How does digital currency work, what types exist and why is the market so volatile? ynet makes order for you in the boiling field of digital currencies. And this time: Haim Venetia and Elad Nomberg from Proxibit Investments, which specializes in investments in digital currencies, answer all the questions for the beginner investor. First article in the series
What are digital currencies and what makes them so innovative?
In 2017, Forbes magazine named digital currencies as the biggest financial revolution of the last decades. The digital currency completely changes the way our money is managed. To this day, money all over the world is controlled by middlemen, led by the banks and credit companies. These institutional entities base their profit on collecting commissions and interest.
The digital currency seeks to eliminate these entities, and create a new type of economy without intermediaries – a decentralized, open and transparent system for the general public. The innovation of the digital currency lies in the fact that for the first time in history people can store assets on the network.
Viewing the gallery Bitcoin virtual currency
Bitcoin is a virtual currency
How do digital currencies work?
The digital cryptocurrency is a medium of exchange created and conducted entirely virtually. Every digital currency transaction is processed and saved in a distributed record on the network, that is – there is no one person who controls the record, therefore it is considered safe. Transactions are processed in the form of chains of “blocks”, hence the name of the record – blockchain.
It is a transparent software open to the public, which is maintained by miners who update the records by investing the computational energy of the computing machines they have.
What can be done with digital currencies?
The first digital currency, Bitcoin, was born at the end of 2008, and its initial goal was to expand the means of payment and the way we manage our money. With the introduction of additional digital currencies to the market in the last decade, additional uses have been added to it and it is also becoming a promising investment channel.
“This is one of the fastest growing markets, which currently generates 2 trillion dollars. Bitcoin, the best-known of the currencies, accounts for 42% of the market value of digital currencies,” says Haim Venetia, CEO and owner of the ProxiBit investment house.
What types of digital currencies exist today?
The name Bitcoin has become synonymous with digital currency, but as of today there are about 17 thousand types of digital currencies. There are three main types of digital currencies: payment currencies like Bitcoin, which is an exchange currency like the shekel and the dollar; Digital tokens (utility tokens) issued by service providers for example, computer games that sell tokens that allow actions to be performed within the game; and security tokens, which represent a financial right to assets such as securities or real estate.
For example, a token security backed by Tesla shares can be issued.
What is the profit mechanism of the digital currencies?
The profit mechanism of digital currencies varies from currency to currency. There are currencies that do not have a profit goal because they are not a company. Bitcoin, for example, was not created for profit, but with the intention of improving payment services and establishing a cooperative and decentralized system. In the Bitcoin network, for every transfer of funds in the network there is a fee, which is collected and given to miners as an incentive. It is important to note that there is no Bitcoin entity or organization that earns directly as in a company model.
On the other hand, there are currencies that operate for profit and most of their profits are taken from commissions of transfers on the network. Coins in the field of gaming, for example, are mostly free platforms. The creators of the game do not profit from the sale of the game itself but from fees for using the currency that serves the game.
How do I buy digital currencies?
To buy digital currencies you first need to open a digital wallet. There are two types of wallets: hot and cold. The hot wallet can be purchased by downloading a custodial services application. The cold wallet is a hardware wallet that comes in the form of a flash drive from companies such as Ledger and Trezor.
The next step is buying the coins. The beginning investor has several options for purchasing digital currencies.
The first option is buying coins from a private person. This is an unrecommended method because it is vulnerable to fraud and theft.
A second option is to buy coins from an Israeli exchange. The downside – these companies deal in a limited number of currencies, mainly Bitcoin.
The third option is a purchase from an exchange abroad; there are currently about 500 exchanges dedicated to digital currencies. It is important to choose a large, old, stable and supervised exchange, because there are quite a few cases of hacking of these exchanges.
A fourth option is to invest through a local investment house that specializes in digital currencies. The investment houses will manage the entire portfolio from A to Z – from the sale and purchase to the custody and taxation.
Can anyone create a digital currency?
Yes, anyone with technological knowledge in the field of cryptography can create a virtual currency, but they must establish a value for the currency. Sometimes the value can stem from the hype on social networks or fraud that emphasizes the need to understand the assets we invest in and to seek help from experts when necessary. For example, four months ago, a lively conversation on social networks about a currency of the squid game boosted its value in a matter of days by more than 5,000%.
Celebrities also have the power to boost the value of an unknown digital currency. This is what happened to the Dogecoin currency, which started as a joke and within a week jumped 420% thanks to a congratulatory tweet from Elon Musk.
Why is the crypto market so volatile?
The main reason for volatility is the size of the market. The market value of all digital currencies is about 2 trillion dollars. For comparison, the value of the stock market exceeded 100 trillion dollars. That is, the digital currency market does not even make up a quarter of a percent of the total money in the world. That’s why it’s easy to shake.