History of Bitcoin and Blockchain Technology
Bitcoin was created in October 2008 by an anonymous developer named Satoshi Nakamoto as an alternative means of payment. Nakamoto has never revealed any of his personal details, and his identity has never been confirmed; hence, people believe that ‘Satoshi Nakamoto’ is a pseudonym for one or a group of developers. Bitcoin has been referred to as the “21st-century version of gold.” Nakamoto called it “a peer-to-peer electronic cash system” in the Bitcoin white paper, where he created the concept of “Distributed Blockchain.”
Bitcoin was first used in 2009 after Nakamoto released it as an open-source software and mined the first ever block on the blockchain known as the ‘Genesis Block.’ It consisted of 50 Bitcoins, and from then on, other early contributors continued to mine Bitcoin until 2010. Since then, Bitcoin has been traded hundreds of millions of times to become the most valuable and well-known cryptocurrency today. More and more cryptocurrencies continued to be created. Right now, there are over 20,000 cryptocurrencies in existence, with new ones being created daily.
The top ten cryptocurrencies by market value, according to CoinMarketCap, a market research website, are:
- Bitcoin (BTC)
- Ethereum (ETH)
- Tether USDt (USDT)
- BNB (BNB)
- XRP (XRP)
- Solana (SOL)
- USDC (USDC)
- Cardano (ADA)
- Dogecoin (DOGE) T
- ron (TRX)
Blockchains are known for their security and anonymity. The two main types of blockchain are public and private, which offer different levels of security. Public blockchains use computers connected to the public internet to validate transactions, while private blockchains only allow known users or organizations to join.
Mining Cryptocurrency
Cryptocurrencies are created through ‘mining’. Crypto mining involves validating transactions on a blockchain and adding them to a distributed ledger. Miners are typically rewarded with the cryptocurrency they mine, which eventually make their way into the market. Different cryptos are mined differently. Proof-of-Work (PoW) and Proof-of-Stake (PoS) are the most widely used consensus mechanisms for validating transactions and adding them onto a blockchain.
Proof-of-Work (PoW)
The proof-of-work consensus mechanism involves the use of computers to solve complex mathematical puzzles. This method is expensive and energy-intensive. Bitcoin uses this system to create new coins. The maximum amount of Bitcoin that can be mined is 21 million.
Bitcoin mining currently consumes about 127 terawatt-hours (TWh) yearly. This is more than the annual electricity consumption of midsized countries such as Norway and Argentina. Research findings show that Bitcoin mining contributes significantly to climate change.
It’s almost impossible for an average person to profit while mining in a proof-of-work system due to its high energy consumption rate. Usually, miners join ‘mining pools’ where groups of miners combine their computational power to increase their chances of finding and mining blocks. The mining pools race to solve the puzzles, and if they succeed, the reward is distributed across the pool.
More than 60% of the total crypto market capitalization utilizes proof-of-work algorithms. Major cryptocurrencies that use this system include Bitcoin, Dogecoin, Litecoin, Bitcoin Cash, and Monero.
Proof-of-Stake (PoS)
In the proof-of-stake system, participants known as “validators” lock up a certain amount of crypto tokens in exchange for an opportunity to validate new transactions and earn rewards in the form of newly minted crypto. The validators stake their crypto into a smart contract on the blockchain. The blockchain algorithm then selects validators to verify new data blocks based on how much they’ve staked. The more the stake, the higher the chances of being selected as a validator. Verified transactions earn a reward in proportion to the size of the stake.
The Proof-of-Stake system was designed to tackle the challenges of PoW, including energy consumption and slow transaction speeds. POS also has a lower barrier of entry compared to the proof-of-work system.
Ethereum recently transitioned from the proof-of-work to the proof-of-stake system. This significantly reduced the energy consumption of Ethereum-based tokens and blockchains by roughly 99.95%. Other cryptos that use PoS include Cardano, Solana, and Polkadot. Solana processes about 3000 transactions per second, faster than the Bitcoin blockchain, which processes a transaction at an average speed of 10 minutes.
