Hello, my name is Carl and I am the “Crypto Hound”. I help businesses and individuals understand, use and invest in cryptocurrencies through blogs, training and technical support.
My aim for this guide is to help you understand Cryptocurrencies (an alternative to money) highlight their unique security, speed and privacy features when compared to regular money, how you can use them in everyday life and make money by investing in them.
What are Cryptocurrencies?
Cryptocurrencies (“Cryptos” for short) are an alternative to traditional money (pounds, euros, dollars etc). They are digital like 92% of our money today and Intrinsic in their nature is security, privacy and speed. They enable payments to be made directly between buyers and sellers without the need for a third party like a bank or money exchange. The infrastructure to buy and sell all ready exists and they are being used today.
What types of cryptocurrencies are there?
Much like there are different monies (euros, pounds and dollars), there are many different cryptocurrencies (i.e. Bitcoin, Dash, Monero and ZCash) offering unique selling points including speed, levels of security and privacy.
Money verses Cryptocurrencies
Money as we know it is controlled and managed privately by banks and financial institutions known as “Trusted Third Parties”. Without them you cannot buy and sell goods and are reliant on them to validate and process every transaction you make.
Their role is to store customer’s money inside accounts, validate transactions and log them using a process known as “book keeping!”. This “centralised” and closed ledger of transactions can only be seen by the bank and cannot be verified by the public at large. Typically banks have high overheads in terms of buildings, energy, transport and salaries which are paid for by the Customers.
There is no central controlling authority for Cryptocurrencies and everyone can use them to immediately send and receive by installing a free software wallet on their computer or smartphone without prejudice.
Cryptocurrencies are built on a public and decentralised “trustless” technology called a “Blockchain”, a software which holds the ledger of all transactions distributed across a network of internet connected computers called “nodes”. Anyone can run a node by installing and running the Blockchain software on a computer to help maintain the ledger, validate transactions and relay changes with other nodes automatically.
The only costs incurred in a Cryptocurrency system is the electricity used to power the computer nodes which is significantly less than running our current banking system (for example Bitcoin the most used Cryptocurrency uses half the power when compared to banks).
What is the Technology behind Cryptocurrencies?
When explaining the Blockchain technology that underpins each cryptocurrency I like to use trees as examples. Imagine the rings inside the tree representing its age being the transactions which are joined together sequentially to form the tree (a block). The trees are then connected by the roots (the chain) joining each tree (block) also in sequential order.
It would be very hard to erase one of the rings without destroying the tree and it is impossible to delete or change a transaction because they form the block. As all the root systems (chain) in a forest are connected to each other, all the trees (blocks) that form the chain know about each other and have a record of the transactions across the Blockchain. If a tree were to die, because all the other trees have a record of all blocks and transactions nothing is lost.
How are Cryptocurrencies created?
Traditionally the privilege of controlling money is given to banks and you and I cannot create money otherwise we will be arrested for counterfeiting! At one time money was backed by a weight in gold which gave money its intrinsic value and helped regulated the market because there was a limited supply of gold in existence.
These days nothing backs money which allows banks to create an unlimited supply (called Fractional Reserve Banking) without being arrested for counterfeiting! They create money in the form of credit cards, loans, mortgages, overdrafts and the interest payable on this debt which appears as assets on the bank’s ledger. Customers then use this money to buy and sell but at some point the debt has to be repaid and if all the Customers were to pay it off, there would be no money in existence! Therefore the banks need to continually find ways to create more debt to keep their balance sheets alive and the cycle continues.
Each decentralised Cryptocurrency blockchain ledger relies on the vast computational power of all the thousands of computer nodes on the network to create new Cryptocurrencies. This is done by all the nodes following the rules of the software automatically to keep the ledger updated and validate transactions in a secure manner. These nodes are called “Miners” and they compete with other Miners to validate transactions – the more powerful a Miner, the quicker they can validate a transaction. Once they validate a certain number they form “Blocks” which are then added to the Blockchain ledger in sequential order. The process of creating a Block is called “Mining” and once a block is mined the Miner receives a reward in new Cryptocurrencies – this is the only way the supply of Cryptocurrency can be increased by the Miners doing the work of validating transactions!
Mining can be profitable and the newly created Cryptocurrency can be exchanged into money. You can own a Miner at one of the many Mining farms across the world, help keep the blockchain secure and earn money at the same time!
Cryptocurrencies are anti inflationary and counterfeiting them is impossible because all Miners on the network are following the same software rules. Using Bitcoin as an example, only 21 million can ever be created and every four years the difficulty for mining them doubles making it harder to mine which slows down the creation of new Bitcoin. Should a Miner decides to counterfeit their own Crypto, because they are not following the rules all the other Miners will reject this illegal creation immediately! In Cryptoland being in debt is impossible as you cannot have a negative balance, you either have some Cryptocurrency or you don’t!
How private and secure are your Cryptocurrencies?
Your bank knows everything about you, your transaction history, how much money you spent, what you spent it on, your credit score, where you live, how much money you earn and your inside leg measurement (well probably not but I hope you get the idea!). All of this data is often sold to third parties and you have no say in it like when Mastercard sold client data to Google in 2018.
