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How to Sell Bitcoin

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Generally, bitcoin investors are split into the buy-and- hold variety and the speculators. As one would guess, the buy-and- hold crowd intends to hold their bitcoin for a long period of time, but if you’re a speculator, you could want to get rid of it as soon as you achieve your desired returns. And if you do decide to sell it, there are two main ways you can go about doing this: online or offline.

Sell Via a Trading Exchange

The most likely option is to sell via an exchange. This is probably the same way you initially bought your bitcoin too, so it would be easy to set up. What you are doing here is converting your bitcoin back into a fiat currency before transferring that currency into your day-to- day banking account.

The exchange takes the Bitcoin off your hands and it is all done near instantly. Just like any other market, a buyer and seller are connected, but this happens much faster than the direct trade option. The result will probably be a higher fee for lower time invested on your part. Fees are generally broken down into withdrawal/deposit fees and then transaction fees, and you should do your due diligence before you waste too much money on these fees.

Another interesting business model for selling bitcoin is to do it via a peer-to- peer marketplace. These marketplaces connect buyers and sellers based on their mutual needs. The way it is set up, someone with Bitcoin is put in touch with someone who wants Bitcoin, and they engage in a bit of a complicated maneuver. The person who wants Bitcoin buys the seller something with their fiat currency, and is then transferred the appropriate amount of Bitcoin from the other person.

Physically Selling Bitcoin

One of the top reasons people perform physical trades of Bitcoin is to avoid the hassle of dealing with regulators. This isn’t to say they are committing illegal acts, it’s just not easy to get through all the regulations which are currently in place. Banks are petrified of regulators and stay away from cryptocurrencies as a result. It also isn’t cheap to deal with the banks. Wire transfers and other money moving methods cost a decent chunk, so online withdrawal can lead to some memorable problems that push users towards the physical side of the industry.

When selling Bitcoin in person, the overall mechanism is the same as selling anything else. The only catch is that it is a lot harder to verify the trade, which leaves open the possibility for fraud. In the best case scenario, you are dealing with family or a friend, so the trust factor of this transaction is not an issue.

Using a Local Service

If you are selling to an absolute stranger over an exchange like Localcoins.com, you will need to agree on a few terms ahead of time. This could mean dictating a price that day, or it could mean choosing the exchange which the transaction price will be based off of. Remember that the cryptocurrency is still very volatile, so price swings are to be expected. This is why terms should be agreed upon way in advance.

Meetups are a safer alternative to meeting new people in areas you are not familiar with. These groups will usually have a few members who are looking to sell some Bitcoin or at least have some friends that will. This is the value of community. Just make sure you stay safe and perform all your transactions in a public place. You wouldn’t go around with a $10,000 good on you, so don’t do the same thing with bitcoin.

Bitcoin ATMs

The other physical option you can pursue is cashing your Bitcoin out at a cryptocurrency ATM. These are present all over the world and are popping up with a higher frequency as time goes on. The major benefit to this method is not having to deal with multiple fees. When you convert your money back into fiat currency online, you usually need to send it to a separate bank account at the end before you can access it. An ATM works to directly charge your wallet and save you this trouble.

Conclusion

Each method has its own positives and negatives, but as long as you register them both, you won’t have a problems getting rid of your coins. Selling them online often results in significant delays, but doing it in person means you have a security risk and have to go through more effort. The industry is expected to evolve, and it will eventually be easier to sell Bitcoin, but for the time being, most innovators are focused on making buying Bitcoin easier. These are your best options for now.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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The Sharding Solution

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In recent months, the news has been rife with cryptocurrency detractors quick to point out flaws in bitcoin or Ethereum, and this has created the need for the development community to come up with novel solutions to the problem at hand.

First – What’s the Problem?

Bitcoin and Ethereum both currently operate on a proof-of-work protocol. This protocol offers a very high level of security; however, this comes at the catch of being very resource intensive. As these cryptocurrencies continue to scale, this is becoming an issue.

The three big issues that are presenting themselves are latency, throughput and scalability (inability to perform at an even higher volume). With some transactions taking between a few minutes and a few days (depending on the transaction fee you pay), it is hard to imagine how this model could handle higher traffic. Bitcoin is currently limited, to 3-7 transactions per second, and Ethereum is limited to 7-15. Neither of these figures are encouraging.

