Did you know that we are currently passing through one of the most interesting times in monetary history? When you hear the word “crypto” you might think of computer nerds, internet funny money or get rich quick schemes. However it is no overstatement to say that the invention of cryptocurrency is one of the most important innovations in human history, and its impact on the world is likely to be similar to that of the advent of email or the internet itself.
You are probably already thinking that such a claim is incredibly far-fetched, but in the early days of the internet many people thought the internet was nothing more than passing fad and would have no meaningful impact on people’s lives.
Just as we have seen the internet create the foundation for thousands of incredible online services ranging from movie streaming to social networks, the invention of cryptocurrency creates the foundation for a vast array of future financial services and more.
To truly understand the importance of cryptocurrencies you need to learn a bit about how money works. Economists and those in financial services like to make it sound complicated, but it isn’t, and once you understand the key principles of money, you’ll never see things the same way again.
To answer this question, we need to guide you through some of the basic principles of sound money. It may seem a little irrelevant or boring, but understanding a few basic principles will help you hugely in navigating the world of crypto and making good investment decisions. Skipping this stage and just buying some crypto that someone recommended to you in the hope of making a quick profit is generally speaking not a great idea and often actually ends up with you making a loss. If you understand why cryptocurrencies are so important you will be in a much stronger position to identify and research crypto opportunities that are more likely to be good investments.
If you understand why cryptocurrencies are so important you will be in a much stronger position to make good investment decisions.
Cryptocurrencies, or cryptos for short, solve one of the hardest and oldest problems in the history of finance, known as the Byzantine General’s Problem. In summary, the problem asks how can a number of individuals who are separated by distance reach a consensus on a decision without a centralised authority, such as a government or a bank instructing them? It is called the Byzantine General’s problem as it originates in military strategy and is described very well in the short video below.
In finance we rely heavily upon centralised authorities to create trust between individuals. If I want to send you some money I would contact my bank and give them your account details and the amount to be sent. The bank would then transfer the money from my account to your account. It would do this by making an adjustment in its ledger, which is simply a record of all the money transfers. Even though I don’t know you and can’t necessarily trust you, I can trust the bank to make the transfer. The bank is acting as a trusted centralised authority to allow us to transact with each other.
Now imagine I want to send you some money, but without using a bank. Well, I could meet you face to face and give you cash, but often that is impractical. We might be in completely different countries, or the amount of money I need to transfer might be so large that it would fill several suitcases with bank notes.
It would be much easier if I could send you the money electronically, just like I do with online banking. However, I want to send you the money without using a bank. To do this there needs to be a ledger somewhere outside of the banking system that reduces my balance by the amount to be sent and increases your balance by the same amount. Even though I don’t know if I can trust you we need to be able to agree on the same ledger. If we increase your balance on your version of the ledger but not on my version then we have a problem as the ledgers no longer match. This would mean that for future transactions it would be difficult to know which ledger is correct.
This is where cryptocurrencies come in. Many computer engineers have attempted to solve this problem for decades, but the invention Bitcoin was the first time the problem was truly resolved. Bitcoin absolutely guarantees that your version of the ledger is the same as my version of the ledger, and the same as all the other copies of the ledger on thousands of other computers. It does this through some very clever cryptographic techniques, which are ways of digitally signing transactions so that other parties know that they can be trusted. That’s why Bitcoin is called a cryptocurrency.
At their simplest, cryptocurrencies allow you to store and send money anywhere in the world without relying upon a centralised authority such as a bank.
The version of the ledger that all the computers agree upon is stored in a special type of database called a blockchain. The blockchain is literally a chain of connected blocks of data. Each block contains thousands of transactions, and every 10 minutes, a new block is added to the chain. Every time a new block gets added, it gets harder and harder for someone who may want maliciously edit historic transactions to do so. In fact, even the world's most powerful computer would be incapable of doing so.
Bitcoin ensures that there is always consensus on a ledger that records how much money each person in the bitcoin network has. It maintains this ledger even though all the people using the Bitcoin network don’t know each other and can’t trust each other. Before the invention of Bitcoin, the only way this could be achieved was through a third-party centralised authority such as a bank or a government.
If you want to learn more about money, how it works and the problems it creates, then it is really worth watching the excellent video series by Mike Maloney on the Hidden Secrets of Money. One of the most important videos from this series is provided below. It is hard to overstate just how important it is to understand the principles set out in this video as it succinctly explains why politicians and banks act the way they do and how it massively affects your personal finances.