What has all the above information got to do with banking? Surely all they need to do is validate the transaction by confirming the buyer has enough funds in their bank account to pay the seller, facilitate the movement of funds and update your account balance on the banks’s ledger?
Nodes on the cryptocurrency Blockchain only need to know whether your account (not you as a person) has sufficient funds to pay the seller then validate the transaction and move the funds to the seller’s account updating the ledger at the same time. No names, addresses, credit scores or bra sizes required! Cryptocurrencies are 100% anonymous which prevents users from falling victim to fraud or identity theft.
There are many ways in which you can authorise spending money from your bank account including PINs, signatures and passwords which are often very public and give a would be thief more ways to compromise your funds.
Inside the world of Cryptocurrencies it’s much simpler, flexible and more secure. Your funds are stored on the Blockchain and referenced by a public key (long string of numbers) which is the equivalent of a bank account number. Linked to this public key is a private key (even longer string of numbers) that only you know. You then use a software program called a Wallet which resides on your computer or smartphone to reference your public key and Crypto assets. When you send funds to someone else’s wallet the private key signs the transaction in the background and never gets revealed, therefore impossible for a thief to know.
This is an overview guide so get in touch if you want to understand in details how to setup your own wallet.
Are Cryptocurrencies cheaper to use than Money?
Putting aside the inflationary effect of banks increasing the money supply which raises prices, how much does it cost to use money? Using a debit or credit card to purchase goods, the retailer gets charged anywhere between 3% and 5% in order to use the Visa or Mastercard network which gets passed on to you the buyer. Then there is the cost of withdrawing and paying for goods abroad, maybe you have a monthly account charge and then when you go overdrawn there is a charge too!
There are no costs to use cryptocurrencies apart from the transaction fee which is normally a small fraction of a percent. They know no borders so there are no fees to pay abroad and It is impossible to go overdrawn (you either have Crypto or you don’t).
How Reliable are Cryptocurrencies compared to money?
When you make a payment to a retailer, you will see money deducted from your bank account the same day, however it may take upto three days for your bank to reconcile with the seller’s bank account.
The funds inside your bank account exist on computer databases physically at your bank – sure they will have back up locations but nowhere near as many nodes as there are on a cryptocurrency Blockchain (as at May 2018 there were over 8000 Bitcoin nodes securing the Bitcoin Blockchain). The benefit of many nodes means that a cryptocurrency transaction can be validated instantly and a few hundred nodes going down doesn’t make a difference.
Banks are also reliant on the financial networks of Visa and Mastercard to process your debit and credit card transactions, so when they fail as they have done in recent years it is impossible to make payments using your bank card – one single point of failure?
If your bank account or debit card is lost or stolen you are reliant on the bank having to print a new card for you and waiting upto a week before you can make payments again. If you lose the phone which has your Cryptocurrency Wallet on, you simply install the Wallet on a new phone and use your private key to associate your funds with the new wallet (no phone call to bank required!)
Are there any restrictions using Cryptocurrencies?
Attached to a bank account are restrictions like how much you can withdraw each day in cash, it may take days to send money abroad and your bank could refuse a transaction without your permission because you are making an “unusual” transaction (is it any of their business where you spend your money?). As we move to a more digital cash free society this could mean that you lose control of your money and give more control to the banks to handle your finances. At least with cryptocurrencies you have 100% control of your wealth and decide where, when and how you spend your funds.
Can you use Cryptocurrencies to buy and sell today?
If you wanted to open a bank account today, how long would it take you? My guess is that after scrutinising you for your very personal details, checking your credit score etc, it would take maybe a couple of weeks to begin using your new account after a physical card has been sent out to you.
To start using a cryptocurrency you could literally be operational in minutes by downloading and installing a software wallet and you are ready to go!
How to buy and sell using Cryptocurrencies
The role of Public and Private Keys
Your Crypto exists on the Blockchain are identified by a Public Key (see below). You give a public key to someone who you want to receive Crypto from.
Example of a Bitcoin Public Key: 3E6Nkgz8DXzYEqhXuw4CMsU44geHD2r5tE
For every Public key there is a Private Key (24 characters) which must never be revealed to anyone and must be stored in a safe place. This key is used to authorise sending Crypto to someone else. Knowing the public key does not reveal the private key!
Using Wallets to send and receive
You can only send and receive Crypto if you have a Wallet which comes in many forms; desktop, mobile, web and hardware (the most secure). A wallet is similar to how you use an online bank account to send money to someone.
When you do send Crypto to another person’s public key from your wallet the private key signs the transaction hidden and encrypted in the background and never gets revealed.
Similar to how you use a PIN to authorise a debit card transaction in a shop, each wallet has a password that you enter to authorise the private key to sign the transaction and send the funds. You can change the password at anytime. Most wallets also utilise a QR code (similar to a barcode) which you can scan to save typing the long public key.
What are the downsides of using Cryptocurrencies?
