Cryptocurrency PlayBook: A Beginner’s Guide
The blockchain-backed cryptocurrency has been a major leap forward in digital currency technology since the internet’s inception. Everyone knows that it has been a game-changer for investors and businesses worldwide because of cryptocurrency.
Cryptocurrencies, like paper money or checks, enable consumers to purchase services and goods or trade them for profit, making them a popular type of investment for a lot of people.
Cryptocurrencies have been dubbed everything from “future money” to “extremely risky assets” — well, it’s true in both senses. Cryptocurrency ideas and strategies spread quickly, owing to the fact that cryptocurrencies are a complex and unique technology that is also easily accessible.
This has left people wondering whether they should invest in cryptocurrencies, whether they are safe, and how they work. If you are one of these folks, you have come to the right place. In this article, we’ll talk about everything that you need to know about cryptocurrencies.
What is Cryptocurrency?
If you’re new to investing, you’d want to choose something which would give you the most benefits and the least risks — and that’s okay. That’s why here at InvestingBosses, we’re not just gonna focus on one type of investment.
So let’s get to the big question.
To put it simply, cryptocurrency is a digital asset or a virtual currency. The name comes from the fact that all of its transactions are highly encrypted, making the transactions extremely secure.
Unlike traditional currencies, which are managed and controlled by a central authority, it is decentralized. A cryptocurrency has a limited supply and is sometimes compared to precious metals such as gold and silver. Cryptocurrency is powered by blockchain, a distributed ledger technology.
Wait, what IS BLOCKCHAIN?
Blockchain technology is core to Bitcoin’s and other cryptocurrencies’ appeal and workflow. As the name implies, a blockchain is essentially a collection of coordinated blocks or a web-based ledger.
Each block contains a collection of transactions that have been independently verified by each network member. Every new block generated must be validated by each node prior to being confirmed, making it almost impossible to forge transaction histories.
The contents of the online ledger must be agreed upon by the entire network of a single node, or computer, that keeps a copy of the ledger.
According to experts, blockchain technology can benefit a variety of industries, including supply chains, as well as processes such as online voting and crowdfunding.
Why Cryptocurrency Is Very Popular
You’re probably wondering why all of a sudden, everyone’s talking about cryptocurrency. There was a time when no one even knew what it is, but now, it feels like you’re being left behind if you’re an investor and you don’t know what crypto is.
But what makes it very popular?
One word: GROWTH. Investors are intrigued by the potential for cryptocurrency to increase in value, as well as the potential for cryptocurrency to transform the financial system.
When Bitcoin first debuted in January 2009, few could have predicted that a single BTC would be worth more than $65,000 (as of November 15, 2021) — or that a single digital currency would inspire the creation of thousands more. But it has happened. In just 13 years, cryptocurrency has evolved from a financial fad to a new market sector worth trillions of dollars.
But it’s not just the monetary value of the coins and tokens that have investors interested. Many different types of cryptocurrency are being developed as part of larger digital platforms as part of the DeFi — or decentralized finance — movement.
There are new crypto investments, new global transaction channels, and a slew of other innovations ranging from smart contracts to non-fungible tokens.
Although cryptocurrencies are still largely unregulated (and their use as an actual currency is limited), there is a growing sense that a floodgate of new opportunities and technologies has opened.
Now, we all know that there are a lot to choose from if you want to dive into the world of cryptocurrency — but which one suits you best?
Different Types of Cryptocurrencies.
Honestly, there’s no way we can talk about all the types of cryptocurrencies in one article. Why? Because there are more than 16,000 types of cryptocurrencies available in the market today, but the most popular and valuable cryptocurrency is Bitcoin.
Satoshi Nakamoto, an anonymous person, invented it and published it in a white paper in 2008. Thousands of cryptocurrencies are available on the market today.
Each cryptocurrency claims a unique function and specification. For example, Ethereum’s ether is commercialized as gas for the underpinning smart contract framework, while Banks use Ripple’s XRP to facilitate transfers between different geographies.
Bitcoin, which went public in 2009, is still the most widely traded and covered cryptocurrency.
There were over 18.8 million bitcoins in circulation as of November 2021, with a total market cap of around $1.2 trillion. There will only EVER be 21 million bitcoins.
Many other cryptocurrencies, known as “altcoins,” have been launched in the aftermath of Bitcoin’s success. Some of these are Bitcoin clones or forks, while others are completely new currencies. Solana, Litecoin, Ethereum, Cardano, and EOS are among them.
By November 2021, the total value of all cryptocurrencies in existence had surpassed $2.1 trillion, with Bitcoin accounting for roughly 41% of that total value.
Advantages and Disadvantages of Cryptocurrency
Now let’s talk about one of our favorite parts – weighing the PROs and CONs of investing in cryptocurrency. Cryptocurrencies were designed to revolutionize financial infrastructure.
However, as with any revolution, there are upsides and downsides. At the point where cryptocurrencies are now in their development, there are many differences between the ideal of a decentralized system with cryptocurrencies and how it works in practice.
PROs of Investing in Cryptocurrency
- Cryptocurrencies represent a new, decentralized money paradigm. In this system, there is no need for centralized middlemen like banks and money institutions to enforce trust and keep track of transactions between two parties.
