A Beginner’s Guide to Cryptocurrency
Cryptocurrency: mention of it is everywhere these days, but what is it really? Whether you’re looking to get involved or you’re just curious to learn more about what cryptocurrency is, we’ve got some answers for you.
What is cryptocurrency?
Most traditional forms of currency are fiat currencies, meaning they’re regulated by a government. Having a fiat form of currency gives the central bank of any country the opportunity to determine how much money is printed and circulated to the population, giving them some level of control over the value of the currency. Both the Canadian dollar and the US dollar are examples of fiat currencies.
On the other end of the spectrum, cryptocurrency is a decentralized, digital form of currency that’s completely unregulated by any government or central bank. There’s no large institution that controls the supply or movement of cryptocurrency: it’s instead run on a peer-to-peer computer system called a blockchain.
Though cryptocurrencies aren’t yet recognized as official in many places, they are legal to hold, buy and sell in most countries and the number of merchants and institutions that accept them as valid is growing.
What is a blockchain?
Blockchain technology is an essential piece of the cryptocurrency puzzle: without it, crypto wouldn’t be able to exist as it does today. In simplest terms, a blockchain is a way of recording information so that the information can’t be changed, altered or destroyed. Its use is being explored in numerous different industries (such as improving the way medical records are stored), but it’s most often associated with its use in cryptocurrency.
For a blockchain to work, it requires a large network of computer servers to be connected to one another. When there’s new information to be added to the blockchain, the information is duplicated and sent to all the servers on the network in packages known as blocks. New blocks are connected to those that came before them, like links on a chain, going all the way back to the first block ever created.
Because all the servers on the network receive the same blocks, the history of the blockchain can’t be altered. If one server on the network attempted to make an inaccurate change, the mistake would be exposed through its connection to all the other blocks on the blockchain.
In regards to cryptocurrency, a blockchain serves the purpose of cataloguing every transaction ever conducted using that currency. For example, if you were to view the Bitcoin blockchain, you’d be able to view every Bitcoin transaction ever made and trace it all the way back to the first Bitcoin transaction ever. This makes the Bitcoin blockchain secure and transparent, serving as an open accounting ledger for the entire currency.
What are the different kinds of cryptocurrency?
There are over 10,000 different types of cryptocurrency, known as coins.
The most popular coin, by far, is Bitcoin. Bitcoin was the first ever cryptocurrency, introduced to the world in 2009 by a person or group that refers to themselves as Satoshi Nakamoto. There is a great deal of mystery surrounding Nakamoto’s true identity, and it’s estimated through the entries on Bitcoin’s blockchain that this individual or group holds a number of Bitcoins worth multiple billion dollars in today’s value. Those coins, however, have interestingly never been spent or traded.
Beyond Bitcoin, there are a number of other types of coins available to purchase, such as Ethereum, Cardano and Dogecoin. Each coin has slightly different characteristics, so if you’re serious about getting involved, it’s worth doing some reading on what makes each coin special.
How do I store my cryptocurrency?
In the same way you have a wallet for your cash and credit cards, you need a special kind of digital wallet to store your cryptocurrency.
There are two main ways of having a “wallet” when it comes to cryptocurrency. You can either be in possession of a non-custodial wallet, where you are the sole owner, or you may have secure and private access to a custodial wallet.
A non-custodial wallet is one where the user owns their own private keys, and a private key is like the passcode into a bank. For this reason, you may hear the term “be your own bank” when it comes to holding cryptocurrency, as a user who has their own non-custodial wallet is the sole owner of that wallet and its funds, and is wholly responsible for the security and safe keeping of their crypto.
In contrast, a custodial wallet is one in which the user puts their trust in a third party (similar to a bank) to keep their private key and all their funds safe and secure.
What’s involved in buying and selling cryptocurrency?
When it comes to buying cryptocurrency, you’ll want to pick a reputable crypto exchange to buy and sell coins on. This may be the same company you choose to hold your custodial wallet with. There are plenty of well-known options, like Coinbase or Robinhood, that feature tons of helpful resources for beginners.
Because crypto is decentralized, you can purchase it directly from individuals too, but this is only recommended if you have an extremely trustworthy relationship with the seller/buyer. Once your coins have been transferred away from you, it’s next to impossible to get them back if the other person doesn’t uphold their end of bargain.
What are the risks involved?
When it comes to investing in cryptocurrency, the old investor’s adage is true: buyer beware! The major rise in value in many forms of crypto has encouraged lots of people to buy as many coins as they can. This is presumably because people want to get in the game before the value of various coins rises any higher, potentially losing out on any major increases in value.
However, it is an unavoidable truth that the value of cryptocurrencies are very volatile. Crypto has been described by wonder-investor Warren Buffet as being “rat poison squared”, and he has compared cryptocurrencies to the tulip bulb trading craze of the early 1900’s.
Beyond the risk of market fluctuations, it’s critical to be wary of ways that a malicious third party might scam you or ‘hack’ their way into your wallet or crypto exchange account. Because crypto is unregulated by large institutions, deposits in crypto aren’t insured: if your wallet gets accessed by a malicious third party and your coins are stolen, you won’t be likely to get your money back. That’s why it’s critical to use security protocols like two-factor authentication, anti-virus software, VPN software and more to protect your wallet wherever possible.
Another risk created by the decentralized nature of crypto is the possibility of losing your investment if you lose your private key. When you open a cryptocurrency wallet, you receive two keys: a public key and a private key. The public key is like an email address and is how others send you coins. The private key, on the other hand, is what you need to prove yourself to be the owner of the wallet, allowing you to authorize the use of your coins and sign off on transactions to be added to the blockchain.
Private keys tend to be extremely long, multi-digit codes, and can’t be easily remembered by the average person. If you lose your private key, there’s no “Forgot Password?” button you can turn to as you would with online banking. Your investment may be permanently lost if you can’t recover your private key, so keeping it safe and secure is essential!
Our Recommendations
If you’re serious about getting involved in cryptocurrency, we have a few suggestions for you.
For one, buying cryptocurrency is more like buying securities on the stock market than going to the bank to pick up some US dollars before a trip. As such, you need to have some money put aside in an emergency fund before you buy a large amount of crypto. If you have a pool of liquid cash to turn to in the event you experience a financial emergency, you won’t face a situation where you need to sell your coins at a lower value than you purchased them for. An emergency fund is essential for playing the long game with any investment!
💡 Saving with QUBER is an excellent way to build your emergency fund. Even if you’re not going to purchase any cryptocurrency any time soon, having an emergency fund is a non-negotiable! If you’re interested in getting started, you can download QUBER by clicking here.
If you do invest in a large amount of cryptocurrency, remember that it should be accounted for in the same way you would for your other assets. That means, don’t forget to include it in your estate! Our friends at Willful recently did a survey that found that 69% of Canadians were incorrect or unsure about what would happen to your cryptocurrency when you pass away. If accounted for correctly (meaning your private key would have to be recoverable by your executor), your crypto can be passed on to your loved ones just as other assets like cash or stocks can be.
Finally, if you are interested in getting involved with cryptocurrency, don’t let fear keep you on the sidelines! We spoke with Ulf Lonegren, co-host of cryptocurrency podcast Show Me The Crypto, and he had some great advice for crypto beginners:
“Cryptocurrency is a complicated subject. The creation of Bitcoin and blockchain technology has caused a paradigm shift in how people think about money, currency, and personal banking. If you’re new to the space, take baby steps and do your own research before you jump in, and never invest more than you can afford to lose. It can be intimidating, but once you start learning more about crypto and try your hand at some investments, you’ll likely be hooked!”
