A Beginner's Introduction to Cryptocurrency
Back to blog
October, 15 2022
Just ten years ago, the concept of cryptocurrency was largely foreign to the entire world. it would seem like a joke then to think that a decade later it would become both a very important term in the global financial stage and a powerful tool for personal financial freedom.
Let’s break this down into simple terms.
Naturally, when you think about money, you think about cash; you think about the dollar, euro, pounds, naira… You know that these currencies are acknowledged around the world and are accepted as legal tender.
But Africa was lucky, and our lack of infrastructure gave us an advantage when the mobile phone came along.
Today we all make online payments - whether sending money to family or buying airtime, online payment has become a thing and we no longer think of money only in terms of physical cash. Now we can easily make transactions online by just transferring directly from our bank account to another bank account. Or we pay for things we buy online with our debit or credit cards or phones without physically exchanging money.
But at the heart of this form of payment are still these currencies that are tied to a particular country or region — the US dollars, British pound, Nigerian naira, Kenyan Shilling, CFA franc or the Euro widely used by European countries. These currencies are usually regulated by the central bank of the associated countries. Governed by Central Banks - these currencies affect us all, but we have no control over which one we get to use.
Something happened in 2008 that would bring this technology to the world: the United States housing bubble burst plunged the global financial market into a crisis.
America’s bad debts became everyone’s problem, as our already fragile economies were crushed by immense pressure from business and banking.
What is Cryptocurrency?
Unlike the forms of currency mentioned above, known as fiat currency, a cryptocurrency has two important characteristics:
- It is digital - this means that it is a purely virtual currency. You cannot handle it physically the way you handle cash money. This also means that It is decentralised - meaning a cryptocurrency is not regulated by the central bank of any country, because it is everywhere. It also means that transactions aren’t slowed down by going through banking systems and switches that require approval - the network does that by design, anonymously and securely.
- It is both private and public - The “crypto” in cryptocurrency comes from cryptography - the art of making and breaking codes. Your wallet and keys to your wallet are all uncrackable (with today’s technology) and much safer than traditional banks methods.
Back in 2008, before the launch of the Bitcoin in January 2009, Satoshi Nakamoto, (the pseudonym for the person or group of persons that created the Bitcoin) invented the blockchain as an open ledger on which Bitcoin transactions are stored. Not to get into too many technical details, the blockchain encrypts the transaction details in a list of records called blocks. These blocks are linked using cryptography. This makes the identities of those transacting secure even though the ledger is open-sourced.
The implication of this is that no one person or organisation is in charge of regulating a cryptocurrency, which makes it a viable solution to one of the major problems plaguing the current financial system that relies on central bank-regulated monies.
It was on this technology that the Bitcoin, the world's first decentralised cryptocurrency, was created. Today, there are several other cryptocurrencies such as Ethereum, Ripple, Litecoin, etc, most of which are also created on the blockchain technology.
If we were to define a cryptocurrency in the simplest way, we'd call it a decentralised digital currency that is encrypted using cryptography.
What is Bitcoin?
Bitcoin is a cryptocurrency, the world’s first, in fact. Given what we already know about cryptocurrency, then, Bitcoin is a digital currency that is created, distributed, stored and traded on the public decentralised ledger called the blockchain.
You may be wondering why Bitcoin is popular. Well, it wasn’t always like that. When it was launched in early 2009, the initial price was somewhere around $0.001. In essence, it was basically worthless. This was because the only people interested in it then were mainly cryptography fans who were sending bitcoins just as a hobby through their bitcoin wallets.
Brief history of bitcoin
For the first few years after its launch, nothing really happened with Bitcoin. But in March 2010 BitcoinMarket.com (now-defunct) became the first Bitcoin Exchange platform, trading 1BTC for $0.003.
Even after that, bitcoin was still not on the radar of most of the rest of the world. So much that in May 2010, when a man in Florida made the first real-world transaction with Bitcoin, he paid 10,000BTC for two pizzas! To put that in perspective, today in September 2020, 1 BTC is worth over $11,000. Now, convert that to your local currency. Yes, that was paid for two pizzas! However, back then, it was just enough to pay for dinner.
- People started to realise the importance of this cryptocurrency and the potential financial freedom its existence brought. For instance, because it was not regulated by any bank or government, it meant anyone who owned bitcoin didn’t have to rely on external bodies like banks for the safety of their money.
It meant they could own and spend their money how they wanted without prying eyes from anywhere. That financial freedom that didn’t place restrictions on sending or receiving money from one end of the world to the other began to turn people towards Bitcoin.
And the price started rising.
- In early 2011, bitcoin went from its worth of virtually nothing when it was launched to taking parity with the US dollar in early 2011 - meaning 1BTC was worth the same as US$1. But that was just the beginning.
The price kept rising as its adoption spread. But it was not all a smooth ride. Before the end of 2011, Bitcoin experienced a 94% drop in price, going from $35 in June to $2.30 in November, that year.
