Cryptocurrency, often simply called crypto, is a term that pops up more and more every day. From specialized tech sites to your standard local news station, everyone is talking about crypto. Sometimes it’s about vast fortunes won and lost, sometimes it’s about theory and ideological ramifications, and sometimes it’s even about law and economic regulation.
If you don’t know much at all about cryptocurrency, then here is a primer to help you understand the basics. You’ll learn what crypto actually is, why it’s so popular, what Bitcoin is, and how you can personally benefit from crypto.
What is cryptocurrency?
Cryptocurrency is a unique form of currency that is heavily encrypted and entirely virtual. Most importantly of all, cryptocurrencies are heavily decentralized, an attribute that makes them both attractive and volatile.
Their encryption makes it so that it’s almost impossible to compromise the currency with direct attacks. There are still points of weakness in the process where user error can come into play, such as account information, but security is still generally higher than average. This increased security is particularly important because of the second attribute.
As virtual currencies, cryptocurrencies don’t have any physical elements at all. Whereas money in a bank account is an abstraction of physical money that you have given your bank, cryptocurrencies are entirely different and more akin to a foreign currency in that they must generally be exchanged for local currency in order to make transactions. Some exceptions do apply, with certain websites accepting certain kinds of cryptocurrencies as valid payment options.
Finally, cryptocurrencies are decentralized, meaning that there is no central regulatory organization to watch over them. For those with libertarian leanings, this freedom from governmental regulation can be seen as a massive benefit to the currency. However, the fact that there is no regulation also means that prices can fluctuate more dramatically than is usual for a currency.
Why would someone want to use cryptocurrencies?
There are a variety of different reasons why someone might be drawn to cryptocurrencies, but they do not completely overlap, leading to a variety of different groups with different motivations and opinions. For this reason, it’s critical that you learn to distinguish between those that are interested in the concept, investment potential, and ideological uses of crypto.
As far as concept is concerned, cryptocurrencies offer a sleek, modern approach to financial transactions. The idea of a shift from precious metals and paper to digital is appealing for obvious reasons. Some admire the technological aspect behind it, seeing it as one of society’s oldest systems catching up with the times. Some admire the specifics of the encryption system and how much less vulnerable to counterfeiting it is relative to physical currency.
As a potential place to invest, cryptocurrencies draw an entirely different crowd, this one more focused on how much money they can make. If the first group can be likened to technophiles admiring and supporting advances in a fundamental area, then this group is far more like stockbrokers trying to play the market. Between their volatility and explosive lifespans, cryptocurrencies make for very exciting investment opportunities where your money might multiply a few thousand times over if you get in and out at the right times. For some, it’s about holding and selling until the last moment before the drop. For others, it’s more about identifying promising new cryptos and getting in while they only cost a few cents each, quietly hoping that they might be worth hundreds or thousands at some point.
Finally, the ideological side of cryptocurrencies attracts those that hold libertarian leanings. The idea that you can have money that is not beholden to your government can be very enticing, especially for those that seek to build up stockpiles of various resources. This can range from full-blown support of cryptocurrencies as the future to tacit agreement with the direction of cryptocurrency and the hope that it may develop into a more suitable currency system in the future.
When considered together, it’s clear where friction may arise between these disparate groups. Investors that want to make a quick buck will naturally frustrate ardent supporters of cryptocurrencies as actual currencies and not just investment opportunities. The increased volatility that the former relies upon is antithetical to the stability desired by the latter. Likewise, those that see cryptocurrencies as the way of the future may not entirely agree with the libertarians that the government should be completely divorced from the concept.
However, it’s also possible for a person to be a part of more than one group at a time. You can support the underlying technology, desire frequent trading as a way to draw attention to the concept, and want it to be an alternative to government-controlled currencies.
Then what is Bitcoin?
Even people that have never heard of cryptocurrency have heard of Bitcoin, but what exactly is Bitcoin? Is it a specific type of crypto? Is it a brand? Was it the first of its kind or just the most popular? Is it still around?
Bitcoin, created in 2009, is a specific type of cryptocurrency and the first to gain mainstream popularity. While other cryptocurrencies date back to the early 1990s, Bitcoin was the first to be decentralized, a major factor in its success.
Since then, a number of other cryptocurrencies have emerged with varying levels of success. Some use different types of encryption and some even use custom ATMs, but most, if not all, draw heavy inspiration from the success of Bitcoin.
Is it too late to make money from cryptocurrencies?
For most people, cryptocurrency is little beyond an opportunity to make money. However, for every story of incredible success and wealth, there are hundreds of stories of small losses and dozens of stories of crippling debt. Thus, it is perfectly reasonable to wonder whether there is still an opportunity to make money from cryptocurrency, and if so, then how risky is it? For starters, consider Bitcoin.
Given the trajectory of Bitcoin from cents to thousands of dollars per unit, it would probably be unwise to jump onto Bitcoin right now. If nothing else, the price of investing in even a single unit would be astronomical. It’s unlikely that you would be able to replicate any of the legendary success stories from years past.
On the other hand, you might find success in one of the many cryptocurrencies that are chasing the trend of Bitcoin. Hypothetically, if one were to follow the history of Bitcoin, then buying very low and holding would allow you to make an incredible amount of money later.
This presents a paradoxical opportunity for you. The more established cryptocurrencies are more prone to maintain relevance, but they probably won’t be so cheap that you can amass a huge number of units for a low price, meaning that potential earnings down the line will be lower. Conversely, you could try to sort through all the new cryptocurrencies and get in early with one or more. You can hedge your bets with minimal investment and reap the rewards if any of them make it big, but the chances of that happening are incredibly low
Statistically, it’s important to note that you are more likely to lose money than make money on cryptocurrency. It’s possible to come out on top, but will it be worth the time you spent on research and monitoring prices and trends? More importantly, will it be worth the incredible risk of all your money vanishing when a currency’s value plummets? Do you have the experience and expertise to determine the best times to dive in and ease off, along with which currencies to invest in?
If not, then cryptocurrencies can still be a subject to learn about or a fun hobby to do with trivial amounts of money, but you shouldn’t consider them as reliable investments.