With the cryptocurrency investment by Tesla and PayPal, and many other commercial companies, cryptocurrency has been in the press and on our minds a lot this year. The average investor has a hard time understanding what cryptocurrency even is, let alone whether it’s a good investment or not. The big question for many recently has been, “Should I invest in cryptocurrency?” and then secondarily, “how to invest in cryptocurrency”!
So here is a beginners guide on cryptocurrency, and how to invest in it in 2021. Here you’ll find out how it works, and which is the most beginner friendly to invest in.
This post was written by our staff writer, Lindsey Smith.
What is Cryptocurrency?
In general, cryptocurrency is a currency made up of coins or tokens that takes place on a decentralized ledger.
Right, clear as mud…so let’s dive a little deeper and make that make some sort of sense.
How Paypal and Venmo Actually Work
The way cryptocurrency is intended to work is as a peer-to-peer transaction. If I were to Venmo you some money, or send it through PayPal, it doesn’t go straight from me to you, even though that’s how it appears to us. On the backend of these transactions, there is a third party company that handles the exchange.
- The selling of our sensitive information by those third party companies,
- the security and liability banks have because they have all of our money,
- and the instability of FIAT currency…
These are all good reasons as to why a decentralized currency is a needed move.
What you need to know right now is that there are a lot of downsides when you’re using a peer-to-peer system that relies heavily on different entities outside of our control.
What Is Cryptocurrency? The Detail…
According to bitcoin.org…
“Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.”
So, to sum it all up, here’s why some people are swearing by cryptocurrencies:
- Fast peer-to-peer transactions
- Worldwide payments
- Low processing fees
When you’re using cryptocurrency, you’ll get something called a “wallet address”. This is a long series of numbers and letters that you can use to send and receive money. It’s worldwide, fast, and has low processing fees.
It’s verified by people on the blockchain (more about that in a minute) which makes it secure, and you don’t have to worry about the transaction being reversed or hacked.
So, now we know what cryptocurrency is and a bit of how it works, but how about the rest of the stuff? Let’s talk about the transaction process, and something called the blockchain.
What is The Blockchain? And How Does Cryptocurrency Work?
It can be a really confusing topic, but at its core, the blockchain is just a database.
When a new transaction is entered (let’s say…you send money to your friend in Japan) the transaction is transmitted to a network of peer-to-peer computers scattered across the world. These are the computers that will be mining this type of data so that the transactions go through.
Next, the network of computers solves equations to confirm the validity of the transaction. This is the secure part.
Once confirmed to be legitimate (by more than one source), transactions are clustered together into blocks. These blocks are then chained together, creating a long history of all transactions that are permanent, and then the transaction is complete.
So, confirmed transactions become a block, strung together becomes a chain, blockchain. The blockchain is also a public ledger, where you’re able to see every single transaction worldwide. Public data, open-source, everyone participates.
How to Invest in Cryptocurrency in 2021
Directly investing in cryptocurrency is just as easy as any other online investment platform. And it is the best way to invest in cryptocurrency (more on this later).
However, there are two other ways you can buy cryptocurrency as an investment.
Three Ways to Invest in Cryptocurrency
In total, there are really three ways to invest in cryptocurrency.
1) Third Party Companies
The first is to invest in third party companies where you’ll technically be a part owner of the crypto, but you can’t actually withdraw the original asset. You are making money on the gains and losses of whatever coin or token you bought into.
2) Grayscale Bitcoin Trust (GBTC)
The second is investing in Grayscale Bitcoin Trust (GBTC) on the stock market. Each share of the stock is backed by Bitcoin that Grayscale actually owns. This is a nice way for traditional investors to get into the world of cryptocurrency and see its potential.
3) Direct Investing
Owning your own coins or tokens is important, and that’s why directly investing in cryptocurrency is the best way (in my opinion). You own it, and it’s not sitting in the hands of others.
The two easiest places to get started with buying cryptocurrency is Binance US and Coinbase. You can purchase it with your credit card, or with your linked bank account.
How to Invest in Cryptocurrency With Coinbase
It’s always a good idea to be using at least two different platforms to invest in cryptocurrency in case the server goes down on one of them, which happens in both the stock market and the crypto world.
Let’s use Coinbase as an example for your platform. It’s a secure, popular platform that has funding by investors in Silicon Valley. There are no purchase minimums, you can invest any amount you want, and it has options for setting up a monthly set-it-and-forget-it recurring payment.
- Set up an account on Coinbase.com
- Link your bank account to your Coinbase account
- Click the “buy” tab on the right hand menu
- Enter the dollar amount you would like to invest
- Click “preview buy”. This will show you how much of a coin or token you’re able to buy with your investment amount. With coins like Bitcoin, it will be a portion of a coin, with Altcoins, it may be several coins or tokens. It will also show you what the current price is of the cryptocurrency you’re buying, and the fee you’ll pay for the transaction.
- Click “buy now”. Your transaction has now been submitted to the network for authentication.
Although Coinbase itself is a secure platform, they do have a feature where you can activate a new security key. You’ll purchase the key, which is a USB stick with a button on it.
Once you login into your account, you push the button on your key. This is another form of security, much like 2-factor authentication on your phone, except you physically have to push the button. If a hacker were to get all of your information; they know your wallet address and get into your cryptocurrency, they couldn’t login at all without the physical key.
