In the world of finance and investment, there is one area that has seen incredible growth in popularity in recent years – and that is cryptocurrency.
The rise of cryptocurrencies like Bitcoin and Ethereum has been nothing short of meteoric, and the value of these currencies has skyrocketed over the past few years.
But what exactly are cryptocurrencies? And why do people invest in them? We take a look at everything you need to know about this exciting new way to make money in our beginner’s guide to cryptocurrency.
What Is Cryptocurrency?
We kick off our cryptocurrency starter guide by taking a closer look at just what we mean by “cryptocurrency”, before moving on to look at the details.
The term “cryptocurrency” was first used by Satoshi Nakamoto, who published his white paper on bitcoin back in 2008.
This document described how he had invented a system for recording transactions digitally using cryptography.
In layman’s terms, it means that instead of sending someone cash or a check, you can send them an electronic file called a transaction record.
This record contains information such as the amount being transferred, when it happened, and who sent it.
It also includes a digital signature which proves that no one else changed the original transaction after it was recorded.
This allows you to keep track of every single transfer without needing to rely on banks or other third parties.
There are many different types of cryptocurrency, but they all work in similar ways.
They use blockchain technology (see below) to ensure that the records cannot be altered once they’ve been created.
Cryptocurrency: How It Works?
Understanding cryptocurrency requires a basic understanding of the methods and technology behind it.
Blockchain technology is essentially a distributed ledger that keeps a permanent record of all the transactions made with each currency. Each block of data is encrypted so that only those who hold the key can read it.
When a user wants to make a payment, they submit their details to the network, along with the amount they want to pay.
The recipient then checks if the sender holds enough coins to cover the cost of the transaction. If they don’t, the transaction fails.
If both sides agree to the deal, the transaction is added to the next block of data on the chain.
Once the transaction is complete, the two users’ addresses are swapped, meaning that the person making the payment now owns the funds.
How Do You Make Money With Cryptocurrencies?
The next stage in our beginner’s guide to investing in cryptocurrency discusses one of the most important steps: how to make some money, and this is one of the most important aspects of any cryptocurrency course!
You can buy cryptocurrencies directly from exchanges, or through brokers.
With a little skill and experience, you can also mine your own coins using specialized hardware.
Buying Cryptocurrencies Directly From An Exchange
An exchange is where you go to trade one type of coin against another. There are hundreds of exchanges around the world, and most offer trading pairs between major cryptocurrencies.
For example, Coinbase offers trading pairs between Bitcoin and US Dollars, Euros, British
Pounds, Canadian Dollars, Japanese Yen, Australian Dollars, Swiss Francs, New Zealand Dollars, Norwegian Kroner, Russian Rubles, Singapore Dollars, South Korean Won, Chinese Yuan Renminbi, Indian Rupees, and Mexican Pesos.
Exchanges usually charge fees for buying and selling, although some will waive these fees if you’re just starting out. Fees vary depending on what country you live in, and whether you’re buying or selling.
Exchange rates fluctuate frequently, so it’s best to check the current rate before you start trading.
Buying From A Broker
A broker is like an online stock market where you can buy and sell shares.
Brokers allow you to invest in cryptocurrencies without having to worry about setting up accounts and transferring money.
They typically have lower fees than exchanges, and often provide more advanced tools for analyzing trends and predicting future price movements.
The downside is that you’ll need to trust the broker to handle your money safely.
Some brokers may not even require you to verify your identity, which could leave you vulnerable to fraudsters.
Mining Your Own Coins
Mining is how new currencies are generated. When people first started mining bitcoin, there were fewer than 100 computers working together to solve complex mathematical problems.
Today, there are over 11 million miners worldwide, and the number continues to grow as more people join the cryptocurrency revolution.
To get involved in mining, you’ll need access to powerful computing equipment, such as graphics cards, CPUs, and ASICs (application-specific integrated circuits).
These devices work by solving complex algorithms that confirm transactions and add them to the blockchain.
