One of the constants in the technology space is that there’s always something new being unveiled. And over the past few years nearly all the buzz has been about blockchain technology and the potential uses for this technology that didn’t even exist 10 years ago.Well, actually, in theory, it did.All the way back in 1991 the technology for blockchains was outlined by Stuart Haber and W. Scott Stornetta. They were looking to create a system that could store indelible timestamps, but never got beyond the theoretical construct.It wasn’t until 2009 that the first real-world use case for blockchain technology hit the world. That was bitcoin, and since its release on the world blockchain has quickly become the biggest and most talked about area of technology.Bitcoin is a decentralized digital currency that runs on a public ledger, which is built on blockchain technology. In the bitcoin whitepaper released in October 2008, bitcoin was referred to as, ‘a new electronic cash system that’s fully peer-to-peer, with no trusted third party.’If you can understand how blockchain was used to create bitcoin, you can begin to see all the other potential real-world implementations of the blockchain that become possible.
The bitcoin BlockchainAs mentioned above, the bitcoin blockchain is a public ledger that is tamper-proof and records every transaction that has ever occurred. This is said to make bitcoin transactions safer and more secure than the current monetary and financial systems.The blockchain that underlies bitcoin is also decentralized. That means there is no single entity that controls the blockchain or the bitcoin currency. Instead the blockchain is maintained by the group of individuals and entities known as miners.Miners run high-powered computers that work to solve complex cryptographic problems that verify the blocks and transactions on the blockchain. They are rewarded for their efforts with newly minted or mined bitcoin. Their activity also ensures the network remains secure from tampering.After a miner validates a block and receives their reward the block is added to the chain of previous blocks. Thus the term “blockchain” was coined to describe this creation.
How the blockchain remains tamper-proofThe blockchain has been praised because it is tamper-proof. That’s because each block added to the chain has its own cryptographic reference, or hash, that refers to the previous block. The hash is created as a part of solving the cryptographic problem to validate the block. The hash is encrypted and unique, and if a block is tampered with it also changes the hash. In order to maintain a valid blockchain it would then require the person tampering with the block to re-mine every other prior block to create the proper hashes. With current computer processing power that is impossible.
Where Is the Blockchain stored?In the case of bitcoin, the blockchain is stored on any computer running a network node and can also be viewed by anyone who wishes to do so. If you are running a network node you get a copy of every block as it is added to the blockchain. As of November 18, 2018 the 90-day average number of full nodes is just under 10,000.The number of nodes has continued growing, and the larger the network becomes, the harder it is to tamper with the blockchain.
Advantages of Blockchain TechnologyEven though it seems very complex, the potential of the blockchain as an indelible and decentralized record-keeping system is nearly limitless. Blockchain technology presents fewer errors, lower fees, better security, greater privacy and a tamper-proof record of transactions.Here are the known advantages of blockchain technology for businesses:
In ConclusionThe blockchain seems complex, and while it is if you need to understand the programming, it really isn’t much more than a public database of transactions, all linked together and secured by encrypted mathematical problems. This concept, which only emerged in 2009, could very well change the way businesses, governments and every single person on the planet operates financially.We continue to come up with new implementations for blockchain technology, and improvements are now being developed that will make the technology more secure, more private, less expensive and much faster. The coming years will almost certainly see blockchain technology being used to increase security, efficiency, accuracy and privacy in business and government dealings.As bitcoin heads into its second decade of existence the only question is what won’t be impacted by blockchain technology.
Because cryptocurrencies are typically referred to as coins or tokens it is perhaps unsurprising that we’ve settled upon the term wallet as an analogy for a place to store the digital assets. But since cryptocurrencies are digital, what exactly is a cryptocurrency wallet, and how are they used to store the various coins and tokens used to represent digital blockchain assets?In short, a cryptocurrency wallet is a software application that is used to store the private keys that convey ownership of the digital assets known as cryptocurrencies.The private key in cryptocurrencies is paired with the public key and is what allows for verification that a wallet address holds the cryptocurrencies when they are being transferred to a different address. The public key is what is shared to have coins sent to your wallet, while the private key is used to prove you have the coins when you’re trying to transfer them.