If you want to take the next layer of precaution you can also purchase cold storage.
When you buy cryptocurrency through Coinbase or Binance, you’re given a hot wallet – that is online storage. Cold storage allows you to secure your cryptocurrency off the platform. The Ledger NanoX is the most popular one to buy, and it offers you peace of mind in protecting your investment.
Related: Everyday Millionaires
What Are The Best Cryptocurrencies to Buy For Beginners?
There are literally thousands of coins and tokens on the market, and more being added every day. Some of them are great, and some are really really bad.
So where should you start buying cryptocurrency as a beginner?
Here are the two best choices to get into the cryptocurrency pool.
Bitcoin is the oldest cryptocurrency, debuting in the ripe old year of 2009. In the first year, you could buy a whole Bitcoin for a fraction of a penny. At the time of writing this article, it trades at $49,601 per Bitcoin.
But before we get into investing, we should talk a little more about what Bitcoin is.
Bitcoin is more of an asset than a currency
As we discussed above, cryptocurrency is a currency, like money, that is decentralized, so not owned by any one entity. Except somewhere along the way people figured out that Bitcoin works best when you hold it, not spend it. So it has evolved into an asset, like gold, rather than a currency, like cash. A more accurate description of Bitcoin is that it’s a digital asset.
What is Bitcoin Mining?
Unlike other assets, we know there is a finite supply of Bitcoin. There will only ever be 21 million in circulation. Right now, there are 18.6 million. We won’t reach 21 million until the year 2140. New coins come into the supply via Bitcoin mining, which are specially designed computers that do hard math problems to earn fractions of Bitcoins.
If you’re new to investing in Bitcoin, you’ve missed the boat on the other-worldly gains, however just in the last 3 years it’s up 421%, so it still offers better investment opportunities than anything else out there.
Is it safe to invest in Bitcoin?
Bitcoin is one of the safest cryptocurrencies to invest in.
Thus far, it follows a four year cycle, thanks to Bitcoin Halving.
What is Bitcoin Halving?
Bitcoin Halving is an event where the amount of Bitcoin produced through mining gets cut in half.
Every four years there is a halving event, and following these events the value increases.
About a year and a half after that, the price starts dropping, people start selling, and the price typically drops. This is a great time to watch and invest, but really investing at any point in time will be key, in fact Bloomberg predicted Bitcoin will reach $100,000 by the end of 2021.
Why Bitcoin is such a popular investment
And when you figure that everyone who has ever invested in Bitcoin and held it is at a profit, you can see why it’s a favorite.
If you’re looking at Bitcoin as a long term investment, not just a short term play, right now is still very early in its life, and it is definitely a good time to invest.
A decentralized software platform modelled after Bitcoin, Ethereum is another great option for investing in cryptocurrency.
How is Ethereum different from Bitcoin?
Ethereum uses smart contracts and “dapps” (decentralized applications) to be built and run without any interference. Ethereum designed their system with the intention of allowing anyone to access financial products, regardless of ethnicity, faith, or nationality. For those in countries without financial infrastructure, this means access to bank accounts, loans, insurance and other financial products.
What’s the value of Ethereum?
Ether is the name of the token and it is the second-largest digital currency after Bitcoin. This also makes it a relatively safe investment for beginners, though I’ve found Bitcoin to be more straightforward.
At the time of writing this article, the Ethereum value was $3,317 per coin.
What does it mean to “stake” with Ethereum?
Ethereum is moving from proof-of-work, like Bitcoin mining, to proof-of-stake, meaning you will be able to “stake” your ether to the network. This secures the network and processes the transactions that are occurring, and when you stake, you’ll be rewarded Ether, much like an interest account. So with Ethereum, you can both invest and stake in the network.
And…Should You Invest in Cryptocurrency?
And this, of course, is the BIG question. SHOULD you invest in cryptocurrency?
I wouldn’t advise investing everything you have into cryptocurrency, because it’s still in early stages and much of its success and stability depends upon its expansion, but I would say it’s okay to put a small amount of your net worth into crypto.
Why invest in cryptocurrency?
Because based on its growth and overall acceptance in today’s economy thus far, it’s one of the most valuable investments you can make. We are still in the early stages of development for cryptocurrency, so now is likely still a good time to get started.
Still on the Fence With Cryptocurrency?
Are you still on the fence when it comes to investing with crypto?
Just like any investment, the value of Bitcoin or Ethereum could sharply drop tomorrow. Or, it could continue to rise as others predict it will. Nobody really knows!
If you’re still not a fan of cryptocurrency, that’s okay. There are still many other investments where you can load up your excess money and experience a healthy return. Earning 10% in the market is still a great return on your investment! And if you can do it consistently, you’ll almost certainly be a millionaire in retirement!
How about you? Are you ready to invest in cryptocurrency? Or does it still seem to speculative for you?
[Derek’s take: Do I currently invest in cryptocurrency? No, I don’t. But, for people that do, I don’t think they’re crazy. There’s definitely something here. The value of crypto will probably continue to go up, or, at the very least, it will become more of a means of exchange than it is today.
So is it foolish to invest in crypto?
Could you lose a lot of money in a short time?
But, as long as you’re investing only a small portion of your net worth in cryptocurrency, you can likely afford to take the risk. If you lose it all, your life doesn’t change. But, if it goes up 500%, you’re sitting pretty.
The decision is yours! What will you do?]
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.