Cryptocurrency is created through a process known as “mining”. However, the process differs from one cryptocurrency to another.  

Bitcoin Mining – produces new bitcoins that are then entered into circulation. Bitcoin mining also maintains and develops the blockchain ledger. Miners use highly sophisticated computers capable of utilising algorithms to solve complex mathematical problems that in turn produce the bitcoins. These miners are sometimes referred to as digital excavators. The creator of bitcoin has deemed that there can only be a total supply of 21 million bitcoins.  

Bitcoin miners compete with each other to add new blocks to the blockchain. This is how new bitcoins are released into circulation. They also audit, validate and verify the legitimacy of every bitcoin transaction on the blockchain. This is known as Proof of Work”, which requires serious computing power and uses an enormous amount of energy. 

Whoever solves the equation first and adds the next block to blockchain is paid 6.25 bitcoin roughly the equivalent of USD 295,000. All winning blocks are verified by all the other miners. They also retain each transaction fee within that block being USD 20 per transaction. 

Ethereum Mining – In many ways Ethereum mining is the same as Bitcoin mining, insofar as they have different miners competing against each other to solve complex mathematical equations. The winning miner or node is rewarded with 3.5ETH. However, Ethereum works with a centralised software platform, and unlike Bitcoin has a central office.  

The major distinction between Ethereum and Bitcoin is that Bitcoin is a currency and Ethereum is a “Ledger Technology”, and whilst both are based on a blockchain, Ethereum is the more powerful of the two. Ethereum uses the proof of work for validation. 

However, unlike Bitcoin, the Ethereum blockchain contains a feature that makes mining more difficult as each blockchain is produced. Eventually this will lead to what is known as the “Ethereum Ice Age”. Ethereum will then move from proof of work to proof of stake which is explained under Cardano Mining,  

Tether Mining – Tether coins or stablecoins are not mined like Bitcoin. They are known as a stablecoin, which means they are tied to a Fiat Currency such as the US Dollar. (Fiat Currency are government issued currencies that are not backed by commodities such as gold. Examples of such currencies are the US Dollar, British Pound, The Euro etc). Every time a client places USD 10 in their Tether Account they are issued the same in crypto stablecoins. Each coin is worth 1 US Dollar. 

Cardano Mining – Cardano tokens cannot be mined like Bitcoin and Ethereum. Both these crypto currencies use proof of work for mining coins/tokens and for validating. Cardano uses “Proof of Stake” which means the more coins that a miner owns the more power they have to validate transactions. Therefore, if a miner owns 5% of the coins in circulation, they can only mine 5% of the blockchain. Miners are therefore using less energy than their counterparts at Bitcoin, who sometimes have to sell their coins to pay for their energy bills. 

A Digital Currency Exchange, (DCE), is a cryptocurrency exchange that is open 24 hours a day. It enables the trading of one cryptocurrency for another cryptocurrency, for cash (fiat currency), or for other digital currencies.   

There are two types of exchanges, centralised and decentralised. Centralised is like a stock exchange insofar as it is owned and run by an independent company for profit. Whereas the decentralised exchange is not run by a third party. All trading on a decentralised exchange is anonymous whereas on the centralised exchange proof of identity and a KYC is required. All trades on the decentralised exchange are peer-to-peer through an automated process. All trades on a centralised exchange are overseen by an approved authority. 

Do Crypto Exchanges Set the Prices? – The answer is no. There is no official set global price. The price or exchange rate of any cryptocurrency is set by the market itself and is based on the volume of trading. 

What are NFT’s 

An NFT or non-fungible token is unique and cannot be replaced by something else. To explain, a Bitcoin can be traded for another bitcoin as it is identical and therefore fungible. NFT’s are especially used for digital art and lately music, and can be sold and also resold on the Ethereum Blockchain. Other blockchains offer this service but the Ethereum Blockchain is primarily where sales of NFT’s occur as they use smart contracts. 