Now you might be thinking “well all that crypto stuff is very clever but I like using my bank and never really have a problem with it”.
It is true that banks allow us to store our money somewhere and help us send money to each other. They allow commerce to take place and act as an intermediary between parties that don’t know each other and can’t necessarily trust each other.
However, relying on a centralised authority such as a bank to manage the ledger does create a problem. How can we trust them to keep the ledger accurate and not manipulate it to their own advantage? In reality, the centralised authority that we are talking about it is a combination of banks, central banks and governments. Each of these parties is involved in managing and controlling this ledger and each has its own agenda and motives to adjust the ledger to suit its needs.
To get elected, governments always over-promise what they are going to deliver. They promise more spending on public services and benefits. Governments also have a tendency to get involved in wars, which can be very expensive. All this money has to come from somewhere. Obviously a government's main source of income is tax, but in the vast majority of countries, the amount of money that the government receives from taxation is significantly less than the money it spends. This is called deficit spending and is the reason why almost all countries have huge national debts.
When the government needs to spend money but has run out of money collected via taxation then it has to borrow the outstanding amount. Where does it borrow this money from? Well, a few places. Other countries might lend it money, or private individuals or corporations might do the same, but a very large proportion of this money is loaned by the country’s central bank.
So let’s say the government needs an extra billion dollars this month to cover its planned spending, and it’s already borrowed as much as it can from other countries, individuals and corporations. In simple terms, it goes to the central bank and asks for a loan (the actual process involves the government issuing a bond which the banks buy and then sell to the central bank). The central bank grants the loan to the government and sends it the money so that it can complete its spending plans.
So where did the central bank get that money that it just loaned to the government from? Well, incredibly, it just printed it out of thin air, or to be more accurate, it just typed it into a computer. Yes, that’s right, the central bank can just create money out of nowhere and it can do this an unlimited number of times. This process is sometimes called quantitative easing (QE). In any other industry this would be known as fraud. Hear it straight from the horse's mouth in the video below, as Jerome Powell, the Chairman of the Federal Reserve (the US central bank), explains where the money comes from.
So how does all of this relate to cryptocurrencies? Well, when the central bank created that money out of thin air, what it actually did was it made a manual edit to the ledger that records all of our bank balances. It didn’t change our bank balance number, but it did increase its own.
Now the problem with that is that whilst it is possible to create new money out of nothing, it is not possible to create new wealth. So when the central bank added a billion dollars to the ledger it increased the total amount of money that exists and thereby decreased the worth of all the money that everyone else previously had. This decrease in the value of our money means that it takes more money to buy things in the real world. We see this play out in our everyday lives through inflation as goods and services cost more dollars for the same quantity of product.
When central banks print more money, they create inflation which steals purchasing power from everyone who holds that currency.
Incredibly, it is not only the central bank that creates money out of thin air. High street banks do the same thing every single day through a process known as fractional reserve lending. When a high street bank issues a loan to someone, it is not necessary for the bank to have that loan money in its account to give to you. Instead, it can simply create the money by typing it into a computer and then send you the newly minted cash. Just like the central bank, what it is doing is making a manual entry in the ledger to increase the amount of money in its account. A simpler word to describe this process is fraud.
So, as we can see, the centralised ledger that banks, central banks and governments use gets manipulated all the time. This ledger is what we all rely upon when we trust these organisations to hold, manage and transfer our money. This manipulation causes us all to be constantly losing spending power due to inflation. It is like a hidden tax on everyone, on top of all the other taxes already being paid.
Some countries have taken the process of money printing to an extreme. In Zimbabwe the central bank printed so much money that they had to issue a one hundred trillion dollar bank note. Every single person in Zimbabwe was a multi-millionaire, but of course this doesn't make them rich, as it could cost a million dollars just to buy a loaf of bread. This level of extreme money printing is known as hyperinflation, and has taken place in many countries including Germany in the 1920s and in Venezuela today.
The Bitcoin ledger sits outside of the banking sector and governments. They cannot manipulate the ledger to create more money. This makes it a good store of value in the long term and far less susceptible to inflation.
Bitcoin is not completely without inflation though. An inflationary mechanism is built into the Bitcoin algorithm and this causes the total supply of Bitcoin slowly increase at a pre-determined rate that is gradually reducing over time. The current rate of inflation is 1.8% and this will reduce further in 2024. The inflationary mechanism was a deliberate feature to help the new currency gain traction. The rate of inflation is programmed to gradually decrease until eventually it is zero.
