This is a 4 part guide for beginners investing in cryptocurrency. This is Part 1, and we cover the fundamental understanding of Bitcoin, Blockchain and Cryptocurrency that you need to have before throwing money at this exciting-but-extremely-volatile investment class.
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I believe in understanding and researching any investment before committing money into it. For that reason, if you’re interested in buying Bitcoin, learning the basic vocabulary in this space is critical.
The new terms we’re covering today will help you…
- Remove dangerous misconceptions of crypto investing
- Understand crypto at a high level so you can invest with more confidence
- Help you be the annoying new relative at the holidays who won’t shut up about cryptocurrency.
So it begins.
Vocab 1: Understanding “Cryptocurrency”
We can’t understand Bitcoin without first understanding cryptocurrency.
Let’s break down “cryptocurrency” into its constituent parts: cryptography + currency.
- Cryptography = a method of storing and transmitting data so that only intended parties can access that data.
- Currency = money, or something that could be used as a means of exchange.
Hence cryptocurrency is a new type of money that relies on cryptographic technology to make it secure.
There are thousands of cryptocurrencies. Because Bitcoin is the first widely popular cryptocurrency, the general masses think “Bitcoin = cryptocurrency,” while the more correct way to think about it is that Bitcoin is just one out of many cryptocurrencies.
Bitcoin = cryptocurrency, but cryptocurrency ≠ Bitcoin
Facebook = stock, but stocks ≠ Facebook.
The US dollar = money, but money ≠ U.S. dollars.
For a more visual understanding, visit the popular Coinmarketcap.com. It lists all the cryptocurrencies available like Ethereum, Ripple and Litecoin.
At the time of this writing there are over 1300 such coins:
Best Video Explanations Of Cryptocurrency:
Cryptocurrency explained in 60 seconds is an info-packed, visual explanation of how crypto works at a high level:
If that video whet your appetite, then watch Ever wonder how Bitcoin (and other cryptocurrencies) actually work?(26 min). It explains crypto from an interesting angle: what you’d have to do if you were to create Bitcoin yourself, from scratch:
What this means for the beginner crypto investor
- Bitcoin is just one of many cryptocurrencies (though it is the biggest).
- Coins like Ethereum and Litecoin are also worth looking into – they’ve made more gains in 2017 than even Bitcoin!
Vocab 2: Understanding “Bitcoin”
Bitcoin was created in 2009 by someone under the alias “Satoshi Nakamoto.”
It’s the first popular cryptocurrency, and its introduction brought with it many innovations like…
Divisibility
The biggest common misconception for new cryptocurrency investors is that they have to buy 1 entire Bitcoin, which can be very expensive.
You can buy a fraction of a Bitcoin, for example 0.001 BTC. Or buy $100 worth of Bitcoin at whatever the current rate is:
Most other cryptocurrencies like Dash and Monero can also be bought in fractions.
Privacy
Bitcoin has a level of anonymity to its design, such that it’s hard to personally identify individuals to their transactions.
For this reason, hackers have demanded Bitcoin as ransom. Other cryptocurrencies tout their privacy features as well.
Limited Supply
There are only 21 million Bitcoin that could ever be created:
As you see in the screenshot, only about 16 million Bitcoin are in circulation.
Bitcoin is created by through a process called “mining,” in which miners use computing equipment to solve cryptographic puzzles.
Bitcoin’s design is such that remaining Bitcoins are harder to mine. The last Bitcoin will be mined in 2140.
The “work” involved as well as the controlled supply help give Bitcoin value.
Most cryptocurrencies have their own features and a roadmap of new feature stop be released.
Here’s an example of Bitcoin’s features and Litecoin’s development roadmap.
Best Video Explanation Of Bitcoin:
How Does Bitcoin Work? (4 minutes) explains what Bitcoin is in the context of what money is:
What this means for the beginner crypto investor
- You can invest whatever amount you’re comfortable with, since you can buy Bitcoin in decimal values.
- Each cryptocurrency has factors like supply, volume and price that are all considerations to make when investing. For example, lower supply may imply that a coin is more scarce.
- Cryptocurrencies tend to have their own “tech” features, whether it’s privacy or being optimized for a certain industry (e.g. marijuana or energy management).
Vocab 3: Understanding “Blockchain”
Saving the most complex best for last. The technology behind Bitcoin and most cryptos is called Blockchain.