The NFT is perceived as a certificate of authenticity or proof of ownership, allowing the owner the right to display the art on the wall of their wallet. (Wallet is explained below under Useful Technical Information). There has been a lot of excitement over NFT’s as they promote ownership of something unique and scarce. So, providing the correct artist is picked the NFT can increase in value making it exceptionally unique. Interestingly, the Wall Street Journal in March 2021 said quote, “NFT’s are fuelling a BOOM in Digital Art”. 

London auctioneers Christies recently auctioned and sold a digital art NFT. If Christies can see the potential in NFT’s…

Derivatives 

Over the past 2 or 3 years, the market for cryptocurrency derivatives has exploded. These are side bets on the future prices of cryptocurrencies. Today cryptocurrency derivative trading can exceed USD100 billion on any given day on the Bitmex cryptocurrency exchange.  To put this in perspective, this rivals the daily trading volume on the New York Stock exchange. In June 2021 total global trading volumes in crypto derivatives exceeded USD3.2 trillion. 

Interestingly the trading activity within the cryptocurrency derivative market can and does affect the actual price of the cryptocurrencies. The most popular crypto derivatives are perpetual contracts, crypto options, crypto futures and crypto swaps. The trading in crypto derivatives were first offered in 2017 on the traditional exchanges of the CBOE, Chicago Board Options Exchange and the CME, Chicago Mercantile Exchange.  

This gave impetus to crypto exchanges to offer derivative products to the market. The market became very receptive to these products, add the ability to trade 24/7 and there are two big reasons why there has been a massive rise in crypto derivative trading. 

Altcoins – refers to all coins that are not Bitcoin 

Blockchain – represents any and all transactions in a particular cryptocurrency which are stored in a digital ledger 

Crypto Futures – are a type of derivative contract which is an obligation that allows the trader/participant to buy or sell an asset at a date in the future at a fixed price.  

Crypto Options – are a type of derivative contract that allows the purchaser to buy or sell an asset at a predetermined price on a predetermined date.  “Put Option” is the right to sell and a “Call Option” is the right to buy. Please note unlike a future an option gives the participant the right but not the “obligation” to buy or sell an asset. 

Crypto Swaps – allows participants/traders to exchange one cryptocurrency or asset for another e.g., Bitcoin, (BTC) for Ethereum, (ETH).  

Decentralised Apps or dApps – these are open-source applications built as a layer over a blockchain and allows for the creation by developers of new on-line tools. They are free from control of any single authority, as they run on a decentralised environment. 

Decentralised Finance or DeFi – is an overall term that covers transactions within the cryptocurrency market. One of the primary functions of DeFi is cutting out third-parties or middlemen. If you pay for something by credit card, your bank sits in the middle of the transaction. Under Defi, everything is peer to peer with no interference from third parties or regulators. 

Digital Wallet – is a blockchain or crypto wallet that allows the holder to manage their bitcoins, altcoins, and NFT’s. This wallet ensures the owner can transfer cryptocurrencies and convert them back to fiat currency. There are a number of wallets, the main ones being a hardware wallet and software wallet. The hardware wallet provides more protection than software wallets, but software wallets are easier to understand.  

Distributed Ledger Technology or DLT – is in fact another term for blockchain.  

Hash or Hashing – is an algorithmic process used by miners to validate transactions on a blockchain. It is a “proof-of work” (see below),  

Gas – Every time a transaction occurs on the Ethereum Blockchain a fee must be paid to a miner. This fee is known as the “gas price”  

Initial Coin Offering (ICO) – This is the cryptocurrency markets equivalent to an IPO, Initial Public Offering. Usually, companies who wish to raise investment use an ICO to create a new coin or app. 

Merkle Tree – is an integral part of the blockchain. It is made up of a number of hashes being separate blocks of data. The Merkle Tree serves as an overview or summary of each transaction within the block. 

Mining – is the process of verifying new transactions and coins on the blockchain. 

Private Key – is a highly sophisticated piece of cryptography that protects the owners of Bitcoins, Altcoins and NFT’s from theft. It also allows the owners to access their coins and NFT’s. It is used to decrypt messages sent from other user’s public keys. Private key is usually made up of alphanumeric characters which makes it very hard to hack. The Public key (see below) is created from the Private key.  