So, the biggest benefit that Bitcoin brings is that it creates a form of money that cannot be manipulated by a third party, making it an excellent store of value in the long term.
Whilst Bitcoin’s foundation is as a store of value, it has some other attractive qualities that make it very unique as a form of money.
Bitcoin is highly resistant to censorship. If I want to send you money through the normal banking system, then the bank may ask a lot of questions about why I am sending the money, and they may even refuse to make the transfer. With Bitcoin the transfer will be made no matter what. This gives you as an individual a great level of control over your money and how you use it.
It should also be noted that once the transfer has been completed it is completely impossible to get it back unless the recipient sends it back to you. This might seem dangerous, but it also creates a great amount of certainty. If somebody pays me in Bitcoin then I absolutely know for certain that I have received the money and that it cannot somehow be taken back from me.
Bitcoin allows you to hold and spend your money without any interference from banks or governments.
Governments have the power to freeze your bank account and prevent you from gaining access to your money. This can happen for many reasons. It could be that your account has been flagged for some reason, or in some countries it could be because you spoke out against the government narrative. Accounts can also be frozen on a massive scale when banks face a financial crisis. We have seen this happen in Greece and Argentina, when banks stopped customers from accessing their money and eventually only gave them a small portion of the money that they once had. With Bitcoin it is near impossible for a government or bank to prevent you from having access to your money.
The existing banking system can be slow, expensive and inefficient, especially for international money transfers. Banks will often charge significant fees for making an international money transfer or for making a large payment. With Bitcoin you can transfer any amount of money that you like to anyone anywhere in the world for the same fee. It doesn’t matter whether you are transferring one dollar or one billion dollars; the fee and the transfer time is the same.
Millions of people in developing countries, especially in Africa, remain completely unbanked. They rely upon cash, agricultural investments or even sim card credits as forms of wealth storage and transfer. Bitcoin presents a tremendous opportunity to these communities as it provides a currency that anyone can use, requires almost no information to register a Bitcoin wallet, and is easy and cheap to access for anyone with a mobile phone or internet connection. A form of money that cannot be manipulated by their government and which can be easy transferred between people is completely transformative for some countries.
Bitcoin provides an excellent form of sound money for the millions of people in developing countries that remain unbanked.
So Bitcoin is a form of money that anyone can use, it can’t be manipulated by governments or banks, it is censorship resistant and it makes it easy to transfer any amount of money between two people who have never met for a very low fee. It is a very powerful idea that puts you in direct control of your money. It is effectively like having your own personal bank.
Bitcoin has no single entity that is controlling it or making decisions about how it should be run. There is no CEO, no shareholders and no office. In fact, this lack of ownership is one of its biggest strengths as it removes an obvious point of attack for a person or organisation who might want to disrupt the network.
Bitcoin operates on a massive network of computers all across the world that store a version of the Bitcoin ledger over which there is consensus. That consensus is achieved through some very clever mathematical algorithms which are run to prove that each transaction is legitimate. The massive global network of computers attempts to solve a very difficult mathematical problem in order verify each transaction. Solving this problem requires a powerful computer that consumes a lot of electricity. The people running these computers are known as miners. The miners receive a Bitcoin fee as a reward for their work.
So it is the miners that are keeping the network running. They are spending money to run powerful computers that verify the transactions, and in return, they get paid a transaction fee. The miners also earn fees for generating new Bitcoins as part of a preplanned and tapering inflation policy.
There are thousands of Bitcoin miners distributed across virtually every country in the world. This vast network creates a huge level of resilience. If a problem occurs in one country, other countries can pick up the slack.
Anyone can mine bitcoin. You could setup your home computer start mining Bitcoin. In the early days of Bitcoin, people were doing exactly that, but as the industry has developed, mining has become increasingly specialised, and you would need to buy some specialist hardware and carefully monitor your electricity costs to become a successful miner today.
Whilst the miners are operating the network, it is extremely difficult for them to have any malevolent impact on the network. They couldn’t just create new Bitcoin out of thin air for free in the way that a high street bank can with dollars.
Good question. People have made and lost fortunes on Bitcoin and other cryptocurrencies in recent years.
Like all new technologies, there is a huge amount of hype around Bitcoin and crypto. Some people see the huge potential, and others simply see the price rising and want to get involved. Governments and regulators are grappling with coming to terms with digital currencies, with some attempting to ban it and others embracing it.
