It’s almost impossible to not have heard something about cryptocurrency these days. Whether it’s on the news, social media, or just a friend who can’t stop bragging about his big Bitcoin score, it feels like crypto is everywhere. Is it money? Is it an investment? Can it make you rich? Exactly how does everything work? If you have serious crypto FOMO (fear of missing out) or are just wondering what the hype is about, you’ve come to the right place. Here’s a beginner’s guide to cryptocurrency.
What is Cryptocurrency?
The most basic definition of crypto is that it’s a form of digital currency. It can be used to buy goods or services, both online and in real life. There are dozens of different cryptocurrencies, although you’ve probably heard of the major ones — Bitcoin, Ethereum, Litecoin, and Dogecoin.
These digital currencies are sold in units called “coins” or “tokens.” You have to buy them with regular money (unless you mine them yourself – more on that in a minute). The price of a single coin or token goes up and down all the time, much like the stock market.
How is Cryptocurrency Created?
This gets a bit tricky – and a bit technical. Crypto uses a technology called blockchain. It’s a decentralized system, spread across many computers, that manages and records every single transaction. This technology has appeal because it’s very secure and incredibly fast.
Before a coin hits the blockchain, though, it has to be created in the first place. This is typically done via “mining.” It’s a complicated process, but it basically boils down to using your computer’s processing power to solve extremely complex mathematical problems. In exchange, you can be granted a small amount of the coin.
However, mining is incredibly slow and costly. Your laptop from BestBuy isn’t going to cut it. You’d need a whole network of incredibly powerful processors and spend a small fortune on electricity to keep it all humming 24/7. There’s also no guarantee you’ll earn the token, because someone else might prove they solved the required equations first.
What is Crypto Worth?
This is another question that doesn’t have a single answer. Like we said, there are many different cryptocurrencies available. Bitcoin, the most popular, is valued at thousands per coin.
On the other hand, there are plenty of “budget” coins available for less than a dollar per coin. The popular Dogecoin was available for pennies until it suddenly shot up in price in 2021. Since then, it’s levelled off around low cents per coin.
Litecoin and Bitcoin Cash both hover in the few hundred dollar range. Ethereum is a few thousand dollars per coin, depending on the price fluctuations. Other coins like Stellar, Curve, and Cardano can be bought for a few dollars per coin or less.
Why Is Bitcoin So Valuable?
When Bitcoin was created, the first few coins were very easy to mine. Now, it’s incredibly hard to mine even a single coin. The process was designed to get progressively harder over time. The reason for that is there’s a maximum amount of Bitcoin that will ever be available: 21 million Bitcoins.
Once the last Bitcoin is eventually mined, that’s it. No more Bitcoins will ever exist in the future. So with a limited supply and an increasing demand, the laws of economics kick in and drive up the price. Some other cryptocurrencies don’t have a limit of the number of coins created, meaning that supply can (theoretically) always outpace demand, keeping their prices low.
Is Crypto a Good Investment?
This is probably the million-dollar question. You’ve probably heard stories about the lucky individuals who bought Bitcoin on a whim when it was first introduced in 2009. You could get a single coin for as little as $1 at first. By 2011, the price jumped up to $32 per Bitcoin, then down to $2, and then back up $13.50.
Now a single Bitcoin is worth a lot. If you invested $1,000 when the price was $13.50, you’d be sitting on millions right now. Even Dogecoin rose in value over 12,000 percent at one point in early 2021.
Unfortunately, these stories are the exception rather than the rule. Yes, some people have made money getting into crypto early and then selling when the prices spike. But like the stock market, these things are hard to time. Plenty of people bought into the hype when Bitcoin was at $60,000 or Dogecoin was at $0.50, thinking it was going to go up forever. Those investors are currently sitting on heavy losses if they sell their crypto off now.
To put it simply: all investments contain a certain degree of risk. The wild price fluctuations of crypto mean investing is not for the faint of heart. You could see massive returns. You could just as easily lose most (or all) of your money. Never invest money you can’t afford to lose, especially in something as volatile as cryptocurrency.
Why Is Crypto Suddenly So Popular?
In the beginning, it seemed like crypto was just for tech bros or IT nerds. (No disrespect to any self-proclaimed nerd.) Now it’s everywhere. It even took over Reddit for a while. Mainstream news is covering it. Suburban soccer moms are even opening their own crypto accounts. Why is everyone suddenly so gung-ho on cryptocurrency?
Part of the answer is that previously-mentioned FOMO. Something gets trendy, gains popularity, and then every average person wants to make sure they get in on it too. There are lots of people who only buy crypto because they think it’s the next big investment opportunity. After all, imagine getting in early on Apple, Google, or Amazon stock, as a comparison! However, there’s more to crypto’s recent rise.
