mined (more on that later!) a record is made in the Blockchain. Larger users and traders of cryptocurrencies keep their computers online and all keep an up to date copy of the Blockchain, so if any computer goes off - even permanently - the database is maintained by everyone else.

Where does the currency come from?

Some cryptocurrencies are created in their entirety when the software that runs them is first built by their developers, and then they are distributed or sold to interested parties - this creates immediate returns for the creators of that currency. This process is often known as an ICO - Initial Coin Offering - these have been outlawed by some countries as they are a clever way to get people to pay for something that has no immediate value - great for the developer, poor for the investor!

Most currencies are instead mined - this means computers (originally), and later dedicated hardware devices (known as ASICs), work on complex maths problems - every time they solve the problem, they are rewarded with a new coin. The maths problems get ever more complicated so as technology gets better, the rate at which the coins are released is maintained. Miners are also rewarded with coins for keeping their servers and devices online handling everyone else's transactions - without this, there would be no incentive to maintain the blockchain.

Where does the value come from?

People invest in the currencies by exchanging real currencies like the Pound, Euro and Dollar at online exchanges. This creates interest in the currency, and so the price increases. The more people that want to buy the currency, the higher the price - because remember the currencies are not infinite and they can be scarce. This can change quickly too - if more people are selling, the price drops. The value of one Bitcoin, as an example, climbed from $1000 to $20000 last year because people were becoming aware of it, and wanted in - but then a lot of people decided to take their profits and get out, so the price quickly dropped back to 50% of the high. People who bought in late will have lost out!

But aren't they all illegal?

Bitcoin has definitely got a bad rap in the tabloid press for being used for some nefarious purposes, but this is only a small thing and not widespread. Owning, trading and mining cryptocurrencies is perfectly legal. Spending them on illegal things is no different to spending your Pound, Dollar or Euro on illegal things. Most cryptocurrencies can also be traced, so there is no true anonymity. Another grey area is tax - you will need to pay tax on any gains - just like you would on interest in your bank account, so remember to keep good records of your investments and withdrawals.

Will it all crash horribly?

This is highly possible - imagine a million people bought a cryptocurrency at £1 a coin - the interest in that coin could cause the value to go up to £3 a coin. But then imagine those million people all wanted to withdraw their profits? There would not be enough money to go around, and the coin would crash - probably to less than you paid for it. This could happen today, tomorrow or in a hundred years - but it is always a risk. But in the meantime, people have made good money from speculating - but it might well be a bubble.

So what can I do with my cryptocurrency?

Some currencies - like Bitcoin - seem built purely to store value. Others have more sensible uses. For example, the currency Ripple (XRP) is designed to allow banks to exchange currency internationally with low fees. The currency IOTA (MIOTA) is designed to offer future internet connected automation devices, for example, electric car charging stations, to exchange payments quickly and with no fees.

Some cryptocurrencies are quite a joke - Dogecoin was set up in response to a meme, and if you had bought 1000 Dogecoins last summer it would have cost you £1.38 - although today they would be worth over £6 - even that's not a bad return on investment!

But if you purely invest to see profits, then there are lots of currencies where you can do that too - just be aware of the risks!

You can also spend your currencies online - sites like CryptoDeChange and GiftOff allow you to swap cryptocurrencies for Gift Cards which you can then spend as if they were cash. (Pippa here again, Flyfour has cashed out some to gift cards and I've done the weekly shops with them in January!)

Finally, some online exchanges will let you return your investment (and hopefully even profits!) back to your bank account as cash.

Remember, you don't have to buy a whole coin of many currencies (except maybe for those that are very cheap!) - if you have avoided being part of it because one Bitcoin is worth £10,000, that is irrelevant -  simply buy as much as you can afford. If you buy £50 worth of Bitcoin at the time of writing you would have 200th of a Bitcoin - but that is okay. You will always have that 200th and if Bitcoin goes up to £20,000 per coin, your 200th of a Bitcoin investment would then be worth £100 - simple!

Should I invest, and what in?

I definitely can't answer this for you - it is a gamble - values can go up but just as soon can crash. If you buy a currency when the price is high, it might never get that high again. Likewise, you might buy low, and find that currency goes nowhere - do you hold on to it or cash out? But what if you get out, and then it goes sky-high overnight!?

So the golden rule is - only invest what you can afford to lose. And, if you do make any profits, it is always a good idea to get back your stake - your initial investment - as soon as you can, and then continue to trade on your profits only, that way you should never lose anything other than your time and effort.

Start by going online to places like CoinMarketCap to look at the values of the coins, including their recent performance. Also, check out sites like Reddit with threads for beginners and expect a rougher ride at CryptoCurrency but with more insight.

Keep an eye out for terms like HODL (originally a typo, but means to hold your coins even if the value goes lower than your investment), FUD (Fear, uncertainty and doubt - often spread by people trying to get you to sell so they can buy as the price goes down) and FOMO (Fear Of Missing Out - the principal reason Bitcoin soared in the last few months due to uneducated investors looking for a quick buck).

If you are in any doubt, it's probably not for you.

Ah, but I am interested - how do I get started?

Unfortunately, you will need to buy in - in my opinion the best coin to start with is Litecoin because it has the quickest transaction times (how long it takes to validate your purchase/trade/transfer) and some of the lowest fees (paid to other users to handle your transaction). Bitcoin, on the other hand, has very slow speeds and high fees.

You can buy Litecoin with your Debit or Credit Card (be careful - some cards attract additional fees) at the cryptocurrency exchange Coinbase - if you use this referral link and then buy £74 or more of any currency, you and I will both be given £7 of Bitcoin for free!

At the time of writing, one LiteCoin at Coinbase will cost you £169.52 - but remember you don't have to buy a whole coin - you could test the water by buying 10% of a coin for £16.95 for example. By the time you read this, the value will doubtlessly have changed.

Then you can either leave your newly bought currency at Coinbase and watch the value increase or decrease, or you can transfer it to your own wallet - there are wallet tools for PC, Mac, iPhones and Android - Google is your friend here. Or if you feel like trading it for some of the smaller or lesser known currencies, you can move it to one of the online exchanges like Binance. Yes, that is a referral link, and I do earn commission on your transactions if you sign up from that link!

One note of warning - leaving it on an exchange is generally fine, but exchanges have been hacked or gone bust in the past - if that happens your currency will be lost, and you have no recourse. If you transfer it to a wallet on your computer or phone, then you control it - but if you lose your phone or the PC dies, again you will lose it! You can also transfer your coin to a paper wallet by printing the long numerical keys that control your investment, and file it in a safe if you want - but you'll find it harder to spend it or trade it this way.

Finally, if you do get in and make some money, do remember me when you are a millionaire - I am happy to accept LiteCoin donations at this address (be careful, only send Litecoin to this - others will be lost): LfYMnWrfxB137CciLv7r7QCkr8RcLMGdvt

Happy Crypto-ing!