Guide to Cryptocurrency for Beginners
We hear a lot about cryptocurrency these days—on the news, in social media, from friends with tales of investment in cryptocurrency. Although bitcoin may account for $6 billion of daily transactions, few of us understand what cryptocurrency is all about. Perhaps only one in ten people have a good idea of how cryptocurrencies work.
Welcome to Cryptocurrency 101. In this class, we’ll help you get up to speed on cryptocurrency and crypto-investment.
What Is Cryptocurrency?
Cryptocurrency is digital money, a currency with no standard physical form; no bank notes, coins, checks. It is a money created by computer code, a money that is formed and bought and sold in a digital universe.
Cryptocurrency is not backed by any valuable assets. But individuals can invest in a cryptocurrency just as they would invest in any securities on the stock market, and they can hope to make money if and when the value of the cryptocurrency increases as demand increases for its limited supply.
In February 2021, the price of the most well-known cryptocurrency, bitcoin, rose above $50,000, a monumental surge in value since the currency’s precious peak of $19,500 a little more than years ago.
How could this have happened? Nobody knows for sure. But many people suspect that it has to do with the acceptance of cryptocurrency by mainstream institutions. According to Markets Insider, February 2021 “saw heavyweight institutions such as Tesla and MasterCard embrace the cryptocurrency.”
Cryptocurrency is gaining popularity and credibility around the world. The Wall Street Journal reports that bitcoin is even coming to America’s oldest bank, The Bank of New York MellonCorp (result of a 2007 merger of The Bank of New York, founded in 1784, and the Mellon Financial Corporation). The bank has announced that it will begin holding bitcoin on behalf of their clients. If the venerable old Bank of New York is on the bitcoin bandwagon, we have one of the clearest indications yet of growing acceptance of the digital currency. It has migrated from the financial fringe to the financial mainstream.
If this trajectory continues, as we have every reason to expect, we will gradually be able to buy more and more things with this super-fast, secure, and decentralized global currency.
How Does It Work?
Cryptocurrency is a decentralized currency. This means that unlike money in the form of cash or credit, it is not controlled by any central bank or government body. Cryptocurrency is uniquely controlled by its users and by the computer algorithms that process it.
The language describing cryptocurrency may resemble that of the physical currency with which we are most familiar. But digital “coins” are just that—digital. These “coins” can be obtained online in exchange for regular currency (e.g., American dollars), goods and services, and other kinds of cryptocurrency. Digital money can be purchased with standard cash just as standard cash can be purchased with digital money.
You must use a special cryptocurrency software to make any transactions involving cryptocurrency. Often called a cryptocurrency wallet, this software is where your private and public keys are stored and can interact with blockchainso that users can send and receive digital currency, monitor their balances, and conduct exchanges with other holders of cryptocurrency.
Becoming acquainted with some key terms will be helpful if you decide to invest in cryptocurrency yourself.
- Digital coins are units of cryptocurrency that can be purchased with cash or credit.
- A cryptocurrency wallet is a software program that stores public and private keys.
- Public and private keys define the location of transactions and facilitate private access to transactions.
Cryptography
Cryptography is a secure method of communication. By providing for the encoding and decoding of information, cryptography allows private, secure messages to be transmitted and transactions to be made between a sender and his intended recipient. Cryptography is similar to encryption in that it scrambles text and information.
Cryptography can be used to encrypt and decrypt electronic data like emails, text messages, and cryptocurrency transactions. And that’s where our public and private keys come into play. Data is encrypted using a secret key. The encoded message is then sent to a recipient who has the secret key.
Blockchain
Blockchain technology is a database or ledger. But it stores data very differently than a typical database does. Blockchain stores data in blocks of data, sequences of bits and bytes that are then chained together. As new data is added, new blocks are formed and added to the chain in chronological order. Blockchain is most often used to store the data of cryptocurrency transactions.
Peer-to-Peer
In this context, a peer-to-peer or P2P network is a distributed network that enables the decentralized exchange of cryptocurrency and digital assets. (A P2P network can be used to exchange other kinds of electronic data as well, like movie or music files.) Buyers and sellers trade, lend, and borrow on these decentralized platforms without the involvement of intermediaries.
Decentralized
A decentralized market is a market in which investors deal with each other directly, without mediation or control by any governing body. There is no centralized monetary exchange for cryptocurrency like the New York Stock Exchange, for example, where orders to buy are routed to the exchange before being matched with an order to sell.
What Can You Do With Cryptocurrency?
As cryptocurrency continues to gain mainstream support, more and more uses are emerging for digital currencies. They are no longer just a high-risk investment. Cryptocurrencies are also real currencies that can be used to buy goods, make private transactions, and accept payments.
Buy Goods
Cryptocurrency is not just something to invest in. In fact, buying and selling things is what these currencies were originally for. The Bitcoin Wallet was designed to help people make payments independently of banks and centralized government money.
Although adoption of cryptocurrency as a payment method is on the rise, it is not yet a universal payment option. If you want to spend your cryptocurrency, doing so online is your best bet. More and more websites are being set up for cryptocurrency payments. You can even buy bitcoin gift cards.
Make Private Transactions
Cryptocurrency allows individuals to make decentralized, private transactions without any bank involvement. It removes the bureaucratic processes traditionally associated with big-money transactions. Cryptocurrency monetary transfers are also low-cost. You avoid the annoying transaction fees that you simply can’t avoid with centralized banking.
