Cryptocurrency is a decentralized form of virtual money that has no government backing, but is almost always valued in U.S. dollars. It doesn’t have a physical presence in the form of bills and coins. Rather, it uses virtual wallets for containment and payment. A cryptocoin gets its value from its usability, scarcity, and demand from buyers and users. When looking at how many cryptocurrency are there on the market, you’ll find there are over 1,500 cryptocoins, or digital currencies, available for people to mine and purchase. The most famous of these coins is the Bitcoin, the original virtual currency. Some consider Bitcoin the best currency to buy due to its status as the first cryptocoin, name recognition, and age.
Cryptocurrency: An Overview
Bitcoin was the only cryptocoin available for many years until people started realizing the value and usefulness of digital currency. Bitcoin cryptocurrency prices went on the rise and went from an obscure method of payment with few retailers accepting it, then into a blockbuster cryptocurrency juggernaut seemingly overnight. Blockchain technology enabled others to create their own versions of cryptocoins and offer them up for miners to uncover. Now cryptocurrency news is a regular feature of financial broadcasting and entire websites are devoted to the topic of cryptocurrency prices and the cryptocurrency market.
A major part of the allure of cryptocurrency is how it’s “earned”. Many people view it as something you get for nothing in that you can run your computer and earn cryptocoins, but that view overlooks the fact you have to balance the cost of your equipment and energy investment against the coin that’s mined. You can buy crypto outright and hold onto it as an investment, or you can set up a computer known as a mining rig. The mining rig is a bare-bones computer that’s designed to solve complex mathematical equations known as blocks. Once the computer solves a cryptocurrency block and the work is validated, the owner of the computer gets a “block reward” in the form of part or all of a cryptocoin. The resulting coin goes into a cryptocurrency wallet that’s locked with a private and public key that’s used by the owner of the wallet and a public entity that accepts the coin.
The global cryptocurrency market cap changes daily, but the volume increases as more coins are mined and more coins are added to the cryptocurrency list. The increase in coin availability can increase the value of a coin instead of decrease as people seek to gain access to the coins for various purposes. Some coins, such as Bitcoin, have a maximum number that can be mined before the supply is exhausted (21 million, in the case of Bitcoin – a process expected to take until 2140). This makes the coins potentially more valuable as the supply runs out, or could cause the value to decrease as miners move into other coins with lower value.
How Cryptocurrency Works
The concept of cryptocurrency has been around for decades, but it wasn’t until 2009 when the concept was perfected by a programmer using the name of Satoshi Nakamoto. No one knows who this person really is, or if it’s a group of programmers under one name. In order to fully understand how cryptocurrency works, start with the white paper written by Nakamoto. It lays out the concept of Bitcoin, and describes how cryptocurrency blockchain technology works. The white paper opens with the statement of “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” When this statement was made in 2009, there were few online payment options outside of PayPal, and PayPal was problematic in that it was known for freezing users funds at random and without explanation. Bitcoin was created to get around these issues, but it took years before it became mainstream and accepted by the populace at large.
The white paper goes on to further state “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” The words “cryptographic proof” were shortened to cryptocoins or cryptocurrency to denote a measure of value that uses cryptographic methods to secure the value and assign it to a cryptowallet. An electronic coin, as it was originally described, is a chain of digital signatures known as a block. A database is created to store blocks of information and chain them together. Data enters a fresh block, fills up, then closes out and chains to the next block. There are 6.25 Bitcoins per block, and there are a maximum of 21 million Bitcoins available for mining.
The structure of Bitcoin is the basic structure of all minable coins, and decentralization is at the core of how all coins are held and distributed. A decentralized currency is stored on thousands of computer databases in various locations around the world called nodes. Each node holds every last bit of data of a cryptocurrency blockchain since it was created. These nodes regularly check their information against each other in order to detect and eliminate errors. In the event an error gets introduced into a node, that node can ping one or more of the thousands of nodes in the network, and self-correct the error. The system of database nodes prevents people from introducing errors into the database that can tilt the coin in their favor as well as providing a complete and thorough history of how each Bitcoin has been used. The use of nodes to check validity of a blockchain is also known as proof-of-stake, or proof of ownership of a blockchain.
