Guide to Cryptocurrency for Beginners
The landscape of crypto is a tough one to navigate. According to research conducted by Finder, usage of cryptocurrency is increasing in Canada, with 16.5 percent of respondents claiming to have purchased cryptocurrency at one time or another. This means that an estimated 4.8 million Canadians may already have purchased cryptocurrency.
But many want nothing to do with it. Finder’s report also indicates that 33% of Canadians regard investing in cryptocurrency as too risky.
This guide for beginners covers what cryptocurrency is, how it works, and why it may be right for you.
What Is Cryptocurrency?
But what is crypto? How does it all function, and—more crucially—should you invest in it, and how? Bitcoin, Ethereum, Dogecoin—what does it all mean? Let’s start simple—with a currency that’s been making the news—Bitcoing. Like all cryptocurrencies, Bitcoin operates on a technology called blockchain, which is essentially, a publicly available database that records every bitcoin-related transaction. It’s decentralized—meaning that no one ‘owns’ it, can’t be manipulated, and is transparent and public.
Cryptocurrency is not tied to physical assets. But as in the case of stocks and bonds and other securities, you can invest in cryptocurrency and earn money on your investment as cryptocurrency markets go up and down.
In February 2021, that value of bitcoin enjoyed a monumental peak, with the price rising above $50,000, its highest ever. Its last great peak had occurred in 2017, when one bitcoin cost “just” $19,500.
As cryptocurrency becomes more popular and better trusted by mainstream institutions, its value has substantially increased. Markets Insider suggests that the value spike we saw in February reflects the support of several big-name institutions as ‘heavyweight institutions such as Tesla and MasterCard embrace the cryptocurrency’.
Cryptocurrency is progressively entering the mainstream. Bitcoin has even been embraced by America’s oldest bank, the Bank of New York (now Bank of New York MellonCorp), which has announced that it will start holding bitcoin on behalf of its clients. In Canada, bitcoin has been embraced by Simon Fraser University.
Digital currency is becoming more and more normal. It may soon be adopted throughout society.
How Does It Work?
Cryptocurrency is not centralized in the way that traditional currency has become centralized. The regular money we use everyday in the form of cash and credit is regulated by central banks. No central bank or governmental authorizing body is controlling cryptocurrency.
When people talk about cryptocurrency, it often sounds as if they are referring to like a centralized money. This is incorrect. Cryptocurrency exists solely in the digital realm, and digital coins are not manifested in the familiar physical form of other currencies. People obtain ‘coins’ online (e.g., bitcoins) in exchange for regular centralized currency (e.g., Canadian dollars), goods and services, or other types of cryptocurrency.
Because cryptocurrency functions digitally, investors must use a cryptocurrency software to make transactions. This software is your cryptocurrency wallet. Digital wallets store private and public keys that interact with blockchain to enable users to exchange cryptocurrency with each other.
Here are a few of the key terms you should know:
- Digital coins are units of cryptocurrency that can be purchased with a credit or debit transaction.
- A cryptocurrency wallet is a software program that stores public and private keys.
- Public and private keys define the location of transactions and facilitate private access to transactions
Cryptography is an extra layer of security that enables the sending of private and secure messages between the sender and a designated recipient. It is a form of encryption used to encrypt and decrypt electronic data. The security is ensured by the use of secret keys to unlock the encoded messages.
Blockchain technology is the foundation of cryptocurrency. Often described as a kind of database, blockchain functions very differently. Blockchain is the storage of data in blocks of data, bits and bytes that are chained together to form blockchains. New transactional data is constantly being added to these chains.
In this context, a peer-to-peer (P2P) network pertains to the exchange of digital assets over a distributed network. (A P2P network can also be used to exchange other kinds of electronic data, like movie or music files.) The peer-to-peer network is where buyers and sellers trade, lend, and borrow cryptocurrencies. Because it is a decentralized network, there are no intermediaries, just individuals trading cryptocurrency directly.
Cryptocurrency is decentralized currency. When we talk about market decentralization, we’re referring to monetary exchanges that occur without mediation. In other words, there is no executive control or governing body stepping in to determine the form of transactions between investors or whether these transactions can occur.
Instead, individuals deal with each other freely and directly. This may seem strange to us, since we’re used to the very different model of a centralized financial market. The New York Stock Exchange, for example, is a centralized market; orders are routed to the exchange before being matched with another order.
What Can You Do With Cryptocurrency?
This persistent question is one of the reasons why many people are put off cryptocurrency altogether. It’s not always clear what its purpose is, beyond innovative financial investment. But things are starting to change.
Cryptocurrency is gradually becoming more mainstream and, as a result, more and more uses for it are emerging. It’s not just a high-risk investment for financial professionals. Cryptocurrency is becoming an increasingly common way to purchase real goods and make other transactions, including investments.
