By now, pretty much everyone has at least heard about cryptocurrencies. But how many people know how they work and how to make money trading these crypto assets?
Here is an easy to digest, beginner’s guide to whether it’s worth investing in bitcoin or another given cryptocurrency.
Before you launch yourself into the world of cryptocurrency trading, it’s important to really understand this asset class. There is a lot to get your head around, including how and why cryptos exist, how they are created and traded and how you can benefit.
Find out how digital currency trading works, how to craft a workable trading strategy and how to avoid putting all your eggs in one digital basket!
What are cryptocurrencies?
Simply put, cryptocurrencies are digital assets. These coins or tokens can be traded, spent, sold and bought on cryptocurrency exchanges.
Cryptocurrencies began as a niche corner of the world of online transactions, before shifting further into the mainstream in recent years.
Interest in cryptos and new investors and traders have increased exponentially over the last few years. This is forcing Governments and regulators to seriously consider creating new legislation and rules for cryptocurrency trading.
One thing is for sure, the world of crypto trading isn’t going to disappear, and will only continue to grow in the short and medium term.
The most well-known cryptocurrency is probably still Bitcoin (BTC), which was the original. However, today there are thousands of different crypto assets offering traders financial freedom and a way to make money outside of traditional investments.
The concept of economic freedom and a decentralised network of transactions is the big draw for those interested in cryptocurrencies. It’s difficult to escape the media headlines, particularly when it comes to BTC and its value.
Cryptos remain extremely volatile, but it is likely that over the next few years, a raft of new regulations will work together with the maturing market to create a mainstream financial alternative.
What makes a cryptocurrency a cryptocurrency?
It’s widely accepted that to be called a cryptocurrency a system must meet the following conditions:
- It can’t have a central authority and is maintained through distributed ledger technology.
- The blockchain stores an overview of cryptocurrency units and who owns them.
- The source code defines whether and how many new units can be created. If they can be created, then the code must define how and how ownership is then determined.
- Ownership of the cryptocurrency assets can be proved cryptographically.
- Transactions can take place on the blockchain to change ownership of the units.
What is an altcoin?
Altcoins are just alternative cryptocurrencies that aren’t bitcoin. You may see it written as altcoins or alt coins and is generally used to describe coins created after bitcoin.
You will often discover that alt coins are different to bitcoins in functionality. For example, bitcoin takes ten minutes to process a block, while Litecoin can do so in 2.5 minutes.
The most popular and most used alt coin is currently Ethereum, and it is so popular it’s no longer considered a true alt coin, since it fulfills its own use cases.
How does cryptocurrency work as a financial instrument?
Crypto tokens, asset or cryptocurrencies are defined as the following, according to Forbes:
“Cryptocurrencies are a digital means of exchange which use cryptography as a means of security.”
This sounds complicated but boils down to the easy-to-understand idea that cryptocurrency is a digital replacement for traditional money. Assets such as cryptocurrencies can be used to pay for goods and services and can be traded in the same way fiat currency can, with the difference that cryptocurrencies are peer to peer, exponentially faster than a bank transfer, and have very low transaction fees.
This P2P model reduces or eliminates the need for third parties such as banks, making financial inclusion worldwide a real possibility, and opening up new trade possibilities.
How is digital currency valued?
As digital currency isn’t based on a specific asset, it has no intrinsic value per se. In the case of PoW based coins like bitcoin, the energy used to mine the coin, which is determined by the hashrate, is a clear indication of how many people are using it, and so, the value is determined by how much of it is available and who wants to trade it – or supply and demand. Hashrate is an important factor to be aware of when considering your investment strategy (for Proof of Work based coins anyway, Proof of Stake differs slightly which is covered in another article).
In other words, cryptocurrency assets are only worth what people are prepared to pay for them, as well as the number of people using them or mining them. In this way, cryptocurrency trading is always unpredictable and highly speculative, although the trading volume is a good indicator of demand trends. It’s difficult for anyone to make an exact and accurate value when trading cryptocurrencies.