Blockchain is a system of making records that are both public and immutable (means it can’t be tampered with).
The blockchain gets its name because it organizes data in blocks. Each block references and identifies previous blocks through cryptography, forming an unbroken chain. Hence “blockchain.”
Just as we don’t need to understand http and internet protocols to use the internet, blockchain is often likened to a “new internet” offering users these benefits:
- Decentralized – can’t be controlled by a single entity
- Trustworthy – records are public and immutable
- Distributed – because databases are hosted millions of computers simultaneously, there is not single point of failure.
Blockchain technology is sweeping all industries and systems of governance, from voting to energy management to insurance.
Best Video Explanations on this topic:
“Understanding Blockchain in 2 Minutes” is the best video I’ve watched that succinctly explains blockchain tech.
19 Industries The Blockchain Will Disrupt is an inspiring video on the transformative effect blockchain will have across many aspects of our lives.
What this means for the beginner crypto investor
- Whether a certain cryptocurrency “fails” or not, blockchain technology is here to stay. Many internet startups have come and gone, but the internet itself is the digital infrastructure that has stayed.
- Companies ahead of the adoption curve on blockchain technology are worth looking into as well, from 2 sides. The first is that corporate partnerships usually mean big things for certain coins, e.g. Microsoft collaborates with X Cryptocurrency. The second is that if you invest in the stock market, blockchain leaders in this space like IBM are well poised for the future.
Putting it all together
So is cryptocurrency money? Or is it an investment? But it also feels like a tech product?
It’s a bit everything. The best way I’ve come to understand it is by comparing it to existing things we already understand…
> Cryptocurrencies are like money
When you think about money in the digital age, most of your relationship with cash is just some number sitting in an online account somewhere. Yes, you can withdraw it for physical bills, but credit cards, Venmo and online transactions already make money feel digital.
The difference with cryptocurrencies is that they’re digital first – there’s no physical counterpart. Yet they serve as a medium of exchange and store of value. You can buy stuff with Bitcoin.
Of course, not many people want to part with their Bitcoin, because…
Cryptocurrencies are like stocks
People hold onto Bitcoin and other cryptos because they see it as an investment – the price of many coins, relative to the US dollar, has gone way up. (Of course they go down at any point too).
Just like everyone wishes they invested in Amazon or Facebook X years ago, the same FOMO – and excitement – is happening with cryptos like Bitcoin.
Cryptos can be compared even more closely to the forex (“foreign exchange”) markets, in which trades are made between USD, the Japanese Yen, the Euro and so on.
Each national currency has unique features, from its design, to its supply, to the governments printing & running it.
Now, anyone with a technical background could launch their own cryptocurrency or digital token. They can design it with a controlled or unlimited supply, as well as put in tech features. But who are these people…?
Cryptocurrencies are like tech products
There are entire teams dedicated to creating its own cryptocurrency and designing uses for them.
- Ripple is a blockchain startup that created the XRP coin, and also the financial technology that makes bank settlements faster and cheaper.
- Ethereum is an open-source project that created Ether. Ethereum is known for enabling a new technology called smart contracts and the ability to create decentralized applications.
- Monero is a privacy-focused coin that enables (supposedly) untraceable transactions.
Looking at these landing pages, it doesn’t feel much different from discovering a new tech startup. These cryptocurrencies are run by teams of programmers, designers and marketers building real technology.
The tricky thing around cryptocurrency is that it’s still being defined. More patterns and conventions are developing each day as this industry matures. As an investor, it’s something you can buy and trade. As a consumer, it’s something you may be able to spend. As a career-oriented individual blockchain is a new industry with growing job demand.
What’s next
When I began my journey in crypto, it was hard to wrap my head around this new market. If I had known the implications of what I was investing in, I would’ve jumped in earlier and made more money.
Hopefully this provided a high-level understanding of a new technology that’s changing before our eyes, and gives you a starting mental framework to approach cryptocurrency investing.
If you’re ready to buy your first crypto, Read part 2 of the crypto investor’s guide.
Otherwise, access my list of favorite crypto resources here:
[et_bloom_locked optin_id=”optin_4″]Link to Oz’s Cryptosheet (Google Sheets)[/et_bloom_locked]
super helpful!!!! i leaned a ton