Cryptocurrency isn’t just a hot new investable asset – it’s a fascinating new technology with world-changing potential. Like the Internet before it, crypto may end up revolutionizing everything – how governments are run, how medical data is stored, and so, so much more.
There’s only one problem: most folks don’t understand it.
And who can blame them?
I mean, when you Google “what is cryptocurrency,” here’s what you end up with:
Perhaps out of bitterness, the Internet doesn’t do a great job of explaining cryptocurrency. Therefore, I’ve written this Crypto Crash Course to explain everything you need to know. Whether or not you plan to invest in crypto, you’ll benefit from understanding concepts like Bitcoin, blockchain, and mining before they rock your world.
What is cryptocurrency?
Cryptocurrency, in a nutshell, is a form of virtual currency. You can think of it like Internet Dollars or casino chips – you have to exchange traditional currency for it.
Now, crypto is still pretty new technology, and many of its long-term benefits are still in the beta stage, so I’m about to use the phrase “in theory” more frequently than a cartoon scientist.
Anyways, many folks consider crypto to be like “Money 2.0” because, in theory, it provides several advantages over government-issued traditional currency like the U.S. dollar (AKA fiat money).
These benefits include, but aren’t limited to:
- Decentralization. Unlike fiat money, crypto is not controlled by a central authority like a bank or a government (and thus more immune from outside influence or foul play). Plus, you don’t have to use a third-party app like Zelle or PayPal to exchange it online.
- Inflation control. Cryptocurrencies are designed to have a finite amount of coins or tokens in circulation, meaning that in theory, crypto inflation will never spiral out of control like many traditional currencies.
- Safety. Cryptocurrency gets its name from the complex layers of cryptography and computer code that validate and record transaction data to the blockchain. In theory, the blockchain, or grand crypto ledger, is totally impenetrable; you’d need to amass more computing power than all the computers maintaining the blockchain combined to attack it. This makes crypto more secure than fiat money – in theory, NOT in practice.
I’m sure at this point you have tons of questions, and rightfully so; crypto is a deceptively complex topic, and undoubtedly one of the most fascinating phenomena of our time.
Where did cryptocurrency come from?
Crypto’s origins trace back to the early days of the Great Recession.
In 2008, a mysterious group (or individual) going by the pseudonym Satoshi Nakamoto published a technical whitepaper called Bitcoin: A Peer-to-Peer Electronic Cash System. It’s short and surprisingly easy to chew on, but here’s a TL;DR nonetheless:
Basically, Nakamoto says the world needs Bitcoin because online transactions are a pain in the a**. You can’t just hand someone cash over the internet – you have to send it through a “trusted third party” like PayPal or Zelle, and while that system works “well enough” for now, it’s unsustainable for at least three reasons:
- It’s slow and inefficient.
- It enables third parties to charge fees and track your data.
- It’s vulnerable to outside influence and manipulation.
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
In essence, Nakamoto wanted to replace banks and PayPal with computer code, and by golly, he did it.
In 2009 he launched both Bitcoin, the first crypto, and the blockchain, the ledger to support it.
Then, he (or she or they) vanished.
If you’d like to learn more about the crazy history of crypto, and who the world thinks Nakamoto really is, check out my feature: Who Founded Bitcoin, And Why?
What’s the point of crypto, and how did it become an investment?
Crypto was not intended to be an investment.
Rather, it was conceived as a way for people around the world to exchange their money for Internet Dollars which didn’t require a third-party during transactions. This, in theory, made cryptocurrency faster, safer, and more immune to outside influence than paper currencies.
But crypto became an investment because Nakamoto didn’t establish an exchange rate.
Bitcoin was designed to only have a maximum of 21 million coins in circulation in order to control inflation. However, when you have ultra-high demand and a limited supply of anything, values for that thing will skyrocket.
Why is crypto so popular?
These are just a few of the reasons why cryptocurrency is taking the world by storm:
- It’s a high-risk, high-reward investment. Some people have gotten really, really rich off of Bitcoin and other cryptocurrencies. And despite the value of Bitcoin peaking at $65,000 this year, many still believe it’ll go to $100,000 and higher.
