Cryptocurrency Starter Guide

Cryptocurrency Starter Guide For Beginners
Beginners Guide Investing In Cryptocurrency
Learn About Cryptocurrency Blockchain
Cryptocurrency Daily News
Cryptocurrency Beginner

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When Bitcoin burst onto the scene back in 2009, the world changed in a big way. Bitcoin ushered in a new way to invest using a form of digital currency called cryptocurrency.

At first, many people thought it was a scam (and many people still do).

Over the last decade, however, the market has evolved significantly, and blockchain technology has taken center stage. Bitcoin prices have soared and Wall Street has taken notice.

Today, all serious investors should know what cryptocurrency is and how it works. In this article, we’ll provide a basic rundown of cryptocurrency to help you determine whether it’s something you should consider adding to your portfolio.

What is Cryptocurrency?

Cryptocurrency is a type of digital currency that can be used for transactions or as an investment (i.e., a store of value). In cryptocurrency, all transactions are verified and managed on a decentralized ledger — instead of by a centralized authority (e.g., a bank or credit card company).

Cryptocurrency is different from most other forms of currency because it’s secured by a technology called cryptography. In other words, all transactions are encrypted, which protects against issues like fraud and counterfeiting.

Transactions — which come in the form of encrypted files or “blocks” — are distributed across public ledgers that are spread across a decentralized network of computers, which creates what’s called a blockchain. These ledgers are typically open, secure, and tamper-proof.

What is a Token?

Cryptocurrencies are digital assets that are distributed in the form of tokens, or coins. However, that doesn’t mean there is an actual physical token. The popular stock photos that you see online depicting bitcoin are just for visual purposes; the cryptocurrency itself is entirely virtual.

It’s important to note that when purchasing cryptocurrency, you don’t have to buy an entire coin or token. In other words, you don’t have to buy an entire bitcoin to get started investing. You can simply opt to throw any amount — even $50 USD — into bitcoin, and you’ll end up with a fraction of a coin that correlates to the bitcoin price at that time.

How to Buy and Sell Cryptocurrency

Buying cryptocurrency is a lot like buying stocks. You have to go through an online broker or cryptocurrency exchange to obtain it. One of the leading platforms for buying and selling cryptocurrency is Coinbase, which recently announced it was planning an IPO. Other options include Binance, Kraken, and Bittrex.

In addition, some financial institutions like Robinhood and Schwab now offer the ability to buy, sell, and manage cryptocurrency on their platforms. However, many leading brokers still do not support cryptocurrency. If you’re investing in stocks through a brokerage, you may want to ask if they support cryptocurrency. If not, you might have to set up an account elsewhere.

Unlike traditional exchanges like Nasdaq, cryptocurrency is traded 24 hours a day, seven days a week, with prices updated in real-time.

Buying Your First Coins

Once you sign up for a cryptocurrency exchange, you’ll need to fund your account by connecting it to a bank account or a payment service like PayPal.

Fortunately, cryptocurrency transactions on Coinbase are instantaneous, so you don’t need to worry about waiting two or three days for funds to clear. You can start investing in bitcoin and coins like Ethereum and Litecoin immediately.

Once you purchase tokens, you’ll be able to see your progress on a centralized dashboard that contains all of your portfolio of crypto and how it has changed in value over time.

Types of Cryptocurrencies to Know About

Bitcoin

Bitcoin (BTC) remains the most popular cryptocurrency by far — despite its turbulent history. This coin receives the lion’s share of attention in the cryptocurrency market, and this is for a few reasons.

The brainchild of an anonymous person (or group) with the pseudonym Satoshi Nakamoto, Bitcoin skyrocketed late in 2020 during the height of the pandemic and achieved over 300% growth — eclipsing its previous record of $20,000 per coin.

Part of what makes bitcoin so valuable is that it can’t be hyperinflated. It’s coded in such a way that ensures there will never be more than 21 million bitcoins. Since it’s a finite resource, the value is skyrocketing as more investors purchase coins. Looking forward, demand is expected to exceed supply — which means the price could continue to increase.

Of course, Bitcoin isn’t the only coin on the market — there are thousands of so-called “altcoins” on the market, too. Here are some additional cryptocurrencies to have on your radar as you explore the cryptocurrency market.