Digital assets are not centrally controlled
One of the main differentiators with a digital asset is that it is not centrally controlled. This decentralised trading opportunity is precisely why cryptos have become so popular.
Rather than being controlled or regulated by one central source, transactions via cryptocurrency markets happen on a public ledger.
So, rather than transactions being controlled in the same way as the global economy by financial institutions, cryptocurrency exchanges operate on a peer-to-peer basis.
This has obvious ramifications for users and for countries that have traditionally controlled their financial systems. Rather than a central control over the creation of the currency, cryptocurrency is collectively created by miners working over a vast network.
Mining is available as a way to make money everywhere around the world, aside from countries that have completely outlawed cryptos. But for those in emerging economies that have been further battered by COVID-19 and the increase in climate related natural disasters, it’s easy to see why crypto mining and trading is seen as a viable option.
Blockchain or distributed ledger technology underpins the crypto world
Cryptocurrency transactions, such as buying bitcoin or making trading decisions, is based on distributed ledger technology (DLT).
The chances are you will have heard of the most well-known DLT with blockchain technology. This technology allows a public record to be kept of every transaction in real time.
There is no central bank involved, but the nature of each block in the chain allows other traders to see each transaction. Data can be shared and synchronised at a global level through this decentralised and unchangeable database. Each account holder on a crypto platform has a private key with which they access their account, ensuring the safety of their assets.
Blockchain technology is therefore self-regulating and ensures that double-spending of cryptos or other fraud is far more difficult to achieve. In a world that has been rocked by repeated financial crashes, caused by the very financial system in place to protect economies, there is much to like about a decentralised system.
Where in the world is cryptocurrency legal tender?
While cryptocurrencies aren’t illegal, they are not considered legal tender. In the UK, they can’t be stored tax-free using something like an ISA. In El Salvador however, Bitcoin is now legal tender, and can be used for everything from receiving salaries, paying taxes, and all day to day purchases.
Even though cryptocurrencies are regularly used to buy services and goods all around the world, there are no international laws in place to regulate them in a uniform way. Some countries have seen salaries being paid in Bitcoin, such as the Netherlands, and USA.
Many countries, including the US, the UK and Canada, accept and allow the use of bitcoin and other cryptocurrencies. Others are totally opposed to it and don’t allow them at all. The latter includes Russia and China.
Cryptocurrencies, such as BTC and Ethereum, can be used to carry out transactions between anyone around the world. As long as they have a crypto wallet, then users can conduct transactions from any country and at any time. And because it’s anonymous, this has obviously led to security concerns.
However, in April 2021, the Crypto Council for Innovation published a report that says money launderers and criminals have now moved away from using BTC and cryptocurrency. The lobbying group was launched to consider regulatory actions for cryptocurrency and was written by ex-CIA Acting Director Michael Morell.
In the report, he says that criminals are “technology agnostic” and as more arrests are made, the less attractive cryptocurrency is to them for money-laundering. They are instead turning to other ways to continue their activities.
Global regulations on cryptocurrencies vary from country to country
Countries around the world are taking different approaches to the world of crypto. Many have yet to clearly define the legality of BTC and other cryptos and are taking an approach that appears to revolve around waiting to see how it pans out.
Others have allowed the use of cryptos in a non-direct way by implementing some regulatory systems. As of June 2021, however, only one country formally recognises BTC as legal tender – El Salvador.
El Salvador’s ‘Bitcoin Law’ was questioned by the International Monetary Fund (IMF) and the World Bank. And while there are definitely legal and technical challenges ahead for El Salvador, there’s a good chance it will force change.
Any organisations that currently oppose cryptocurrency as legal tender will have to rethink and it should speed up regulatory reforms in how both commercial law and US taxation treats cryptocurrencies.
Cryptocurrency acceptance and regulation in the US, Canada and other countries
In the United States, there has generally been a positive take on BTC and cryptocurrencies so far.