- blockchain technology has limitless possibilities. As you’ll learn later in this piece, blockchain technology has world-changing potential. A secure, online ledger that can record all kinds of data and isn’t controlled by any one person or corporation is a true game-changer.
- Crypto is polarizing, to say the least. Part of why crypto has become a stalwart conversation topic is because everyone who understands it has an opinion on it. Some say it’s vaporware, while others say it’s a complete replacement of our 5,000-year-old banking system. Both viewpoints have merit, so the debates are heated and endless.
What do the world’s governments think of crypto?
Crypto is like marijuana – some governments will give you a jail sentence for growing it. Others, tax benefits.
In crypto’s case, the two extremes are El Salvador and China.
- In September of 2021, El Salvador became the first country to officially recognize Bitcoin as legal tender.
- In China, well…if you know anything about the Chinese government, you’ll know why they really, really hate cryptocurrency. It sucks up power, they can’t control it, and it’s making Americans rich; ‘nuff said. So in 2021, they banned the hell out of it and introduced their own.
According to Yahoo News, there are also plenty of other countries that have banned crypto:
- Bolivia banned crypto in 2014 specifically because it’s decentralized and not regulated by a central authority.
- Colombia told their banks in 2014 that they may not “protect, invest, broker, or manage virtual money operations” – presumably as a measure to curb money laundering, which is a common concern.
- Iran allows mining but not trading cryptocurrency – you may only trade your mined crypto to the Central Bank. This allows the regime to financially benefit from mining.
Meanwhile, America’s stance on crypto is basically “if you do it, do it inside the house.” The IRS has extremely strict rules about reporting your crypto capital gains on your taxes, but otherwise, as long as you’re not using crypto to buy bad stuff, you’re in the clear.
Read more: Using Bitcoin Or Other Cryptocurrency? You’ll Still Owe Taxes
Why are there so many cryptocurrencies?
According to Statista, by Q4 2021 there were nearly 7,600 cryptos in existence.
What’s the point of all these cryptos?
Well, there are many reasons why someone might generate a new crypto – including, but not limited to:
- Better variations of Bitcoin. Some cryptos like Litecoin (LTC) aim to simply be a better, faster, or more eco-friendly version of Bitcoin.
- Cryptos that store data. Some cryptocurrencies like Ethereum (ETH) let you store more than just records of financial transactions to the blockchain.
- “Stablecoins”. Since Bitcoin is so volatile, some cryptos like TrueUSD (TUSDUSD) aim to tether their value to a real-world equivalent like $1. These “stablecoins” encourage spending and discourage investing.
- Jokes. The infamous Dogecoin was launched purely as a joke, and yet became hugely popular and inflated in value nonetheless.
- Cryptocurrency scams. Like the American Wild West, sadly crypto attracts a lot of criminals seeking an easy score. In November 2021, the creators of the unofficial Squid Game crypto, SQUID, essentially stole $3.4 million from their investors and then disappeared.
What crypto terms should I know?
Whether you’re looking to become a crypto investor yourself or simply understand what the crypto stan in your friend group is saying, here are some key terms you should know!
The blockchain is like a giant online ledger upon which all cryptocurrency transactions are recorded. The blockchain isn’t owned or controlled by a single entity, but rather maintained by a global network of computers through the process of bitcoin mining or staking, which I’ll cover below.
Nakamoto’s original vision for his blockchain was to have a “single history” of our online transactions. Rather than 1,000 ledgers owned by 1,000 financial institutions, each with their own agendas, why not have one that’s owned by nobody?
blockchain technology doesn’t just work – it works better than he realized. Soon, other computer scientists discovered that you can store more than just financial transaction data to this infinite, safe ledger; you can store legal data, medical records, and more – making the possibilities endless.
So if the blockchain is this giant online ledger processing millions of transactions, who’s maintaining all that?
Well, the bitcoin miners, of course!
