Unless you have been living under a rock, you have heard of cryptocurrency. This lucrative, emerging sector of the financial marketplace has occupied headlines and lined investors’ pockets.
Cryptocurrency, specifically bitcoin, has multiplied or decimated the fortunes of those avant-garde enough to invest in it. More recently it has earned a semi-conventional place in the financial world by becoming considered less of a fringe investment.
But what is cryptocurrency? How is it traded and how can you as an individual investor utilize it? This guide will tell you all this and also how to make money with bitcoin.
Cryptocurrency is a label given to many different forms of digital currency whose transactions are verified and recorded by a decentralized system that operates by solving a series of encrypted codes. This decentralized system is usually blockchain.
Crypto differs from other areas of the financial market because it lacks a centralized authority, such as the Federal Reserve, to regulate it. Cryptocurrency is, in effect, a self-regulating system that requires no outside oversight.
Most cryptocurrencies, including bitcoin, use blockchain to establish a ledger of encrypted transactions that are maintained across a peer-to-peer computer network.
A peer-to-peer network means that the computers themselves act as a server for each other. In a peer-to-peer network, there is no need for a centralized server to access shared files or data.
Blockchain is a relatively complicated technology that is the backbone of cryptocurrencies such as bitcoin. The most important aspect of blockchain is that it serves as a veritable unforgeable transaction ledger.
Each new transaction recorded in a blockchain depends on the previous transactions to be written correctly. No previous records can be altered and each new record must build off the last record.
Understanding blockchain is the first step in understanding how cryptocurrency works in general. Creating a blockchain takes multiple computers, a lot of processing power, and a huge number of encrypted transactions.
Blockchain was first incorporated into bitcoin by Satoshi Nakamoto. In 2008 Satoshi Nakamoto published a historic paper that ushered in the era of cryptocurrency. Satoshi Nakamoto’s identity still remains shrouded in secrecy.
Some say he is an individual, possibly a male of Japanese descent. Others theorize that he is an alias for an organization or group of people. Whoever he is, he is considered the founder of applied blockchain and as a result, cryptocurrency.
Types of Cryptocurrency
Now that you have a basic understanding of how cryptocurrency works, learning about the different forms of cryptocurrency on the market is the next step in profiting from it.
It seems that every day new micro-cryptocurrencies are popping up. We will only focus on the major players that are used most frequently and are considered the most valuable.
The big three of crypto are bitcoin, litecoin, and ethereum. Although there are close to 7000 cryptocurrencies on the market today, none rival the big three in value or frequency of use.
Bitcoin is the undisputed king of crypto. Created by Satoshi Nakamoto in a proof-of-concept cryptography mailing list in 2009, bitcoin soon gained unfathomable popularity amongst the fringe investment community.
Since its first transaction on January 12th, 2009 bitcoin’s price and its resulting popularity have skyrocketed. Bitcoin is the cryptocurrency that has seen it all. Its price has fluctuated immensely and with volatility.
It came a long way from its humble beginnings in which 10,000 bitcoins were used to purchase two Papa John’s pizzas to reach its all-time high of $19,783 for one coin in December 2017. As of December 2020, the average price per coin is roughly $18,000.
Litecoin is the significantly less valuable cousin of bitcoin. It is still based on the principles of blockchain, but its total market cap is 45 times smaller than bitcoin.
For investment purposes, Litecoin’s smaller value and faster transaction speeds are what is most important to pay attention to. As of December 2020, the average price per coin is roughly $70.
Like bitcoin, ethereum utilized blockchain to establish a ledger of transactions stored on a decentralized payment network. Unlike bitcoin, ethereum also used blockchain to store computer code that enables decentralized applications and financial contracts.
Ethereum possesses the middle price point of the three. As of December 2020, the average value per coin is roughly $550.
How to Make Money With Bitcoin
The basic laws of financial trading still ring true here: buy low and sell high. From there it gets a bit more complicated. Your first step in trading crypto is to find yourself a wallet.
A wallet is an exchange or place where you can trade cryptocurrencies. Once purchased, you can store crypto offline in hard storage such as a flash drive, a computer, or an external hard-drive.
You can also leave it stored in the wallet. Choosing which wallet to use is the first step in learning how to make money with bitcoin.
Types of Wallets
Coinbase.com is the most well-known crypto wallet. After creating an account, you can link a debit card or bank account to Coinbase which allows you to convert hard currency into crypto and vice versa.
Coinbase Pro is another crypto wallet option. It boasts lower transaction fees than its predecessor Coinbase and has a few other notable interface differences.
There are many other wallets out there besides the two Coinbase models. Exodus markets itself as the “best wallet for beginners.” Electrum boasts that it is the “best wallet for advanced users”.
Wallets such as Mycelium, Ledger Nano X, Trezor Model T, and Ledger Nano S all have their own sets of positives and disadvantages. Some are targeted for mobile users or high volume traders. Do some research and see which fits your needs!
Striking Crypto Gold
After you have selected your wallet, you now must pay close attention to the price fluctuations of your targeted cryptocurrencies. This is an art as well as a science.
The risk is even more inherent here because of the high level of volatility for crypto prices and the lack of centralized authority to regulate them.
It is a long risky process of trial and error to learn how to make money with bitcoin. The risks however are balanced out with ample rewards. You can also use crypto to buy things and some employers are willing to pay you with it.
For those still unsure as to how to enter the cryptocurrency marketplace, contacting a professional financial planner may be your best option.