Decoding the digi-world: The how, what, and why of cryptocurrencies
In part two of our five-part series, Khaleej Times examines the highly volatile world of cryptocurrencies and how you can buy and sell them
If you have not yet heard about crypto or cryptocurrencies, you must probably be living under a rock.
Every bit of talk these days seems to be about bitcoin — and other cryptos
Which brings us to the big question — is crypto even real money?
Am I ready to add these new kids to my investment portfolio? Is crypto the gateway to the future economy?
And the biggest question of them all — is it safe to invest in cryptos, given the way the digi-currency has been careening like a yo-yo in recent years?
Investing and trading cryptocurrencies can be different from investing in other assets, but there are some similarities as well, say experts.
In part one of this Khaleej Times’ special on digital assets, we looked at blockchain technology — the decentralised online ledger system that makes all crypto-based transactions possible.
Today, we deep-dive into the highly volatile world of cryptocurrencies. From bitcoin to Ether, and from paying in cryptos for a brand-new Lamborghini or a cup of tea, we look at everything you need to know about the internet’s most-talked-about digital asset.
What are cryptocurrencies?
By trading in bitcoin, you are not buying a currency; you accept the idea behind the coin — supported by underlying blockchain technology. Confused?
Motaz Ben Saoud, the director of business development at the Sharjah Research, Technology and Innovation Park (SRTI Park), will explain. “I am fascinated by crypto,” said Ben Saoud.
“In basic terms, cryptocurrency or crypto is digital currency where transactions are done on blockchain technology. Crypto is currently not managed by a central authority such as a bank that propagates its use, instead it is a decentralised system where transactions are recorded and verified across multiple computers,” he explained.
Multiple cryptos can be traded on centralised or decentralised exchanges.
“Banks, for example, keep ledgers to maintain how much person X or person Y have in their accounts. With crypto, all of that information is verified on multiple computers worldwide,” said Ben Saoud.
Bitcoin, the world’s first and most popular cryptocurrency, was first outlined in principle by an anonymous developer (s) Satoshi Nakamoto, in a 2008 paper titled Bitcoin: A Peer-to-Peer Electronic Cash System.
He, or they, described the project as ‘an electronic payment system based on cryptographic proof instead of trust.’
Cryptographic proof comes in the form of transactions verified and recorded on a blockchain.
How can you use cryptocurrencies?
Many people invest in cryptocurrencies as they would in other assets such as stocks or precious metals.
According to Ben Saoud, cryptocurrencies are used for three main purposes:
1. Crypto owners trade them, wherein they buy and sell them just like stocks
2. It is used for purchasing NFTs on the metaverse and for real-world goods and services
3. It facilitates in-border and cross-border transfers.
“Since crypto is decentralised, by its very nature it is borderless, which makes it easy to transfer it across countries.
“I can assign some of the digital money to someone in another country without using a money transfer agency,” he added.
What does the word crypto mean?
Ben Saoud explains. “It means it is secret or hidden, something that cannot be counterfeited,” he explained.
“The blockchain technology ensures that the double spending of cryptocurrencies does not happen. You cannot spend the same coin or token to purchase two different things. The ledgers are verified every time a transaction occurs,” he stated.
What are the various types of cryptocurrencies?
You may be familiar with the most popular ones, Bitcoin (BTC) and Ethereum (Ether), but did you know more than 10,000 different cryptocurrencies are in circulation. Other types of crypto generally fall into two categories: coins and tokens.
“Ether has become very popular as it can be used to purchase or sell non-fungible tokens (NFTs) on the Ethereum blockchain. For example, Ether has become very popular on the metaverse,” he added.
One can also purchase crypto tokens which are built on existing blockchains. Tokens can be used for transactions in real-world items such as electricity, money, digital assets, and more. They also allow for the creation and execution of smart contracts.
Other popular cryptocurrencies — both coins and tokens — are Binance Coin, Dogecoin, ADA, SOL, USDT, XRP, and Litecoin.
How to buy cryptocurrencies?
According to Ben Saoud, there are two ways to buy cryptocurrencies: centralised exchanges or decentralised exchanges.
The idea of centralisation refers to using a middle man or third party to help conduct transactions. “Binance or BitOasis, are examples of centralised exchanges (or CEX). One has to go through a simple verification process, and you can exchange your fiat money for crypto. Binance also allows you to re-convert your crypto into fiat money, such as dirham,” he said.
Other examples are Coinbase, eToro, Robinhood, and Gemini.
A decentralised exchange (or DEX) is a peer-to-peer marketplace where transactions occur directly between crypto traders. They foster financial transactions that aren’t officiated by banks, brokers, payment processors, or any other kind of intermediary.
What is a digital wallet?
A cryptocurrency wallet is an app that allows cryptocurrency users to store and retrieve their digital assets. It behaves like a traditional wallet; however, it holds proof of the owner’s digital cash instead of paper currency.
Each wallet comes with a private key that allows only the owner to access the wallet’s contents. There are different crypto wallets available, including mobile apps and wallets that look like USB sticks.
Examples of wallets are Coinbase Wallet, Crypto.com, Zengo, Binance, Bitcoin IRA, MetaMask, Kraken, Bitcoin IRA, etc.
Where can you use cryptocurrencies?
According to those investing in cryptocurrencies, the potential is limitless. For many, cryptocurrencies are a tool of long-term investment, a way to send non-cash remittances, get paid to post content, buy property, buy expensive sports cars, and travel the world.
Travel agencies such as CheapAir and Destinia accept Bitcoin as a payment method to book flights, car rentals, and hotels. For those who desire space travel, Richard Branson’s commercial space travel company Virgin Galactic had announced way back in November 2013, that it would accept Bitcoin for space travel bookings.
Many companies, law firms and cafes in Dubai also accept crypto to facilitate payments. Luxury real estate developer Damac announced it would soon accept crypto as payment.
Cryptocurrencies will be the only currency traded in the metaverse. According to experts, crypto wallets will hold individuals’ metaverse-only digital goods such as avatars, avatar clothing, avatar animations, and virtual decorations. For example, Decentraland’s native MANA token is the currency used throughout the metaverse.
What about cyber threats?
The short answer to that question is both yes and no. While there is no way to change, hack or cheat the blockchain system on which cryptocurrency is based, it is not 100 per cent failsafe.
Emad Haffar, head of technical experts at Kaspersky, said: “Our reality is ripe with data security and privacy challenges that we continue to overcome. As companies push their boundaries into making the metaverse the next frontier for life and work, similar challenges — perhaps more complex in nature — are bound to overspill into our virtual world.”
Haffar said identity theft and account hijacking by analogue with social networks and multiplayer games could potentially lead to theft of virtual or real fiat currency or cryptocurrency from cards and wallets linked to an account or expensive virtual items such as skins or outfits.
“Cyber criminals too are doubling down on more complex and targeted attacks, and are always looking for new ways to achieve their goals. Metaverse will become one of the gateways. Since we will be venturing into the unknown, it is important that users like you and me tread with caution,” he said.
Start with taking simple precautions such as avoiding sharing personal and financial information, and educate yourself on this new phenomenon,” stated Haffar.