As a result, novel solutions like “proof-of-stake” protocols are being invented in order to improve the speed at which transactions can be processed. Sharding is an offshoot that shows promise, and the founder of Ethereum has indicated it will likely be implemented in the future for the network.

Explaining Sharding

A common engineering solution is to split a bigger problem into smaller problems and solve them one at a time. Sharding is a solution that follows a similar train of thought. The way it works is by taking the entire network and splitting it into a bunch of smaller subsets. Each subset of nodes is called a shard, and this takes away the need for each node to go through the entire transaction history in order to verify a transaction.

The term “shard” comes from the idea of a fragment of glass or pottery. The whole is split into smaller component pieces that govern themselves much like states do within a larger country.

One possible means to split up the network is based on the first digits of the public addresses, but there are many other methods that are being floated around.

By requiring its own set of validators, proof-of-stake becomes a prerequisite for the functioning of a shard. By requiring a proof-of-stake protocol to properly function, sharding becomes more practical for Ethereum in the short-term when you examine Vitalik Buterin’s recent comments on the scaling of Ethereum.

Benefits of Sharding

Sharding is necessary for the key reason that these networks need to find a way to grow, otherwise their value will be significantly limited. Implementing a solution like sharding serves to both increase the flexibility of the network while limiting the amount of storage required for it to function.

The difficulty in changing the networks from their current proof-of-work protocols is that they need to keep maintain their security, otherwise they lose all value. Sharding seems to be one of the few solutions that solves the scalability problems while still being secure.

Potential Risks

Every solution comes with downsides, and it is important we address those of sharding. As with proof-of-work, the problem comes from the same thing that makes sharding powerful. Shards are designed to make it easy to transact with other users on the same shard. However, transactions between shards becomes complicated and add an extra layer of complexity to the solution.

If facilitating communication between the shards proves to be too difficult, then the solution has no merit. There are several workarounds that have been theorized (such as transaction receipts), although a lot of work must be done before this is brought to fruition.

Another potential issue is what happens when you create all these small shards. Will they be vulnerable to 51% attacks because of their size, or will the proof-of-stake method still make this too costly to be feasible? The value of the bitcoin and Ethereum network is in their security, so they need to be able to guarantee sharding’s efficacy before implementation.

The final thing to make clear is that this is only a potential solution, and it has not been tested yet, so we have no idea how well it would work or what the results of its implementation will be. For that, only time may tell.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Understanding the Lightning Network: Where We Stand

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The scaling of bitcoin’s network has long been a source of strife among supporters and detractors alike. As the network gained momentum over the last few years, users have seen both the transaction fees and wait times increase significantly.

Other cryptocurrencies have spawned based on this weakness, but bitcoin’s development community is hard at work on the scalability problem. The most promising project at the moment is the Lightning Network.

The Shortcomings of Bitcoin

Bitcoin’s original promise of being able to create a trustless network that enabled immutable financial transactions is still true to this day. With the implementation of SegWit on August 24th, 2017, it was hoped that the issues could be solved by finding a roundabout way to increase the block size. However, the protocol has not been widely adopted, and as such, a new solution is required.

This is where the need for the Lightning Network arose from, and it has been in development since 2015. The simplest way to understand the network is that it helps manage bitcoin transactions without executing them directly on the Bitcoin blockchain.

The Basics of the Technology

The core idea behind the Lightning Network is that you can create small “bidirectional payment channels” that act as a running tab between two accounts. The smart contracts determine how much is owed to who, but none of this is stored directly on the blockchain until a payment is rendered. Basically, it is a running tab system that allows for microtransactions. Allocations are made between parties off-blockchain, with all the confidence of performing commerce on-blockchain.

Multi-signature wallets are the connecting force that acts as a running tab in a safety deposit box for the two parties. Their cryptocurrency sits in the wallet and is debited and credited according to the pre-existing agreement.

The result is that all of the different payment channels connect multi-sig wallets to create a network of two-party ledger entries. This means you don’t need to have a wallet between every duo that wishes to do transfer money. The connections can occur across a network of users with the same effect.

