Decrypting cryptocurrency in 5 minutes
Highly volatile. High risk and reward. Invest money you can lose.
Unless you’ve been living under a rock for the past year or two, you’ve probably heard of Bitcoin.
2017 was the year of cryptocurrencies, a coming out party for Bitcoin and many other cryptocurrencies, also known as altcoins. Initially considered a pipe-dream, cryptocurrency has made a few millionaires and quite a few paupers out of the “crazy” folks who invested in it. To be honest, a majority of those folks are millennials playing true to their reputation of being early-adopters and risk-takers.
So, what is cryptocurrency? Why is everyone going gaga over it? Can you make money from it? We attempt to answer some of these questions here.
The state of traditional currency
Traditional currency is issued by the government and managed by banks. The government issues it, controls its value, and works to prevent counterfeiting. The banks maintain a centralized log of transactions so the same buy or sell action is not duplicated. After all, you wouldn’t want someone to pay you with money they’d already paid someone else with.
Though it is considered safe and stable, traditional currency is exposed to macroeconomic risks such as the issuing government’s monetary policy. Case in point, consider how the value of the Euro was negatively affected by the Greek debt crisis, or the devaluation of the Russian Ruble in the late nineties.
However, traditional currency is still the primary medium of exchange across the world. And we pay transaction fees to use it because banks maintain that central ledger of transactions to avoid duplication.
Enter cryptocurrency and the blockchain
Cryptocurrencies are mathematically generated tokens by computers in a network executing difficult number-crunching tasks, a procedure known as ‘mining’. These currencies do not need a government’s approval to be created. These tokens can then be used as a medium of exchange for goods and services.
Blockchain removes the financial middleman, the banks, from transactions. The blockchain protocol is the basis for a public decentralized ledger that records all cryptocurrency transactions, and allows transactions to be settled in minutes. Each transaction is verified and validated, resulting in a ledger (or log) of these transactions that is public and transparent.
This decentralized ledger is maintained by a network of ‘miners’ — users with computers that validate each transaction. The miners earn a reward for helping maintain the distributed ledger, usually in the form of a few tokens.
A world of coins — Bitcoin and Altcoins
Bitcoin was the first major cryptocurrency, created in 2009 by an unknown individual using the alias Satoshi Nakamoto. Today, Bitcoin is the biggest cryptocurrency by market capitalization, but there are a thousand newer entrants in the market — collectively known as altcoins. Ethereum, Ripple, Litecoin, Cardano, Neo, Waves, Stellar, Dash, Verge, and so on — the list of altcoins is an ever growing one.
The best traders will tell you to buy and hodl (cryptocurrency enthusiast slang for hold) when the market is down, and sell a long time later when the market is up. The newer (and smaller) cryptocurrencies have more fluctuations in their value, leading to higher profits or losses.
All trading happens on cryptocurrency exchanges that allow you to pay in fiat currency to buy and trade various cryptocurrencies. There are dozens of such exchanges all over the globe, with Bitfinex, Bittrex, Cex.io, Coinbase, Kraken, and Poloniex logging the highest volumes of daily trading.
Everyone wants to make money!
Cryptocurrencies are highly volatile, gaining and losing value at the drop of a hat. This leads to a high risk and high reward market, with returns as high as 1000x your investment (and higher!) within a year.
Here’s how profitable investing in cryptocurrencies can be:
- If you’d invested $100 to buy Bitcoins in January 2017, it’d be worth about $1000 now.
- If you’d invested $100 to buy Ethereum in January 2017, it’d be worth about $8100 now.
- If you’d invested $100 to buy Ripple in January 2017, it’d be worth about $14000 now.
And here’s how risky and volatile it can be:
- If you’d invested $100 to buy Bitcoins in December 2017, it’d be worth about $50 now.
- If you’d invested $100 to buy Ethereum in December 2017, it’d be worth about $114 now.
- If you’d invested $100 to buy Ripple in December 2017, it’d be worth about $124 now.
So, you can make or lose money, a lot of it, very fast. No wonder everyone wants in!
After a year of research, and some mixed results from my cryptocurrency investments, all I can say is this…
Cryptocurrencies are highly volatile. Invest or trade at your own risk with money you can afford to lose.