When you “mine” bitcoins, you dedicate some of your computer’s processing power to validating and adding transactions to the blockchain. In return, the blockchain generates a tiny trickle of bitcoin for you – hence the term “bitcoin mining.”
In the early days, cryptocurrency mining was hugely competitive since only the fastest computers would get rewarded. Nowadays, you can add your computer to giant mining pools of processing power through a third-party cryptocurrency mining company and share in the spoils.
Ethereum (ETH) is the second most popular crypto behind Bitcoin in terms of market value. ETH rose to prominence because of its clever and game-changing innovation on blockchain technology.
In layman’s terms, Bitcoin lets you record financial data to the blockchain. Ethereum lets you record financial data and just about anything else.
With Ethereum, you can record currency transactions, legal contracts, who owns what NFTs, and more.
In short, you can think of Ethereum as the crypto that lets you store anything to the blockchain.
A smart contract is like an “if…then” code stored on the blockchain that automatically executes itself when outside conditions are met.
Perhaps the most exciting (and long overdue) application of smart contracts is electronic medical record storage and retrieval. Currently, the world’s medical records are stored across thousands of databases that are expensive to maintain and disturbingly easy to hack.
If we stored them on the blockchain instead using smart contracts, you and any provider in the world could instantly access it using a simple password (if the password is correct, then release the patient’s record).
NFTs, or non-fungible tokens, are like “certificates of ownership” that are added to the blockchain using, you guessed it: Ethereum.
NFTs allow creators of virtual art and digital assets to certify certain pieces as “unique.” To illustrate, you can copy/paste Nyan Cat all day, but that doesn’t make it “yours.” Buying the NFT does make it yours.
Somebody really wanted Nyan Cat to “belong” to them, so they paid $600,000 for the NFT.
NFTs are the internet’s equivalent of buying an original painting. You don’t get anything – no copyright, just bragging rights. Still, people buy NFTs as investments, to support artists, or both.
To learn more about the weird and wild world of NFTs, check out my feature What Is An NFT? – How Nyan Cat Was Sold For $600,000.
A cryptocurrency wallet can be a confusing concept to grasp, since it’s often mistaken for the place where your crypto is stored.
But remember, crypto is stored on the blockchain – your wallet, therefore, is more like a keyring to access your crypto.
Your cryptocurrency wallet holds two keys:
- Public key. Your public key is like your account number. You can share it with others so that they can send you cryptocurrency payments.
- Private key. Your private key, on the other hand, is like your account password or the key to your safety deposit box. Whoever holds this can manage your balance.
Now, most popular crypto trading platforms will generate a wallet for you and let you access your public key from your account dashboard. Advanced cryptocurrency traders like to generate and store their own private key – a strategy that works if you don’t lose it and lose access to your crypto!
Staking and lending
Staking and lending have just recently entered the crypto lexicon.
- Staking is like Mining 2.0. “Older” cryptos like Bitcoin use what’s known as a “proof of work” model that uses raw computing power to record data. Newer, more eco-friendly cryptos like Ethereum 2.0 use a “proof of stake” model that uses Ethereum to record data. So when you stake a crypto like Ethereum, you’re essentially loaning it to the blockchain in exchange for more Ethereum. In that way, staking is like the Certificate of Deposit (CD) of crypto.
- Lending involves, well, lending your crypto to a borrower for a predetermined interest rate. Unlike staking, lending is newer and under tremendous regulatory scrutiny, so it’s not a feasible option for most crypto newbies.
Read more: Best Crypto Wallets To Stash Your Bitcoin
Finally, there’s the legendary HODL.
HODL traces back to a 2013 forum post on bitcointalk.org where user GameKyuubi, admittedly drunk on whisky, proudly proclaimed:
“I AM HODLING”
It becomes clear from the post that he meant to type holding, but it was too late – an internet meme had been born.
HODL has since become a rallying cry within the crypto community and was even appropriated by r/wallstreetbets during the meme stock investing craze of early 2021.
The term has become so popular it’s even been given its own backronym: Hold On for Dear Life.
What are the risks of using cryptocurrency?
As an investable asset, crypto certainly isn’t without risks.
