The basics of cryptocurrencies

May 02, 2018

Because of the recent media interest in bitcoin and cryptocurrency, what used to be a vague, nefarious-sounding secret of the dark, deep web, is becoming trendy. But just because it's becoming more mainstream doesn't mean you should dive in before you understand what you're investing in. Cryptocurrencies aren't for everyone and the risks are less well known than standard investments and speculation. You really need to have a good understanding of them before you get involved. Cryptocurrencies are as simple or as complicated as you want to make them, but everyone has to start learning somewhere so here are some of the basics.

The first place to start is the most obvious and basic question: what is a cryptocurrency? It's a digital, decentralized currency created using code. It only exists online and isn't backed by gold or any other physical substance like most currencies today. As a decentralized currency, the first of its kind, there is no third party involved. There is no middleman like the bank or government and because of how it exists, on the blockchain, which is an immutable code, it's one of the more secure ways, hypothetically, to keep your money.

There is no interest or tax on cryptocurrencies, because it is decentralized and not controlled by any one entity or institution, which is one of the reasons governments and some media focus on the dangers instead of the rewards and practical uses of cryptocurrencies. A currency that can't be taxed or regulated is no friend to governments, which is partly why they were invented and are used widely on the internet. This is one of the major pros and cons to cryptocurrencies and something you'll need to understand as part of its basic concept. They are an anonymous, ungoverned, global currency and therefore are primarily used in illegal dealings. They are the currency of the underworld. What this means for the simple investor, is that if you're scammed or hacked, there's no one to help you retrieve your money.

Cryptocurrencies have been quickly on the rise and you'll most likely have heard of the bitcoin bubble. Or, what everyone is assuming will be a bubble because of its unheard-of growth. Because of that growth, many people don't have the money to invest in a full bitcoin so instead buy sections, which cost less. There are many different cryptocurrencies, like Ethereum which has its own family of currencies to use on its platform, and Litecoin, which is a smaller coin than bitcoin and often amassed as a backup should anything happen to bitcoin. Many investors are finding startup cryptocurrencies to put their faith and their money in, hoping to win big like the early adopters of bitcoin. But cryptocurrencies, though appearing as though they're here to stay, are still a volatile market and you need to be prepared to lose everything before you put anything in.

Though cryptocurrencies sound daring and fascinating, you should be wary of diving right in, driven by the success you've heard other investors having. Research a variety of cryptocurrencies and spread yourself out. Cryptocurrencies are made and die over days and weeks, so be prepared for sharp rises and falls in your investments. If you choose to invest in one of the larger currencies, really investigate the pros and cons and consider what type of investor you are and whether or not this is the market for you. Once you understand the basics of cryptocurrencies, you can start to think about if you want to join the craze or observe from afar.