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Basic investing, demystifying crypto, and more.
It seems as if you can’t even go to the grocery store without hearing someone talking about cryptocurrency (or crypto). You’ll often hear questions around the value of crypto, the volatility of crypto, and whether or not we should be accepting our salaries in cryptocurrency.
But if you’re among a large population of us, you probably respond to most of those questions by saying, “What the heck is cryptocurrency?”
Good news: We did the research for you. Not only will this guide help you get your mind around what crypto is, but we’ll talk about some of the intricacies of trading crypto, the different forms of crypto, and what all of this means for the future.
What is Cryptocurrency?
Let’s start our crypto conversation off with a dictionary definition of the term. As Investopedia explains, cryptocurrency is a digital or virtual currency that is secured by cryptography. Unlike paper money, crypto is virtually impossible to counterfeit.
OK, but what the heck is cryptography? And what makes it so difficult to counterfeit? Again, we turn to Investopedia, which explains that cryptography is a term for “secret writing.” This secret writing is only readable by the intended recipient. Not only does cryptography ensure security, advocates of cryptocurrency tout the fact that it also promises some amount of anonymity. However, this benefit is controversial, to say the least. Financial experts say that anonymity in crypto can evolve into a major vehicle for crimes such as money laundering and human trafficking.
As you might have already guessed, knowing the definition of crypto is just the beginning. You’re about to enter a world full of acronyms and jargon. Let’s dive into some of those strange quirks.
What is DeFi?
Once newbies wrap their minds around what crypto is, it’s hard not to wonder how on Earth any of this is legal. The short answer? It’s legal because until recently, there weren’t any laws regulating anything remotely related to trading or mining for crypto (more on those concepts in a bit).
The even shorter answer for crypto experts is DeFi, short for “decentralized finance.” Alyssa Hertig at CoinDesk explains that DeFi is an umbrella term for financial applications in cryptocurrencies that are designed to disrupt traditional financial intermediaries. Hertig adds that DeFi expands the use of blockchain and allows people to use crypto in very complex financial use cases.
(Need a primer on blockchain? IBM explains that a blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. They add that blockchain is ideal for financial transactions because it offers immediate, shared, and completely transparent information that can only be accessed with permission.)
DeFi also tends to be a rallying cry for crypto enthusiasts who don’t just want to disrupt traditional finance, but dismantle it altogether. According to Etherium.org, there’s a long list of “issues” with traditional finance, including:
- Many people aren’t eligible to open a traditional bank account.
- A lack of a bank account tends to make people unemployable. In other cases, it makes it difficult for people to qualify for mortgages or rental properties.
- Traditional financial services can make it more difficult to get paid or receive money.
- Governments can close down trading platforms or close markets whenever they want.
- Traditional banking transactions can be far too expensive.
It’s important to note that we neither agree nor disagree with these sentiments. However, it’s important to document these issues, especially in an effort to equip you with the knowledge you need to have discussions about the merits (or lack thereof) of a DeFi approach to financial freedom.
OK, so we’ve covered what crypto is and established that investors use it in sophisticated financial transactions. But how the heck does it work? And more importantly, where does it even come from?
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Demystifying Cryptocurrency: Understanding Bitcoin and Beyond
How Does Cryptocurrency Work?
There are a few things that are worth talking about, whether you plan on investing in crypto or just want to have educated conversations about it:
- Where does crypto come from?
- Where can I buy and sell cryptocurrency?
- How does cryptocurrency increase or decrease in value?
- Where do I store my cryptocurrency?
That’s a lot of questions. Let’s dive in.
Since cryptocurrencies are digital assets, the most obvious question you might ask is where it comes from. The simple answer is through a process called crypto mining. PCMag explains that mining is a competitive process that verifies and adds new transactions to the blockchain for a cryptocurrency that uses the proof-of-work (PoW) method. In other words, mining for crypto requires you to play a game or complete a puzzle as part of a competition. The people who complete these games and puzzles the fastest win the competition. If you win a competition, you get some amount of cryptocurrency.
PCMag adds there are several forms of cryptocurrency mining, which include the following:
- Individual Miner: Want to mine for crypto? All you need is specialized computer hardware and an internet connection.
