In our past blog, we learnt that the first cryptocurrency that was ever created was bitcoin. It was created by an anonymous computer geek called Satoshi Nakamoto in 2009. From then to present, many cryptocurrencies have been introduced into the market. Although people are using cryptocurrencies as speculative instruments and get-rich-quick schemes, Satoshi Nakamoto’s initial idea was to create a secure and private protocol for transfer of value over the Internet. The bitcoin’s objective was to achieve individual freedom and the right to privacy while transacting.
As we saw earlier, cryptocurrencies are decentralised and use the peer-to-peer network, solely powered by its users. As much as Cryptocurrency gives you freedom from government control, it is your own responsibility to safeguard your money. You are the sole custodian of your stored money and addresses. There’s no formal entity to complain to if you spend your digital money in a wrong way or lose access to your wallet’s password. Neither is there any authority to report if your money is stolen by fraudsters.
Anonymity of Cryptocurrencies
Even though the need for anonymity when carrying out cryptocurrency transactions is one of the main reasons the digital currencies are preferred, not all cryptocurrencies are anonymous. More and more currencies are mushrooming every now and then trying to fix the privacy or anonymity issues with different approaches. For instance, the bitcoin is considered to be more pseudonymous rather than anonymous. This means that the value of the bitcoin within a wallet is not tied to real-world people or personal addresses, but rather to a specific public key called bitcoin address(es). Though the public key is not tied to any specific identifiable information, over time it can be sued to reveal information about a person. No one explicitly identifies the owners or those who control the addresses but the transactions are recorded in a digital public ledger called the blockchain.
There are cryptocurrency exchanges where the virtual currencies are traded with the fiat currencies. These exchanges are required by law to collect the personal information of users. However, tracing the real owners is quite difficult as most traders neither use their real names nor real addresses when transacting. Cryptocurrencies which have been found to be purely anonymous include Zcoin, Monero, Scash, Dash, Verge and Zencash. These currencies are good in preserving the privacy of the transactions compared to their peers. No evidence can be found to reveal the true identity, social details and location of someone.
How to protect your cryptocurrencies
Investors in cryto face a lot of risks and instability. New scams are cropping up from time to time. There is always something to watch out for if you own the cryptocurrencies. Whether it’s a fake wallet set up to trick users, a phishing attempt to steal private cryptographic keys, or even fake cryptocurrency schemes. At the start of using cryptocurrencies, a wallet is highly required. A wallet is a secured place to store or hold your digital currencies. It stores all the information necessary or credentials to handle your bitcoins or other altcoins, and gives you access to them when you need to. As we learnt earlier, cryptocurrencies use cryptography, where two cryptography keys, one public and one private, are generated. So a wallet is a collection of these keys.
There are several wallets to choose from. The keys to access cryptocurrencies can be stored using software applications, hardware applications or physical places. Those that connect to the internet are referred to as hot wallets while those that work offline are referred to as cold storage wallets.
We have online or web wallets which entirely depend on the internet. Mobile wallets depend partly on the internet and they have additional features compared to web wallets. They are more secure than the web wallets. Desktop wallets are cold storage wallets which offer more convenience to those who cannot access the internet often and more secure as they can’t be easily hacked. Hardware wallets store the keys in hardware devises. We also have paper wallets where the keys are written down on a piece of paper and are not stored on any computer. We will look more into wallets and how you can choose the most ideal one.
Cryptocurrencies can be exchanged both online and offline. There are quite a number of cryptocurrency exchanges where one can buy cryptocurrencies using fiat currencies or credit cards. They include spectrocoin, bittrex, coin base and many others. Bitcoin ATMs have also been set up in some countries and they offer a ready supply of bitcoins. Locally in Kenya, we have a few exchanges prominent among them is Localbitcoins which only deal in bitcoins and Remitano which deals in both bitcoins and ethereum. Carefully consider an exchange to buy or sell your crypto as some can be scam. The price is subject to the market forces of supply and demand, which can be manipulated by speculators. The price of crypto is most volatile among all other investments because of the sensitive nature of these assets to news events.
Whereas fiat currencies are printed by governments, cryptocurrencies are discovered. Specialized computers are used to mine because it is a competitive exercise which requires more than a regular computer. Mining is the act of processing and verifying transactions in a network and securing them on the blockchain.
So where can you spend your bitcoins or alt-coins? There are several ways of spending your cryptocurrencies just like the fiat currencies, especially if you are shopping online. A number of eCommerce platforms such as amazon and apple have approved cryptocurrencies as a means of exchange. Several stores, hotels and restaurants also accept cryptocurrencies as payment. As more governments come to terms with the changing technology and embrace cryptocurrencies, more businesses are accepting them as a means of payment. Who knows, maybe soon we will be paying for almost everything using the cryptocurrencies, even basic commodities!