Cryptocurrencies have become an investment craze again, which means, because I follow the subject for the Wall Street Journal, I get questions from a lot of people that I don’t usually hear. Recently, a friend from high school who I haven’t talked to in years contacted me. He started investing in cryptocurrencies but was looking for guidance.
“I would appreciate suggestions on where to find good information, particularly geared for beginners,” he wrote.
As an asset class, cryptocurrencies are so new that even some people within them don’t understand them. And the wild west, no holds barred nature of the market ends up attracting some bad players.
How do you navigate all of this
Carefully. With this principle in mind, let’s answer some common questions about cryptocurrencies. What is cryptocurrency and why bitcoin is important
Cryptocurrency is a name given to a large group of digital assets that debuted in 2009 with bitcoin. There are thousands of them, but only a dozen have appreciable dimensions and future potential.
There is a lot of hype around bitcoin. Some argue that it will become the reserve currency of the world. Others represent it as the new gold. Others simply think it will continue to rise in value and make anyone who owns it rich. Still others think it is a fad or a chain of sant’antonio.
Putting aside for a moment the fundamental value or use of bitcoin, the main reason it matters is that Bitcoin allows any two people, anywhere in the world with an internet connection, to make a transfer of value in minutes. without any intermediary.
With Bitcoin, you can send $ 1 million to someone, pay a small transaction fee, and have the exchange settled in 10 minutes or less. No bank, no exchange. With this technology, everything that can be digitized can be exchanged quickly and economically. How cryptocurrencies work
The basic idea is that cryptocurrencies operate on software networks, where myriads of computers run separate copies of the same program. Computers are connected, but no computers are controlling the network. In Bitcoin parlance, this is a decentralized network.
These computer networks have two main functions: One is to process transactions, the other is to maintain the database that records and stores these transactions. In general, transactions are grouped into blocks, which are then linked in chronological order in a long and unbroken chain. This is why the software was called a “blockchain”. Who controls the computers
Anyone can download and run these software programs; they are open source programs. The database where transactions are recorded, usually called the ledger, and therefore publicly visible to anyone.
This ensures that no one in the network is faking the currency or spending the same bitcoins twice. Transaction history is collectively agreed by each computer; therefore, it cannot be changed later. Transactions are permanent.
The people who run these programs have an incentive: a competition with a monetary reward. They compete against each other to put together a block of transactions. The first block to be recognized by the network earns the winning computer a batch of freshly minted bitcoins. Currently, the reward is 6.25 bitcoins, distributed approximately every 10 minutes. These are the bitcoin miners, a nickname given why what they are doing and how to mine for gold.
This competition does two things: it provides an incentive for people to maintain the network, and it is the mechanism by which new bitcoins are created. How it all started
On October 31, 2008, someone under the pseudonym of Satoshi Nakamoto published a nine-page document describing a new “electronic money” system called bitcoin.
What Bitcoin promised was an alternative to the existing financial system, and it struck a nerve, as there were so many people affected by the global financial crisis. Bitcoin has become as much a social movement as it is a piece of technology. This is one of the reasons why it has such a passionate following; cryptocurrency adherents believe they wanted a financial revolution in existence.
Furthermore, since bitcoin was released as open-source software, anyone can take the code and create their own version. They could modify it to make it work differently, or alter it for a completely different use case. This is why there are thousands of different cryptocurrency platforms doing different things, everything from decentralized versions of operating systems (Ethereum), digitized banking services (DeFi), supply-chain networks (IBM and others), even new ones. types of collectibles and art (NFT, or non-fungible tokens). It is a massive and lively experiment in the application of a new technology.