Ethereum

Ethereum (Ether) is the second-largest cryptocurrency behind bitcoin, and one of the most actively traded coins in the world. Ethereum is an open-source blockchain platform that enables digital applications that allow users to make transactions directly over a distributed ledger.

XRP

XRP is managed by Ripple, meaning all XRP transactions take over Ripple’s network. Ripple had a difficult 2020, as the company was sued by the Securities and Exchange Commission (SEC) alleging that they misled investors by not registering with regulators.

That said, the Ripple coin is not going away. Still, Coinbase recently announced that it would no longer support Ripple transactions. So you may want to think twice before pouring money into Ripple.

Litecoin

Litecoin (LTC) is another open-source project released under the MIT/X11 license. It’s been around since 2011 and is very similar to bitcoin in terms of its structure. Like bitcoin, Litecoin also has a fixed supply.

The Pros of Investing in Cryptocurrency

Cryptocurrency Starter Guide For Beginners

Diversification

Buying digital assets is a great way to diversify your overall investment portfolio. Plenty of investors are choosing to allocate a portion of their portfolio into cryptocurrency to spread their money around and increase their earning potential.

Explosive Potential

One of the top reasons to invest in cryptocurrency is its explosive earning potential. The trick is to buy coins when the price is low and then hold on until the price skyrockets. That, of course, is easier said than done.

For example, people who invested in bitcoin during the early stages of the pandemic were able to experience significant gains as the price climbed from $5,000 per coin in March 2020 to over $54,000 by late February 2021 — proving you can get rich quickly by investing in cryptocurrency if you time the market right.

Beginners Guide Investing In Cryptocurrency

Access Finite Resources

Coins like Bitcoin and Litecoin are capped, meaning there is only a specific number of coins that can be mined over time. As a result, they likely will become more valuable as time goes on and demand outpaces supply. People who invest in cryptocurrency now could wind up with a precious commodity in the coming years.

The Cons of Investing in Cryptocurrency

Volatility

The cryptocurrency market is highly volatile — even more so than the stock market. As a result, coins can crash at any time without warning. Investors are encouraged to use extreme caution when investing in cryptocurrency and avoid rushing in and dumping large sums of money for quick gains.

When a coin crashes, you’ll still retain your currency as long as the coin is actively traded. However, the value of your investment can plummet. Plenty of investors have learned this the hard way over the years.

Scalability

Another issue with cryptocurrency is that it’s still making its way into the mainstream. As a result, it lacks the infrastructure to compete with payment providers like Visa — for now at least.

Over time, more businesses will likely accept cryptocurrencies as payment options. And as this happens, it will get easier for consumers to use coins for everyday purchases. For now, investors need to be patient if they want to use crypto to buy things. It’s much better as a store of value.

Lack of Regulation

There remains a major lack of regulation in the cryptocurrency market. As a result, there are higher risks associated with investing in it. Until more governments recognize and regulate cryptocurrencies, it will remain a turbulent commodity.

Tips for Buying Cryptocurrency

Buy the Dip

One strategy is to wait for a cryptocurrency to drop to a certain price, and buy when the price reaches that level. Keep your eye on cryptocurrencies as they move up and down in price, and buy when the price reaches a level you are comfortable with.

Set up Automatic Purchases

Another method is to set up automatic transactions so that you buy a fixed amount of coins every month (e.g., $500 worth). This is one way to keep investing in coins without having to make an effort to sit down and do it every few weeks.

Figure out a Strategy

Spend some time researching the overall value of each coin and figure out a long-term investing strategy. Some people believe in selling their assets and claiming a profit when they anticipate a crash is coming while others prefer to ride out slumps and buy more coins at opportune times.

For the best results, figure out a strategy that you are comfortable with and stick to it.

Watch out for Taxes

All cryptocurrency sales, payments, conversions, and donations need to be reported to the IRS. The IRS considers these currencies to be property and you could owe taxes if you mine or use them in any way.

Capital gain transactions are reported on IRS Form 8949. Even if you don’t liquidate any of your holdings, you still need to tell the IRS if you made any transactions. Failure to do so could result in fines and penalties.

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Frequently Asked Questions

Can you trade cryptocurrency on Robinhood?

Robinhood is one mobile broker that allows you to buy, sell, and manage cryptocurrency transactions. That means you can make crypto exchanges alongside your stock market investments. This is a quick and convenient way to buy and sell cryptocurrency.

What is a Bitcoin IRA?