- Yet, things got better again. In fact, 2013 was a busy year for bitcoin. It experienced the largest relative growth yet—from $13.40 in January 2013 to $800-$900 dollars in January 2014 (unprecedented at the time!).
- Also, in November 2013, it witnessed the largest difference between the day’s high price and the day’s low price. This is called the intraday price. On the 19th of that month, the high price was almost twice the low price.
- However, in that period, it also experienced a major dip. In December 2013, the Chinese government declared cryptocurrencies too risky and proceeded to ban all transactions for Chinese banks, Because China is one of the largest markets for bitcoin, this led to a significant decrease in the price of bitcoin—by almost half its price as at the time.
Factors Affecting Bitcoin Price
One of the things we learned from this and other similar incidents is that the price of bitcoin is influenced by several factors. These factors tell us the best time to buy bitcoin and they are including, but not limited to:
- Market demand and supply - like any other thing in the market, the higher the demand, the higher the price can become, and the higher the supply without a matching increase in demand, the lower the price can become.
- Mass media coverage - sometimes, something happens in the Bitcoin world that catches the eye of the media. When news about happenings in the bitcoin market hits the public, it usually influences either the demand or the supply, thus, affecting the price. For instance, when the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) launched Bitcoin Futures in December 2017, BTC price went up on several exchange platforms, from around $15,000 to $17,000.
- Network technical issues - for instance, in 2010 a code vulnerability allowed someone to send a transaction that created 184 billion bitcoins which was way above the total amount of bitcoin that should be in circulation - 21 million BTC. Although the issue was quickly fixed and the limit restored, incidence like this can affect Bitcoin price.
Challenges facing bitcoin
It is true that Bitcoin presents a better alternative to the prevailing system, however, it is not without its own vulnerabilities. One of such is based on its core feature: its decentralised nature. Because Bitcoin is not regulated by any governing body, whatever happens on an exchange platform can personally affect those associated with it.
For example, in 2014, the Japanese bitcoin exchange, Mt. Gox was attacked and 850,000 BTC was stolen—the largest bitcoin loss so far. At the time, Mt Gox was handling over 70% of all bitcoin transactions in the world. This led to the company suspending trading and filing for bankruptcy. You can imagine the impact on the Bitcoin world at the time.
Nonetheless, Bitcoin still has some advanced features that are in place to prevent fraud and manage mishaps. One of such is known as smart contracts. These are self-executing programs that ensure that an agreement between several parties is concluded in an automatic manner, eliminating the possibility of a breach of contract.
Another issue is the volatility of bitcoin, like other cryptocurrencies. Even though it enjoyed its lowest volatility period between September and October 2016, its volatile nature is still a cause of concern for many. While governments do not regulate Bitcoin, as the adoption spreads into new territories, the reception and consequent announcement by those countries can affect the price.
A case in point is when Chinese regulatory authorities imposed a ban on initial coin offerings (ICO) in September 2017. This made the price dip, although it picked up again soon after when the Japanese Financial Services Minister’s recognition of 11 companies as cryptocurrency exchanges. It went on to trade at an all-time high of $20,000 in December of that year.
Bitcoin acceptance and the future
Bitcoin has come a long way since then. Even though it was not the first peer-to-peer internet currency to show up, it has endured over a decade (unlike some of its precursors, Bit Gold and B. Money). Many celebrities, such as DJ Khaled and Jamie Foxx have endorsed it which has helped endear it to the public (50 Cent even accepted it as a form of payment for his album back in 2014!). In fact, Microsoft accepts bitcoin on its online stores, as well as other major companies.
Today, Bitcoin adoption is spreading through Africa and many companies like Yellow Card Financial are making that happen. The goal is to bring Financial Inclusion to everyone and make sending and receiving money from anywhere in the world seamless.
A lot of cryptocurrencies have sprung up since Bitcoin. There are very well over 5000 cryptocurrencies today and you may never hear of many of them. However, some have gained so much popularity that you will come across them in conversations involving crypto trading. Some include Litecoin (LTC). Ripple (XRP), Steem (STEEM) and Ethereum (ETH).
Every other cryptocurrency other than bitcoin is referred to as an “altcoin”. This is because these digital currencies present themselves as better alternatives to bitcoin. While their utility as a medium of exchange might not be relevant to many, people interested in investing in crypto have to understand to some extent the workings of altcoins so as to make informed trading decisions.
While cryptocurrencies are not acknowledged as legal tender almost all over the world, regulators are starting to make provision for its existence in the financial market. Other than the obvious benefits of bitcoin, some people are also starting to invest in it alongside forex.
It is an exciting time to be alive. Cryptocurrencies and blockchain technology offer immense growth opportunities for many sectors that will improve the lives of many. It is our pleasure at Yellow Card to be helping Africans adopt the use of cryptocurrencies. That’s why we make it very easy for anyone to buy, sell, receive, send and store bitcoin and other cryptos on our platform.