The last decade or so has been uncertain, to say the least. There’s been multiple financial crises, growing concern over climate change, multiple extremely divisive presidential elections in the United States, and (of course) a global pandemic. Plenty of people have seen their long-term financial prospects dry up. Mistrust of the Federal Government and big banks is growing. So a decentralized form of money like cryptocurrency appeals to a lot of folx.
How Do I Buy Crypto?
In order to buy your own cryptocurrency, you need one of two things: either a crypto wallet or a brokerage account with a firm that offers crypto for sale. One of the most popular online markets for cryptocurrency in the U.S. is Coinbase. Or Coinberry, in Canada.
A crypto wallet is software for your PC or smartphone. It uses encryption to secure your coins and ensure that every transaction is safe. There are plenty to choose from, so do a little research before you pick one. Once set up, you can use your wallet address to send and receive crypto when you buy or sell it.
In recent months, many online investing apps like Robinhood or WealthSimple (in Canada) are now selling cryptocurrencies. You simply fund your brokerage account with your own money, and then use it to buy your coin of choice. You don’t need a crypto wallet, since your coins stay safe inside your investing app. The downside of this method is that you can’t actually use your coins for anything other than investing. You’d need to convert them back into regular cash in order to actually buy something.
What Can I Buy With My Crypto?
Although many people are only using cryptocurrency as a speculative investment, it’s still a currency at its core. That means you can pay for things with it, if you want. The only catch, of course, is that you have to be shopping somewhere that accepts Bitcoin (or Ethereum or Dogecoin or whatever) as acceptable currency.
Tesla Motors famously started to accept Bitcoin payments for their electric vehicles, before pausing that decision in 2021 based on environmental concerns. However, there are still hundreds of businesses – both online or brick-and-mortar locations – that accept various cryptocurrencies as payment. The list continues to grow all the time. You can even donate to certain charities with Bitcoin!
Are Cryptocurrencies Legal?
The legality of cryptocurrencies largely depends on where you live. In the United States, they are perfectly legal. However, China has pretty much banned all cryptocurrencies. And then there’s El Salvador, which recently adopted Bitcoin as legal tender on a federal level. In short, look up your local laws before making the plunge into buying or selling crypto.
So far, most governments have stayed away from trying to regulate cryptocurrency. After all, the whole point of crypto is to have a decentralized, deregulated form of currency that isn’t subject to the whims of a Federal Treasury (who can influence interest and inflation rates with their decisions). However, there are some concerns that governments will step in if crypto ends up being used to launder money, commit tax evasion, or defraud innocent citizens on a regular basis.
Are Cryptocurrencies Safe?
For the most part, yes, cryptocurrencies are safe. That is, your coins won’t magically disappear out of your wallet or brokerage account. However, they remain extremely volatile in terms of value.
If you invested $10,000 in your crypto of choice, it could be worth $25,000 in a couple weeks. Or it could be worth $2,000. So in terms of being a “safe investment,” they definitely aren’t a sure thing. While the big “brand name” coins like Bitcoin or Ethereum are fairly safe to own, there are some things you should watch out for.
Plenty of smaller cryptocurrencies have been founded in recent months, claiming to be “the next Bitcoin.” However, critics are quick to point out that these seem a lot like “pump and dump” scams, where online influencers promote a new crypto coin, encourage people to buy it up, and then sell their own stake when the price goes up. That leaves the retail investors stuck holding heavy losses. With more than 10,000 different cryptocurrencies available on the market, it can be hard to figure out which ones are the safest.
The Future of Cryptocurrency
Crypto hit a bunch of all-time highs in the first half of 2021, but the markets have cooled off since. Is the bubble slowly popping? Or is this just an expected dip before the value of various coins spikes up again in the future?
No one knows the answers to these questions. If we could predict the financial future with that much accuracy, we wouldn’t be writing articles about cryptocurrency. Things could go a number of ways, since the future is wildly unpredictable.
More governments could attempt to regulate cryptocurrency, which would probably hurt its value. On the other hand, it continues to increase in popularity. With coins like Bitcoin having a finite supply, the continued demand could potentially keep the price going up. There’s also chatter that the Securities and Exchange Commission (SEC) could approve a “Crypto ETF” — an investment fund of various crypto coins. That would be a big boom for speculative investors.
If you’re thinking about dipping your toes into the crypto waters, follow a few basic rules. Don’t expect to get rich quick. Don’t risk money that you can’t afford to lose. Do as much research as you can on your coin of choice. Finally, try to have a little bit of fun. Crypto is definitely an interesting and exciting new merger between the technology and finance spheres.