Once you’ve got your setup running, you’ll be able to earn bitcoins by confirming transactions.
This process takes time though, so you won’t see any returns immediately.
What Are The Best Ways Of Investing In Cryptocurrency For Beginners?
There are many ways to invest in cryptocurrencies – and we have put together all you need to know as part of your cryptocurrency beginners guide. Some of the most popular options include:
Bitcoin Investment Trust
Bitcoin Investment Trust (GBTC) is one of the easiest ways to invest in bitcoin.
It allows investors to purchase shares in GBTC, which represent ownership of a certain amount of bitcoin.
You can buy GBTC through authorized dealers, including stockbrokers, fund managers, and other regulated firms.
You don’t actually own the bitcoin itself – instead, you own a share of the company that owns the bitcoin.
You can then use the bitcoin to make purchases on websites like Amazon or withdraw cash from ATMs.
Investors who want to diversify their portfolio into other cryptocurrencies should consider investing in this way.
Ethereum Investment Trust
Another option is Ethereum Investment Trust (ETN), which works similarly to GBTC but trades on the Toronto Stock Exchange.
ETNs are similar to ETFs (exchange-traded funds), except they trade like stocks rather than bonds.
Like GBTC, you can buy ETNs through authorized dealers, including fund managers, banks, and stockbrokers.
If you want to invest in multiple cryptocurrencies, you might also consider purchasing a basket of different coins.
One example is CoinShares’ Bitcoin Tracker One (XBT), which tracks the performance of 10 major cryptocurrencies.
Litecoin Investment Trust
Litecoin Investment trusts (LIT) are another type of investment vehicle (see also ‘What Is An Investment Vehicle?‘) that lets you invest in litecoins.
Like GBTC and ETNs, LITs are traded on exchanges, and you can buy them through authorized dealers.
Unlike GBTC and ETNs however, LITs aren’t backed by an underlying asset.
Instead, they’re simply a tradable security that represents a portion of the value of each coin held within it.
This means that you can lose all of your money if the price of a single coin drops significantly.
If you want to invest in several cryptocurrencies, you may prefer to invest directly in baskets of different coins.
What Are The Main Types Of Cryptocurrencies?
The main types of cryptocurrencies are:
Bitcoin was the first digital currency ever created, and remains the largest cryptocurrency today – it is also perhaps the most famous example of cryptocurrency, and tends to be the automatic connection that many people make when they hear the term.
Bitcoin is a decentralized payment system that uses cryptography for security. Transactions are verified by miners, who are rewarded with new Bitcoins for doing so.
Because there’s no central authority, users have complete control over their private keys, meaning that they can spend their money as they wish without needing permission from anyone else.
However, because there’s no central bank backing up the network, Bitcoin isn’t suitable for large-scale transactions such as sending payments across borders.
Ripple is a distributed open source protocol for real-time gross settlement (RTGS).
This means that Ripple is used for transferring money between two parties instantly while avoiding the need for intermediaries.
It does this by using a consensus algorithm called ‘proof of stake’, where nodes are given rewards based on how much they contribute to the network.
As well as being more secure than traditional banking systems, Ripple has been designed to be faster than existing financial networks.
Litecoin is a peer-to-peer Internet currency that enables instant payments to anyone anywhere in the world.
It was one of the first alternative currencies to gain significant traction and continues to grow in popularity.
Litecoin is similar to Bitcoin in some ways but differs in that it uses a different hashing algorithm, and allows for larger blocks of data to be stored.
Ethereum is a decentralized platform that, amongst other things, is resigned to run apps known as “smart contracts”.
Smart contracts are applications that are designed to run exactly as programmed without any risk of downtime, fraud, interference from third-parties, or censorship.
Smart contracts give developers the ability to create their crypto tokens and use Ethereum to launch a variety of Dapps (decentralized apps), including ones that enable crowdfunding, exchange trading, prediction markets, game development, insurance, mortgages, and loans, etc.
