Have you been wondering what this “Bitcoin thing” is all about? Bitcoin is a cryptocurrency. And unless you've been living under a rock, you've likely heard of this lucrative, emerging sector of the financial marketplace.
Cryptocurrency, specifically Bitcoin, has multiplied or decimated the fortunes of those daring enough to invest in it.
And more recently it has earned a semi-conventional place in the financial world by becoming considered less of a fringe investment.
In February 2021, Tesla bought 1.5 billion in Bitcoin and announced that it would accept Bitcoin to purchase its products. Consequently, the price of Bitcoin skyrocketed.
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 show you how to make money with Bitcoin.
Crypto 101
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 maintained across a peer-to-peer computer network.
A peer-to-peer network means that the computers themselves act as servers for each other. In a peer-to-peer network, there is no need for a centralized server to access shared files or data.
Blockchain
Blockchain is a complex technology that is the backbone of cryptocurrencies such as Bitcoin. Its most important aspect 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.
Satoshi Nakamoto
Blockchain was first incorporated into Bitcoin by Satoshi Nakamoto. In 2008, Satoshi Nakamoto published a historic paper that ushered in the era of cryptocurrency. His identity 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
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
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.
Ethereum
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 store and trade cryptocurrencies—choosing which wallet and place to trade is the first step in learning to make money with Bitcoin.
Centralized Wallets & Exchanges
Coinbase is the most well-known crypto centralized exchange and 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.
Gemini is another centralized exchange and wallet option.
Finally, many new and old “brokerage ” firms are allowing you to trade crypto as well. The new brokerage shop Robinhood is a good example.
Decentralized Wallets & Exchanges
Wallets such as Metamask, Ledger, and Trezor all have their own advantages and disadvantages. Some are targeted at 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.
Learning how to make money with Bitcoin is a long, risky process of trial and error. However, the risks are balanced out by ample rewards. You can also use crypto to buy things, and some employers are willing to pay you with it.
For those still unsure how to enter the cryptocurrency marketplace, contacting a professional financial planner may be the best option.
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Joe DiSanto is the founder of Play Louder! He has built multi-million dollar businesses, produced critically acclaimed documentaries and an Emmy-winning TV show, invested millions in real estate, and semi-retired at age 43. Now, Joe serves as a Fractional CFO for several creative firms and is sharing a lifetime of fiscal know-how via Play Louder, an invaluable resource that helps individuals and business owners increase their net worth and plan better for their future.