Yep – it’s finally time to talk about cryptocurrencies.
It’s the new craze: people are losing a ton of money, some are making too much money and most have no idea what it’s all about. Cryptocurrencies have been all the hype in the past few years, and it’s important to be on the right end of it. How can you make sure that happens? By knowing. This lil’ cryptocurrency guide will get you one step closer to that.
What we’ll be talking about today:
- What are cryptocurrencies
- The cool benefits
- How people make the ££
- How to get started in your twenties
WTF are crypto
Cryptocurrencies are funny. No one, not even the banks or the governments, really know how to deal with these weird digital currencies. Some countries are banning it, some are encouraging it and some are too scared to touch it. It’s bloody awesome in my opinion. But why is it so confusing? Why are countries and the rest so dazzled by this new digital currency? To understand the why I’m going to start with explaining the what. What do crypto exactly consist of?
I’m not going to go into huge detail, simply because I am no expert and you honestly don’t need to know every single intricacy. But we’ll do a basic overview of what digital currencies do and some nice resources to expand on at the end.
We can start by explaining the process behind Bitcoin, the first big cryptocurrency. Understanding Bitcoin will help understand the rest of them.
Bitcoin has two different processes: mining and transactions. The mining process is completed by huge computers requiring big amounts of computing and electricity power – mostly done in places like China and Iceland. These big computers do complicated calculations to try and find the right combination for a specific algorithm, called a hash. It’s based on cryptography (surprise surprise): the computer is looking for that specific key to unlock a problem, and as the problems get more complicated, the more electricity, time and energy required to solve it.
Once they find that specific combination, they unlock the hash and are one up on the blockchain. And every time they solve a problem, they earn a certain amount of Bitcoin. The interesting thing is, it’s all a race: the person with the most powerful computer is the one who can go through as many combinations as possible and find the key to the hash, and therefore are the one most likely to solve the algorithm quickly. The first person to solve the problem earns some Bitcoin.
But what if their key to the hash is wrong? To make sure that doesn’t happen, the key must be verified before moving onto the next hash. Computer A says the combination is 6566. Before using that combination to unlock the hash, computer B, C and D (obviously way more in real life) need to verify it. They verify and confirm the combination and bam, computer A gets their Bitcoin. Which is why everyone says a Bitcoin is basically a chain of verifications (blockchain): one problem being resolved and verified after the next.
To make sure the keys are verified, computer B, C and D are rewarded with a bit of bitcoin every time they confirm a hash, encouraging miners to complete verifications.
The transactions are the other essential part to the crypto mania. We now have a bitcoin, but we have to give it value and purpose: make it useable and make it transferable from one person to another.
The awesomeness of crypto really appears when we start doing transactions. Daisy wants to give Jimmy a bitcoin. She has an online crypto wallet that only she can access with a unique password, called an address. She goes to an online platform like Coinbase, puts in her address and sends over the bitcoin. But before Jimmy can receive the bitcoin, the transaction needs to be verified to make sure that her bitcoins are legit and do actually resolve the algorithms. The transaction hops onto the blockchain and will be verified by other miners (who’ll be awarded a small amount of bitcoin).
What makes cryptocurrencies different to a normal currency is that these digital coins are not secured by people or trust, they’re secured by maths, by cryptography. The only way Jimmy will ever get his bitcoin is if the key is verified and can solve the algorithm. No one can fake the algorithm or the key, since it’s all down to those huge computers up in China, Iceland, etc. As you can imagine, not having someone control your crypto has some pretty sweet benefits.
Some cool benefits
Hopefully you understand bitcoin and therefore crypto a bit better now. It’s hard to get your head round it, but I find that the more research you do and the more you hear about, the easier it is to understand. Here are some cool benefits:
Anonymity: Since there are so many combinations and encrypted transactions involved, it’s hard to connect the address to a real life person. This is a great benefit if you’re a drug dealer or up on the black market.
Global and fast: You can be anywhere on the world and at any time, all you need is a wifi connection. The confirmation of your transaction takes a few minutes, and you get your bitcoin. This is very beneficial to people who are trying to send money back to their home country and don’t want to pay high fees or wait for months.
Secure: As we’ve discussed before, crypto is all about confirming transactions, so no one can ‘pretend’ to send themselves bitcoin. The strong cryptography and the big numbers make it impossible to hack. Only the owner will ever know the address to their crypto wallet and this changes every time they make a transaction (so you really don’t want to give out your address to anyone). Once the key is verified and on the blockchain, it’s made permanent. The transaction can never be reversed and no one can touch it. If Jimmy sends you 2 bitcoins, you get 2 bitcoins whether you like it or not.
Control: No bank is telling you how much you should own or how you should use it. No one will take your crypto away unless they know your address. You get to control how to use your crypto and it’s pretty hard to track down who used them and for what (which is why countries like China are banning it). Also anyone can have a bitcoin – no matter what your credit score is or how much you owe someone, your bitcoins are still yours and won’t be locked down or taken from you.
