The Everything Guide to Investing in Cryptocurrency

From Bitcoin to Ripple, the Safe and Secure Way to Buy, Trade, and Mine Digital Currencies

Ryan Derousseau

• Publisher: Everything
• Year: 2019
• ISBN:
  9781507209332
• Topic: Desarrollo personal
• Subtopic: Finanzas personales

Maximize your money while avoiding the potential pitfalls of investing in cryptocurrency—this handy guide shows you how to get in from the bottom up in this hot new market. Cryptocurrency—a digital asset that uses cryptography to secure all of its transactions, making it nearly impossible to counterfeit—is moving into the mainstream, receiving coverage from major financial websites such as Forbes and Bloomberg, as well as increased attention from serious financial institutions, and experiencing wider availability in trusted markets, such as the world's largest futures exchange, Chicago Mercantile Exchange.As the price of Bitcoin and other cryptocurrencies continue to fluctuate and and news stories of cryptocurrency hackers increase, investors have to be more conscious of the huge opportunities and large risks in this market. Understanding these risks and rewards of cryptocurrency is vital for everyone wanting to make money on this exciting new form of investing. The Everything Guide to Investing in Cryptocurrency is an authoritative and comprehensive guide to help you safely jump into the lucrative world of e-commerce. You'll learn:
—The different major cryptocurrencies, including Bitcoin, litecoin, and ethereum
—Where to buy and sell cryptocurrencies safely and securely
—Setting up and managing your cryptocurrency wallet
—Properly analyzing their investmentsLeap into cryptocurrencies with a full understanding of what you're investing in. With the help of The Everything Guide to Investing in Cryptocurrencies, you'll maximize your gains and minimize your risks in this radical new frontier.

CHAPTER 1

Welcome to the Cryptocurrency Craze

In a matter of only a few years, bitcoin has transformed from a theory into one of the era’s most closely watched and intriguing investment trends. Potential for the coin and other cryptocurrencies now run the gamut, depending on whom you talk to. Some prognosticators have argued that the price of bitcoin will reach beyond $100,000. Many others claim it’s a bubble on the level of the largest market mirages in history. Such is the world of cryptocurrency investing where the truth likely lies somewhere in the middle. Now that you’re thinking of entering the space, make sure to embrace some of that excitement, but also keep in mind what you’re buying when you declare yourself a crypto investor. It’s far more than purchasing a digital coin. This chapter offers an initial explanation of cryptocurrencies and will serve as a first step on your new journey.

What Are Cryptocurrencies?

At its basic level, cryptocurrencies are a very simple concept. They’re digital coins, created online, and meant for online spending. Developed via software code, cryptos are a way to transfer value, most often via digital means, like when you’re purchasing something online.

FACT

While the spending of bitcoins launched on the Internet has primarily been relegated to the online world, there are ways in which you can use them in your everyday shopping. The payment processor company Square gives its merchants the option to accept bitcoins. This allows any shop that uses Square’s functionality, from the antique store to your local coffee shop, to accept bitcoins.

Take a very simple scenario, such as using a quarter to purchase a piece of gum. When you buy that gum, you’re giving the quarter to a shopkeeper in order to pay for the slice of gum. The quarter is a tangible coin that a US shopkeeper trusts. He knows that if he takes the quarter, it will cover the cost of the gum and the profit that he expected to gain from the sale. It’s a very predictable transaction. A quarter’s value doesn’t change all that dramatically in a short time. What will cost twenty-five cents today will likely run twenty-five cents tomorrow. (Over many years, that quarter won’t buy you as much, due to inflation, but for the short term, it does, which is valuable for commerce.)

One bitcoin is essentially the same as a quarter except it’s not tangible. It’s a piece of code, and only you, as the owner, have the identifier, which is known as the coin’s key. You can pass that identifier on to someone else, in order to purchase an item. That person then receives a new identifier for the bitcoin, and the old identifier becomes obsolete. You can’t actually hold bitcoin. You can’t feel it. But when someone accepts bitcoin, she is viewing it the same way as that quarter.