The technology and ecosystem are evolving extremely quickly, and whilst we have some of the smartest and highest integrity people working on developing crypto products, we have also seen a number of get-rich-quick scams appear that attempt to exploit the hype around crypto.
All of this has led to significant peaks and troughs in the sentiment around crypto. When a news story breaks about a major corporation or country embracing crypto then the price can rally. When a country bans crypto, or a major scam is exposed then the price can fall.
The volatility of the price of Bitcoin is gradually reducing.
Bitcoin is attempting to find its fair value, and this is the first time in human history that we have seen a new global currency introduced with the potential to benefit the entire existing financial ecosystem. It is likely that we will continue to see some volatility in the price of Bitcoin over the coming years, but we can already see that price volatility is reducing and is likely to continue to reduce as we move forwards. In fact, there have already been periods when Bitcoin has been less volatile than the US stock market.
Whilst there has been significant volatility in the price of Bitcoin and other cryptocurrencies, Bitcoin still remains by far the best-performing financial asset in recent years. We are likely to continue to see volatility reduce, and we must consider the volatility risk of cryptocurrency against the risks associated with traditional (fiat) currencies such as the dollar. More on that below.
All new revolutionary technologies attract their sceptics. Horse and carriage drivers claimed that the automobile would never catch on. The post office claimed that the telephone would never catch on. Newspapers claimed that TV would never catch on.
This is memorialised in a number of classic quotes from the relevant periods including:
“The horse is here to stay but the automobile is only a novelty – a fad.” - Advice from the president of Michigan Savings Bank in 1903.
"This 'telephone' has too many shortcomings to be seriously considered as a means of communication." - William Orton, President of Western Union. Note that Western Union's line of business would have been significantly damaged by the advent of the telephone.
"Television won't be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night." — Darryl Zanuck, 20th Century Fox. Again note that at the time the film studio business may have felt threatened by the potential of television, yet in due course television became massively advantageous to film studios.
There are many sceptics of cryptocurrencies and Bitcoin, and just like in the examples above, the most vocal sceptics are from organisations that are likely to be negatively affected by the technology.
There are a number of common themes that these critics tend to repeat about Bitcoin and crypto, and despite endless failed predictions about the end of crypto, these same narratives just keep coming up. We want to address these narratives properly and comprehensively, so we have an entire article dedicated to the Common Crypto Criticisms Rebuffed.
As the crypto market has developed it has seen the development of some obscure cryptocurrencies that are best avoided, however the biggest crypto projects, and in particular, Bitcoin, are highly innovative products that are solving real-world financial problems. Whilst there are some risks associated with Bitcoin, it is certainly not a scam as there is no Bitcoin person or company to scam you. It is not a Ponzi scheme as it does not pay out a dividend, and it would be an idiotic choice for criminals as every transaction is highly traceable via the public ledger.
The biggest users of Bitcoin are people who have realised that the traditional currency system is fundamentally flawed and in response are seeking an alternative from of sound money.
There are some people who, for whatever reason, just hate crypto and confirmation bias leads them to seek out evidence that validates their opinion that crypto is a scam. A more healthy approach to crypto, or any financial product, is to try to calmly and objectively consider the benefits and risks of the product and then decide whether the product is right for you.
It all started with Bitcoin back in 2009, but since then, we have seen the launch of thousands of other cryptocurrencies. Are these other cryptocurrencies legitimate? How are they different to Bitcoin?
Bitcoin proved that blockchain technology was viable. It was deliberately designed as a simple and robust backbone on which future financial technologies could be built. However, its design does incorporate some features that some people feel could be improved upon. Some people consider the Bitcoin transaction speed to be too slow. Others feel that the mining process uses too much electricity. There are many other facets that people feel could be improved.
These perceived shortcomings caused developers to start working on alternatives to Bitcoin that could address these issues. Typically they focused on one issue, for example they may have tried to create a cryptocurrency with a faster transaction speed. This was how the first cryptocurrencies beyond Bitcoin were born. Cryptocurrencies that are not Bitcoin are sometimes referred to as altcoins.
As the technology developed further, developers realised that you could incorporate more than just the traditional qualities of money into a cryptocurrency (i.e. the ability to store value, and easily send and receive money). The developers realised that you could also include simple contracts within the cryptocurrency. These "smart contracts" allow binding promises to be built into a transaction. For example, a transaction might exist that forms the basis of a loan, with a binding schedule of payments attached to it. The subject of smart contracts is deep and complex, but all you need to know at this stage is that this idea gave rise to a number of additional cryptocurrencies, most notably Ethereum.
