Cryptocurrency – Basics to know before investing.
The market has been going crazy for cryptocurrency lately. Bitcoin, Ethereum, and even off-brand coins like Dogecoin have taken upfront pages of even the most respectable financial media outlets.
It all seems complicated, but this article will guide you through the basics to get you caught up. After reading this article, the news that comes out will make a bit more sense, and you can decide easier if buying cryptocurrencies is a good idea.
What Is Cryptocurrency?
Cryptocurrency is a broad term, but to put it simply, it is a digital currency that is stored exclusively on a blockchain network. We will get more into the blockchain shortly.
It might be best to think of the whole system like the gold mining systems of old. Some miners take gold out of the ground, and some gold experts keep track of the gold and its supply chain.
In our example, the cryptocurrency is the gold, and the gold experts are the blockchain.
The programmers receive the currency itself and go to successfully “mine” a new token. The process uses powerful computer servers that have to process lots of computer code. These tokens represent fungible and tradable assets or utilities that reside on their blockchains. Crypto tokens are often at the base of fundraising for crowd sales but are also substitutes for other things.
The cryptocurrencies are interesting from a monetary standpoint, but the blockchain is the most fascinating.
What Is the Blockchain?
You hear about blockchain in almost every reference to cryptocurrencies and, there is a good reason for that. Blockchains are a critical part of why cryptocurrencies even have value.
Let’s back up a bit and give an overview on why the US Dollar, for instance, has any value at all.
That iPhone or Android phone you bought has a dollar value attached to it. Apple or Samsung knows what it costs because the banking system can, with relatively high accuracy, estimate accurately how many US dollars are in the system.
This process is possible because of a complicated ledger system that verifies funds and transactions when they take place.
The blockchain is a highly secure digital ledger system that verifies a token in a particular cryptocurrency system, stores it, and records every single transaction in that system.
It is the same function that banks serve in our centralized financial system, which is why the term “de-centralized finance” is getting some attention now.
De-centralized finance is just a reference to cryptocurrencies that maintain their value outside of any central banking system. The security of the blockchain is why tokens such as Bitcoin or Ethereum have value and why people are putting more faith in these tokens.
Are cryptocurrencies a good investment?
As an investment, cryptocurrencies technically aren’t backed by any system other than the current belief that hacking a Blockchain is close to impossible.
There have been hacked accounts at various brokerages and digital wallet companies, but the blockchain itself has held up. The moment this is no longer true, that particular cryptocurrency might suddenly become worthless. Other cryptocurrencies might follow as faith in the blockchain crumbles.
This single point of failure and the relatively high volatility in each one shows that cryptocurrencies are highly speculative at the moment and should not be seen as investments.
How Do I Buy It?
In the early days, you needed a heavy background in computer science and networking to mine your tokens. However, these days, you might only need to sign up for a simple brokerage account.
If you want to buy an actual token such as a Bitcoin or Ethereum, it’s important to note two things:
- You will need a cryptocurrency wallet specifically designed to store the tokens
- You don’t own the tokens – only the keys to the part of the blockchain where yours is stored.
This second point is crucial. Nodes around the world support the blockchain, and you won’t know where your token is. But your user details are coded directly into the token’s coding when you make your purchase, so rest assured that it’s yours.
Cryptocurrencies are very complicated. They are all over the financial news these days, making it very important to remember that any investment, whether speculative or not, requires research for you to understand what can affect your investment.
As a new field of investing, the tax implications on profits are also constantly changing. To avoid penalties from the IRS, you might want to talk to a tax professional that specializes in investments or even cryptocurrencies.