Tips for Understanding Cryptocurrency
Cryptocurrency is a tough subject, and if you didn’t study computer science in school, chances are you are a little lost when it comes to what’s what in the blockchain world. This can make it difficult to adopt cryptocurrency or make a wise investment.
As cryptocurrency becomes more popular, it’s more and more important that you understand what blockchain is and how it functions. Below are some tips for helping you understand the cryptocurrency world.
1. To Start: What is Cryptocurrency?
It’s important to start at the beginning, so here we are. Cryptocurrency is a digital form of money, and unlike real money, where you own a piece of paper issued by the government, with cryptocurrency, you own a piece of technology.
It can be difficult to grasp the idea of money you can’t touch. But know that you already have, in a way. Think about it, today, most people pay with credit cards or debit cards. This type of money is just numbers on a screen. All someone has to do is go delete the numbers on the screen, and your “money” is gone.
Cryptocurrency isn’t like this. While it does only exist on a screen, it’s decentralized (for the most part, more on this later), which means that it exists in more than one place. So even if one computer was hacked and the piece of technology you own deleted, there would still be a record of your money on another computer. Therefore your balance can never just be deleted.
2. Know How Cryptocurrencies are Different From One Another
There are currently hundreds of cryptocurrencies on the market. What makes them different is the technology that is behind them. Remember, cryptocurrencies are backed by software, but they are not all backed by the same software.
Think of it this way, the US Dollar and the British Pound are both money. But they are not backed by the same thing. The US Dollar is backed by the US government, while the British Pound is backed by the British government.
Therefore the difference between Bitcoin and Ethereum is the software that backs the program. This software has many aspects, such as the consensus methods used, as well as other coding additions which make it useful. For example, Ethereum can be used to run decentralized applications, while Bitcoin is a simple store of value.
Now getting deep into how cryptocurrencies are different is a degree in and of itself, so we won’t get too deep, but know that you need to know the basics of what makes one cryptocurrency different from another.
The number one piece of advice for investors in the cryptocurrency world is to know how cryptocurrencies are different. These differences can make all the difference between a good investment and a bad one, as the software behind the cryptocurrency dictates how it will function as well as its purpose in the world.
3. Know Centralized Versus Decentralized
Currently, the most widely accepted currencies are issued by the government of a single country. Because these currencies are issued by one entity, they are centralized. Any currency that is issued by multiple entities, such as Bitcoin, is decentralized. Decentralized currencies can’t be affected by a single person.
In the cryptocurrency world, as we mentioned above, there are both centralized and decentralized projects. You need to know how to tell which projects are which. This is part of protecting yourself from scams and ensuring you truly know what you are buying into.
4. Understand What a Cryptocurrency Does
While we don’t expect you to learn the inner workings of every cryptocurrency, you need to know the basics of what the cryptocurrency you want to invest in does. Does it allow users to run applications like Ethereum does? Is it a store of value like Bitcoin is? Does it provide value to another project?
You need to be able to explain to someone else, in basic terms, what your cryptocurrency does. If you can’t explain it or don’t understand what it does, know that it could be a scam coin and that it probably isn’t the project for you. Believe it or not, there are some common projects out there that have no purpose that people regularly invest in because they just don’t know.
5. Are Blockchain and Cryptocurrency Different Things?
Essentially, no, but in a way, yes. Blockchain is the technology that cryptocurrency is built on, but it typically takes a cryptocurrency to run a blockchain. Therefore neither exists without the other, but they are separate entities.
While this isn’t too important when it comes to investing in cryptocurrency, it can help clear up a lot of confusion in your understanding of the topic.
6. Know About the Truth Behind Cryptocurrency “Mining”
Many scams involving cryptocurrency have to do with the word “mining.” When people hear this word, they think of mining precious metals and of immediate riches. Know that this is not the case.
When the word mining is used in cryptocurrency, it is used only in the terms of the creation of a cryptocurrency. There are no men with picks and no way to get rich quickly. Mining in cryptocurrency is the running of the software on a computer called a node, which creates the cryptocurrency.
Most cryptocurrency “mining” runs at a specified rate. This means that more miners doesn’t mean more riches. Also, becoming a cryptocurrency miner doesn’t guarantee you will make any money. Just like real mining, it is expensive to start mining cryptocurrency, and it is long, hard work. You may also walk away with nothing.
Unless you are a company in a country where electricity is cheap, never become involved in a mining scheme, as many of these are scams. If the word mining is in their pitch to you, run.
7. Know that Cryptocurrency is Risky (Know The Laws of Supply and Demand)
No matter how much you know or how much research you do, cryptocurrency is volatile. This is because it is controlled solely by the laws of supply and demand and not by a government. If people want to buy it, the price will rise. If no one wants to buy it, the price will fall.
We recommend only investing in cryptocurrency projects which are already large as then you know that there is demand. This doesn’t make it not risky, just less risky than projects which don’t yet have a following.
8. Know Cryptocurrency is an Investment
Even if you never learn the consensus mechanism behind the coin you invest in or the creators of said coin, know that cryptocurrency isn’t a get-rich-quick scheme. Any cryptocurrency that is promoted to you as a get-rich-quick scheme is a cleverly disguised scam. Cryptocurrency is an investment, and if you truly want to become involved, it’s something that may take years to come to fruition.
We hope that by now you have a basic understanding of what cryptocurrency is and what to look for before you invest. Check out other articles on our blog at MintDice.com to learn even more about cryptocurrency.
This article was originally published on the MintDice Blog.