Many of the alternative cryptocurrencies are seeking to improve upon Bitcoin, for example by improving transaction speed or privacy.
Then as momentum continued to build, we started to see coins built that would track the value of things outside of the world of crypto. For example, there are a number of cryptocurrencies that track the value of the US dollar, and others that track the value of gold. These types of cryptocurrencies are known as stablecoins and have proved very popular as they allow traders to trade between US dollar amounts and cryptocurrencies very quickly, without having to move the money into real US dollars through the traditional banking system.
Some of the new cryptocurrencies allowed other developers to easily create new additional cryptocurrencies within their ecosystem. This is when the number of cryptocurrencies really started to explode.
Not hugely. Bitcoin holds a very unique position in the crypto ecosystem. Many cryptocurrencies existed before Bitcoin, but these never really worked as they never properly solved the problem of creating a robust decentralised ledger.
The innovation created by Bitcoin when it solved this problem was huge, and as the first cryptocurrency to fully address this issue, Bitcoin gained a substantial first mover advantage.
Other cryptocurrencies that have been developed after Bitcoin have tended to focus on trying to improve upon Bitcoin, but these improvements have generally been quite modest in comparison to the milestone breakthrough made by Bitcoin. In other words, the innovations have not been strong enough to move the market away from Bitcoin.
As part of the first mover advantage, Bitcoin benefits from massive network effects. This describes how the benefits people get from a new technology increase exponentially the more people use that technology.
When the first telephones were available they were not very useful as hardly anyone else had a phone. Through the process of network effects more and more people got a phone, and the benefit of having a phone became increasingly great. Having a phone or email address now is nearly essential, and it is possible that Bitcoin will eventually reach this essential status through similar network effects.
Bitcoin holds a very unique position in the crypto ecosystem because it is completely decentralised, has no controlling entity and benefits from large first mover advantages and network effects.
There are many examples in the history of new technologies where a technological breakthrough has been made and then competitors have made minor improvements on that breakthrough. Despite the potential improvements, the first mover still became the dominate technology due to network effects.
The biggest cryptocurrencies such as Bitcoin and Ethereum are seen as the safest options in crypto and many investors prefer to stick with them. Bitcoin in particular, has some unique qualities beyond just its first mover advantage that make it very hard to replicate.
Bitcoin is extremely decentralised. The inventor of Bitcoin went by the pseudonym of Satoshi Nakamoto. Once Bitcoin was up and running he disappeared and has not been seen since. This was a very wise move as the potential for Bitcoin to disrupt the existing financial system is substantial, and there are many government agencies that would look to investigate or even prosecute him for creating such a technology. Ross Ulbricht was sentenced to 2 double life sentences plus 40 years for creating a website that allowed anyone to trade anonymously with anyone else in the world. Some users of that website used it trade drugs and other illegal items. The same accusation could be levelled at the creator of an anonymous form of money.
As the first mover, Bitcoin has been repeatedly attacked by hackers. Indeed the financial incentive to hack Bitcoin is extremely high, as a successful hacker could potentially walk away with billions of dollars.
With every year that passes by, Bitcoin's proven resilience to these attacks increases. Despite the very high incentive, there has never once been a successful hack on Bitcoin. This proven track record on security is hard to beat as any contender is inevitably starting with fewer years under its belt.
Despite massive financial incentives, Bitcoin has never been hacked. Since 2009 it has proven itself to be extremely robust against hacks and security breaches.
The fact that there is no controlling entity for Bitcoin puts it in a powerful position to resist coercion and manipulation. The vast majority of other cryptocurrencies have some form of controlling entity. They may be incorporated into a business or have a CEO and other board members. This controlling entity can make changes to its crypto at will. Some of these changes are good, some are bad, but the potential for change by a dictating entity puts the cryptocurrency at risk of failure through a bad decision. Similarly, the controlling entity could be forced to make a bad decision at the behest of a coercive third party such as a government. Bitcoin, on the other hand, is highly decentralised, which means there is no single point of coercion or failure.
Yes, governments could and have banned cryptocurrencies. The problem for governments with banning cryptocurrencies is that it tends to just drive the technology underground. People continue to use it, but they do so privately. A number of cryptocurrencies are designed specifically to be very difficult for a government agency to trace.