While a number of Government agencies fight to reduce the chances of illegal use of cryptos, many high-profile companies accept BTC as payment. These include the likes of Subway, Dish Network and Microsoft.
Guidance has been issued by the Financial Crimes Enforcement Network (FinCEN), which is a department of the US Department of Treasury since 2013. However, in formal terms, the Treasury says that BTC is not a currency. Instead, it’s defined as a money services business (MSB), which brings it under regulations including the Bank Secrecy Act.
By the Internal Revenue Service (IRS), cryptocurrency is considered property for tax purposes.
Canada has a similar relatively positive take on BTC, while at the same time ensuring it’s not used for money laundering or criminal purposes. The Canada Revenue Agency (CRA) categorises crypto as a commodity.
Due to this categorisation, any money made from trading cryptos is legally business income, which is taxed in different ways. Canada considers crypto exchanges as money services businesses, which brings them under the anti-money laundering (AML) legal system.
Cryptocurrency is categorised as neither a foreign currency nor money in Australia. Instead, it’s categorised as an asset by the Australian Taxation Office (ATO) and falls under capital gains taxation.
The European Union
Since 2015, buying and selling cryptocurrencies has been categorised as a supply of services. This makes it exempt from VAT in all 26 EU member states.
Individual countries within the EU have also added their own stance on BTC and digital currencies. Foer example, in Finland BTC is a commodity rather than a currency and is VAT exempt according to the Central Board of Taxes.
Belgium’s National Revenue Agency (NRA) has pulled BTC under its tax laws, and Germany considers BTC legal but that it should be taxed differently according to whether they’re taxing miners, users, companies or exchanges.
Future regulations expected for cryptocurrency in the UK
While the UK’s stance on cryptocurrencies is largely in line with the EU’s for now, this is likely to change in future.
The UK will more than likely move away from this regulatory landscape and, using market data and analysis, craft more specific legislation.
The UK Crypto Asset Task Force has said that the country intends to bring some (not all) crypto assets under its financial promotions regulation. HMRC also says that it intends to take a “broader regulatory approach” to crypto assets and the personal data involved.
Investing in cryptocurrencies begs the question – which one?
If you’re considering investing in cryptocurrencies you will need to examine which specific crypto will work best for you.
There are between 5,000 to 7,000 different crypto currencies out there right now. This does include those that have failed.
The most well-known in mainstream circles is still Bitcoin. This has a market cap of about $600 billion.
BTC is followed by Ethereum (ETH) as the most well known and popular crypto. Other popular assets include Ripple (XRP), Tether (USDT), Cardano (ADA) and Litecoin (LTC), but there are many many others to look into. When starting out, it’s advisable to stick with a tried and tested crypto, rather than chancing it on a completely new offering, until you are more familiar with trading activity.
What is a market cap and how does it impact traditional investments?
An investment term that is well-known within the industry, market cap is another term that newcomers to the market may not know.
In traditional financial product terms, the ‘market cap’ is a shortened form of market capitalisation. Investors use this to work out the size and success of a company. The cap is worked out by multiplying the available shares by how much they’re worth.
A good example can be seen in a business with one million shares that are achieving £50 each when sold has a market cap of £50 million. Generally speaking, the larger the cap, the more stable and worthwhile the investment opportunity is.
When considering traditional financial instruments and stocks, it’s relatively simple to measure an investment’s chances of success. Companies with a market cap in excess of £10 billion are large cap. Mid cap are between £3 billion and £10 billion and small cap businesses generally between £300 million and £3 billion.
The smaller the cap, the riskier the investment.
How the market cap impacts crypto trading decisions
As we’ve seen, the crypto landscape is mostly unregulated, which means extra factors must be considered in addition to the cap to ascertain risk when you want to buy cryptocurrency.
Market caps for BTC and other cryptocurrencies can be used to compare their value. It remains a good tool for this market.
However, cryptos come with other factors to consider that simply don’t appear in the traditional stock market. One of the major risk factors, is the lack of liquidity in the market.