- Mining Pools: This is an organization that has combined resources to obtain a lot of mining hardware.
- Cloud Mining: Don’t want to buy a special computer to mine crypto? Cloud mining services allow you to do so over the cloud in exchange for a monthly fee.
Why is cryptocurrency mining so controversial? The amount of computing energy required to mine for crypto is massive, and several of the world’s top universities have conducted extensive studies to understand crypto’s impact on the environment. While there are several aspects of crypto that are undeniably exciting, conversations around mining tend to be complex, to say the least.
Cryptocurrency Exchange Platforms
While many people enjoy the process of mining for crypto, you can also purchase it on a variety of cryptocurrency exchange platforms. A crypto exchange program operates much like a traditional brokerage house. These platforms enable folks like you and me to buy and sell digital currencies. In a similar fashion to brokerage houses, there are a surprising number of crypto exchange platforms on the market.
Some of the most popular cryptocurrency exchange platforms include:
Each of the platforms above offers a variety of trading fees, product functionality, and customer support. On most cryptocurrency exchange platforms, you can sign up for an account without purchasing any digital currency. Take this opportunity to evaluate each one and determine which one suits your needs.
The value of cryptocurrency is determined in the same way you’d evaluate a company’s stock price. In many ways, the price of a particular form of crypto is influenced by supply and demand. For example, Bitcoin is one of the most notorious forms of cryptocurrency on the planet. But because so many people know what Bitcoin is, the supply has been depleted to the point where a single coin is worth tens of thousands of dollars.
However, the price of any given cryptocurrency is also heavily influenced by large communities of investors. The Bitcoin community is very vocal and very influential, and it has influenced the market to the point where professional athletes are taking portions of their salaries in Bitcoin.
In response, you’ll find countless communities that are passionate about lesser-known forms of crypto. These folks raise their voices on sites like Twitter and Reddit about the merits of their preferred crypto. If you’ve ever seen someone Tweet the words “to the moon,” it’s because they truly believe that a specific cryptocurrency should be the next big thing.
The biggest challenge to crypto prices? Unpredictable and often negative sentiments toward crypto as a valid form of payment. In 2021, we’ve seen several governments either strongly discourage crypto trading or crypto-based payments. We’ve also seen some countries make it illegal to accept cryptocurrency in everyday transactions. The latter of these examples sent the entire market into a tailspin, and even well-established forms of cryptocurrency like Bitcoin saw a severe drop in value.
So while crypto can make people wealthy beyond their imagination, it’s obvious that it comes with a decent amount of risk—especially if you don’t understand what you’re trading and how crypto prices may rise or fall based on circumstances completely out of your control.
Crypto Market Capitalization
Cryptocurrency trading has gotten so sophisticated, investors use a market cap to understand the current value of each form of cryptocurrency. If you’ve ever invested in a stock, this term should sound familiar. In the world of crypto, market cap is a term used to describe the total value of all of the coins that have been mined.
As Coinbase explains, the coin market cap is a rough gauge for how stable an asset might be. In other words, a large market cap indicates that a form of cryptocurrency is more likely to be resilient in a down market—and one with a smaller market cap might be more vulnerable to a huge drop in value during a downturn.
While crypto is vulnerable to the ebbs and flows in the world’s economy, the latest coin market cap indicates that it’s not a fad as folks once believed. According to Yvonne Lau at Fortune Magazine, crypto hit a market cap of $3 trillion in November of this year. Lau adds that this growth is a 5x increase over the market cap of November 2020, when it was a “mere” $578 billion.
This might go without saying, but you can’t carry digital currencies in a physical wallet. Enter the cryptocurrency wallet, which is a blanket term to describe an application of cloud platform from which you can store and trade cryptocurrencies. NDTV explains that crypto wallets contain public and private keys that are unique to the owner. This enables you to make purchases with your cryptocurrency and monitor your balance based on current market values.
Choosing a crypto wallet app can be tricky. Not only do each of them offer slightly different features, but there are just a lot of them on the market. However, you can keep things simple by using software wallets on your trading platforms, including Coinbase and Gemini, as you get started.