It is very difficult for a government to enforce a ban on cryptocurrency. In effect, they would be seeking to ban a ledger on thousands of computers that are distributed in every country on the planet. Even if a government could remove every single computer in their country, it would have no effect on your cryptocurrency wallet as all your money would still be stored safely on all the other computers in all the other countries.
Banning cryptocurrencies is comparable to banning drugs. It is now widely accepted that the ban on drugs is failing, and a more progressive strategy such as that adopted in Portugal of legalising drugs and supporting those who have become addicted in their recovery has actually seen drug use and the associated crime reduce.
There are extreme scenarios which could make cryptocurrencies difficult to use, such as switching off the internet or every world government coming together to enforce a simultaneous ban. Even these highly improbable scenarios would be unlikely to completely halt the biggest cryptocurrencies.
Some governments have attempted to ban Bitcoin, but others have embraced it and even adopted it as legal tender in their countries.
Whilst some governments are still trying to ban cryptocurrencies, others are embracing them. Cryptocurrencies can be revolutionary, particularly for poorer countries. El Salvador and the Central African Republic have adopted Bitcoin as legal tender. The governments hope that by embracing the technology their populations can benefit from sound money, decouple from the US dollar and attract investment from crypto businesses.
Embracing cryptocurrency may also present governments with potential new sources of revenue. Generally speaking, the governments in most countries are cautiously exploring the potential of embracing cryptocurrencies. In fact, some central banks are considering launching their own cryptocurrencies, known as Central Bank Digital Currencies (CBDCs). Whether CBDCs could be trusted is another matter.
A surprisingly common concern of people who are new to crypto is that the price of Bitcoin is too high. So much so that they can't even afford one Bitcoin.
Each Bitcoin is divisible into a smaller unit of account. Just as every dollar comprises 100 cents, every Bitcoin comprises 100 million Satoshis.
You don't need to buy one whole Bitcoin. You can buy just a fraction of Bitcoin.
So there is absolutely no need to buy one whole Bitcoin. You can buy half a Bitcoin, a tenth of a Bitcoin or even one millionth of Bitcoin.
It is perhaps unfortunate that the total number of Bitcoin, 21 million was not set much higher, as it is a natural human instinct to measure whether something is cheap or expensive by the size of the number rather than the rate.
Two thousand dollars for a tonne of apples might seem expensive, but two dollars for 1kg of apples seems cheap. Of course, both are the exact same price, it's just the quantity being purchased that has changed.
Once you have researched and weighed up the pros and cons of cryptocurrencies then you might decide that you would like to own some. Buying cryptocurrencies is getting easier and easier, although some of the concepts might take a little getting used to.
To buy cryptocurrency you will need to use an exchange. The exchange will convert your traditional (fiat) currency into cryptocurrency for you. It is comparable to foreign currency exchange that you might find at an airport that will convert your dollars to euros for you.
Just like foreign currency exchanges, crypto exchanges charge different rates and commissions. You might see a foreign currency exchange counter at an airport that claims that they charge no commission. Well, this can be true, but perhaps their exchange rate is not very competitive. Similarly, with crypto exchanges, some charge commissions, whereas others are commission free, but in both cases, it is also worth paying attention to the exchange rate you are getting too.
To buy cryptocurrencies you will need to use a currency exchange. This is just like a foreign currency exchange at an airport. Some exchanges charge commission, some don't.
There are many crypto exchanges out there, but if you are just getting started then it is probably best to start with a very easy-to-use exchange, even if the rate is slightly less competitive. A good choice would be one of the big crypto platforms such as Nexo. You can compare all the big crypto platforms here.
Using Nexo as an example, the first thing you need to do is to sign up for an account. During the signup process Nexo will want some personal information about you. Whilst Bitcoin is completely decentralised, and can be used anonymously, a crypto platform such as Nexo is a centralised financial services business and as such it is required to comply with Know Your Customer (KYC) and Anti Money Laundering (AML) checks.
Once you are signed up you will be presented with an empty cryptocurrency wallet. This will show a list of the different cryptos supported by the platform and the amount of each that you currently hold.
To buy some cryptocurrency you will first need to transfer some fiat currency (e.g. dollars) onto the platform. You can normally do this via bank transfer or by using a debit card. Many traditional banks will flag transfers to a cryptocurrency platforms for extra fraud checks. If there is a delay in the money appearing on the platform, don't panic that the platform has stolen your money. Instead, check with your bank to see if the transfer has been flagged for extra checks and if so, ask when these are likely to be complete. Remember, you are doing nothing illegal by transferring money to these platforms.