For example, according to blockchain analytics company Chainalysis, there are up to four million bitcoins lost or locked up on servers somewhere. These missing coins must be taken into consideration when analysing the market cap valuation (that is based on how much each coin is worth multiplied by how many there are).
Other metrics to consider include monthly trading volumes
Daily volumes can be so volatile that they don’t give an accurate picture of the best way to trade or invest, so it’s important to look at the bigger picture.
Cryptocurrencies remain relatively risky as an investment, and understanding how the market works is your first step.
Are there risks involved in trading cryptocurrencies?
Absolutely. As the sector is still relatively new and currencies are volatile, there’s no doubt that there are risks involved when you trade cryptocurrency.
However, despite this, crypto assets are becoming more and more mainstream.
In October 2020, when PayPal officially allowed customers to use their cryptocurrency wallet to buy, hold and sell assets including Ethereum, Bitcoin, Bitcoin Cash and Litecoin, this became a clear signal that the idea of crypto as a financial product is becoming much more widely accepted.
However, the FCA reacted by banning the sale of cryptocurrency exchange traded notes as from the start of 2021. This means that the FCA has essentially banned selling products that are based on cryptocurrency prices. However, it’s legal and accessible to buy the cryptocurrencies themselves.
The FCA points out that audience insights tell them that consumers remain confused about the products and their true value. It also says that there is the possibility of financial crime in the secondary market.
Deciding on a cryptocurrency to buy
The first step to starting out as a trader in the crypto space is to make a decision about the currency you want to purchase.
It’s easy to become overwhelmed with confusion when starting out in this market. The first thing to do is thoroughly research the different currencies. Use audience insights and trader opinion to work out which would work best for you.
This should include an analysis of future price movements and the likelihood of the asset remaining strong into the future.
Your first move is to select a crypto exchange or broker. Both of these will allow you to process personal data and buy crypto, but there are key differences.
What is a cryptocurrency exchange?
An exchange refers to the platform where sellers and buyers gather to trade crypto assets.
Generally, exchanges have low fees but they also tend to come with relatively complicated interfaces.
You may be faced with advanced data in the form of complex performance charts and information covering a number of different trade types.
This can feel intimidating for people new to crypto trading.
Which crypto exchanges are most well known?
You will already have heard of some of the most well used crypto exchanges.
Coinbase, Binance and Gemini are examples of popular exchanges. And while these may seem complex to start with, they do offer simple options for newcomers.
However, be warned that this convenience does cost newcomers as the user-friendly options cost more than it would to buy the same asset using the normal interface. It wouldn’t be a beginner’s guide without giving information on the simplest options, but’s worth knowing that it will cost you more up front.
Therefore, to save money upfront it’s worth learning how to trade on the normal platform before you buy your first asset. Or, if you do decide to start with the simplest option, be prepared to put some time in to learn how to use the standard exchange relatively quickly. NiceHash offers a very simple trading platform designed for newcomers, to help you get started in trading, as well as an advanced trade view with more options and over 70 trading pairs.
Make sure that the exchange you selected allows the transfer of fiat currency and purchases with British pounds or US dollars. Some exchanges only allow the trader to buy crypto using another crypto.
What is a broker in terms of cryptocurrency?
A cryptocurrency broker is a much simpler way to access information. In simple terms, a broker ensures that buying and selling crypto is accessible and as easy as possible.
They do take a small percentage, and some will undoubtedly charge higher fees than other crypto exchanges. However, they play a major part in getting started for new investors.
Watch out for any that say they’re free, as they may largely depend on selling your data to bigger funds, rather than ensuring your trade is at the best possible price.
Crypto brokers are convenient and definitely attractive to investors who are still figuring out even the largest cryptocurrency and how it works. It can feel extremely risky to go ahead and instigate transactions that make it feel you’ve put everything in one basket without the best possible investment advice.