For years we have been reliant on banks to organise our money and provide a system in which we use to access those funds. Maybe for you this system is very convenient and to move to a system in which you are 100% responsible for your wealth by having to safely store a private key somewhere maybe a step too far…after all with Cryptos you are the bank and if you lose your private key then you lose your assets forever!
Where can you buy cryptocurrencies?
The easiest way to accrue cryptocurrencies is If you have a product or service to sell – how about adding a 10% discount to your next invoice if clients pay in cryptocurrencies, put a sign on your shop window saying “we accept cryptocurrencies” or sell a cake to a neighbour in Crypto?
You can also buy Cryptocurrencies with cash at a Cryptocurrency ATM or directly from someone you know. They can also be bought online with a debit card or via bank transfer through an online exchange.
Recommended online cryptocurrency exchanges to use
Coinbase (Buy with your debit card)
Probably the easiest and quickest exchange to use if you are starting out and want to buy the key cryptocurrencies like Bitcoin, Litecoin and Ethereum using a debit card. They charge a 4% fee for each transaction and if you use the link below you will get £6’s worth of free bitcoin on your first exchange!
Bitstamp (Buy with US Dollars and Euros)
This is my favourite exchange for buying Bitcoin, Litecoin, Ripple and Ethereum and charges only 0.25% per transaction. However you need to have a Euro or US dollar account. If you don’t have either of these, I recommend using a Revolut card to exchange from your currency at wholesale rates.
Binance (Buy with Bitcoin or Ethereum)
This is my go to exchange for buying all of the other cryptocurrencies that Bitstamp and Coinbase don’t stock. Fees are 0.05% on each trade.
How valuable are Cryptocurrencies?
The traditional money supply is being squeezed through inflation, bank charges and taxation which means the value of your Pound, Euro or Dollar today is worth less than it was yesterday. Whereas Crypto assets maintain their value as they are impossible to inflate due to their limited supply and therefore provide a more solid currency.
It’s only when you start to compare cryptocurrencies to money that their value can change. The price of a particular currency can be volatile and in 2017 investors have seen their crypto assets increase in value compared to money by over 100% in the first six months and to see them dive to 10% profit in the following six months. However if you were to look at the annual interest rate for a standard UK Pound (£) bank current account for the same period it would have given you a 0.00095% return!
Checkout https://www.coingecko.com/en to see how valuable each cryptocurrency is today.
Personally I buy cryptocurrencies in the hope that they will one day become mainstream and enable anyone with an internet connected device to do business. Today there are still many humans who do not have a bank accounts, carry lots of cash around and have a smartphone that they could use to transact using Cryptocurrencies.
Real world use of Cryptocurrencies
All ready there are real world examples of how cryptocurrencies are being used successfully. While I was travelling South America I was able to pay for food and healing ceremonies and the list below highlights some other examples:
- You will find ATMs in most cities to exchange money for Cryptos
- Cafes, shops and communities are turning to Cryptos as a cheaper alternative
- NEM and Pundix have created a PDQ terminal for retailers to accept Cryptos
- Using the Minex Pay debit card pay for goods in Crypto where you see a VISA sign.
- Cryptos low fees mean they can replace existing global money transfer systems
- Companies like Nasdaq, Yahoo finance and Square have financial crypto products
- Pension firm Hargreaves allows you to invest your pension into Bitcoin.
How Blockchain technologies are changing the world
It’s not only the finance industry that is reaping the benefits from the Blockchain technology that cryptocurrencies are built on.
Below are a few examples of how this technology is also improving other industries where traditionally information has been heavily centralised, slow and costly to manage.
- Crypviser’s messaging app that doesn’t steal your contacts like WhatsApp.
- Steemit is an uncensored alternative to Facebook
- Sonm are competing directly with Dropbox and Google Drive to store your files encrypted over the Blockchain.
- VeChain’s solution tracks end-to-end medical equipment transportation.
- Icon is helping the Korean government make elections more transparent.
- Everpedia has a transparent encyclopedia that cannot be censored and controlled.
- Umbrella is disrupting the insurance industry with its “pay as you go” product
Should you get involved with Cryptocurrencies?
I feel cryptocurrencies offer a real alternative to money enabling buying and selling securely without the restrictions of banks. More importantly you can be in control of your wealth and do with it as you wish…with Cryptocurrencies you are the bank!
For some people there is no need to change our current system, maybe it brings up too much fear and perhaps they don’t want the responsibility of controlling their finances…For those of you excited by the prospect of cryptocurrencies I encourage you to look deeper into your pocket and the world of money and see whether cryptocurrencies may be an alternative for you.
How I can help you?
My background is in technology and training and for over 10 years I have provided IT Support to home and small business users through my IT company ithound.co.uk. In recent years I have added Cryptocurrencies to my product offering with cryptohound.me
Whether you are a business wanting to accept cryptocurrencies or an individual interested in investing in them, I will help you get started and provide training and support to give you confidence using them.
I regularly write blogs on the Steemit platform so be sure to connect with me there if you want to keep up to date on cryptocurrencies and Blockchain technologies.
Carl Hughes, The Crypto Hound
Signal Messenger: +447919 562 418
Telegram: @ flowingman