Occasionally we hear news of another old pirate or viking gold hoard found. For much of humanity, banks didn’t exist and people hid their valuables, often by burying them near a familiar landmark, or in a secret hiding place in their home. In this modern age, we have much more convenient ways to protect and grow our wealth. I’m building my hoard on the blockchain. Keep reading to start learning cryptocurrency basics.
I’ve had an intellectual curiosity in cryptocurrency for a number of years. It was probably around 2011, a couple of years after Satoshi Nakamoto announced Bitcoin. I read about it often, but didn’t have the thought or means to really start trading and investing in crypto until about a year ago.
In this past year, I took concrete steps to start investing in crypto. Of course at the end of 2019, as I was laying out plans and resolutions, we hadn’t yet entered pandemic territory. So the old adage, “life is what happens when you’re busy making plans,” is appropriate here. I haven’t been able to invest as much as I wanted this year, but I’m doing alright.
Disclosure: Trading and investing in cryptocurrency carries some risks. I am not a trained or licensed financial advisor. I’m relating my experiences and sharing resources I personally have found useful. I will try to explain some of the risks, but you are encouraged to perform due diligence on any potential investment. Some of these resources are affiliate or referral links which will reward or pay me if you make a purchase or complete certain required steps. Many of these companies will reward you as well for signing up. Terms & Conditions of offers set by advertisers.
So What is Cryptocurrency?
Cryptocurrency is a decentralized digital medium of exchange which can be used for trade and investment. Satoshi Nakamoto the inventor of Bitcoin (BTC) set out with the goal of creating a peer to peer electronic cash payments system that didn’t involve banks. Satoshi succeeded in this by creating the blockchain ledger, with a byproduct of that work being Bitcoin, the worlds first cryptocurrency.
Since then there have been hundreds of tokens or coins created on various blockchains. Simply put a blockchain is blocks of data that are immutable, with time-stamps, and publicly viewable. Each of these blocks (i.e. block) of data is secure and bound together using the principles of cryptography. (i.e. chain). A cluster or network of computers manages each blockchain according to it’s own rules. (No single entity owns or controls the blockchain).
Since a blockchain has no central authority, it is the definition of a democratized system. It is an unchangeable shareable ledger and the information it contains is available and open to anyone. And anyone can join the computer network that verifies blockchain transactions (mining) with the right hardware and software. The process of verifying transactions on a chain rewards miners with the cryptocurrency or tokens of that blockchain. Keep in mind that equipment needs vary from network to network, and that mining cryptocurrency is energy intensive and thus can be costly. If managed properly, mining can be very profitable enterprise.
Blockchain technology testing is now testing and use is growing in a number of areas including smart contracts, Defi (decentralized finance), decentralized social media, and much more. The blockchain has great potential to benefit humanity moving forward.
How to Start Trading Cryptocurrency
Cryptocurrency is different than fiat currency. Fiat is money or currency issued by a government or central bank organization (i.e. the dollar). Most crypto is not fiat and also is not legal tender, however it is given value because of the principles behind it, the cryptographic rules that make it immutable, and because people trade or use it for these reasons. Keep in mind that some governments and central banks in the world are exploring or have already issued digital versions of their fiat currency.
There are numerous platforms and ways to start trading crypto. On some retail stock trading platforms such as Robinhood, you can buy and hold Bitcoin and a few select other digital currencies solely as an investment. You cannot spend or send any crypto held in Robinhood.
Bitcoins, Altcoins, Stablecoins, CBDC: Um What?
- Bitcoin: The original cryptocurrency launched in 2009. It has primarily taken on value as a commodity. As of this writing, Bitcoin is trading around $15,500 per bitcoin. It can be bought and sold fractionally, and at times is subject to high volatility.
- Altcoins: Any digital token or cryptocurrency that’s not Bitcoin is an altcoin. Many are derivatives of the original Bitcoin source code altered for function and features. Some altcoins may be more vulnerable to high volatility.
- Stablecoins: These are digital tokens often wrapped or secured with fiat currency, precious metals or other commodities of value. For example the US Dollar Coin* (USDC) ties itself to the US Dollar and its tokens are automatically adjusted to be approximately equal in value to the Dollar. Stablecoins have significantly less volatility than Bitcoin and other altcoins. *USDC is not a US government issued currency, but merely tied in value to the US Dollar
- CBDC: Central Bank Digital Currency. These are digital currencies issued by various world governments and central banks. CBDC’s are generally tied to the value of a countries paper currency. Thailand and China are among countries leading the world in this realm.