Types of cryptocurrency walletsCryptocurrency wallets are available in several versions, with differing functions and features, and a variety of user interfaces. Some store just one type of cryptocurrency, while others can hold dozens or hundreds of different cryptocurrencies.The wallets come via several different platforms. There are basic web-based wallets, such as those you use when you purchase Bitcoin or other cryptocurrencies from an exchange. One such popular web-based wallet is MyEtherWallet. Its popularity stems from the fact that it can be used to store any of the hundreds of Ethereum ERC-20 compatible tokens. Another plus point is that it is free to use. This open-source client-side interface allows for easy interaction with the Ethereum blockchain.There are also desktop cryptocurrency wallets that are installed on a PC, and mobile cryptocurrency wallets for use on smartphones and other mobile devices. Exodus and Jaxx are popular desktop wallets.One of the most secure cryptocurrency wallets is the hardware wallet. These are small devices that were created specifically to store and secure cryptocurrencies. The most popular hardware wallets are the Ledger Nano S and the Trezor. Both can hold hundreds of different cryptocurrencies, and as long as they aren’t connected to the internet are considered 100% secure.A final type of cryptocurrency wallet is the paper wallet. Where the other cryptocurrency wallets store the public/private keys of the cryptocurrency within the software application, often in an encrypted state, a paper wallet has the private key (and possibly a QR code) printed on a piece of paper. Because they can be generated offline, and are never connected to the internet, they are considered the most secure type of wallet. Of course, since they are paper, they are subject to other risks such as theft or accidental destruction.They might be called wallets, but cryptocurrency wallets do much more than just hold your currency, cards, and receipts. They are a connection to the blockchain, allowing users to send and receive, keep track of, and secure their coins. Some wallets even have features that allow you to swap one cryptocurrency for another. In that way they are a blockchain interface, not just a storage medium.
How would you feel about an asset that has wildly volatile price swings, no regulation or protections, and a seemingly endless number of scams?That's the impression that new traders get when they first check out the cryptocurrency markets. The risk levels look off the charts, but cryptocurrency trading doesn't have to be as risky as it appears at first glance.If you take some time to educate yourself about the markets and various cryptocurrencies you can substantially reduce the risk in your cryptocurrency trades.To get your education started and help you avoid some of the risks associated with trading cryptocurrencies here are the top risks you need to be aware of in the markets.
Market Risk #1: Asset VolatilityHere we are at the end of 2018 and the bear market that gripped cryptocurrencies throughout most of 2018 is well known. From January through November the MVIS CryptoCompare Index lost roughly 80% of its value. That makes the 2018 cryptocurrency bear market worse than the dot-com bust of 2000 when technology indices lost 78%.Bitcoin peaked just above $20,000 in December 2017 and went on to drop below $6,000 by mid-November 2018. The rest of the market looks similar too, with most altcoins dropping substantially throughout 2018 and showing little movement at all during September and October.But we can't only look at 2018. Bitcoin and cryptocurrency markets have seen similar crashes before.
- In 2011 the first Mt. Gox hack caused a 95% drop in bitcoin.
- In 2013 banking issues in Cyprus caused a 52% move lower.
- And 2014 had a second My Gox hack leading to a 63% bitcoin loss.
Market Risk #2: Regulatory IssuesWith little progress made on the regulatory front in 2018, this could be one of the largest risks in cryptocurrency trading in 2019. That’s because we simply don’t know what regulations and laws could be enacted, having a major impact on our trades.The cryptocurrency asset class is just so new that governments and financial regulators haven’t yet decided how to classify and deal with them. Tax status, trading rules and even the legality could change on a dime, creating potential risks for you just by holding cryptocurrency.
Market Risk #3: LongevityNot many traders think of it, but the growing number of altcoins can present trading risks. There’s probably more, but right now Coinmarketcap.com lists 2082 altcoins. And it’s an impossible task to complete due diligence on all of them to know which ones might have the potential to remain for the long term.So far there are very few real world examples of mainstream blockchain adoption. Prices of coins are being driven solely by speculation. And experts in blockchain technology agree that nearly all the projects currently in existence will die off in the coming years.Even after the bear market of 2018 there are 14 coins with market capitalizations greater than $1 billion. And that means nothing for the longevity of any of them. It’s simply far too early in the game to have any confidence that any single cryptocurrency will last more than a few years at best.