It’s necessary, therefore, to be selective with brokers as you could find yourself hit with certain restrictions when you want to move your assets away from the platform. Savvy crypto investors know that the best way to keep their transactions secure is to hold coins in crypto wallets. Remember that there is no backing from traditional financial institutions when it comes to buying and selling digital currencies.
Some investors select hardware wallets for their crypto assets. Hardware wallets aren’t even connected to the Internet and are stored on an individual hard drive for maximum security.
Creating and verifying your account on the chosen exchange
To make daily transactions on your chosen platform, you will need to sign up for an account.
It’s possible that you will need to verify your account in order for the platform to access information about your transaction. This depends both on the platform itself and how much you intend to trade.
When your account is set up you’ll need to transfer money to the platform so you can invest it. Options include depositing money into the account via a bank transfer or using a credit or debit card.
Be aware that credit card companies process these types of purchases as cash advances, which means they incur a higher interest rate.
When your account is set up and verified and you have transferred money into it, you’re ready to look at investing in one bitcoin – or many more!
There are more cryptocurrencies than BTC to choose from, of course.
Which are the biggest cryptocurrencies according to market capitalisation?
While you definitely need to consider more factors than just market capitalisation when it comes to investing in cryptos, it’s useful to know where their market capitalisation value puts them.
The values below are as of 28 June 2021 and the cryptocurrencies are in order of value and importance.
- Bitcoin (BTC)
- Ethereum (ETC)
- Tether (USDT)
- Binance Coin (BNB
- Cardano (ADA)
- Dogecoin (DOGE)
- Ripple (XRP)
- USD Coin (USDC)
- Polkadot (DOT)
- Uniswap (UNI)
The initials in brackets are the ticker symbols for each crypto, and this is what you enter into the platform to specify how many you want to buy. In many cases, it’s possible to buy shares of cryptocurrency, so that you can purchase a slice of the most highly-valued coins, such as BTC and ETH. Otherwise they would cost a prohibitive amount to own for many people.
Storing your crypto
As we’ve already talked about, cryptocurrency exchanges are mostly unregulated and unprotected.
This means they are at risk of being hacked. However, other risks are more under your control as the investor.
For example, millions of BTC are locked away on servers and inaccessible because their account codes (the private key needed to access their account) have been lost. This equates to a value of millions of dollars’ worth of crypto lost due to human error, and this is why it’s essential to store your cryptocurrencies securely.
If you are using a broker, you may not be able to select your own storage method. But if you are buying your assets from a exchange you can do the following:
- Leave the crypto stored in the wallet attached to the exchange. If you decide this isn’t secure enough and you want to move your crypto away from the platform, you can exchange it to a separate crypto wallet.
- ‘Hot’ wallets are stored online and access via devices connected to the Internet, such as phones or computers. This is obviously convenient but can also be far less secure than a hard, or cold, wallet.
- ‘Cold’ wallets are entirely separate and are in the form of an external device, such as a hard drive or USB drive. Obviously, if you choose this option, you must make sure you never forget the code to access the account. Also, if the device fails you could lose all of your crypto assets.
Access information about alternative ways to buy cryptocurrency
Buying bitcoin or any other cryptocurrency directly is very popular at the moment. However, it does come with various risks, which we have touched on in this guide.
If this isn’t the path you want to take, then there are other ways to invest in BTC and other cryptocurrencies. Here are some suggestions:
Hold out for a crypto Exchange-Traded Fund (ETF) to appear
ETFs are popular investor tools because they allow the user to buy exposure to many different investments in one go. This means they give you an instant diversified investment portfolio, which is always less risky than one-time investments.
Crypto ETFs will allow you to invest in many different digital coins at once, which offers obvious advantages.
As yet, there is no cryptocurrency ETF available for investors. However, in June 2021, the US SEC (Securities and Exchange Commission) began reviewing three applications to start a crypto ETF. They are WisdomTree, VanEck and Kryptcoin. It could be worth waiting for one of these to be approved.