Here are what I perceive to be the six biggest risks to a cryptocurrency investment. You can read more details on each point in my piece Is Bitcoin Safe? What Investors Need To Know.
- Crypto holdings are not FDIC insured. Let’s say you have $50,000 in a checking account with Joe Schmo bank and $50k in crypto with Kelly Patel cryptocurrency exchange. If both businesses fold tomorrow, the FDIC will only cover the former. Granted, some cryptocurrency exchanges now have private insurance – but historically crypto paybacks have not been successful.
- The blockchain can’t be hacked, but cryptocurrency exchanges can. To date, hackers have made off with billions in crypto by targeting cryptocurrency exchanges, not the blockchain. $2 billion in crypto was stolen in 2020 alone.
- Your private key could be lost, stolen, or forgotten. If you lose your bank passcode, you can just call up a number and get another one. But if you lose your crypto private key, well, you’re SOL. In fact, the New York Times did an entire piece on how otherwise savvy crypto investors have locked themselves out of their own fortunes.
- Bitcoin is already sucking up more energy than Sweden. Yes, Bitcoin now requires more power to maintain than entire developed nations. Its strain on the power grid was a major driver for China, Inner Mongolia, and other countries to ban it. Sure, the newer proof-of-stake model is more eco-friendly – but now that humanity has entered climate change red alert, the shift may not come fast enough.
- More countries could ban crypto over time. China has banned crypto and India’s predicted to follow suit. 40% of the world’s population now cannot trade crypto – a number that’s likely to grow.
- Bitcoin is still extremely volatile. In 2021, the value of 1 BTC has gone from $64,000 to $30,000 back to $59,000 within a matter of months. That may not sway long-term HODLers, but anyone forced to sell in the short term lost a lot of money. There’s hope, but no guarantee, that Bitcoin or any other crypto will make you money.
Is it safe to mine crypto?
Mining is much safer than trading. If you mine $50 worth of BTC this month and the value drops to $20 next month, well, you haven’t technically lost money since you basically got it for “free.”
I put “free” in quotes because mining still requires a powerful computer with a high-end graphics card and a small uptick in your power bill. But if you already have the required hardware, it’s a zero-effort way to make some side cash – and the only risk-free way to attain crypto.
Should YOU invest in cryptocurrency?
Oof. That question is loaded like a Wendy’s baked potato.
Crypto is high-risk, high-reward. It’s thrilling, but extremely uncertain. It may be the future of the global economy – or a catalyst to our demise.
So should you put a few bucks in crypto today?
Well, I won’t say yes or no (I’m not an investing expert) – but do keep a few things in mind when making your decision:
Don’t feel FOMO for skipping crypto
When you hear about your friend or classmate who made untold millions by investing in crypto at the right time, it’s hard not to feel a sense of FOMO.
But that shouldn’t be the sole reason you invest.
Impulse investing is like impulse shopping – it more often results in regret, not relief.
If you do invest in crypto, do it safely
If you do decide to invest in cryptocurrency, just don’t lose sight of the fact that crypto is still highly speculative and extremely risky.
Here are four beginner tips to get you started:
- Pick your platform. Crypto trading platforms like Coinbase and Binance.US are especially friendly to beginners, and the former will even reward you crypto for learning about crypto!
- Start small. Your overall investment portfolio should include a mix of low, medium, and high-risk investments (depending on your risk tolerance). Since crypto falls well into the high-risk category, start by giving it only a tiny fraction of your overall portfolio.
- Research and diversify. As with all investments, research pays off. Don’t put all of your eggs in one basket – read some whitepapers and consider some promising altcoins. For a starting point, check out 8 Alternatives To Bitcoin – What Will Be The Next Bitcoin.
Cryptocurrency is an immensely fascinating and complex topic, and I could talk all day about the hidden risks, limitless applications of blockchain technology, and more.
But for now, I hope my little Crypto Crash Course has helped you grasp the essentials. Even if you have no plans to invest, you now have the knowledge to monitor and wonder how crypto is going to change our world.