A Bitcoin IRA is an IRA that allows you to contribute Bitcoin for long-term growth. For example, investors who have a Roth IRA can buy bitcoins using post-tax dollars and avoid paying gains when they make qualified distributions.

Is there a crypto debit card?

There sure is. Crypto debit cards are now growing in popularity. You can use these cards to buy products using cryptocurrency at any location that accepts debit cards.

You can also use them at ATMs and at online merchants, collecting rewards in the process. Leading examples include Coinbase Card, Nexo Card, and Cryptopay.

Is cryptocurrency better than real estate or ETFs?

It’s not a matter of saying that cryptocurrency is better than any other type of investment. It’s more volatile and unpredictable, and it’s also mostly unregulated. At the same time, it has a lot of upside, too, in the form of rapid growth and earning potential.

Only you can decide whether cryptocurrency is right for you — and whether you have the risk tolerance to take on such a volatile asset. If you do invest in cryptocurrency, treat it as a risk in your portfolio, and build up more stable investments around it to protect yourself from volatility.

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What is mining?

Bitcoin miners receive Bitcoin in exchange for completing blocks of transactions that get added to Bitcoin’s blockchain. Mining can allow you to earn currency without paying for it directly. However, you will pay for it in other ways, including time and resources.

Mining for bitcoin is exorbitantly expensive because it requires a significant amount of computer processing power — and the associated cooling and electricity costs. Mining is extremely difficult and beyond the scope of most investors.

However, it’s not impossible. If you’re proficient in computers, you may want to look into it to determine whether mining is the right fit for you. Who wouldn’t love earning some bitcoin instead of paying for it?

Are all cryptocurrencies equal?

Not all cryptocurrencies are equal. As an investor, it can be difficult to know where to focus your attention. Research each cryptocurrency and only put your money into coins that you trust.

Due to its lasting power, bitcoin remains the most trustworthy cryptocurrency of them all.

The Bottom Line

Here’s a final disclaimer before moving forward with cryptocurrency: It’s very risky and not for the light of heart. Even though it’s very popular right now, you could lose a lot of money if you’re not careful. Like any investment, you need to know how it works before diving in.

That said, investing in cryptocurrency could also be a profitable personal finance decision. Only time will tell.

Explore the market, and consider making a few small investments to start. Then, build from there. With enough patience and determination, you can build up a sizable crypto wallet before you know it.

Cryptocurrencies are an exciting new technology poised to disrupt the way financial transactions occur. Whether money is sent, spent, invested, or more, cryptocurrencies represent a paradigm shift in how we think about money. Cryptocurrencies have been around for over 8 years, and they currently have a market value of around $170 billion.

Recent media spotlight paved the way for more and more people to take note and delve a bit deeper into the world of cryptocurrency and its purpose. So, with this starter’s guide we want to give you a good understanding of what cryptocurrency is all about.

In this starter’s guide you’ll learn:

What Is A Cryptocurrency?

Cryptocurrencies are distributed digital currencies, much like a form of digital cash. They allow for seamless, direct, and extremely fast transactions between parties. You have full control over your payments and balance, and can spend and earn with ease and transparency.

Because you have full control over your cryptocurrency, you don’t need to rely on a central authority to validate your transactions, all validation is done by the cryptocurrency network. Today, credit card companies, banks, and others act as the ‘gatekeepers’ to your money. You trust them to protect your information and your money, and in exchange, they manage transactions to ensure that everything is in order.

However, cryptocurrencies don’t require a central authority and instead manages transactions in a distributed fashion. As such, while a bank might have a database that’s an obvious target for hacking for someone to steal your money, cryptocurrencies aren’t susceptible to these attacks. Additionally, cryptocurrencies can process transactions in a matter of seconds or minutes, and not hours or days as it may take to send money today.

Cryptocurrencies, often referred to as coins, are stored in digital ‘wallets’ that you use to manage your payments. Your wallet is protected by a private key – think of it like an extremely complex password – that only you know about. You can spend or send money by submitting a transaction from your wallet to someone else’s.

Like cash, you can spend the money however you want – whether lending to a friend, paying for lunch, or even paying an employee. Unlike cash though, as cryptocurrencies are digital you can pay with a wallet app on your phone, with a special keychain, and in other ways that make cryptocurrency easier to use.

Learn About Cryptocurrency Blockchain

How Do Cryptocurrencies Work?