Invest
Cryptocurrency prices can be volatile, sometimes rising and falling significantly within a single day. This volatility can make digital currency great for nimble investors. Cryptocurrency assets are traded on cryptocurrency markets around the clock, and the trades require low minimum investments and low transaction fees.
Mine
Cryptocurrency mining is about producing new cryptocurrency without paying any money for it. Mining is a painstaking process. A cryptocurrency miner completes “blocks” of transactions and is then rewarded with tokens. When the transactions are verified, the miners get paid.
Popular Cryptocurrencies
Most of us have heard of bitcoin, but many different digital currencies are currently in circulation. The big three are bitcoin, ethereum, and litecoin.
Bitcoin
Bitcoin (BTC for short) is the most well-known cryptocurrency. Created in 2009 by the pseudonymous Satoshi Nakomoto (whose identity is still unverified), bitcoin keeps monetary balances and bitcoin transactions on a public ledger that can be transparently and universally accessed. Transactions are computationally verified and entirely decentralized. Although bitcoin is not legal tender, its popularity has spurred the development of other cryptocurrency models.
Ethereum
Ethereum is a digital money used to power ethereum apps. Like bitcoin, ethereum enables you to manage your funds in a decentralized marketplace. ETH is the currency that drives ethereum network, and users pay a small ETH fee to use it. Ethereum can be used to pay or receive funds, to earn interest, and to serve as collateral for cryptocurrency loans. Owners of ethereum can swap tokens with other cryptocurrencies, like bitcoin.
Litecoin
Litecoin is a cryptocurrency created in 2011 by Charlie Lee. It too it is a decentralized, open-source, global payment network. But its incredibly fast block generation and distinct algorithm, scrypt, make litecoin unique.
The Pros and Cons of Cryptocurrency
Cryptocurrency has both pros and cons. Drastic changes to traditional financial markets and transactions can seem scary. But as cryptocurrency becomes more and more mainstream, many appealing advantages are evident.
Pro: Transparency
Cryptocurrency offers complete transparency. When you are using a cryptocurrency, your performance of the transaction remains anonymous. But the transactions themselves are stored on an open ledger or blockchain for anyone to see. The idea is to make banking more transparent and honest and to enforce a culture of financial accountability.
Pro: 24/7 Access
Cryptocurrency never sleeps. You can spend, exchange, and transfer your cryptocurrencies anytime, anywhere, from your computer, tablet, or mobile phone.
Pro: Potential Returns
Cryptocurrency can produce high returns on your investments. From its inception, bitcoin has compounded at an annualized growth rate of 131.5 percent.
Con: Limited Acceptance
Cryptocurrency is becoming mainstream, but it’s not mainstream yet. Cryptocurrencies like bitcoin and the like are accepted by many payment platforms. But it’s still harder to use cryptocurrency than regular centralized currency. Few brick-and-mortar shops are ready to accept bitcoins instead of cash, check, or debit-card payments.
Con: High Volatility
Cryptocurrencies rise and fall in value, often dramatically. The global banking group EFG International reports that the “annualized volatility of monthly percent change in the price of bitcoin” in U.S. dollars is approximately 90 percent. This volatility isn’t necessarily a bad thing; but it does mean that, as an investor, to succeed you must time your buying and selling of cryptocurrency carefully.
Con: Unregulated
Cryptocurrencies are decentralized and unregulated. Although this feature has its advantages—no more Nanning of your financial assets by banks or governments—it also has risks. Cryptocurrency can be vulnerable to criminal activity and scams, so it’s important to use it with caution.
Which Cryptocurrency Is Best?
Bitcoin was the first cryptocurrency, and it is still the most valuable one. But since its birth, other innovators have also entered the scene, and there are now many platforms to choose from. Top alternative cryptocurrency platforms include:
- Ethereum (ETH)
- Litecoin (LTC)
- Cardano (ADA)
- Polkadot (DOT)
- Stellar (XLM)
How to Buy Cryptocurrency
How you’ll be buying your cryptocurrency depends on your location and your country’s regulations. But cryptocurrency is usually purchased on online. Different websites host different cryptocurrencies that you can purchase, so need find one that sells the currency you want. Some sites charge a fee when you set up an account. Once you have established an account, the cryptocurrency you purchase will be stored in your own cryptocurrency wallet.
Some popular sites for investing in cryptocurrency include:
- Gemini
- BlockFi
- Kraken
- Robinhood
- eToro
- Coinbase
To Use Cryptocurrency or Not to Use Cryptocurrency
The unprecedented performance of Bitcoin both as a currency and as an investment has attracted lots of investors in recent years. And cryptocurrency investments have other advantages over traditional investments. People invest in cryptocurrency just like they would other assets, but you can actually use it to buy regular goods and services. Cryptocurrency is an exciting asset class. However, purchasing it can be risky. Wondering if you should invest in cryptocurrencies? Consider the advantages and disadvantages here.
The world of digital finance and cryptocurrency can be intimidating. But once you understand that cryptocurrency is just unregulated online money, it becomes much more accessible. The popularity of cryptocurrency is growing. Although not yet a method of payment generally accepted in brick-and-mortar shops, in time cryptocurrencies may well become fully mainstream.