The Benefits of Lightning

The most salient benefit of the Lightning Network are the faster payments at a lower cost. The presence of instant payments will increase the usability of the entire network, and the smart contracts used will still be secure enough to prevent tampering.

As we mentioned before, the Bitcoin network was previously limited by its lack of scalability, so on a meta-level, the lightning network is enabling the network to continue its expansion.

The presence of the Lightning Network will also enable cross blockchain transactions (also known as atomic swaps), even with heterogeneous blockchain consensus rules. The enablement of these instant transactions between blockchains will eliminate the need for third party custodians and change the way the networks interact.

Where We Are Now

In order for Bitcoin to be a viable payment option in the future, something like the lightning network is absolutely essential. Scaling requires the ability for small payments to be made quickly, otherwise it will never be feasible to make everyday purchases like coffee or lunch with bitcoin.

Looking at all the potential benefits listed above, it is clear that the lightning network will have a drastic effect not only on the Bitcoin network, but the entire cryptocurrency ecosystem. As such, the protocol is not only being developed for the Bitcoin network, but many other of the top cryptocurrencies (Litecoin, Stellar, zcash, Ethereum, and Ripple). The test results are starting to come in, however, none of the implementations are ready for launch yet. Lightning Labs has released a beta version, but before this technology can change the industry, a lot more work must be done.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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What is Proof of Stake?

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Newbies to the cryptocurrency space often struggle to understand how the mining mechanism works. The idea of having a cryptographic algorithm that mints new coins to reward those who help maintain the blockchain isn’t exactly a natural one, and a long explanation is usually required.

But once this group understands how the traditional proof of work theorem functions, they often find out that there are algorithms different than the one implemented by Satoshi in the beginning.

Where Proof of Work Falls Short

News stories keep surfacing about the growing energy requirements of networks using proof of work algorithms. The enforced scarcity of coins means that as more miners join the network, the amount of computation required continues to increase. Not only is this not sustainable in the future, but it also prices out smaller mining pools that don’t have the capital required, leaving a market structure similar to the oligopoly of the banking industry.

Additionally, from an economic standpoint, the proof of work theorem is vulnerable to the tragedy of the commons. This is an economic scenario where users are incentivized to act in accordance with what is best for them, rather than what is best for the group. Profitability on mining coins like Bitcoin will begin to fall, and that will drive miners out of the market, hurting the whole network.

Proof of Stake as an Alternative

So if proof of work rewards you for the amount of work you do, proof of stake will reward you for the amount of coins you hold. You will mine coins in proportion to the amount you hold, which is much like the traditional interest rate structure.

Our previously described tragedy of the commons issue is solved, because people now have reason to continue holding the coin and are rewarded for it. Additionally, the centralization risks are minimized, as those with the most mining power or capital are no longer in control.

51% attacks are hardly a worry on the Bitcoin network, because you’d need to gain access to more than 51% of the computing power of the network. However, with PoS there is an even smaller risk because of how expensive it would be to buy 51% of a coin, only to devalue it.

Many Cryptocurrencies Using It

Since the incentives are different, proof of stake algorithms essentially change the entire structure of the market for a cryptocurrency. The fact you can earn coins just by holding cryptocurrency would be very appealing as an alternative to using tons of electricity.

Dash, or digital cash, may be the best known cryptocurrency using PoS, but NEO, PIVX, and many more are currently using it. The incentives change when you use these coins, because of all the additional benefits of just holding them. Often the only way to gain this interest is by joining a masternode or having a significant amount of coins yourself, but it is still something worth looking into.

Finally, we are finally starting to see larger cryptocurrencies like Ethereum considering a move to a hybrid algorithm that uses proof of stake as well, it is clear the consensus method will finally get tested at scale.

The Risks of PoS

As with any solution, there are risks involved with the potential implementation of proof of stake algorithms. The biggest risk inherent in a proof of stake system is that the bad actors aren’t pruned out in the same way as with a proof of work system. They can continue to collect “interest” while they vote for “invalid” blocks, and not be harmed in any way. For the proof of stake system to work, this problem will eventually need to be solved, but at the same time, it shows a lot of potential.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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