Cryptocurrency and Bitcoin for beginners: what you need to know about it
Nowadays, cryptocurrency is a topic on every investors mind. So what is cryptocurrency? What is Bitcoin? How can people make some money on it?
Cryptocurrency was first created in 2009 by Satoshi Nakamoto when he created bitcoin which is just a type of cryptocurrency. A basic definition of cryptocurrency and bitcoin would be that these are digital money that people can exchange with someone anywhere in the world without restrictions or borders.
Before, if someone had US dollars and wanted to buy shoes from somebody in India, this person would have to take her US dollars, go to the bank and exchange these for Indian rupees. After that, she can take these new dollars and go buy her shoes. The fact is that the amount of rupees that one dollar can buy is changing almost every second. The value of the money is changing because private entities like the Federal Reserve and the government both play a part in manipulating the value of dollars.
The goal with cryptocurrency is to create a decentralized worldwide digital currency. It means that cryptocurrency like Bitcoin doesn’t rely on banks, the government or any private entity like the Federal Reserve to exist. So now someone can buy things and exchange money from anyone anywhere in the world without worrying about exchange rates or banks or borders. Moreover, it’s not possible to just create more cryptocurrency to change the value of it like how the Federal Reserve is able to just print more bills.
- Is it possible to create cryptocurrency and bitcoin mining?
It’s not possible to just create more bitcoin, it has to be mined using different complex computer algorithms. However there is a limit to how much bitcoin people can mine. Indeed, a person can only have a total of 21 million bitcoins in existence. Once someone hit that number, he will not be able to create or mine anymore bitcoins. The mining process is complicated but it’s important to understand that there is a limit to how much cryptocurrency can be created and there is currently no way to exceed that limit. This way it’s impossible to devalue cryptocurrency the same way it’s possible to do it for paper dollars by just printing many of those.
- What are the different types of cryptocurrencies?
There are different cryptocurrencies on the crypto market like Bitcoin, Ethereum and Litecoin which all have their own properties but they all follow most of the basic cryptocurrency principle. The exception is Ethereum because when Ethereum was created, the founders didn’t put a cap on how much Ethereum could be created.
- What about the downsides of cryptocurrency?
First of all, a lot of places and people don’t accept cryptocurrency yet. This is starting to change but people still can’t necessarily rely on Bitcoin to buy apples when they go to their local grocery store. However, one can speculate that if a company like Amazon was starting to accept bitcoin as a mean of payment, we can imagine that cryptocurrency and Bitcoin would increase a lot.
Second, because cryptocurrency is a new asset class it’s very volatile. It means that if a person is trading it, she can make a lot of money very quickly but it also means that she can lose her money just as quickly.
Third, the rise in cryptocurrency would ultimately mean the decline in big banks and the government. Hypothetically, if the cryptocurrency continues to grow in popularity people could start using less dollars or they could stop using dollars completely. The fact is that it would mean that big banks and the government will lose their control, they would lose their profits and they would lose their power. This is why they won’t be very receptive to the cryptocurrency movement. However, it’s unclear what they could do to fight cryptocurrencies and to what extent will it work. They might try to ban certain exchanges or create more regulations which is already why a lot of foreign exchange brokers don’t allow US clients. China is the perfect example because the Chinese government is worried about the rise in crypto currency so they announced that they will be trying to ban crypto currency exchanges.
- How to make money with cryptocurrency?
→ Make profit by trading or investing in cryptocurrency and bitcoin
To make money, someone can trade and invest in cryptocurrencies like bitcoin. However, there is no guarantee to make money when investing, it’s also very possible to lose money. Moreover, it’s important to understand all the local laws and regulations so people can know how to invest or if they shouldn’t take this risk.
Trading cryptocurrencies is in a sense like trading other currencies on the foreign exchange market. Someone would buy a cryptocurrency like Bitcoin and then would hope that its value goes up so he can sell it and make a profit.
→ Make profit by being a Bitcoin lender
The second thing someone can do to make money with cryptocurrencies is be the bank. Indeed, there are no big banks that control cryptocurrency or Bitcoin. However, there are businesses and people that rely on cryptocurrency as the currency of choice and they need access to more. So one solution to make profit is to be a Bitcoin lender. To do so, you have to find somebody who is looking for Bitcoin to fund their business. Then, they will pay you interest until that loan is paid off. Moreover, unlike most bank loans these Bitcoin loans tend to have a shorter term. They are typically between 6 months and 2 years long. Investors can benefit from this because they can make money by charging interest on the loan. The interest rates are usually quite high to cover the risk taken by investors.
A good way to do this lending would be by going through a lending platform. With this type of website, people can search their database for business owners that are looking for bitcoin loans. Then, investors can see what kind of money they are making, how big of a loan they want to take out, how much interest they want to pay and what they want to use this loan for. Then people can decide if they want to fund a portion of the loan or the whole project. So at the end they can invest as much as they want.
The subject is still debated: is cryptocurrency our future?