The recent hot topic in financial news has been cryptocurrencies. Even working in finance; I find the concept complex and confusing. I aim to briefly overview the basic concept here and provide you with a little bit of better understanding as well.
What on Earth is Crypto?
Cryptocurrencies are difficult to explain since they are literally a new form of digital currency that was invented in 2009. To use a metaphor; think of cryptocurrencies as poker chips that you buy and use online. They have worth since there are people willing to trade actual cash for these “poker chips” but are not actually cash. When you acquire cryptocurrency, you have an individual identifier, called a token, that is assigned only to you for your transactions.
Sounds easy? It isn’t. Cryptocurrencies are unregulated, meaning they follow few rules with no organization monitoring them, and they are very risky. If you purchase a whole bunch of cryptocurrency today, there is no guarantee that you can exchange it for goods/services/money tomorrow. The entire value of each crypto is based on the market demand.
How to Acquire Crypto
You can acquire cryptocurrencies in a few different ways. The easiest, yet expensive, way to do so would be to purchase shares on a cryptocurrency exchange like. Coinbase, Gemini, or Binance US. These exchanges allow you to open an account and purchase various cryptocurrencies with your actual money.
Another way to acquire cryptos is to mine for them. When cryptocurrency transactions take place, everything is public on an online ledger, called a blockchain. Maintaining this ledger and checking it to make sure that transactions are not duplicated takes a lot of time, manpower, and algorithms. If you are very savvy, then you can become a crypto miner and acquire shares of crypto by checking the blockchain transactions and/or teaming up with other miners to do so.
The third way to acquire cryptocurrency is to require it as payment for your good or service. This may seem to be the easiest way to get in on the crypto train but, while cryptocurrencies are gaining popularity and legitimacy in the market, you should consider your customer base and the likelihood of its ability to actually pay in cryptos.
How Many Types of Cryptocurrencies Are There?
Bitcoin was the first and, currently, is the most widely used. It was founded by an unknown person or persons under the pseudonym Satoshi Nakamoto. Since its inception in 2009, Bitcoin has had much growth and volatility, especially during the pandemic.
As of 2021, there are so many other cryptocurrencies available and even some governments are starting to get involved (think: China banning cryptos and El Salvador acknowledging it as legal tender).
When Should You Buy In?
If purchasing cryptocurrencies sounds interesting to you, do your research. Once you completely understand how crypto works, have chosen one that you would like to purchase, and have the extra cash or time to spend on it, then (and only then) should you participate. There are so many nuances and such high risks associated with crypto that you should only use time or money that you are willing to lose altogether.
Cryptocurrencies are a complex, continually evolving topic. While I hope that this brief and simple overview made the concept a little clearer for you, I have not provided the in-depth detail that you would need to start mining, trading, or purchasing cryptocurrencies just yet. I highly recommend doing your own extensive research if that is something you are interested in.