An Overview of Popular Cryptocoins
Bitcoin and Ethereum are arguably the two most famous names in cryptocoins, but there are many established coins that are not as well-known and are good investment options. Another type of cryptocurrency is known as an NFT, or non-fungible token, that validates authenticity of an item or object. There’s also a token that’s built on top of a web browser. And last, but not least, are meme coins that were created for a laugh and not intended to be taken seriously by investors. Here’s a look at the different types of coins and how they work:
Bitcoin is the original cryptocurrency that came into being in 2009. However, the coin languished for years until people started to find legal and not-so-legal uses for it. At one point, Bitcoin was worth very little. Those who mined it early and held onto their coins wound up profiting handsomely from their efforts. The blockchain system of Bitcoin is the basis for all cryptocurrencies and their derivatives. Bitcoin has also been the source of many innovative uses for incorruptible data storage solutions. As of the time of this writing, Bitcoin has the largest cryptomarket currency market cap with Ethereum coming in a distant second.
Ethereum is also a decentralized blockchain cryptocurrency, but it has multiple features and uses that go beyond the act of holding a value. The coin takes advantage of the inherent uses in blockchain technology to offer privacy, censorship resistance, guarantees that funds go to the person they’re being sent to, and offers banking services to those who can’t otherwise access traditional bank accounts. Ethereum’s blockchain can also be used for programming so users can adapt it to other digital assets that include Bitcoin.
Another attractive aspect of Ethereum is the fact it offers multiple types of wallet features that allow you, the owner of the wallet, to handle your finances in your preferred method. An Ethereum cryptocurrency wallet has the ability to allow you to buy cryptocurrency with a bank card, cash out directly to your bank acount, set purchase limits, make high-volume purchases, and have multi-signature accounts for more than one user.
Ethereum also provides developers with the opportunity to create decentralized apps, or dapps that allow the developer to permanently put their app onto a database. Once the app is on the Ethereum database, it stays there for as long as Ethereum exists. Developers also benefit from the lack of censorship, ease of use, and built-in payments that don’t take a cut from a storefront.
NFT, short for non-fungible token, take advantage of the fact that blockchain enforces accuracy and can’t be altered. An NFT can be used to authenticate a valuable item such as art, actual and digital, sports cards, real estate, even a tweet. The NFT also works by assigning a value to a previously intangible asset, and makes it easier for an artist and client to close a sale. Another advantageous use of an NFT is the ability to add information such as a chain of ownership, source of a material or good, and even the signature of the artist. NFTs practically eliminate fraud in the art market and helps give a value to something that is otherwise intangible.
Dogecoin is a type of cryptocurrency known as a meme coin. These coins aren’t intended for trading or investment so much as they’re a representation of a meme. There are currently over 5,000 meme coins in existence, and none of them have significant value. Dogecoin began as a meme on the website Reddit via the Shiba Inu meme that involved a specific way of speaking to express a thought. Someone got the idea to create a cryptocurrency based on the meme, and Dogecoin was born. Elon Musk drew attention to the coin to help boost its image and increase its value, but the coin has only had 15 minutes of fame to date. It hasn’t held onto its market high, and the same goes for other memecoins. It’s essentially the cryptocurrency version of a penny stock.
Basic Attention Token (BAT)
The Basic Attention Token (BAT) is a token built into the Brave web browser in order to make surfing the web safer and more fair. BAT and the Brave browser were created by Brendan Eich, the co-founder of Mozilla and Firefox in order to take advantage of the honesty of blockchain. It’s built on top of Ethereum and uses the blockchain code to track how users spend time on websites. Users benefit by getting ads that are more accurately targeted towards their browsing habits and ensures that advertisers get paid fairly for clicks. BAT also uses blockchain technology to keep users information private and secure against trackers, malware, and cookies.
Filecoin is a cryptocoin as well as a decentralized cloud storage system. Someone who’s mining Filecoin also has to provide storage space for the data of other users no matter who they are. A miner’s ability to store files safe and securely is verified by the network. Once a miner has shown they’re reliable, Filecoin adds them to the network. A user can upload and download files to the network, but someone who wants to download a file has to pay the miner that’s holding the data. In case you’re wondering if this is one of the better cryptocurrency types, wonder no more. The cryptocoin market cap for Filecoin is over $13 billion and is growing as more companies invest in the coin to gain access to the technology.