Put your money into firms connected with crypto
Another way to invest into the market would be via companies that offer regulated products and services.
By this, we mean investing in company stock that either own or use cryptocurrencies and that are powered by blockchain.
For example, an online brokerage account would give you the option to purchase shares of public companies like Nvidia (NVDA) or PayPal (PYPL). PayPal expanded in October 2020 to allow customers to trade certain cryptos with their PayPal account. Nvidia is a tech business that sells GPUs (graphics processing units) that are used to mine cryptocurrencies, as well as AMD.
Mine your own cryptocurrencies
Have a look at NiceHash for details on how to get started with mining cryptocurrencies quickly and easily, as the core concept is for people to be able to earn crypto by selling the computing power for mining. This is one of the easiest and trouble free ways to get started with cryptocurrencies.
A quick history of bitcoin valuations
There is a separate beginner’s guide to bitcoin available, but it’s worth taking a look at the original cryptocurrency in this guide too.
Compared with traditional asset classes, BTC is highly volatile. This is immediately apparent from its history.
In 2010, the cost of one bitcoin rose for the first time to $0.08 (from $0.0008). In the 11 years since then, bitcoin has gone up in value and crashed down into a bear market a number of times.
This has led to some in the media to denounce bitcoin and cryptocurrencies in general as a bubble or a fad. Perhaps this isn’t surprising when we consider its price action over the years, and the wild swings we’ve seen from bitcoin bulls to bears.
However, when one looks at the yearly price of Bitcoin, it is clear to see that as a long term investment it has gone up and up, and the long term prospects are very encouraging if you wait long enough, or HODL, as the industry likes to call it.
Why has the price of bitcoin varied so much?
Analysing bitcoin and its price action gives us a good blueprint for other cryptocurrencies and their possible trajectory.
Bitcoin’s price changes can be seen, with hindsight, to accurately reflect the general enthusiasm (or not) for the crypto asset and its original promises.
It was devised and invented by Satoshi Nakamoto following the 2008 financial crash. The intent was to create a new way to carry out day-to-day transactions without having to rely on a financial system that could collapse.
The ensuing price changes are down to traders and retail investors betting on higher and higher prices per coin, without apparently having much to back it up at the time. However, the story has changed more recently and bitcoin is becoming more mainstream thanks to institutional investors taking an interest.
The market matures and bitcoin goes mainstream
Bitcoin’s story today then is that it may well still be volatile, but the markets have matured. Regulatory agencies are now crafting new rules and laws, and bringing it further into daily life.
It started out as a way to allow a decentralised system of money that doesn’t rely on traditional infrastructure that can collapse at any moment. But today bitcoin is a functional financial system that connects with the mainstream economy, and has moved away from being purely about quick trades for quick profits.
Bitcoin price bubbles since 2011
There have been a number of notable price bubbles since bitcoin emerged.
It’s worth noting that there is always daily volatility for bitcoin and all other cryptos. It’s possible for these fluctuations to measure in double digits up or down. The system has, after all, had to deal with a number of threats to its fundamental infrastructure, ranging from fraudsters to the lack of regulation available.
However, there have also been a few times that enormous price bubbles have occurred.
In 2011, the price for one bitcoin rose from $1 in April to $32 in June. This represents an increase of 3200% in just 12 weeks. Immediately following this sharp rise in value for bitcoin, a sharp fall in the crypto markets brought the price back down to $2 by November.
Two years later, in 2013, the year started with bitcoin worth $13.40 in money. By April the price had risen stratospherically to $220, and again was followed by a rapid and dramatic fall to $70 at the end of the same month.
There were more rallies and crashes in the same year. In October each bitcoin was worth $123.20 and two months later it had reached $1156.10 only to fall to $760 in just three days. This fall actually started a slump in value for bitcoin that lasted until 2015.
To find out more, head to our Beginner’s Guide to Bitcoin.
How are cryptocurrency assets created?
Bitcoin mining or any cryptocurrency mining refers to the process of getting new coins into circulation through a process called Prof of Work (PoW).