Most cryptocurrency trades on exchanges. Exchanges come in a couple of flavors. Decentralized exchanges allow you to connect your wallet and trade coins on a peer to peer basis. Decentralize exchanges tend to have less government regulation. Centralized exchanges make it possible to buy cryptocurrency with fiat. Simply connect your exchange account to your bank account, and start buying. Because centralize exchanges connect into the traditional financial system, they tend to be more regulated and thus a bit safer. Just use caution and vet whatever exchange you might be considering. As with any financial system, there are those who would scam and steal from you. Just be aware and if in doubt, do more research.
Choosing a Cryptocurrency Wallet
To hold cryptocurrency, you’ll need a wallet for each flavor of coin you wish to hold. For example you might need a Bitcoin wallet, and an Ethereum (Eth) wallet. Most wallets allow you to hold a variety of coins. You will also need to decide whether you want a custodial or non custodial wallet.
A non custodial wallet is a decentralized wallet in which you the consumer control completely and are solely responsible for it’s security. Installing a non custodial wallet on your phone, or computer is as easy as downloading an app and setting it up. You will need to write down the 12 word backup phrase to recover your funds should you lose or break your phone or other device. With many non custodial wallets you don’t have easy quick access to use funds with the exception of sending them directly to another wallet. I have a couple with funds that I expect to increase in value over time, and not having quick access makes it less likely I’ll spend it on frivolity.
A custodial wallet is a wallet in which an exchange or other company protects the keys to your wallet. If there’s problem with your device, you simply login from a different device. If something happens to your account or you make a mistake, they have a backup and can generally fix it. Though keep in mind that some mistakes can’t be fixed. I always double check the wallet addresses I’m sending or receiving with. The critics of custodial wallets argue that a big centralized company controls the keys to your wallet and thus you’re funds. This is anathema to the spirit of the peer to peer currency ethos of Bitcoin.
The answer for me is multiple wallets of both types on different platforms. I primarily use Coinbase, a popular centralized exchange to buy, sell, and trade crypto. Coinbase also has a learning program in which users watch short videos about a particular token or blockchain and take a quick one question quiz. For each video, completed Coinbase will deposit a small amount of that token in your account. It’s yours to trade, spend, convert, etc. Read on to learn how I put mine to work earning more.
Ad: Use the Coinbase links in this post to sign up and buy or sell $100 worth of cryptocurrency, and we’ll both receive a deposit of $10 worth of Bitcoin into our accounts.
In addition to your Coinbase custodial wallet, they offer a non custodial wallet as well. Coinbase doesn’t charge an additional fee to move funds back and forth, so you get the best of both worlds. The non custodial wallet also has a special browser for Dapps or decentralized apps. This is handy if you want to explore Defi or decentralized finance, smart contracts, and much more built on a blockchain internet.
Another popular non custodial wallet is the Exodus wallet which also has Windows desktop support. Finally you can get offline hardware wallets that simply connect to an online device when you need to move funds.
What is Defi?
Defi, is short for decentralized finance. There has been a recent explosion in Defi this year, and there are numerous companies and projects that allow to to lock in your crypto assets as both collateral and lending capital. I have a small amount invested in the compound protocol, which earns me interest in the form of the Compound token, and grants voting rights for changes to the protocol.
BlockFi is another Defi platform that makes lending and borrowing super easy. As of this writing, I’m currently investing Bitcoin and US Dollar Coin. Currently BTC is earning me interest at 6% APY compounded monthly. And my USDC is currently generating 8.6% APY and also compounding monthly.
Is Crypto Secure?
This is a question people ask often enough. And the answer as with all things online, is that it’s complicated. Cryptocurrency transactions and movements are recorded on a publicly visible ledger that is immutable. However crypto provides a certain level of anonymity, and thus difficult to recover stolen or mis-sent funds. Crypto exchanges and organizations are vulnerable to hacking attempts just as any other financial or business organization. Some are better than others.
The biggest factor in strong cryptocurrency security and cyber security in general for that matter is you. Use strong unique passwords and 2 factor authentication when available. Do not share your information with others. Be wary of scammers. Phishing is common, as is malware in an email. If you’re not sure, Google it for news and reviews, and check trusted sources.
From shells, to coins to paper currency, humanity has long given value to things that have no apparent intrinsic value. However we give them value to facilitate trade and our economy. As we progress into the digital era, our financial systems are evolving. The best time to invest in crypto was a decades ago. The next best time is now
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