How to Get Started in Cryptocurrency
You have two options to get started in cryptocurrency: mining and trading. Mining involves building a computer with the maximum processing power to solve blockchain equations while buying involves using a cryptocurrency exchange. When taking a look at how cryptocurrency works for beginners, it’s quickly apparent that you need to have some existing computer knowledge to build a mining rig. You also have to be patient, have the funds to buy the best technology you can afford, and willing to pay for the energy cost of running your rig. If the concept of mining doesn’t appeal, you can always get into non-mined cryptocurrencies and buy coins on a trading platform.
If you’ve tried to buy a high-end video card in the last couple of years or so, you’ll have found it’s very difficult to get your hands on one. That’s because the video card is the most important part of building a mining rig. Graphics cards, also known as GPUs, operate faster than a CPU when it comes to executing instructions. A GPU can process commands up to 800 times faster than the average CPU, making the use of a GPU for cryptocurrency mining a better choice.
Cryptomining makes it difficult for the average computer builder to buy the latest and greatest video card, and it’s not advisable to buy a used video card due to the amount of processing pushed through the card. It’s still possible to build a computer for the purposes of mining, but you may not be able to get the best hardware right away. A slower GPU can still mine, but you’ll want to set your sights on lesser coins such as Dogecoin, Lytecoin and Feathercoin. As you gain experience with mining, you can work your way up to better hardware and get into coins with more competition.
Other Avenues to Get Into Cryptocurrency Mining
Another option for mining cryptocurrency is to sell your unused processing power to a miner through a third-party broker. It works like this: your unused processing power, also known as hash power, is sent to a pool for a miner to buy. The miner pays for the power to the third party, and the third party pays you for the use of your hash power. You get to pick the currency you want to mine, which pool you want to mine in, select a miner that’s paying a price that appeals to you, and place your order. The broker puts up the order for the miner, and if it’s accepted, your excess computing power is delivered to the miner. The miner then pays you per the contract.
Buying and Trading
Multiple platforms are available for buying and trading cryptocurrency and cryptocurrency stocks. Many of the platforms are names you’ll recognize. Buying crypto through these platforms is straightforward and is as easy as buying a stock or other security. You fund your trading account, identify the cryptocurrency you’re interested in buying, and make your purchase. Some coins, such as Cardano, don’t require the use of mining to obtain coins, but it’s not as valuable as coins that are mined. Cryptocoins that are already mined and sold on an open market are also referred to as non-mined coins. Non-mined coins of either variety offer a lower barrier to entry and allow you to enter the cryptocoin market without the need to learn about, then build an expensive mining rig and compete against much larger players for blockchains.
Trading Platforms for Cryptocurrency
With the explosion of cryptocurrency prices has come the cryptocurrency exchange. Most offer multiple types of cryptocurrency to buy and allow for cryptocurrency trading. Following are a few places for cryptocurrency trading which also have information to help you decide which cryptocurrency to buy:
Binance US is a straightforward, no-frills cryptocurrency exchange that offers over 50 major cryptocoins including its own coin known as BNB. The website itself is easy to use, provides real-time data for the performance of a coin, has good security, and charges 0.1% on trades. It also lets you stake your coins for a period of time and earn anywhere from 0.5% to 1.0% in interest on your coin. However, the site isn’t a place to learn cryptocurrency for beginners, and isn’t available for use in seven U.S. states.
Coinbase is one of the oldest cryptocurrency exchanges. It was founded in 2012 and has 30 million users. It’s easy to use, offers users the opportunity to earn rewards by watching videos and taking tests, and has a clean portfolio view. You can track cryptocurrency prices in one window, then switch to your personal portfolio to see how your coins did on the cryptocurrency market that day.
Kraken enables users to create an account and start buying from their cryptocurrency list of 50-plus coins in minutes. Account holders can put as little as $10 into their account and start cryptocurrency trading. The site provides guidance in cryptocurrency for beginners, intermmediate investors, and firms that want to get into cryptocurrency for internal reasons. Kraken provides excellent customer service and features strong security to keep their customer’s data and investments safe from hacking.
Robinhood has been the subject of negative news in the recent past, but it’s still a good entry-level platform for people who want to get into cryptocurrency trading. The site itself has a clean interface that’s easy to read, displays cryptocurrency prices today and every day in a concise fashion, and gives you the ability to invest on margin. The drawback to investing in cryptocurrency with Robinhood is that it doesn’t have a comprehensive cryptocurrency list. There’s no anonymity for traders, and cryptocurrency funds can’t be withdrawn. You have to transfer funds to an external account before you can gain access, and the transfer process can be slow.