But one bitcoin has grown to become much more expensive than one slice of gum. That’s because a whole community has grown around the cryptocurrency craze, willing to give bitcoin owners more and more for that one coin.

Why Would Anyone Want This Digital Coin?

If bitcoin and other cryptocurrencies function just like regular money, then why would anyone want to use them instead of the fiat currency (that is, the regular currency) that we all are used to? It’s a fair question, one that the world has only begun to sort out. The answer depends greatly on who you are and why you’re choosing to use the coin.

The Anti-Federal Reserve Crowd

Early adopters saw bitcoin as a tool to spend without requiring a central bank to dictate the terms of the currency. Regular currency, like the US dollar, is subject to inflation. This is, to an extent, controlled by the Federal Reserve. It increases or decreases the amount of money flowing through the world markets through its use of interest rates. On a very basic level, when there’s more money flowing into the market, then the supply rises, decreasing the value of one dollar. When the Fed restricts dollars, then the value rises. The Federal Reserve does this to retain a consistent inflation rate, so the economy doesn’t grow too fast. Hyper-growth can lead to an overvaluation of goods you purchase, which would hurt the currency. Hyperinflation leads to a devaluation of the currency altogether and the Federal Reserve is mandated to try and hold inflation in check.

ALERT

This is a very simplistic definition of inflation. Since the economy has become global in nature, there are a lot of factors that would increase demand in the US dollar, like a devaluation of a foreign currency. The Federal Reserve must account for all of those factors, as it sets interest rates.

Digital coin enthusiasts don’t believe that government entities should have the power to dictate these fluctuations in the money supply. One of the original goals of a cryptocurrency is to avoid inflation altogether. That’s why bitcoin has a maximum number of coins—21 million—it can ever have in circulation.

The Business Case for Cryptocurrencies

What started as a libertarian dream, however, actually has a legitimate business use. It costs money to spend money. As odd as that is, there’s a reason banks and financial institutions have grown so large. It’s because they can collect fees in countless number of ways as money moves through their systems. For businesses, this can become very costly.

One of the easiest ways to imagine this is when you’re going on a trip to Europe and you have to exchange dollars for euros. When you go to the exchange counter at the airport, you not only receive less money back than you put in—because the dollar is worth less than a euro—but you also lose a large chunk to a fee that the exchange agency charges to give you the euro. Now imagine that on a wide scale, where a business is making exchanges in the millions of dollars every day. Clearly there is an incentive to reduce that cost.

FACT

The US Treasury handles the actual dollar development and distribution, but it’s dictated by the interest rate determined by the Federal Reserve. If the Fed decreases the interest rate, then it encourages banks to borrow more funds since the cost has dropped. Rate increases discourage borrowing, since it’s expensive, and therefore, less money flows through the financial system.

That’s where a digital coin has an advantage, since it isn’t tangible. It can serve as an independent third party. Instead of going to a teller, you could use bitcoin to exchange the dollars by buying bitcoin with US dollars then selling them for euros once in Europe. The transaction is processed on bitcoin’s decentralized platform, leaving the transaction fee for processing the digital coin as the only fee the company has to pay. That saves you the cost of the much higher exchange fee created by the middleman. Financial institutions and other organizations are seeing the value of that, particularly in areas where the local currencies aren’t as stable.

The Everyday Use of Cryptocurrencies

When evaluating why you and other regular spenders of currency would want to use cryptocurrencies, the discussion becomes a little more difficult. While there are benefits to a digital coin that’s un-hackable, lives online, and will transfer almost immediately to the retailer when you purchase an item, it hasn’t outweighed the ease of use and trust in the American dollar. Whether cryptos become a more prominent tool for everyday purchases depends on the ease of use. Regular consumers are going to spend the currency that’s safest and simplest for them to use. Right now, that’s the US dollar. If there was a reason for bitcoin or another cryptocurrency to replace the US dollar, and it was as easy to use as dollars are today, then it could grow. But that reality hasn’t presented itself yet.