Mining is also a major component of the blockchain ledger itself and ensures that it maintains and develops. It takes a lot of computing power to mine crypto tokens, which is why the process needs very sophisticated and powerful computers.
Cryptocurrency mining is appealing to investors because when miners work to create new units, they are rewarded with crypto tokens. So, technologically savvy people who have spare computer power can make money mining cryptocurrencies, and less tech savvy people can also give it a try easily with software such as NiceHash.
There are also other ways that coins are created such as Proof of Stake (PoS), and Proof of Time and Space (PoTS), that we will look into on other articles.
The hardware and architecture of cryptocurrencies
The rate at which bitcoin or other decentralised cryptocurrencies are produced collectively is publicly known.
This differs in a fundamental way from traditional centralised banking and global economic systems. In these systems, Governments or other stakeholders control how much money is created and supplied through printing FIAT money.
Decentralised cryptocurrencies however, are not dependent on these bodies to produce new units. Instead, they’re created collectively through the system itself.
The community of miners within each cryptocurrency system ensures its integrity through the use of timestamped transactional validation. Each transaction is added to the ledger with a specific timestamping scheme.
Cryptocurrencies start out with a finite number of units, and gradually decrease its production. This caps the amount that will ever be in market circulation.
More on blockchain technology and its validity
The blockchain gives each coin its validity. Think of the blockchain as a constantly increasing list of records (or blocks). They are linked and made secure through cryptography.
A hash pointer is included in each block. This is what links it to the block preceding it. Also included in each block is the transaction information and a timestamp.
Blockchains can’t be modified afterwards, and the distributed ledger technology was designed to securely record transactions in a permanent and verifiable way.
Managed through peer-to-peer transactions as described earlier, the data in each block can’t be changed later on without every single block that came after it being changed too.
Where do nodes come into the process?
You may have come across nodes in the crypto world but aren’t sure what it is.
A node is the computer that connects up top the cryptocurrency network.
The node then relays transactions, validates or hosts a copy of the blockchain data. When a transaction is made, the node that created the transaction, tells other nodes in the network about it.
Timestamping schemes are used to prove the transactions’ validity, and that they can be added to the ledger with on need for checks. Widely used schemes are based on scrypt and SHA-256.
There are other hashing algorithms used too. These include SHA-3, X11, CryptoNight and Blake. These methods secure the network and ensure that distributed consensus is achieved.
More on crypto mining
Mining further validates transactions made in cryptocurrency networks.
Miners who are successful in this get new cryptocurrencies as a reward, which provides an incentive to manage and verify the network.
The validation of the transaction are known as hashes, and the rate of generating hashes has been greatly sped up by specialist machines such as ASICs and FPGAs. These use complex hashing algorithms as mentioned earlier, such as scrypt and SHA-256.
Generating hashes in order to validate transactions and mine coins has become more and more complex since cryptocurrency began. Miners often invest in expensive ASICs with high specs. However, this then often means that the value in finding a hash doesn’t cover the cost of the computing power needed to do it. This is where NiceHash comes in, offering an accessible and secure way to be rewarded for mining cryptocurrencies.
What is an initial coin offering?
If you’re interested in cryptocurrencies, you will no doubt have come across the term ‘initial coin offering’ (ICO).
An ICO is a way to raise funds to launch a new venture in the crypto space. It’s used by start-ups and is popular with initiatives that want to avoid regulation.
However, times are changing and many jurisdictions are clamping down on security regulation of ICOs. For example, in Canada and the US if a coin is considered to be an investment contract, then it is designated a security and thus subject to securities regulation.
Generally, in an ICO campaign, those that back the project are rewarded by a percentage of the crypto currency in exchange for transferring money or other cryptos.
A move towards increased regulation
In 2021, Governments around the world have been forced to look at the rise in cryptocurrencies.
The inexorable rise of a distributed ledger allowing unregulated transactions has forced them to question whether they need to devise new rules and regulations.