Once the fiat currency has arrived in your account on the crypto platform you can then convert this money to the cryptocurrency of your choice. The process is straightforward and fast, and if you have any questions then there is a customer service chat box that can help you out.
You are now the proud owner of your first cryptocurrency. This cryptocurrency is currently held in your wallet on the platform. This is called a custodial wallet and is a bit like a traditional bank account. Just like your regular bank, you have to log in to your account to check your balance, and as with a regular bank account, you will want to keep your login details private and secure.
Most platforms will offer an extra layer of security called two-factor authentication. This allows you to set up your phone to provide a unique code that must be entered each time you want to log in. To set this up you will need to install a two-factor authentication app on your phone, such as Google Authenticator or Authy. It is highly recommended that you add two-factor authentication to your account as it significantly increases your account security.
You can store your crypto currency with a crypto platform, a bit like a crypto bank account, or you can store it yourself on hardware wallet.
Your cryptocurrency can be stored this way, in a custodial wallet on a platform, but one of the powerful features of cryptocurrencies is that you can also store them yourself in a private wallet. These wallets normally take the form of a hardware wallet, and you can find a list of the most popular hardware wallets here.
Storing your cryptocurrency on a hardware wallet gives you full control over the currency. It is actually like having your own private bank. You are in full control, and nobody else is involved. It is impossible for anyone to stop you using your money or spending it in any way that you see fit. By taking full control you also take control of all security matters relating to your wallet. The wallet manufacturers utilise various systems to make this as easy as possible, for example there are systems that allow you to recover your money even if your hardware wallet is lost, stolen or destroyed.
Some people prefer to store their cryptocurrency on a hardware wallet because it removes the risks associated with a crypto platform holding your money, such as them freezing your account or going bankrupt. Crypto platforms go to great lengths to provide assurance that your money is safe with them, including independent audits, insurance cover, prudent risk management policies etc., but nonetheless, some crypto platforms have encountered difficulties that have led to the freezing of accounts. One of the key aims of DeFinda is to review these platforms, and to impartially assess the risks and benefits to help you decide if they are right for you.
Whether you decide to use a custodial wallet on a platform or your own private hardware wallet, your cryptocurrency will be stored in a wallet with a unique identifier. Just like your traditional bank account, your crypto wallet has an account number. This number is unique, and you can safely give it to people when you want them to send you money.
Crypto account numbers tend to be quite long. Much longer than the bank account numbers that you are used to having with traditional bank accounts. When you want to give someone your account details then you can give them this big long number. These account numbers can also be represented with QR codes, which are a bit like barcodes, but with more detail. QR codes can be scanned easily with a phone camera, and this saves the time involved in manually typing in the long account number.
It is perfectly safe to share your account number with other people. The worst they can do is pay you some money. However, one consideration that arises from the open ledger nature of some cryptos such as Bitcoin is that somebody could interrogate your bank balance simply from your account number. This is because anybody can read the public ledger and check how much money has been sent to that account.
To resolve this problem, many wallets offer the option of creating unique wallet account numbers for each transaction. That way, it is harder for somebody to see what your total balance is from just one of the account numbers. Your wallet automatically connects all the account numbers together, so all you see is your total balance.
So to receive crypto, you just need to give someone your crypto wallet account number. This is sometimes called your crypto wallet address.
To send crypto you just need the wallet account number that the crypto needs to be sent to. You need to make sure that the destination wallet is in the same currency as the funds that you plan to send. So if you are planning to send Bitcoin then the destination account number needs to be a Bitcoin wallet.
When sending crypto there is a small fee associated with the transaction. This fee is used to pay the miners that validate the transactions. For most cryptocurrencies, there is a flexible fee scale. The higher the fee, the faster your transaction will be processed.
There are a number of different ways to approach the purchase of cryptocurrencies. Defining your objective, timescales and risk tolerance levels are an important part of deciding what the right route for you is.
Cryptocurrencies, and in particular Bitcoin, have the potential to completely revolutionise mainstream financial services. The limited supply of Bitcoin gives it the potential to act as an excellent hedge against inflation. One strategy that many investors adopt is to simply buy and wait. This is a long-term strategy and requires patience and good levels of risk tolerance.