Monero is a privacy-centric cryptocurrency that offers strong anonymity features.
It is often referred to as a ‘crypto-anonymous’ currency, which makes it ideal for those seeking to stay anonymous online.
Unlike other cryptocurrencies, Monero doesn’t rely on mining to verify transactions. Instead, it uses ring signatures and stealth addresses to ensure that its users remain untraceable.
Dash is an open-source project that aims to provide a fast, inexpensive, private and convenient way to send money globally.
It uses a unique form of proof-of-work known as InstantX, which gives Dash a number of advantages over other cryptocurrencies.
These include no pre-mine or ICO, as well as low transaction fees and fast confirmation times
Why Should You Invest In Cryptocurrency?
There are many reasons why investing in cryptocurrency could make sense for you. Some of these include:
One of the main advantages of investing in cryptocurrency is that it tends to be lower in risk, especially when compared to other investments such as stocks.
If you invest $1,000 in cryptocurrency, there’s a good chance that you’ll see a return of around 10%. If you invested that same sum in shares, however, you’d have a better chance of seeing a return of just 2% – 3%, depending on the company.
Another advantage of investing in cryptocurrency is that they tend to process faster than traditional methods of payment. This can be useful if you want to move large sums of money quickly.
For example, buying a house using cryptocurrency would allow you to complete the purchase much quicker than if you were to pay by credit card.
You wouldn’t need to wait days or weeks for your bank to transfer the money into your account before you could close the deal – instead, you could take care of the details in mere minutes.
No Third Party Interference
A final benefit of investing in cryptocurrency is the fact that it allows you to avoid having to go through a third party like a bank or PayPal.
With cryptocurrency, you control your own money. There are no middlemen taking a cut out of your earnings.
In short, investing in cryptocurrency is a great way to keep more of your hard-earned cash under your own control.
You Can Buy Bitcoins Directly From Another Person
If you want to purchase bitcoins directly from someone else, then you need to learn about mining. Mining involves solving complex mathematical problems in order to add blocks to the blockchain.
Once you’ve solved these problems, you’ll earn yourself some bitcoins. However, you’ll need to pay a fee to the miner for each block you solve.
When buying bitcoins directly from another person, you’ll usually have to wait until they’re ready to sell. This means that you’ll need to be patient when purchasing your first bitcoin.
Are There Any Downsides To Investing In Cryptocurrency?
Of course, there are some downsides to investing in cryptocurrency. Here are some of them:
High Transaction Fees
When you invest in cryptocurrency, you’re likely to incur high transaction fees. These can range from anywhere between 0.01% and 5% of the value being sent.
It should be noted, however, that this isn’t necessarily a bad thing in itself – the reason for this is that most cryptocurrency exchanges charge higher fees than banks do.
As an example, Coinbase charges 1.49% per transaction, while banks typically charge less than half that rate.
So, even though you may end up paying more for your transactions, you’ll still come out ahead overall.
Lack Of Regulation
While cryptocurrencies are generally considered to be safe ways to store and send money, they aren’t regulated by any government agencies.
As a result, investors don’t always know exactly how their money will be handled once they put it into a wallet.
Some wallets might hold onto your coins for longer than others, which could mean that you lose access to your money at some point.
This lack of regulation means that you won’t get any protection against theft or fraud. You also won’t receive any compensation if your funds disappear.
Limited Investment Options
The biggest downside to investing in cryptocurrency is the limited investment options available.
Most people who invest in cryptocurrency only have one option available to them – they either buy Bitcoin directly from another person (known as “mining”), or they buy Bitcoin on an exchange such as Coinbase.
While investing in cryptocurrency diversifies your overall portfolio, the options within this section can be a little limited if you lack the technical savvy and understanding of mine.
Investing in cryptocurrency is a relatively new concept. While many people think of it as a risky venture, it’s actually quite easy to make money with it – as long as you understand what you are doing, and have done plenty of research.
Our cryptocurrency for dummies guide should have provided you with all you need to know to get started.