The top three cryptocurrencies have an estimated value of over $300 billion USD. This short guide is going to help you understand bitcoin, bitcoin forks and what to look for if you are interested in investing in the currency.
Cryptocurrencies and Bitcoin
To some people, cryptocurrencies may sound a bit like a scam. It’s digital money that has no real world origin or backing. Unlike other currencies which are backed by countries or gold, cryptocurrencies are endorsed by communities. Essentially, if enough people think it will work then the currency will work (not unlike real currency.)
You can think of a cryptocurrency exchange much as you would a ledger except that all information is public. The amount of Bitcoin each user holds is public information and this information is updated in real time across computers all around the world.
This makes Bitcoin secure against hacking as it would be nearly impossible to hack all of the different computers on the exchange. This also adds to the legitimacy of transactions as no one can pretend they have more of the currency than they really have.
Although not exactly the first, Bitcoin has been the form of cryptocurrency that ushered in this revolution. Nowadays, it is used synonymously with the term cryptocurrency in general much in the same way people use Kleenex instead of tissue. This article will focus on Bitcoin, but it does have some rivals including Ethereum and Ripple.
Understanding mining is critical to cryptocurrency. Mining is a way for users to earn currency without having bought any of it. Cryptocurrency is all about exchanges and through using your computer to “mine” which is the process which verifies transactions and adds them to the public ledger which is called the blockchain. Any person with an Internet connection and the suitable hardware can do it.
However, it is important to note that any computer with a solid graphics card could mine fairly well, but nowadays there are computers that are specifically designed to mine so it can be hard for the average user to really get a lot out of mining when competing against that.
Bitcoin Forks are quite new. The first one occurred on August 1, 2017 and imitators have followed suit since then. This was unusual because there are many imitators of Bitcoin, but this worked differently. This network dubbed Bitcoin Cash instead branched off the existing Bitcoin database.
You can think of it similar to a stock split. So anybody who owned one Bitcoin now owned a Bitcoin Cash. Now Bitcoin Cash’s currency in circulation is valued roughly $20 billion. Also, it has the effect of pushing up the value of the overall currency which is now currently over $170 billion.
As a result, this has spawned numerous imitators who want to similarly cash in on the value of their Bitcoin. Since August there have been numerous new exchanges created including Bitcoin Diamond, Bitcoin Gold, Bitcoin Uranium and so on.
Advantages of These Forks
With the current value of original Bitcoin being so high, the average person cannot buy a significant amount of it easily. Purchasing even ten Bitcoin would cost well over $100,000. These forks give users at an opportunity to buy at much more affordable level. For example, today one Bitcoin Gold cost $170 and other networks may be even cheaper.
The original Bitcoin also faced technical limitations. BTC blocks are limited to one megabyte in size. This translates into three transactions each second. New currencies like Bitcoin Diamond, raised their block limit size which both improves transaction capacity and block generation speed.
As a result, the cost of transactions is reduced making it cheaper per transaction. They also offer other features. Bitcoin Diamond actually encrypts user balance and other information affording the privacy some people may want.
Disadvantages of Bitcoin Forks
Anybody interested in investing in this market must know that it is highly volatile. Even BTC which is now the cornerstone of all these forks, rapidly changes in its valuation. Many of the currencies will fail, but some will succeed and knowing which of these is the right one for you to invest in can be tricky.
Deciphering which of these to go for can be a challenge and for the average person way too much research would be involved. Some of the splits come from individuals and groups effectively trying to improve Bitcoin transaction and exchanges, others are just an attempt to cash in on the craze while others may simply just be a joke such as Bitcoin Uranium which has the ticker symbol BUM.
It all goes back to trust. If users flock to a new currency and there is a level of transparency about how it works and if it operates on fair principles than it can be successful like Bitcoin Gold and Bitcoin Cash. Likewise, if the currencies make it onto other currency exchanges as well as being able to exchange for real money through a service like Coinbase is another effective endorsement of a currency.
Hard vs Soft Forks
This is another thing that users need to watch out for and adds volatility to the market. Hard forks are when previously considered invalid blocks are now valid while soft forks are the reverse. To put it simply, soft forks typically signify increasing rules and hard forks relaxing them.
Again the community all works by consensus so those who want to stay in the game must upgrade their software during a hard fork otherwise new features in a block will not be available to them. In either case, it is important to stay up to date with the community and keep with forums and currency media outlets like Coin Telegraph and Crypto Compare.
Changes occur when a majority of the community approves a proposal and this can tell you a lot about what will happen with a currency as well as what opportunities there will be for forks.
Bitcoin Forks So Far
December 2017 was a month of some serious forks. Major releases such as Bitcoin Diamond, Bitcoin Cash Plus, and Bitcoin Platinum were all released. To establish legitimacy as well as user bases for these platforms, many have offered essentially “free money” or a duplication of BTC users holdings at the time of a network snapshot.
The other important factor is how much of a new Bitcoin fork a company tries to hold onto or rapidly mine before others users have a chance. Bitcoin Gold mined 100,000 coins before giving public access. At one point the currency was valued at $270 per coin so it created a roughly $27 million pool for itself. The move was controversial, but the team has pledged to use it to improve the Bitcoin Gold project and didn’t face a backlash. Imitators may, however, not be so fortunate.
Bitcoin God was released on Christmas 2017 by Chinese Angel investor Chandler Guo. Although, the release notes and names are slightly humorous as a trusted investor this currency is set to do well. Not only that, he pledged there would be no “pre-mine” on Twitter so that the platform would be fair and open to everyone with nothing reserved to him. Moves like these help build the trust and popularity a new coin needs to be successful.
What to Look for in Upcoming Forks
Upcoming forks are a lot like a gold rush. You may luck into something highly profitable or you may end up with nothing. The key thing to remember is volatility. Do not invest your life savings in this rather some money you are comfortable losing.
New exchanges may also have security vulnerabilities as well where the exchange itself may be fine but the user information may be targeted and people’s wallets may be emptied. This happened in a recent attack on the mining marketplace Nicehash where over $64 million in cryptocurrency was stolen when hackers stole user password information.
There are two similar strategies. You can be ready to adopt a new currency as soon as its released or experiment in one of the newer exchanges. It is hard to predict which ones will have a skyrocket and time is an important factor. Some exchanges simply need to time to add to their user bases and establish themselves while others put together by more recognized investors and teams may already have some built-in audience.
The most important thing is that you do your homework on the group. There are many forums and new sources out there so you can understand who is doing the release. A “pre-mine” is not necessarily a bad sign, but it gives you a smaller window to work with if you expect to earn money through mining.
Finally, just like any other investment game patience and luck may be the right tools. Keep track of total users, numbers of exchanges and so on. A growing marketplace is a good sign while stagnation is not. Be sure to compare to other markets or similar age and size and do not put all your eggs in one basket.
At the end of the day, with some research, a little luck and a solid mix of few different currencies, you can be sure to have a fairly secure investment even in this crazy world of cryptocurrencies!
Mikhail Korolev, CEO at 2Miners