Less than a decade ago, cryptocurrencies seemed like a sci-fi pipe dream, but Bitcoin and others have made a big splash in the last year, leaving the average investor to wonder if it’s a good place to grow their money.
But what are cryptocurrencies? How are they made, how do you buy them and are they even a sound investment? Let’s look at the ins and outs of the cryptocurrency craze and give you some clear steps on what to do next, if you’re interested in investing.
I should start by saying that I’m not a financial advisor, and any decisions you make about your money should first be researched, thought out – and if you deem fit – discussed with a qualified professional.
What Is a Cryptocurrency?
A cryptocurrency is a digital form of money, and it works similarly to the currency you have in your bank account. In many cases, you can use cryptocurrency to buy products and services, or save it, invest it or even exchange it for another type of currency – such as dollars.
When the talking heads on television are discussing the performance of Bitcoin, for instance, they’re typically comparing it to the performance of the US dollar.
What Is Blockchain Technology?
Blockchain is another word that’s become popular vernacular among the cryptocurrency-savvy. And while it might sound like something out of 1984, its actual purpose is incredibly cool.
Blockchain technology – or simply blockchain – is a public ledger that tracks the transactions happening within a specific cryptocurrency. Different cryptocurrencies are built on different blockchain technologies.
Since there’s not a government or centralized force controlling cryptocurrencies, there needs to be visibility into factors like date, timestamp, source and destination.
This helps protect the cryptocurrency system from fraud, specifically a nasty little practice called double spending.
What’s the Purpose of Cryptocurrency?
When trying to explain cryptocurrencies, it’s important to delve into why they exist in the first place. Cryptocurrencies were invented to fix some perceived problems with traditional money systems. Here are some of the main perks of cryptocurrencies:
- Decentralization – Cryptocurrencies are known for being peer-to-peer monetary systems, meaning that no bank or government has to approve the transactions.
- Fraud protection – Transactions in cryptocurrencies cannot theoretically be counterfeited.
- Fewer and lower fees – As of right now, there aren’t many fees in the world of cryptocurrency. This may change, but it’s a pro over the current money systems in place, especially when you consider international exchanges of money.
- Faster transactions – With traditional monetary systems, there are situations where money transactions are delayed, often because of large third-party approvals. With cryptocurrency, these transactions can happen immediately.
There has been some fear in recent years regarding cryptocurrencies being used for criminal behavior – everything from blackmail and ransoms to good, old fashioned tax evasion. There are, apparently, opportunities to hide your identity.
That said, it doesn’t mean that you can’t be found by governments and, more notably, the IRS.
For instance, only 800 people reported their Bitcoin gains in 2016, meaning a lot of people out there are trying to scam Uncle Sam. The IRS is now cracking down, so you probably should begin claiming your cryptocurrency income.
Is It Secure from Hackers?
This is the question of the day. While proponents of cryptocurrency say it’s just as safe, if not more safe, than traditional forms of investments, there have already been a handful of incredibly serious cryptocurrency hacks.
Perhaps a bigger danger, though, involves your personal hard drives. In the age of cryptocurrency, your hard drives and computers are like personal banks, and if someone hacks into them, they could potentially access your investments.
While there’s not a perfect solution to hackers, check out these suggestions for making your cryptocurrency investments as secure as possible.
How to Invest in Cryptocurrency
If you’re ready to dive into the world of cryptocurrency investments, first of all, be aware of the risks. While some people are convinced that it’s the future monetary system, others believe that there’s a potential bubble. If you’re just getting your feet wet, don’t bet the farm on cryptocurrency.
But if you’re determined to sink your teeth into cryptocurrency, one of the best places to start is with Coinbase, which is where you’ll have the opportunity to buy and sell some of the more established cryptocurrencies, such as Bitcoin and Ethereum. You’ll be charged a relatively small fee by Coinbase for your transactions, and these fees are disclosed when you make a transaction.
If you want to get in on the ground floor of an up-and-coming cryptocurrency, you’ll need to look beyond Coinbase, to places such as Kraken – another digital currency exchange. From here you can check out the lesser known currencies, such as Ripple and Steller, which could be the next big things in the world of cryptocurrency.
Since there’s not a central authority that keeps a record of the transactions happening in a cryptocurrency, it’s up to people to confirm and maintain a public record of these transaction. This process is called mining.
One way for a member of the network to log a transaction is by solving complex mathematical problems. Once the problem is solved, the transaction is officially recorded on the public ledger.
Whoever solves the problem fastest is then rewarded with a number of the cryptocurrency coins – known as a mining reward. This reward is incentive to encourage members of the network to maintain the public record on the blockchain.
Before you grab a pickaxe and start looking for Bitcoin, know that it takes some serious computing technology to answer these questions before other users of the network. Often, groups of people and several computers are harnessed to get to these answers the fastest.
The story of cryptocurrency is just getting started. While it’s too soon to say if it’s here to stay, there are indicators that it may have legs to stand on in the near future. If you’re ready to make an investment and a bit of a gamble, try your luck (and math) with cryptocurrencies today.
Cryptocurrency isn’t the only concept that may need some translating. Check out our Super Bowl commercial to watch Keegan-Michael Key translate some of life’s more complex moments and see how Rocket Mortgage makes the whole mortgage processes easier.
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.