The first thing a curious investor should do is read Nakamoto’s original white paper. It is technical but not inaccessible and explains quite clearly how the bitcoin network works. Bitcoin has become so expensive. How Can I Afford
It Bitcoin has risen to nearly $ 70,000 in 2021 from about $ 30,000 at the end of 2020. However, each bitcoin is divisible to the eighth decimal place, which means there are 100 million small units (nicknamed Satoshis) in one bitcoin. Therefore, it is possible to buy practically any amount of bitcoins that you want. How do you buy one
Originally, the idea behind bitcoin was that you download the software itself and run your own version of it, mining new bitcoins on your own. You were your personal banker, a self-ruler.
In practice, this proved to be too cumbersome – and expensive – for most people. The most common way to buy bitcoins now is through a cryptocurrency exchange like Coinbase or Gemini, or a smartphone broker like Robinhood, PayPal or WeBull.
If you have a financial advisor, he or she could buy it directly for you, or put you in one of the new bitcoin exchange-traded funds. At least in the US, these ETFs are based on bitcoin futures, not bitcoin itself. There are some bitcoin ETFs that trade outside the US.
Stock exchanges and other brokers often act as custodians of your funds. This means they are responsible for safeguarding the account, up to a point. If you allow someone in a phishing scam to access your account, for example, that person can drain your funds, probably permanently. In bitcoin, there is no way to reverse a fraudulent transaction. What should I be on guard against
From many things. Because cryptocurrency is such a new area, and has been largely unregulated or only slightly, scams and fraud are rife. The Federal Trade Commission warns investors to steer clear of all opportunities that promise to make a lot of money in no time, or that ask you to recruit other investors, offer guaranteed or free money, or make exorbitant claims short of details. .
In general, it is best to stay away from any social media investment offers, especially if it comes from you. I regularly receive emails from readers who have not heeded this warning and have been scammed. And do your research on any investment manager or offering. If you can’t learn enough to feel comfortable, move on. How Do I Make Money
Buying bitcoins is not like buying a stock or a bond. When you own bitcoin, you don’t own a piece of a company. You make money with bitcoin in only one way: by selling it to someone else for more than you bought it.
There is a thriving part of the cryptocurrency market called defi, short for decentralized finance. These are bank-like services that allow you to lend or borrow your cryptocurrencies. If you lend, you can earn interest that typically ranges from 5% to 20%. If you borrow, you can borrow cryptocurrency and invest it elsewhere in the market, always hoping to sell it for more than you bought it.
However, the defi is a new field, with virtually no trade rules. Almost once a week, there is a loss of funds. Quite often, some malicious coder finds a flaw in a defective program and drains the accounts. Sometimes, bad software crashes and deletes transaction histories. Other times, the platforms were created only to steal money (a “rug pull”). Research firm Elliptic estimates that around $ 10 billion was lost on defi platforms in 2021. This is an environment in which the buyer must be very careful.
Ultimately, it is possible to make a profit in crypto, but be aware that you are putting money in a largely unregulated area with lots of opaque corners and volatility. Billionaire hedge-fund manager Paul Tudor Jones realized this when he entered the market, calling bitcoin “great speculation”. This is the best description I’ve heard. GLOSSARY Cryptocurrencies : Digital tokens used to transfer money between individuals’ computers with minimal fees. The blockchain: The simple open access ledger that underlies currency. When a bitcoin owner transfers a token to another person, he or she inserts the transaction into the blockchain, signing it with a unique string of numbers and letters. Financial firms that are skeptical of bitcoin and other cryptocurrencies have also embraced blockchain technology itself. Miners : Bitcoin miners verify transactions by running the numbers through formulas on high-powered computers. Satoshi: One of the hundred million units that make up each bitcoin. Also the name of the alleged inventor of bitcoin, the mysterious Satoshi Nakamoto. Defi:An abbreviation for “decentralized finance”, or banking services that allow investors to lend or borrow their cryptocurrencies. Read more: Dozens of books have been written on how cryptocurrencies got started. Some are extremely technical, others are written specifically for newbies. Read all the ones that time and budget allow you to read. Among the best:
Digital Gold by Nathaniel Popper
Kings of Crypto by Jeff John Roberts
The infinite machine by Camila Russo