Market Risk #4: No Consumer ProtectionSo far there are absolutely no consumer protections for cryptocurrencies. No FDIC to protect your holdings, and no Better Business Bureau to complain to when an exchange treats you poorly. Speaking of exchanges, they are hacked frequently, and the return of your funds is completely up to the largesse of the exchange. With that said, there’s nothing to stop exchanges from manipulating prices to take your funds either. And that brings us to the next risk...
Market Risk #5: Market ManipulationIt’s been alleged many times, but it’s never been proven. Even without proof it’s widely believed that cryptocurrency markets are rife with collusion, market manipulation and insider trading. Experts have even hypothesized that the massive rally at the conclusion of 2017 was primarily due to the efforts of a small group of people with huge cryptocurrency holdings working together.It’s well known that there are so called “pump and dump” groups, and seeing an altcoin shoot up one day and crash the next is commonplace. It’s also common to see accumulation of coins ahead of positive news, and dark pools are used to keep exchanges unaware of trade volume.The lack of regulation makes these activities impossible to prevent, yet they do add risk to the markets, especially for new traders unaware of the morally questionable tactics sometimes being used.
Market Risk #6: Market ExitsEven the most devout cryptocurrency enthusiasts may want to cash in their altcoins for fiat at some point. Surprisingly, this too can create risk. It’s improving but moving cryptocurrencies back into fiat can be a difficult proposition. Several factors contribute to this problem:
- Most exchanges require KYC and AML verification before allowing withdrawals. This process can take valuable time.
- Many exchanges that allow fiat withdrawals only support a handful of the largest coins.
- Most exchanges only allow USD withdrawals. There are some that support EUR, GBP and JPY withdrawals, but the choice is frustratingly limited.
- Exchanges may have tight limits on fiat withdrawals.
- Exchanges have been accused of withholding or freezing funds for vague reasons.
Market Risk #7: ScamsWe all know that scams are widespread in the cryptocurrency industry and newcomers are most susceptible to getting pulled in and ripped off.One common type of scam is the fake ICO. An ICO is the equivalent of a stock market IPO. Unfortunately too many people fail to do research into ICOs they hear about. Scammers quickly learned this, and they were quick to jump in and offer fake ICOs or set up phishing sites that looked like a known ICO. Once they get their hands on the cash – poof! – they’re gone.Another common scam is on the social media platform Twitter. Scammers set up accounts that look official and promise to pay out a certain amount of coins in the future for a small deposit today.Finally there are the Ponzi schemes that are branded as blockchain projects. The most famous include Bitconnect, Plexcoin and OneCoin. Remember that even in cryptocurrencies if it sounds too good to be true it often is too good to be true.
Market Risk #8: Human ErrorYou simply can’t avoid human error in pretty much anything you do, but with cryptocurrencies mistakes are easier to make and the risks are very real. Those with no trading experience are going to find the exchange interfaces very confusing, and the chance of making a mistake there for newcomers is nearly guaranteed. Placing an incorrect order is the smallest risk too. You could send your coins to the wrong address, or even lock yourself out of your account or wallet entirely.
In ConclusionRisks are a part of any investing strategy. That’s why risk/reward ratios are so common around investments. When it comes to cryptocurrency trading, you’ll find both the risks and rewards at an extremely high level. If you don’t have the mental fortitude to watch an asset you own move by 10% or more in a single day, then cryptocurrency trading might not be for you. But if you can manage the risk that comes with cryptocurrency trading you could find it is a very rewarding activity.Bitcoin Volatility.png from https://www.buybitcoinworldwide.com/volatility-index/
Cryptocurrencies are notoriously volatile, although more recently that volatility has dried up and bitcoin is now less volatile than the Nasdaq.That lack of volatility makes it less likely that you would be able to make 2-3% daily in trading cryptocurrencies.Even if the volatility were to return it is extremely unlikely, virtually impossible, for you to make 2-3% every single day when trading cryptocurrencies. The odds simply aren’t in your favor to get consistent daily returns like this day in and day out.There are always going to be unexpected events that can cause you to have a bad day, or even a string of bad days. And since prices rarely continue going straight up, it’s almost guaranteed that you’ll make some bad trades all on your own.If you still think making 2-3% daily seems realistic, consider this; starting with $10,000 and compounding by 3% per day you’d end a 31-day month with roughly $25,000. Maybe that still sounds realistic? What about the $147,000 you’d have after 3 months? And if you still think it sounds realistic consider that a 3% daily return for 365 days, 1 year, would net you a grand total of just shy of $485 million.Bitconnect promised 40% monthly returns, which is far less than a 2-3% daily return, and it was soon discovered to be a scam. There are other scams, usually Ponzi schemes, that have offered similar returns.I know cryptocurrencies have delivered some crazy returns for people over the years, but not consistent returns over the longer term. Like any other asset class there are periods of good returns and periods of poor returns. If anyone tells you they can deliver 2% every day you should run in the opposite direction, because it simply isn’t realistic.
