The thought of someone being taxied around in a complete stranger’s personal vehicle? Again, unheard of. Enter Uber. Renting out your home to strangers? Ludicrous. Enter Airbnb. We’re learning quickly how fast reality is catching up with what once was our imagination. Cryptocurrency had a coming out party in 2017 and might be the next technology disruptor to have mainstream appeal.
I’ll try to demystify cryptocurrency with the answer to some common questions:
What is it?
A digital currency with no physical form and no intrinsic value.
What are the major currencies?
Bitcoin was the first and is still the most popular cryptocurrency. Other major players include Litecoin, Ripple, Ethereum, and Monero.
How does it work?
Think about our current financial system. When you go to a store and use cash or a debit card to pay for something, who validates that transfer of funds? Who tells ABC Store that your debit account has enough funds or that the $20 bill you just handed over has any real value. Who records these transactions? We trust in our banks and governments to handle this. There’s essentially a central ledger, which is like a huge Excel spreadsheet, which keeps track of all of our historical financial transactions. The foundation of Bitcoin and other cryptocurrencies is a technology called Blockchain. Instead of the one large central Excel spreadsheet, Blockchain’s software allows thousands of computer systems globally to essentially have a copy of this Excel spreadsheet (called a distributed ledger). Every time a transaction is made, a sophisticated process ensures that every other computer system validates this transaction and that no one can try to insert false data into the system.
How do I buy them?
You need a coin exchange to trade traditional money into cryptocurrencies. Canada is starting to develop more exchanges, one of the largest being Quadriga.
How do I store them?
Your exchange often gives you a ‘wallet.’ It is similar to the real world application of a wallet except these wallets are either online, mobile, or in some kind of hardware. Many come with a secret key that’s about 32 characters long. You DO NOT want to store this anywhere online or even on a computer (as it can be hacked). You have to keep this in a very safe place, or someone with the key can spend or take your cryptocurrency.
Should I invest in them?
Like stocks and other speculative investments, the general rule is only to invest as much you can afford to lose. 2017 saw an incredible rise in value for Bitcoin, but as fast as it rose, it started to decline, indicative of how volatile the space is (see chart below). Some say it’s the inevitable future, while others think it’ll never really develop. (But remember those Amazon, Uber, and Airbnb examples?)
What’s an ‘initial coin offering’?
Initial coin offerings (ICOs) are very similar to an initial public offering (when a new stock goes public); they occur when a new coin is being offered to the public. Caution: There have been a number of reported schemers trying to mislead people into investing into ICOs, so ensure you do your due diligence and research thoroughly if you are exploring this avenue.
Are mass retailers going to start accepting it?
Microsoft, Expedia and a long list of recognizable retailers have already started accepting it, and there are rumours that Amazon will start in the near future, which I think says a lot.