Not all countries have yet decided, although a number have started to take action.
As of June 2021, the US SEC has been deciding on cryptocurrency regulation and what must be done. There is a renewed sense of urgency from the SEC, with Senator Elizabeth Warren writing to the chairman on 8 July 2021 to demand that decisions regarding regulation are made by 28 July 2021. This is due to the constantly increasing crypto exchange trading and the perceived threat to consumers.
On 21 June 2021, China implemented a total ban on financial institutions providing cryptocurrency related services.
Inevitably this prompted a mass sell-off, with Bitcoin decreasing in value by 31%, Etherum by 44% and Dogecoin by 30%.
On 10 January 2021, the UK announced that all crypto firms and any associated with cryptocurrencies in any way must register with the FCA.
On 27 June 2021, the financial watchdog in the UK insisted that the world’s biggest crypto exchange (Binance) stop all regulated activity in the country. This has led to some concern that this hardliner regulation will be implemented across the UK cryptocurrency market in future.
Cryptocurrency as a tool
Legalities surrounding cryptocurrencies vary between countries. There are studies that show the connection between BTC and illicit finance are vastly overstated and that DLT analysis can be used as a tool to gather intelligence and stop financial crime.
However, some countries have outright banned cryptocurrencies. These are:
An implicit ban on cryptocurrency in 15 further countries also exists.
Bans on personalised ads
There has also been a temporary ban on personalised ads relating to cryptocurrency on certain platforms.
The platforms that have temporarily banned personalised ads about cryptocurrency trading, mining or any other aspect include Facebook, Twitter, Google, Snapchat, LinkedIn, Mailchimp, Bing and Google.
In China, the following Internet platforms have also banned personalised ads relating to BTC: Tencent, Baidu and Weibo. In Japan, the Internet platform called Line has banned personalised ads in this market and in Russia, personalised ads are banned on Yandex.
Media coverage is not always positive
Scepticism does exist in the cryptocurrency world. Cryptos have been called economic bubbles and compared with everything from pyramid schemes to Ponzi schemes.
Despite the fact that these digital currencies are managed and processed using advanced and fully encrypted technology, there is a reticence from Governments in allowing them to become truly mainstream.
The fear is that their decentralised nature will jeopardise financial security and this has led to some regulators actively dissuading users.
However, cryptocurrency offers a future that we know from audience insights that consumers want. Economic growth, individual freedom and a financial system that is accessible by any country in the world.
It’s easier for people to access the cryptocurrency market than financial support from traditional banks, particularly in emerging economies and developing nations. In nations dealing with high inflation and where fiat currency isn’t easily accessible, many naturally turn to cryptocurrency in order to strive for economic freedom.
What is the environmental impact of cryptocurrency mining?
This is another commentary that you may have come across in the media – that cryptocurrency comes with a big carbon footprint.
Mining does use a lot of electricity and computer power and there are definitely conversations to be had about reducing the environmental impact of the market sector. However the power usage remains minimal when compared to the amount used in traditional finance (powering all the banks in the world, plus the energy of producing cards / payment tills and systems, equates to many many times more power use than all cryptocurrencies combined).
Also, the financial transparency offered by cryptocurrencies is revolutionising charity giving. Recently, a number of charities and aid agencies have started to accept donations in cryptocurrencies.
So far, aid agencies that are doing this include the UN World Food Program, UNICEF and the American Red Cross. Agencies say that it’s simpler to track donations from cryptocurrencies there is also the possibility that donors could see precisely how their donation is used thanks to the transparency of the ledger.
Cryptocurrency – the bottom line
If you are ready to invest in cryptocurrencies and learn about the market, then there are definitely opportunities available to you. Check out our guides to BTC and ETR for more information on these specific cryptos, and make sure you do plenty of research before diving in.
For an accessible way to mine crypto and make money from excess computing power, head over to NiceHash. You can also trade more than 50 cryptos on the NiceHash exchange.