So, a system based on cryptocurrencies makes it impossible for a single point of failure, like a big bank, to cause a global crisis like the one in 2008, which was caused by the failure of institutions in the United States. - Cryptocurrencies promise to make it easier to transfer funds directly between two parties, eliminating the need for a trusted third party such as a bank or credit card company. Such decentralized transfers are protected by the use of public and private keys, as well as various incentive systems such as proof of work or proof of stake.
- Cryptocurrency transfers between two transacting parties are faster than traditional money transfers because they do not use third-party intermediaries. Flash loans are a good example of such decentralized transfers in decentralized finance (DeFi). These loans, which are processed without the use of collateral, can be completed in seconds and used in trading. 4. Cryptocurrency investments can be profitable. In the last ten years, the worth of cryptocurrency markets has gone through the roof, at one point reaching nearly $2 trillion.
Fun fact: Bitcoin was worth more than $862 billion in crypto markets as of December 20, 2021.
- One of cryptocurrency’s most prominent use cases is the remittance economy. Currently, cryptocurrencies such as Bitcoin serve as intermediary currencies to facilitate cross-border money transfers.
As a result, a fiat currency is converted to Bitcoin (or another cryptocurrency), then transferred across borders and converted back to the destination fiat currency. This method makes it easier and cheaper to send money to someone else.
CONs of Investing in Cryptocurrency
- Cryptocurrencies are pseudonymous, despite their claim to be an anonymous form of transaction. They leave a digital trail that can be deciphered by agencies such as the Federal Bureau of Investigation (FBI). This opens the door for governments or federal authorities to track ordinary citizens’ financial transactions.
- Cryptocurrencies have grown in popularity among criminals for nefarious purposes such as money laundering and illegal purchases. The case of Dread Pirate Roberts, who ran a drug marketplace on the dark web, is well known. Cryptocurrencies have also gained in popularity among hackers, who use them to launch ransomware attacks.
- In theory, cryptocurrencies are supposed to be decentralized, with their wealth distributed among many parties via a blockchain. In practice, ownership is extremely concentrated. According to an MIT study, just 11,000 investors held roughly 45 percent of Bitcoin’s soaring value.
- One of the conceits of cryptocurrencies is that anyone with a computer and an Internet connection can mine them. But mining the most popular cryptocurrencies takes a lot of energy, sometimes as much as a whole country uses. Due to high energy costs and the fact that the industry is hard to predict, most mining is done by big companies that make billions of dollars a year.
- While cryptocurrency blockchains are extremely secure, other crypto repositories, such as exchanges and wallets, can be compromised. Many cryptocurrency exchanges and wallets have been hacked over the years, with millions of dollars in “coins” stolen in some cases. Price volatility affects 17 cryptocurrencies traded on public markets. Bitcoin’s value has fluctuated dramatically, reaching as high as $17,738 in December 2017 before plummeting to $7,575 in the months that followed. Because of this, some economists think cryptocurrencies are just a passing trend or a speculative bubble.
You may have read all the PROs and CONs that we shared above, but you’re still not sure if cryptocurrency is the best choice for you. Don’t worry, we’ll talk about more important things here about investing in cryptocurrency.
So now, we’re moving to the next big question – “How Do You Invest in Cryptocurrency?”
Ways To Invest In Cryptocurrency
There are numerous ways to invest in cryptocurrency, just as there are in any other form of investing. However, because the crypto market is entirely digital, decentralized, and based on blockchain technology, investing in this space can look very different from trading stocks, bonds, and ETFs. However, as you’ll see when you look at the options below, even cryptocurrency is making inroads into more traditional markets.
1. Cryptocurrency Trading
Trading, similar to trading traditional securities such as stocks, bonds, or ETFs, is perhaps the simplest way to invest in cryptocurrency. You can open an account on a cryptocurrency exchange, fund the account by connecting your bank or using a wire transfer of cash (different exchanges have different rules), and then start buying and selling the cryptocurrency of your choice.
It’s best to have a strategy, just like with traditional forms of investing.
2. Cryptocurrency Mining
Mining is another method of obtaining crypto assets, but it usually needs a much larger investment in terms of time and equipment. Many crypto platforms use crypto mining, also known as proof-of-work, as a consensus mechanism.
It’s a time-consuming and competitive endeavor in which miners (basically the computers or “nodes” on the network) perform billions of complex calculations in order to verify a block of data on a given blockchain. A miner is typically rewarded with coins for being the first to confirm a block.
How does cryptocurrency mining work?
Crypto miners use specialized computer hardware to perform the complex mathematical cryptography required to confirm each blockchain transaction. This process, known as “proof of work,” requires miners to perform billions of calculations in order to validate a block of transactions. Proof of stake (PoS) is another consensus mechanism used to create crypto, but PoW is used by many different types of crypto.
Crypto mining is a highly competitive industry. The process is based on network-wide consensus, which essentially validates each transaction even in the absence of a central authority. If a miner is the first to verify a block of transactions on a given blockchain platform, they may be rewarded with new coins after completing a certain number of calculations.