As discussed earlier in this article, price volatility can be high, and there may be times when the value of your investment measured in fiat currency is lower than the total amount you have paid. However, the volatility of cryptocurrencies is reducing, and those that have been able to patiently ride out the highs and lows of crypto have tended to do well in the long term. This long-term strategy is so popular that the word HODL has become popularised to describe the act of holding your position irrespective of price volatility. HODL stands for Hold On for Dear Life.
Price volatility also presents the problem of knowing when to buy. Human psychology means that people tend to be more inclined to buy when the price is high due to fear of missing out (greed). Conversely, they tend to be less inclined to buy when the price is low due to fear of losses (fear). The price of cryptocurrencies is particularly susceptible to these cycles of fear and greed.
One common strategy to navigate the price volatility is to buy a small amount on a regular basis, irrespective of the price. This is called dollar cost averaging, and the strategy means that sometimes you will buy at a low price and sometimes at a high price. Overall the average price that you buy at is likely to be better than if you had simply tried to time the best moment to buy in one big lump sum.
Crypto enthusiasts tend to fall into two groups: long term holders who look to ride out the ups and downs, and traders who look to find the next big thing and turn a quick profit. Trading is high risk and on average a majority of traders lose money.
Whilst investing is a sound strategy, it requires patience and a long time frame. The hype, greed and fear around cryptocurrencies can mean that some cryptos have spectacular rises and falls in price over a very short period. There have been many times when some cryptos have doubled or halved in price in a single day. These massive price movements can tempt people into a strategy of trying to catch the next cryptocurrency that is about to take off. This is also compounded by the false idea that they are too late for Bitcoin because the price is already too high.
Trying to catch the next meteoric price rise would be considered a trading strategy as opposed to an investment strategy. Trading strategies have short time frames and very high risk levels. Some people increase this risk level even further by using leverage (borrowing money they don't have) to increase the size of their position even further.
There are many blogs and youtube videos pushing the next crypto that is about to take off. Our advice is that you should approach these with extreme caution. If you feel yourself rushing to buy out of fear that you are about to miss out on a massive price rise, then that is a strong warning sign for you to pause and calmly review whether you are making the right decision.
Perhaps more importantly, you should consider whether the cryptocurrency you are thinking of buying has real value. How is it disrupting an existing marketplace? Is the supply limited, or can additional coins be created at any time? Do the creators of the cryptocurrency seem reputable? Have they reserved large quantities of the new cryptocurrency for themselves?
As a beginner, we would encourage you to start with one of the big, established cryptocurrencies, such as Bitcoin, before considering any of the more obscure cryptos.
Just like traditional fiat currencies, it is possible to invest your cryptocurrencies to earn income from them.
When you deposit fiat currency in a traditional bank account, what you are actually doing is granting a loan of your money to the bank, and in return, the bank is paying you interest. You are trusting the bank to take good care of your money and to let you have it back when you need it.
In a similar fashion, it is possible to invest your cryptocurrency in order to earn interest. Just like a traditional bank account, you would actually be loaning the crypto out, asking the holder to take good care of it for you and trusting them to let you have it back when you need it.
You can earn interest on your crypto in the same way as you earn interest in your traditional bank account. It's important to research crypto savings products carefully. DeFinda can help you do that.
There are many crypto platforms emerging that allow you to do just that. You can deposit your crypto with them, and in return, they will pay you interest. There are different account types available, with different interest rates depending on the type of crypto you deposit, the amount, and whether you want instant access to your funds.
You also need to be sure that the platform is trustworthy. Most platforms recognise that this is a key consideration for investors, and in response they offer insurance, financial audits, security checks and much more to provide you with the assurance that your money is safe. The financial risk levels taken within the organisation are an important consideration too. Often the platforms are able to pay you interest because they have loaned out the money at a higher rate to someone else. These loans are normally secured against other assets that are of a greater value than the loan size.
Reviewing these benefits and risks is one of the key purposes of DeFinda, and you will find a comprehensive analysis of the risk associated with each platform and the interest rates available in our detailed platform reviews.
Nothing is risk free. There are risks associated with cryptocurrencies, and with fiat currencies. There are risks associated with crypto platforms and there are risks associated with traditional banks.
To address the issue of crypto risks it is worth comparing them to the risks associated with the traditional financial system.
Now you understand why cryptocurrencies are so important and what you can do with them, you might want to compare the best crypto platforms, compare the best crypto wallets or explore potential crypto savings rates.
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