What is Cryptocurrency?
The conversation I have a lot:
“Hey I wanna buy Bitcoin, how do I do that?”
Me: Do you have any idea what Cryptocurrency is or how it works?
Them: No.
Me: Then why are you investing in it?
Them: Because the price keeps going up and I want to make money.
Me: You have no idea what you're doing. Would you throw all your money at a stock you've never heard of cause some random person told you to? No. Do some research and find out what the deal is before blindly YOLOing your money.
As you can see, this is not a good way of investing. So let's go through some of the most popular questions so you can get a better understanding of this.
What is it?
Cryptocurrencies are a class of assets much like every other currency in the world, except entirely digital. It's private, decentralized, permissionless, and entirely virtual. It only exists as computer code on the blockchain.
But what does that mean?
Privacy - It's like cash, where the only people who know the transaction is occurring is you and the recipient. It's not totally anonymous, as your transactions are public, but the identity of the people transacting is private.
Decentralized - Where most countries have a central bank and government that handles monetary policy, such as issuing new currency, no single entity owns or handles the cryptocurrency. This prevents any one person or entity from messing up the economics or causing chaos, and is substantially better for security.
Permissionless - Much like cash, you are in control of your own finances. You don't need to rely on anyone else, and can do with it what you please without interference.
Isn't this stuff just used by criminals to buy drugs and launder money?
There are people doing that yes, but the vast majority of people are not. According to various researchers, the most common source of money laundering and illicit purchases is still the US Dollar.
Does this mean the US Government is going to ban it?
I don't know. They could. However, I am INCREDIBLY skeptical that they will. They could try, but they won't be successful. Much like prohibition, it would be near impossible to enforce as no one person owns all the Crypto or is responsible for it. They also can’t just go around and arrest all the people who own cryptocurrency, it would be impossible. It also just presents too much economic potential. The govt. knows that if they oppose it, all the companies setting up shop here are going to go overseas to places like Israel, EU, Russia, and China, that are more friendly to it. They won't take that risk.
Ok so if I buy this is the price going to go up?
I DON'T KNOW. Nobody in the world knows what's going to happen. It could lose 50% of its value tomorrow (although unlikely), or it could go up 100%. By investing in this you're taking a financial risk akin to investing in the stock market. I am not a financial advisor. Nothing said here is financial advice. I am NOT liable for losses incurred while investing. I make my decisions based on the information available to me, attempting to be as informed and possible, and you should as well.
So then why should I buy it?
Because it's an interesting piece of technology, with potential to radically change the world and our understanding of finance. It could go up 1000x, it could go to $0, or it could stay where it is. Read through the rest of this document, and you may start to see that this technology isn't going anywhere though.
Ok I'm in so what do I do?
Hold your horses,. Don't just invest in things you don't understand because you're eager and full of FOMO (fear of missing out). That's how you end up losing it all. Let's talk about the underlying technology first.