The weak points are the currency exchanges: the platforms such as Coinbase and Bitfinex exchanging cryptocurrencies for dollars/euros etc. If you put your money on the exchange and it gets hacked… not good news. This is why it’s always good to have a crypto wallet and not to leave your money on the platforms. This happened to companies such as Coincheck and Mt Gox. Nasty stuff.
How people make money
So now onto the big question: how does one make the dough?
There are several ways, both directly and indirectly. I’m not including things such as ‘write about bitcoin’ or ‘work for a cryptocurrency company’ since mate, that’s kinda obvious. Here are some ways you can earn ££ with ฿฿.
Mining: Go to Iceland, set up a huge ton of computers and mine some crypto. Realistic? Not really. Expensive hardware and high electricity costs mean only big corporations can afford to do the mining. Back in 2010 you could mine bitcoin from your own home computer, but now it’s not a realistic way of earning money. Was just putting out there.
Trading: Crypto’s value is extremely volatile on the market. This means it goes up and down like crazy and is hard to predict. But if you get lucky – you could buy low and sell high. This is similar to stock trading, only much more volatile and risky. You sign up to a platform such as Coinbase or Plus500, buy a bit of a bitcoin at a low price and then try and sell it at a higher price. Your best option is to do this with day trading.
Buy and Hodl: This is basically long-term trading. In the stock market it’s called value investing and it’s also something people do with gold: buy and wait till the price goes up. People who bought and held $100 in 2009 would have gained around $17,004. 76 (the memes call it hodling). Some predict the value will rise even more… some predict it’s going to crash and everyone will lose their money. Who knows?
Invest in blockchain ETFs: This is the most attractive option to someone like me: doesn’t want to get their hands too dirty but still wants in on the craze. It’s basically investing into a specific ETF that tracks companies involved in cryptocurrencies. An example is a platform called Reality Shares. Their funds track companies which are working with cryptocurrencies such as Intel, Microsoft and Barclays. So you’re not touching the crypto itself, but investing in the companies that deal with crypto. Pretty sweet.
Here are some of the companies included in Reality Shares’ ETF fund:
Lending: Same as with normal currencies (called fiat currencies), but instead of lending ££ or $$ you’re lending crypto. You lend 1 bitcoin to an individual or a company and they’ll pay you back after a certain amount of time with a certain interest. It is pretty high risk considering the volatility of the market, but could interesting. Platforms such as Salt Lending and ETH Lend do this.
How to get started early
Aha! My favourite section of all: how to get started as a twenty something year old. If you’re like me, you’re don’t have a ton of money lying around but still want to get in on the crypto craze. Here are some simple steps.
1- Start with the stock market
Crypto is volatile. Crypto is risky. I’m sorry to be the bearer of bad news, but you really want to treat crypto as an experiment. Meaning only invest with money you can afford to lose. And if you’re a young adult, chances are you don’t have much of that. Before even touching cryptocurrencies, learn about the stock market. Educate yourself and start investing in index funds: a safe and secure way to get a good return on investments. You’ll see that many things in the crypto world are identical to the stock market, so starting with the safer option will still be getting you onto the crypto track. Check out the investing section of #Adulting to learn more.
You’ve invested in the stock market and now believe you’re ready for the digital world. But before we take any action, we need to be sure we know what we’re doing. As the much loved Warren Buffet said, never invest in something you don’t understand. Sign up to newspapers like the Financial Times, newsletters like CryptoWeekly and some crypto demo platforms like Plus500 or Bitfinex. Ask people around you and see what others have done. Look at the money making methods listed above, which ones appeal to you the most? From there, do some research and see what you need to know before getting started.
Woohoo! Time for the action. Once again: only experiment with money you can afford to lose (that’s why it’s called experiment money duh). What are you trying to gain from crypto? Do you want to earn some money? Invest in the long term? Do some day trading? With those answers in mind, sign up to the corresponding platform and do some experimenting.
I personally got started in day trading: I put in a bit of money into my Plus500 account and bought some Ethereum, Litecoin and IOTA. The problem was that I didn’t have any goals in mind – I just wanted to see what would happen. So surprise surprise, I lost a good £90. Annoying, but at least I was ready for it.
Start with something small like £100, and then try out new things as you gain more confidence. This is why I love the demo accounts, first you try it with fake money, learn how the platform works and see if it’s worth an investment. Then you decide whether to put your own money in.
Crypto is risky – but that’s what makes it fun and so intriguing. If you’re young and enjoy doing money experiments, now’s the time to do it. Learn as much as you can and experiment with a bit of extra money. It’ll go a long way to understand what both the stock market and crypto market is all about; you’ll be ready for the next crash. Banks are getting uncomfortable, countries are tightening regulations and investors are going crazy. Now’s the time to learn all you can about the magical digital currency.
Some cool resources
Awesome cryptocurrency blogs and websites: