In August of 2008, the domain bitcoin.com was registered and a few months later, a paper authored by Satoshi Nakamoto (an alias) titled Bitcoin: A Peer-to-Peer Electronic Cash System suddenly appeared on a cryptography mailing list. In January of 2009, the first Bitcoin (BTC) was mined. No one then could have guessed that one BTC would climb to become worth more than $65,000, yet that’s where we are now.
What began as a response to the recession of 2008, by creating a decentralized currency that the Federal Reserve couldn’t manipulate to create bubbles, turned into one of the greatest investment opportunities of the century. More and more cryptocurrencies have entered the market, each with its own ideology behind it. Some value privacy, others would rather act as currency rather than assets, and still others adhere to their own path of “resetting” BTC.
Many people find all of this overwhelming. Bitcoin seems so complicated, but it can be easily broken down.
What is Crypto?
Cryptocurrency is a 100% digital currency that exists on a decentralized ledger called the blockchain. This ledger is amend-only and can be used to keep track of many things, including goods, patents, services, and much more. It’s transparent in that, unlike a private banking account, anybody can view the blockchain, but your digital wallet can still provide privacy.
Any cryptocurrencies you own are stored in your wallet. A wallet can either be 100% digital, existing online or as software on your computer or another device, or it can be physical, similar to a thumb drive. Each wallet comes with its own address, similar to a bank’s account number, where you can send your crypto, and each wallet has its own key that will allow you to access it. The most secure wallet is a physical one, but desktop wallets are very secure as well. An online wallet is the least secure, and those are usually the kind that hackers target.
While Bitcoin is what most people think of when they hear the term ‘cryptocurrency’, there are many other coins out there as well. Existing under the umbrella term ‘altcoins’, these cryptocurrencies include Ethereum, DogeCoin, GoodDollar, DAI, LiteCoin, Bitcoin Cash (BCH), Monero, Binance Coin, and many others. There are thousands of them out now!
In addition to cryptocurrencies, there are also non-fungible tokens, or NFTs. These are crypto assets that are all unique. Whereas every BTC or altcoin is worth the same, each NFT has its own price. NFTs can be anything from a written document to art, which is what makes them so individual. Think of them as virtual collectibles.
The similarity between all of these, besides being digital, is that all are decentralized (DeFi). There is no central bank regulating these currencies, so all trading, lending, and payments are handled by individual users on the blockchain. The pros of this are that transactions are completed privately between individuals and that inflation and deflation aren’t issues. The downside to blockchain technology is that you cannot reverse a payment. If you mistakenly sent someone more crypto than intended, for example, that person has to send you the difference back.
Currency or Asset? And How Do You Obtain It?
Bitcoin set out to be an alternative currency, unaffected by the poor decisions of politicians. However, with its value increasing and decreasing in a way so similar to stocks and commodities, many investors choose to treat it, and all other cryptos, as assets rather than currencies. Some altcoins, such as Bitcoin Cash, have attempted to return crypto to its founding ideals as a currency, but many cryptos are still treated in the same way that investors treat precious metals.
Regardless of how you plan to view your cryptocurrencies, however, the methods of obtaining them are all the same.
Mining
Mining crypto, especially established types, isn’t for the faint of heart. Miners use special computer hardware to work out the mathematical cryptography, which is very complex, to confirm transactions on the blockchain. By solving the cryptography, new coins are generated, or mined. Generally there are a limited number of coins, so inflation isn’t an issue, but it can be very taxing on computers to perform this task.
Crypto Exchanges
Exchanges are websites where you can buy, sell, and trade cryptocurrencies with other users. There are three kinds of exchanges: decentralized, centralized, and hybrid.
Decentralized crypto exchanges are platforms where all trading is done peer to peer. You find a user who’s looking to buy or sell a certain amount of their crypto and you contact them. You agree on the terms of the agreement and make the trade. Sellers can request payment via money order, PayPal, bank transfer, or even through gift cards. Ways of verifying payment are establishing trust are left to the individuals on the exchange.
Centralized cryptocurrency exchanges are platforms where a third party handles transactions, providing extra security. This comes with the price of higher transaction fees and slower trade rates, but many prefer to allow a third party to conduct the transactions on their behalf.
A hybrid model allows you to trade on the individual level while also providing the liquidity of a centralized exchange.
ATM
Bitcoin ATM machines are springing up throughout the USA, allowing you to purchase crypto directly from a machine. Buyers must create an account with the ATM operator. Sometimes, these machines will provide you with a temporary wallet, but other times just make sure you have the address to your own wallet ready. You then proceed to buy your BTC and tell the machine where to send it.
Fees are quite high still on these machines, but they provide convenience and are faster than other transactions.
Staking
Staking is the process of buying crypto and waiting to be selected as a validator on a network. Much like mining, validators can be awarded more coins when they validate a correct answer to the cryptography problems.
Stocks
Investing in a crypto-based stock is actually investing in companies that work with cryptos, such as miners and exchanges. Investing in companies that allow customers or clients to pay in crypto is also considered investing in crypto stocks. You don’t obtain actual crypto this way but it allows people who don’t purchase coins themselves to still invest in this alternative form of currency.
The Future
Crypto is always changing, and the government’s response to it is always changing, too. Many libertarian-leaning people enjoy the idea of a competing currency that isn’t prone to the devaluation that’s seen in many fiat currencies, but others are wary of anything that isn’t centralized and seeks to make tracing transactions difficult.
The question also arises of whether it will morph into an accepted currency by stores and companies or if it will remain a more underground currency.
As such, it’s difficult to know where crypto will head in the future, but one thing we do know is that it’s here to stay.