Cryptocurrencies were developed as an application on top a cryptographic invention known as blockchain, hence the name cryptocurrency. Blockchain is a technology that will support multiple technologies – cryptocurrency is just one of them. But importantly cryptocurrencies, as we have them today, would not be possible without the blockchain technology. So, what is blockchain?

Blockchain

A block is a complex mathematical problem based on a cryptographic technology (called a “hash”) which computers aim to solve. Once the mathematical problem is solved, the block is ‘complete’. The important property of a block is that if you change any information inside of it – like transaction data – becomes invalid, or broken. The only way to fix it is to replace the incorrect data with the correct, original, data.

When a new block is created, it takes data from the previous block, creating a link – hence the term blockchain. In a blockchain, if any data in any block is altered, the entire blockchain from that point onwards is broken. You can think of it like a tower of wooden blocks, if you break one block in the middle of the tower, all the blocks above it topple over. The only way to ‘fix’ the tower is by correcting the data that was tampered with. In fact, blockchains are often measured in terms of ‘height’ which is the total number of blocks in the tower. So, the older the data is, the more secure it becomes. Generally, a block will be considered ‘valid’ once enough additional blocks are added to the chain in order to ensure security. In cryptocurrencies, the blockchain is used to store an immutable transaction ledger for the currency.

Mining

People called miners solve these mathematical problems. They are responsible for bundling together transactions and then solving the mathematical puzzle. Mining can be very computationally difficult and thus requires powerful computers to solve these puzzles. The computers cost money and importantly require electricity to run. In order to incentivize people to mine, they are given a prize for their work – either in new coins, transaction fees, both, or otherwise.

Part of a miner’s job is also to ensure that transactions are valid. They do this by ensuring that the person attempting to send coins has enough to send – they can examine the existing blockchain to determine a wallet’s balance. Because the blockchain is available for anyone to view, every transaction made by every wallet is visible to all. While this may seem like a privacy concern as someone can track your balance and spending, you can actually have as many wallets as you want, and there are technologies and specific cryptocurrencies that exist to provide complete anonymity while still maintaining the integrity of the blockchain.

Distributed Ledger, and Confirmation

Anyone who wants can have a copy of the blockchain, so when a miner successfully solves a new block, they announce it to the network to get acceptance of the new block, or consensus. Other miners first verify the transactions – this is a security measure to ensure that a rogue miner doesn’t try to facilitate invalid transactions – and then add new blocks to the latest blockchain. As additional blocks are added to the chain, older transactions are considered confirmed. The more confirmations that a block has, the more it is trusted. As the network verifies the transaction ledger, it is called a distributed ledger. This is opposed to a central ledger that a bank might maintain. Unlike a bank’s central ledger though, the distributed ledger can’t be hacked, broken, or counterfeited.

Did You Know? May 22^nd is known as Bitcoin Pizza Day! A programmer paid a Bitcoin user 10,000 bitcoins for two Papa John’s pizzas on this day in 2010. Check the current price →

Is it Secure?

As with any time you’re dealing with money, security is one of the ultimate concerns. Cryptocurrencies have numerous security measures designed into the technology to ensure that individuals and the entire network are secure.

On a personal level, each wallet is secured by a private key to which only the owner has access. Your wallet also has an address that is used to place transactions from wallet to another. In order to place a transaction, you must digitally sign it with your private key to prove that the owner is authorizing the transaction. This means that even if someone else were to find out your wallet’s address, they would not be able to make any transactions. However, if you were to give someone your private key, or if they somehow found it out from you, they would be able to authorize any transactions on your behalf. This is why it is of the utmost importance to keep your private key private!

As mentioned already, the underlying technology of blockchain makes it impossible to edit transactions after they have occurred. Additionally, because of the way transactions are reviewed, cryptocurrencies also aren’t susceptible to the “double spending” problem where a person tries to pay two different parties with the same money. The increased safety of the network over conventional methods makes cryptocurrencies safer, and thus also cheaper. If you look at the transaction cost of most conventional ways to pay (for example 3% fees for merchants on credit cards), the fees are meant to cover problems like fraud, chargebacks, and more that is spread across all users. If you take away these costs, you can provide ultra-low-cost transactions, sometimes just pennies in fees for thousands of dollar transactions.

Did You Know? The FBI supposedly owns 15 percent of the world’s Bitcoins after raiding a black market.

Top Cryptocurrencies