It’s, however, still early days in cryptocurrency usage. To get a sense of just how early, let’s look at how the entire market began.

An Origin Story

Maybe you believe you already know how you feel about cryptocurrencies. Maybe you’re reading this to get an understanding of what exactly cryptocurrencies are before rushing to judgment. Either way, you should know where they come from in order to theorize about their future. Their origin story also provides a backdrop on why the technology supporting cryptocurrencies has the potential to shift the way the world operates.

Satoshi Nakamoto and the Creation of Bitcoin

Bitcoin, the original cryptocurrency, has an origin story that contains a number of mysteries, mostly because the creator of the coin has never come forward and proven that he or she published the concepts that would launch the crypto craze and form what you now know as bitcoin.

In 2008, an author using the pseudonym Satoshi Nakamoto published a paper outlining a new structure to develop a decentralized, peer-to-peer currency. In the paper, Nakamoto explains the concept of the blockchain, which produces a decentralized digital ledger and will become the backbone to bitcoin. Many enthusiasts had attempted to launch a digital currency in the early 2000s, but it wasn’t until this framework published—in which the notion of the blockchain was described—that the ability to structure a currency completely decentralized from any oversight was shown to be possible. The author of the paper remains a mystery to this day.

Nakamoto’s vision worked because she or he conceptualized the notion of removing the requirement of trust in order to process a payment. For instance, when you pay by check, you’re trusting that the bank will provide the funds to the vendor based on what’s in your checking account. The vendor accepts the check, trusting that the bank will ensure you have the funds for the service provided. The concept Nakamoto described removed the notion that vendors and consumers needed a third party, such as a bank, to provide this trust. Instead, this blockchain, or digital ledger, would verify the information as the transaction unfolds. Therefore, if you were trying to spend all your bitcoins on a car, the blockchain would first double check all the transactions ever provided by you to ensure you have the funds to supply the car dealer with the amount of bitcoins required for the purchase. Trust is no longer a factor—the blockchain verifies that you have the funds. This opens up dramatic opportunities to bypass traditional financial systems.

To this day, despite many efforts to uncover the person or group behind the pseudonym, the identity of Nakamoto remains a mystery. Some have claimed that Craig Wright, an Australian entrepreneur, is Nakamoto. But efforts by Wright to prove this have fallen short.

FACT

Nakamoto has an estimated 980,000 bitcoins, based on analyses done in the early days of bitcoin’s popularity. If this number holds true, then when bitcoin’s price rises, Nakamoto’s crypto wealth matches some of the richest people in the world. At bitcoin’s peak, Nakamoto’s paper wealth placed him just behind Paul Allen, the cofounder of Microsoft, on the Forbes 400: The Wealthiest in America list.

Bitcoin Changes Everything

Shortly after this concept paper was published, Nakamoto created the first bitcoin. This technological breakthrough—the blockchain—separated bitcoin from all other previous attempts to develop online or digital currency. From this code and concept, many other cryptocurrencies have been birthed in an effort to fix problems within bitcoin, improve upon what Nakamoto started, or to jump into the cryptocurrency craze in search of a quick buck.

All Cryptos Have Their Own Origin Story

While you won’t find many cryptocurrencies’ origins as unique as the patriarch coin, bitcoin, they all have their reasons for existence and a purpose for using them. The first piece of advice in investing in cryptocurrencies is to understand and recognize these origin stories. It’s the first chance you have to see whether it’s a legitimate tool or a scam. Who is behind the cryptocurrency? Does it seem to be a viable concept? Does it make sense to link a cryptocurrency to this concept?

Reading these narratives will be a first step in recognizing what’s worth investing in and which cryptocurrencies have value.

The Blockchain

Without a computer science degree, it’s not always easy to conceptualize the blockchain. It’s essentially a digital ledger that tracks transactions within its code, providing a public, searchable, and infinite record of a cryptocurrency (or other item in which the chain was built to track). What’s different about the blockchain, separating it from past attempts to develop a digital currency? It’s important to at least tangentially understand the mechanics of the blockchain in o...