Cryptocurrency is not yet a common method of payment in shops, bars, and restaurants. But there are some consumer goods that you can buy with cryptocurrency. Already, some businesses are accepting cryptocurrency payments, especially online. In fact, buying and selling stuff—serving as a medium of exchange—is what these currencies were originally designed for. The Bitcoin Wallet was invented as a way to make payments independently of banks and government centralized money.
Make Private Transactions
Making transactions through your bank often incurs fees. Because cryptocurrency is decentralized, private transactions can be conducted between individuals without any external involvement and without any hidden fees. This is one reason why cryptocurrency platforms are increasingly popular with individuals who wish to make large transfers. They can skip the hefty transaction fees that they would otherwise incur.
The value of cryptocurrency fluctuates often and rapidly, sometimes rising and falling by a staggering amount each day. But if you know what you’re doing, you can exploit this volatility. Cryptocurrency assets can be traded with low minimum investments, low or no transaction fees, and around the clock. If you sell at the optimal moment, return on your investment can be handsome.
Cryptocurrency mining has nothing to do with digging in a precious-metal mine. It is a means of obtaining cryptocurrency without paying money for it. Instead of exchanging regular currency for cryptocurrency (as is standard), miners painstakingly complete blocks of transactions on the blockchain. They are rewarded for verified transactions with tokens.
The big three cryptocurrencies are bitcoin, ethereum, and litecoin.
Bitcoin (BTC for short) is the original cryptocurrency. In 2009, it was invented and created by Satoshi Nakomoto (a pseudonymous and still unknown individual or perhaps group of individuals). Bitcoin works by keeping balances and bitcoin transactions on a public ledger that can be transparently and universally accessed. In this decentralized marketplace, transactions are entirely decentralized and are verified computationally. Learn more about Bitcoin here.
Ethereum is the digital currency that powers the ethereum app. Inspired by bitcoin, ethereum allows individuals to manage their funds in a decentralized marketplace. But ethereum isn’t a mere copy of bitcoin; it is modelled somewhat differently. ETH can be used to pay or receive funds, swap tokens, earn interest, or serve as collateral for cryptocurrency loans.
The cryptocurrency litecoin was created in 2011 by Charlie Lee and functions much like bitcoin. Litecoin is a decentralized, open-source, global payment network distinguished by its incredibly fast block generation, a speed made possible by an algorithm called scrypt.
Pros and Cons of Cryptocurrency
Let’s take a look at some of the good and not-so-good things about cryptocurrency.
Cryptocurrency is great when it comes to transparency. Transactions are stored on an open ledger (or blockchain) for anyone to see. This makes banking more transparent and increases financial accountability.
Pro: 24/7 Access
Cryptocurrency is always on. You can spend, exchange, and transfer your cryptocurrencies anytime, anywhere, from your mobile phone, tablet, or computer.
Pro: Potential Returns
Cryptocurrency offers opportunities to earn high returns on your investments. Since its inception, bitcoin has compounded at an annualized growth rate of 131.5 percent.
Con: Limited Acceptance
Cryptocurrency is not yet a routine medium of exchange. It is still hard to use it instead of regular currency. Many shops or vendors will not accept your bitcoins.
Con: High Volatility
Cryptocurrencies are volatile. Their value rises and falls dramatically over very short periods of time. The global banking group EFG International reports that the “annualised volatility of monthly percent change in the price of bitcoin” is approximately 90 percent. This volatility isn’t necessarily a bad thing; but it does mean that to succeed as an investor, you must time your buying and selling of cryptocurrency carefully.
Decentralization, for all its worth, also comes with some risks. Cryptocurrency can be vulnerable to criminal activity and scams. So it’s important to be cautious.
Which Cryptocurrency Is Best?
Bitcoin is the original cryptocurrency and remains the most valuable. However, this doesn’t mean that it’s the best. Innovation is occurring all the time, with new cryptocurrencies emerging as serious competitors.
Other top cryptocurrency exchange platforms include:
- Ethereum (ETH)
- Litecoin (LTC)
- Cardano (ADA)
- Polkadot (DOT)
- Stellar (XLM)
How to Buy Cryptocurrency
The most common way to buy cryptocurrency is online. Cryptocurrency platforms allow individuals to purchase cryptocurrency in exchange for regular cash or credit. Websites like Coinbase host different cryptocurrencies for users to purchase. Find one that sells the currency you’re after. Some websites may charge an initial startup fee.
Popular cryptocurrency platforms in Canada include:
Cryptocurrency in the future
Digital finance can be an intimidating topic, but it need not be. Cryptocurrency is just digital, unregulated money. As new innovations occur and cryptocurrency grows in popularity, we can expect to see it embraced by more and more institutions and venues.
The unprecedented performance of Bitcoin both as a currency and as an investment has attracted lots of investors in recent years. And cryptocurrency investments have other advantages over traditional investments. People invest in cryptocurrency just like they would other assets, but you can actually use it to buy regular goods and services. Cryptocurrency is an exciting asset class. However, purchasing it can be risky. Wondering if you should invest in cryptocurrencies? Consider the advantages and disadvantages here.