There is a lot of buzz in the press lately about cryptocurrencies. Bitcoin has taken the world by storm and its name has become synonymous with everything from overnight millionaires to illegal activities on the so-called Dark Web. But what is it? What’s a blockchain? Can you really “mine” currency?
In this article, I’m going to do my best to answer these questions and to provide an overview of cryptocurrencies in addition to some information to help you start investing.
First, a word of caution: I am not a financial advisor, nor do I play one on the Internet, Radio, TV or any other medium. I am a network engineer, by trade and I am approaching this topic from that point of view. I don’t own any stock more complex than my 401K and I know nothing about economies of scale or traditional investment strategies. The bottom line doesn’t invest anything anywhere that you are not willing and able to lose. Cryptocurrencies like Bitcoin and Ethereum are not regulated or backed by any bank or government. This is not necessarily a bad thing as I will explain later, but it does mean that all the risk rests on you.
There, now that the mandatory disclaimer is out of the way, let’s get to the interesting stuff.
What are cryptocurrencies?
A cryptocurrency is a general term that covers the range of available cryptocurrency coins. The word “coin” here means a virtual currency that exists only in computer systems, not physical coins. The most well-known coin is the mother of all cryptocurrencies Bitcoin. So what is Bitcoin?
Bitcoin is a worldwide cryptocurrency and digital payment system called the first decentralized digital currency since the system works without a central repository or single administrator. It was invented by an unknown programmer, or a group of programmers, under the name Satoshi Nakamoto and released as open-source software in 2009. The system is peer-to-peer, and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain.
So basically Bitcoin and it’s associated blockchain technology is a way of conducting financial transactions digitally and it provides a virtual paper trail to “prove” that a transaction occurred. For the non-technical reader, this is similar to SSL encryption on websites. You purchase something online from a website that is encrypted with public key encryption. You provide your credit card or PayPal information and the crypto algorithm on the website encrypts or scrambles the data so only your computer, phone, iPad, etc. and the website you’re doing business with can read the data. Bitcoin works like this as well, but it records every transaction in its blockchain. This means that in order to hack or alter a transaction, you would need to alter the first transaction and every transaction that came before it, which is mathematically impossible. This is both the beauty and terror of the system as there is no one person, government or corporation that can control, let alone shut down Bitcoin.
Why invest in cryptocurrencies?
The short answer is you could make a great deal of money. On September 26th, 2016 one BitCoin was valued at $605.19. On September 26th, 2017 that same coin is worth $3,922.80 at the time I’m writing this article. That means you would have earned $3,317.61 in one year. Try finding an interest rate of return like that on any traditional investment!
The other nice thing about investing in cryptocurrencies like Bitcoin and Ethereum is that you can buy fractions of coins instead of a whole coin. For example, you could buy as little as $10.00 of Bitcoin and still get into investing. The same goes for other cryptocurrencies as well.
What about mining?
When you hear someone talking about “mining” a cryptocurrency, what they are talking about is running specialized software and in some cases hardware to “mine” a new coin. The way cryptocurrencies are created is that mathematical problems must be solved by a computer to create or “mint” a new coin. When Bitcoin was first introduced in 2009, this could be done on standard desktop or server hardware. However, as time goes by and the cryptocurrency blockchain grows, the mathematical problems become more difficult to solve. For example, BitCoin can now only be mined by very specialized equipment that is cost prohibitive for your average citizen (even a well-funded one) to buy and operate at a profit. Consumption of electricity must also be taken into consideration when calculating the potential probability of mining a cryptocurrency.
It is still possible to mine Ethereum with traditional Graphics cards, such as Nvidia GPU’s. However, the price on desirable cards has been driven up by the demand of new miners minting new Etherum coins. If you live in an area with very cheap electricity such as the Pacific Northwest in the United States and can snag a good deal on some fast GPU’s, it is still possible to mine Ethereum. Hit me up in the comments if you would like more information.
So you’re sold on investing and want to get in the game?
If you’ve read this far, you’re probably interested in making an investment. The process can be annoying but is no more difficult than making a trade with a stockbroker. In the case of cryptocurrencies, in the United States, you have three main choices. Coinbase, Kraken, and Gemini. I’m going to cover Coinbase here because in my opinion, it is the easiest for newbies.
The first thing you must do is to establish a Coinbase account. They have an excellent referral program that will give both of us $10.00 in Bitcoin if you use the link below and invest $100 or more in any coin they process transactions in (currently Bitcoin, Ethereum, and Litecoin). You don’t have to, but free money all around is a good thing in my opinion. This is how I started investing and I can attest to the fact that they do pay both users. The cool thing is you’ll receive your own link to refer others and get the same rewards going forward.
You have to provide a mobile number that can receive text messages for mandatory two-step verification to set up the account. The process is that you log in with an email address/password and then you receive a text message with a one-time verification code each time you log in. Once you have an account, you have to add a payment source in Settings > Payment Methods > Add Payment Method.
You can use a bank account or credit card to buy coins, but you must go through the verification process where Coinbase makes two small deposits to your account, that you must view an verify through your bank or credit card. The process is straightforward and Coinbase will walk you through it, but be patient as during heavy transaction times it may take days for the verification deposits to show up. In my case it took over 7 days, so please don’t start the process until you’re committed and ready.
Once verified, you simply go to the Buy/Sell tab and choose the coin you want to buy, the amount in US Dollars and payment source to use. You will also be shown the transaction fees that Coinbase will collect upfront before you make a purchase. These are processing fees and are typically very low.
Once finished, you will be the proud owner of BitCoin, Ethereum or Litecoin and can either hold it to let it increase in value or you can use it to purchase goods and services from merchants that accept cryptocurrencies. You can also purchase different types of coins with coins you already own. For instance, buying BitCoin with Ethereum coins, etc.
Hopefully, this has been a nice primer for the world of cryptocurrency investing. As always, feel free to ask questions in the comments. Happy investing and good luck to all the future Internet Millionaires!