Initial Coin Offerings (ICOs)
Initial coin offerings (ICOs) were a popular way of fundraising capital for cryptocurrency projects in their early stages. Blockchain-based crypto startups mint a certain amount of their native token and offer them to early investors in exchange for other cryptocurrencies like Bitcoin or Ethereum.
ICOs allow crypto startups to raise funds without giving up equity and establish a community of incentivized users interested in the project’s success. This, in turn, increases the presale token value.
Ethereum was the first project to use ICOs as a fundraising technique and successfully raised $15.5 million in 2014. Early users who purchased ETH tokens got a 1,408,903% return on investment when ETH hit an all-time high (ATH) of $4,382.73 on May 12, 2021.
How to Invest in Cryptocurrency
If you’re a newbie in the crypto world, finding your way around the numerous cryptocurrencies might be challenging. Simply put, here are some steps to start investing in crypto.
1. Do research
Before buying crypto, it’s best to research the industry since it is relatively new. Find out what cryptocurrencies are, how they work, what makes one successful, and why. This way, you will have general knowledge about the crypto market, blockchain, and cryptocurrencies before you spend any of your money.
2. Choose the cryptos
Choose the cryptos you want to invest in After researching, you can settle on one or a few cryptocurrencies to invest in, e.g., Bitcoin or Ethereum. It’s better to invest in more than one coin instead of putting all your eggs in one basket. The crypto market is highly volatile, and different cryptos respond differently to the changing circumstances in the market.
3. Choose a broker or crypto exchange
After figuring out which crypto you want to invest in, select the broker or crypto exchange from which you will buy the crypto. A crypto exchange is an online marketplace for buying and selling cryptocurrencies. They usually offer user-friendly guidelines on how to maneuver their platforms. Popular crypto exchanges include Binance, Coinbase, Kraken and Crypto.com. Different exchanges have different crypto listings and exchange fees.
On the other hand, a broker purchases cryptos on your behalf for a fee. They act as an intermediary between you and the crypto exchange. Some brokers charge more fees than crypto exchanges. It is important to be wary of brokers since some don’t allow you to move your crypto holdings out of your account. This could be a problem when you want to move your funds to a crypto wallet for safekeeping.
4. Create an account
Once you identify a suitable broker or exchange, the next step is to create an account on the platform. You will be asked to verify your identity using a driver’s license or passport and even upload a selfie for security purposes.
5. Deposit cash into your account
Before buying crypto, you must first put some money in your account. You can deposit the money through a wire transfer or make a credit or debit card payment. However, credit card payments are usually more expensive due to higher interest rates and additional cash advancement fees.
6. Place your crypto order
Once there is money in your account, you can place an order for the cryptocurrencies you’d like to buy. Select a storage method Once you own crypto, ensure you store it in a safe place rather than leaving it in the exchange since they are prone to hacks and security breaches. You can choose to store your crypto in crypto wallets. Crypto wallets are either hot or cold. Hot crypto wallets are run online and are stored on internet-connected devices such as smartphones or computers. Cold wallets are external devices such as hard drives and are not connected to the internet, making them more secure.
Is Cryptocurrency the Future of Finance?
Due to increased adoption, cryptocurrency has been a hot topic over the years as it has undoubtedly changed how the world thinks about finance. A key feature of cryptocurrency is decentralization, the ability to conduct transactions without the need for an intermediary like banks and other financial institutions. This makes transactions faster, cheaper, and more secure. In the future, we expect to see a lot of businesses adopt cryptocurrency as a means of payment to reduce corruption and avoid manipulation. Cryptocurrencies are easily accessible. Anyone with internet can own and transact crypto regardless of where they are. As the crypto industry continues to develop and gain popularity, more and more people will likely want to adopt cryptocurrencies, as has been the trend.
Moreover, blockchain technology is changing how we perceive security and transparency in finance. In the next ten years, we expect to see more companies harness the power of blockchain technology to improve their financial products and services or develop new ones.