3. Cryptocurrency Staking
Proof-of-stake is an alternative to the proof-of-work model (PoS). This, too, is a consensus mechanism, but it uses a process that is considered more passive and thus more energy-efficient than PoW.
Staking cryptocurrency entails purchasing cryptocurrency and waiting to be chosen as a validator on the network. Validators, like miners in a PoW system, validate blocks on the blockchain and are rewarded with additional coins. So far, PoS has been used in fewer projects, and there is some debate about whether PoW or PoS is more efficient or secure.
4. Bitcoin Exchange Traded Funds (ETFs)
After a protracted regulatory battle, the SEC began approving exchange-traded funds (ETFs) based on bitcoin futures in October 2021, paving the way for a flood of new investment opportunities. These ETFs will only invest in bitcoin futures, not actual bitcoin assets, as of November 2021. Investors should also consider funds that invest in blockchain-based technologies.
5. Cryptocurrency-based stocks
Companies that provide hardware and other backend services are growing in popularity as cryptocurrencies become more popular as well. Investors can consider investing in large-scale crypto mining companies, cryptocurrency exchanges, or companies that use cryptocurrency as part of their business or payment model.
Crypto stocks, like emerging crypto-based ETFs, are likely to provide investors with an increasing number of opportunities as this space expands.
At this point, I’m sure that you’ve already decided what method you’d like to use in your cryptocurrency journey, so let’s get down to the step-by-step process of investing in crypto.
4 Basic Steps to Buying Cryptocurrencies Safely:
1. Choose where you will buy it.
There are many safe ways to buy cryptocurrency, but a centralized exchange is probably the easiest way for beginners. Centralized exchanges act as a third party to keep an eye on transactions and make sure customers get what they pay for. Most of the time, these exchanges sell crypto at the market rate.
They make money by charging fees for different parts of their services.
If you are used to more traditional brokerage accounts, there are a few online brokers that give you access to both stocks and cryptocurrencies. The key is to look for pure-play crypto exchanges if you want to find an exchange that only deals with cryptocurrencies.
For more experienced users, there are decentralized exchanges with fees that can be less than what centralized platforms charge. These can be harder to use and require more technical knowledge, but there is no single target for a cyberattack, which may make them safer. Peer-to-peer transactions can also be used to trade cryptocurrencies.
2. Decide how you’ll pay for it.
Once you’ve decided the WHERE, you can then decide the HOW.
Even though there are thousands of cryptocurrencies that are traded all over the world, the most popular ones can be bought with fiat currencies like the U.S. dollar.
If this is your first time buying cryptocurrency, you will probably have to use regular money.
If you’re a more experienced investor, you might want to trade some of the crypto you already own for another type, like Bitcoin for Ethereum.
3. Increase the value of your account.
Depending on how you pay, you may need to add money to your account before you can buy cryptocurrency. Most exchanges let you use debit cards or bank transfers if you have fiat currency.
Some also let you use a credit card to pay for a purchase, which can be risky with a volatile asset like cryptocurrency because interest costs can make your losses bigger if the value of your investments goes down.
If you already have cryptocurrency, you can move it from a digital wallet or another platform into your account and then trade with it. Just make sure your crypto exchange lets you trade between the assets you’re interested in. Not all cryptocurrencies can be traded directly for each other, and some platforms have more trading pairs than others.
Another thing to keep in mind is that the fees for exchanges depend on what you’re buying and how you’re buying it, so make sure you look over these details carefully.
4. Choose the cryptocurrency that you want to invest in.
There are a lot of choices for people who want to invest in cryptocurrencies, but none of them are likely to be right for everyone. Before you buy, you should think about what you want to get out of this investment.
Ask yourself these questions:
- Do you expect it to appreciate in value?
- Do you want to conduct transactions with cryptocurrency?
- Do you want to make use of the underlying technology via decentralized applications?
The answers to these questions would help you in making your decision.
Okay, so far, you’ve established the type of cryptocurrency that you wanna invest in, and you’ve read all the PROs and CONs of doing so. But one thing that most investors ask before finally deciding is — “Is it safe?”
How Secure is Cryptocurrency?
When investors ask about security and cryptocurrency, they do so from a variety of perspectives. The first is that, while crypto is secure because it is based on cryptography and peer-to-peer consensus, many cryptocurrencies, particularly in their early days, have been plagued by hacks, theft, and other forms of cyberattacks. These are uncommon, but they are a risk to consider.
Then there’s the question of how to protect the cryptocurrency you buy. To securely store cryptocurrency, an investor must use a cryptocurrency wallet, which can be either digital or physical, such as a thumb drive.
You will be expected to store, remember, and secure a password that only you know when using a crypto wallet. This is a common problem with cryptocurrency, as people who forget their passwords effectively leave their assets stranded.
Hackers may also target cryptocurrency wallets.
Finally, investors must consider the overall risks of trading a volatile investment like most cryptocurrencies. Cryptocurrency prices can change by the day, hour, and minute. While this is also true for some traditional investments, particularly equities, cryptocurrencies are so new that the sector as a whole lacks a track record that investors can use to make investment decisions.