Bitcoin mining is the process of creating new bitcoin from your computer by “finding” new blocks. Miners use powerful computers, known as ASICs (application specific integrated circuit), to help secure the bitcoin network and to update the bitcoin ledger. Currently the first miner to find a new block is rewarded with 12.5 BTC. That reward is halved roughly every four years and will drop to 6.25 BTC approximately on May 22, 2020.
Bitcoin MiningAnyone can participate in updating bitcoins ledger and become a miner. All that’s required is a computer powerful enough to solve the cryptographic problem created to “hide” blocks. If your computer is the first to solve the problem, you get the BTC reward.Sounds like an easy way to get some free money, right?That used to be the case, but not any longer.Bitcoin mining was designed so that the more power there is directed at finding a solution to the block problems, the harder those problems become. In essence, the network increases difficulty to ensure that a block is only found, on average, every 10 minutes. That keeps inflation in check, but now that so many miners exist it also means the difficulty has gotten extremely high.As you can see from the chart below, the difficulty remained very low until late in 2015. It really began to grow in 2017 and has been nearly parabolic since.
Mining EvolutionWhen bitcoin was created in 2009 mining was done with the central processing unit (CPU) in a personal computer. The difficulty was quite low at that time, but soon people began looking for more powerful ways to mine, so that they could find more bitcoin.By 2011 many miners had shifted to using the graphics processing unit in their computer to mine bitcoin. That was more efficient because one GPU has the mining power of 30 CPUs (on average).The next shift in bitcoin mining came in 2013, when the ASIC miner was introduced. ASIC stands for application specific integrated circuit, and as the name suggests the units are built specifically to mine bitcoin, or to solve the cryptographic problems used by the bitcoin network.Today the standard for mining bitcoin is the ASIC rig.
Can you make money mining Bitcoin?Yes you can, but the correct question should be whether it is possible to become profitable mining bitcoin.Anyone can purchase an ASIC unit and mine using it. You can even join mining pools, where you add your mining power to that of others, and for each block found by the pool the mining reward is split between the active miners in that pool. You’ll get small amounts of bitcoin regularly this way.The truth is that profitability in bitcoin mining depends on a lot of factors. There are calculators that help you determine your potential profitability. Here’s what you can expect if you’re mining with an Antminer S9 ASIC unit, which is considered one of the better mining rigs: As you can see the expected outcome is a small loss of $2 a week, or a bit over $100 a year.Here are the factors you’ll need to take into account when calculating bitcoin mining profitability:
- Hash Rate – This refers to the performance of your mining hardware. It’s a measure of how many guesses per second are being made. Hash rate is measured in MH/s (mega hash per second), TH/s (terra hash per second), GH/s (giga hash per second), and PH/s (peta hash per second).
- Bitcoin Reward – The reward for finding a block halves roughly every four years. It began at 50 and is 12.5 as of 2018. The next halving is expected to occur in May 2020.
- Mining Difficulty – How difficult it is to find the next bitcoin block. This is based on how much mining power, or hash rate, is in the network.
- Electricity Cost – ASIC mining units use a lot of electricity, and that cost will affect your potential profitability. You can find your electricity cost (in $/kWh) on your electricity bill.
- Power Consumption – The greater the power consumption, the more electricity you’ll be using.
- Pool Fees – Unless you have a mining farm, you’ll almost certainly be using a mining pool, and they come with fees that can range from 0% up to 3% or more.
- Bitcoin’s Price – Always changing.