Gemini is another cryptocurrency exchange that’s been around for a while. Launched in 2014, it offers 20 cryptocurrencies and over 25 fiat currencies. It’s effectively a hybrid cryptocurrency and currency trading site. Gemini offers bonuses on sold or bought Bitcoins worth $100, and has an earning promotion that offers a generous interest rate for users who hold onto their crypto. There is a $5,000 daily limit on deposits and a $30,000 monthly limit total for deposits. However, a user can withdraw up to $100,000 daily. All assets are stored in cold storage and account holder funds are insured by the FDIC, a feature that few cryptocurrency exchanges offer.
Investing in Cryptocurrency: Risk Vs. Reward
Just as with any other type of investment, you have to accept the risks of investing in cryptocurrency. The most inherent risk of investing in the cryptocurrency market is the fact it has no underpinnings. That is, the price of cryptocurrency is what someone is willing to pay for it at that time as opposed to having an industry or service that drives its value. It doesn’t take much to upset the cryptocurrency markets and cause the price to tank at a moment’s notice. The most famous example of this is Elon Musk’s tweet where he turned on Bitcoin due to its high energy usage for mining a few months after buying more than a billion dollar’s worth of the cryptocurrency. Musk engaged in blatant market manipulation to tank the price of Bitcoin, and now has to hope the coin maintains an average price of $32,000 to break even. Following are some risks and rewards that come with mining and investing in cryptocurrencies:
Risk: Lack of Regulation
The unregulated nature of cryptocurrency makes it vulnerable to market manipulation. There are no governments that have oversight of cryptocurrencies due to the fact that crypto is not issued or owned by any one government. State and federal agencies in the U.S. are still trying to figure out how to regulate cryptocoin in general, but face an uphill struggle due to the fact that it’s extremely difficult to calculate tax liabilities on cryptocurrency. Another aspect of cryptocurrency that makes regulation difficult is the utility, or crypto, token. A utility token rides on the blockchain of a given cryptocurrency, and represents a unit of value that’s a fraction of the cost of an entire coin. These tokens have actual value that can be utilized in a variety of ways that include paying out a dividend to offering bonus points for purchases. Regulating cryptocurrency is difficult; the existence of crypto tokens is even more difficult due to their various uses.
Risk: Money Laundering Can Destabilize Coin Value
Cryptocurrency is also used for money laundering. Many countries restrict the flow of money leaving their borders, and their citizens work to find ways around these restrictions. Using high-value coins like Bitcoin and Ethereum enable people to get their money out of the country and potentially earn extra when there’s an increase in the price of the coins. This is an issue that affects the actual value of a coin or cryptocurrency in that it can inflate the price of a coin. Some will argue that money laundering through cryptocurrency helps stabilize the coin’s value. However, this argument overlooks the fact that a large enough sell-off of the coins can cause irrational actors to panic and sell their coins, causing a domino effect that lowers the value of the coin.
Risk and Reward: Day Trading Coins
The increased availability of cryptocurrency on many trading platforms enables you to buy coins at a valuation that you’re comfortable with, hold the coins until they reach a price that delivers a satisfactory return on investment, then sell for a profit. This is the same tactic used by stock traders on the exchanges and is perfectly legal. The risk of day trading coins is the fact that coins are more sensitive to sell-offs than a stock, especially with low-value coins. You have to be willing to accept the fact you may leave money on the table if you sell too soon, and that you’ll lose if you sell too late. However, if you set your tolerances for risk and reward accordingly, you can learn and earn while day trading coins.
Reward: Financial Gains
The cryptocurrency future is here to stay, but just like stocks, there’s no knowing what cryptocurrency prices will be tomorrow. Making wise choices in selecting which cryptocurrency to invest in can be lucrative, but so can mining if you do it right. Ultimately, it comes down to understanding the kinds of risks that are inherent to cryptocurrency trading. And if you decide you want to get involved in cryptocurrency mining, you get the reward of learning how to build a computer, install software, and tweaking it to perform optimally for the act of mining a coin as well as the financial reward of owning a cryptocoin that has value.