Public Key – acts as the account holders or digital wallet holders’ address. Public keys are accessible to all other public key holders and are used to encrypt messages. The private key decrypts messages received by the public key. Basically, the public key acts as a mailbox, and the private key is they key that unlocks the mailbox. 

Perpetual Contracts – were introduced on the Bitmex exchange in 2016. It is an agreement to buy or sell an asset at an unspecified date in the future. Traders are not required to hold the underlying asset or post the collateral equivalent of 100%. This allows the trade to be leveraged many times over. All margins are denominated in Bitcoin. A list of available contracts can be found on the Bitmex website. 

Proof of Authority, (POA) – is a consensus algorithm that is based on reputation, (as opposed to proof-of-work and proof-of-stake). Blockchain miners/validators stake their own reputation rather than coins and are pre-approved participants. These participants are also known as validation nodes (see below) 

Proof of Stake – allows miners to validate cryptocurrency based on the number of coins they own 

Proof of Work – is the traditional means, (Bitcoin), by which miners are recompensed. A hashed block shows proof of work has been completed. See above for “hash”. 

Seed Phrase – a series of or number of words that are created by a cryptocurrency wallet that gives the owner of that wallet access to the contents of the wallet, (see above). The seed phrase is also used by the wallet to create the private key, (see above). 

Segregated Witness – is a process that separates transaction data from digital signature data. A simple transaction data is where a seller sells Bitcoin to a buyer. A digital signature proves that the public key is connected to the private key without revealing the private key. It validates the authenticity of messages. 

Smart Contracts – This is one of the main features of NFT’s and the Ethereum blockchain. They are essentially just ledger contracts written in computer code. The contracts are carried out automatically once pre-set agreements have been met. A number of banks and investment houses are using smart contracts to execute trades.  

Validator Nodes – are essentially miners who are responsible for validating blockchain transactions and adding new blocks to the blockchain. 

Whale – is an individual who owns an exceptionally large amount of bitcoin and can move the market with one trade. As of the end of March 2021 three bitcoin wallets owned 7.1% of the total bitcoin in circulation. This equates to a value of USD74 Billion. One third of all bitcoin was held by just 100 wallets equating to USD 342 Billion. 

Energy 

Lower energy prices for mining will be essential over the coming years. The cost of energy to miners is their single biggest expense. China was recently the main centre for mining as energy was relatively cheap. China housed in excess of 50% of all global miners but that has now been drastically reduced as the government is developing its own digital currency.  

Texas is now the destination of many miners as they are being offered long-term cheap energy contracts. Based in the middle of rural Texas lies Dickens County, and they have agreed with Argo Blockchain that they can build a 320 acre mining facility. 

Property 

It appears that property transactions may soon be paid for in cryptocurrency. Evidence shows that recently a Miami penthouse sold for USD22.5 million and was paid for in cryptocurrency. Across the Atlantic in London’s west end, a penthouse at 1 Hyde Park has been listed with an option to pay in cryptocurrency. If property sales expand into cryptocurrency settlement, it will revolutionise the buying and selling of properties. 

Conclusion 

Is Bitcoin here to stay? This is an interesting question as a recent survey by JP Morgan of 1,500 investors showed that 49% considered Bitcoin to be a temporary fad, while 51% said that Bitcoin is here to stay. But judging how crypto is moving into property and art sales, albeit slowly, plus the explosion in cryptocurrency derivatives, suggests that cryptocurrencies and NFT’s are here to stay. 

However, a dark cloud still hangs over cryptocurrencies as some platforms /exchanges are allegedly being used for money laundering and terrorist financing. Recently London’s Metropolitan Police confiscated £114 Million of cryptocurrency which is believed to be linked to international money laundering. America will reach a point where there will be a shadow financial system which is beyond the reach of regulators and will be unable to combat tax evasion, money laundering and other forms of illicit finance. Soon the SEC in the USA, the FCA in Great Britain will be demanding that proper regulation is put in place by cryptocurrency companies and cryptocurrency exchanges.