The term “digital coins” is another blanket term that’s used to describe any form of digital currency. We’ve talked about Bitcoin several times throughout this guide, but other forms of cryptocurrency have dominated headlines in recent months. Most notably, Dogecoin and Etherium were initially valued at less than a penny until an overwhelming groundswell caused their values to spike. Early investors of these digital coins became multimillionaires overnight.
You might have guessed by now, but the world of digital coins gets a little more complicated from here. Ever heard of stablecoins? No? Guess what—we’re about to talk about them.
Most forms of cryptocurrency are worth what people are willing to pay for that form of crypto. Stablecoins present an interesting twist; these digital coins are “pegged” to what’s considered a stable reserve asset. Many examples of stablecoins are pegged to gold or the U.S. dollar, which decreases your exposure to risk to some degree.
According to ICOHolder, some of the most popular stablecoins on the market include the following:
- Libra: This is considered one of the most controversial cryptocurrencies of all time for several reasons, including the fact that it threatened government-run financial systems.
- Binance USD: Launched in 2019, Binance is backed by the United States dollar. According to its website, Binance is a crypto coin backed by 36 exchanges and more than 20 digital coin wallets.
- Digix Gold: This form of crypto coins is backed by gold and touts itself as being a “digital version of gold.” Currently, one Digix coin is equivalent to the value of one gram of gold.
- Tether: ICOHolder says that this is one of the most popular forms of stablecoin according to its market cap.
- Algorithmic stablecoins: While this is a category of stablecoins, it’s important to discuss them here. Algorithmic stablecoins are the one form of stablecoin that isn’t tied to a single peg. As HackerNoon explains, algorithmic stablecoins use an algorithm underneath which issues more coins when price increases, and buys them off the market when the price falls.
Coinbase explains there are a few tangible benefits to investing in stablecoins, including:
- The ability to trade or save cryptocurrencies without a bank account
- Earning interest on your crypto investment, often at higher rates than you’ll find at a bank
- Cheaper money transfer fees and easier ways to send money internationally
However, where there are advantages, there are also disadvantages to investing in stablecoins. Some crypto advocates warn against investing in stablecoins for many of the same reasons they’re wary of traditional investments. Because stablecoins are backed by more secure assets, they’re also centralized in ways that other forms of crypto aren’t. In spite of this centralization, there’s a significant lack of transparency in the stablecoin market that regulators have been cracking down on for years.
Much like any digital possession, new forms of cryptocurrency seem to pop up on an hourly basis. For the most tech-savvy folks out there, spinning up a new form of crypto only requires some rudimentary coding skills—and it’s clear that everyone is eager to create the next Etherium. Earlier this year, The U.S. Sun reported that over 2,000 new cryptocurrencies were released between May and October of 2021.
This is also where the crypto landscape tends to get a little silly. You can get a rolling list of cryptocurrencies on sites like CoinMarketCap, which provides insights into the price and market cap of established and newer cryptocurrencies alike. When you search their website for new cryptocurrencies added within the last 30 days, you get some real humdingers. Here’s just a small cryptocurrency list to keep in mind:
- Santa’s War NFT Epic
- Purple Floki Inu
This begs an important question: How do you choose which cryptocurrencies to invest in?
For many experts, the answer is to look for a cryptocurrency list that showcases the merits of communities and visions that you are passionate about. Much like the stock market, the value of each form of crypto is subject to some amount of volatility. Crypto investors tend to believe that if a community is worth investing in, it’s only a matter of time before the digital currency increases in value—and perhaps makes them wealthy beyond their wildest dreams.
What Can You Do With All of This Crypto Knowledge?
It’s important to caveat everything in this guide by saying that this isn’t a substitute for professional investment advice. The knowledge you gain from this article should help you have more educated conversations about crypto trends. However, we purposely avoided offering anything that could be confused for trading tips.
If you are interested in pursuing a cryptocurrency portfolio, use this guide as a starting point for your education. And if you forget anything along the way, don’t be shy about referring back to this article to refresh your memory.
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This article is not intended to be financial advice.