Cryptocurrency, like all currencies, is simply a piece of digital information. It’s stored in a “blockchain,” which is a list of transactions between people and computers. In Bitcoin’s blockchain, each transaction is represented by a block of data that contains some of the properties of the transaction and some other information. A block is chained to the previous block in the chain by a hash value so that it can’t be altered without changing all the hashes in the chain.
The encrypted nature of a cryptocurrency means that it can be used anonymously; you don’t have to give your name or hand over your identification card when you buy something. But cryptocurrencies also make their history public, so an analyst can track their growth over time. By doing this, he can calculate how much money has changed hands and extract the price from that maths.
One way to invest in cryptocurrencies is to buy them on an exchange where they are traded for dollars or another currency you want to hold for short-term or medium-term purposes, such as for trading purposes. The advantage of this method is that you can immediately sell them if you need cash or want to get into another currency before converting it back into crypto again.
There are many different exchanges where you can trade cryptos for other
Cryptocurrencies are a new, highly speculative form of money. They’re like stocks, but instead of being traded on stock exchanges, they’re traded online according to set rules. Cryptocurrency is often called “virtual currency” because it’s not backed by any government or central bank.
Most people who own cryptocurrencies aren’t investing in them for their financial return. Instead, they’re hoping their virtual currency will become more valuable over time. More precisely — and this is the way to think of cryptocurrencies — they want to be able to exchange their cryptocurrency for something else of greater value. If the price of Bitcoin rises from $100 to $1000, they’d like to be able to exchange their Bitcoins for a bigger chunk of cash— say, $100 per Bitcoin rather than one Bitcoin for ten cents.
In other words, cryptocurrencies are a new kind of asset that can be exchanged for other assets: cash, gold coins, houses, or pretty much whatever you want.
Cryptocurrencies are a new kind of asset, and a new way of making money. As such, there are two obvious ways to invest in them: buy them and hold them for a long time, or trade them. To the extent that cryptocurrencies are volatile, those two options are pretty much the same.
But both approaches have disadvantages too. When you buy a cryptocurrency it’s not really yours until you own it. If there isn’t a market for it when you want to sell it (which is likely if people don’t know you own it), you might have to wait as long as several years before someone else realizes that they need it and decides to take it off your hands. Or they might be able to get it from someone else who already owns it (if they don’t yet know that they need it).
If you want to trade cryptocurrencies, you have to find someone who wants to buy your cryptocurrency at the price they offer, and then hope that this person will be willing to give you the cryptocurrency at the price they offer. The best way is probably to trade among friends, but with most cryptocurrencies (including Bitcoin) no one seems very interested in buying their friends’ cryptocurrency unless they already have some themselves or know someone else who does.*
Some people have called cryptocurrencies the “wild west” of investing. They’re not just an investment, but an investment that’s new and speculative, so you never know what to expect.
But I think they’re worth considering. Here’s why:
1. It’s a new industry. The first thing to understand is that the cryptocurrency market is very young. It is still in its infancy; it is only now coming into its own as a field of investment, after several decades of development. Only a few years ago cryptocurrencies were all but unknown, and most people were skeptical about them as an investment. There are now more than two dozen cryptocurrencies with different levels of maturity and attraction, and many more will follow in the next few years.
2. Cryptocurrencies are software protocols for exchanging money between people online without using banks or other institutions. While there are many other applications for these technologies, their biggest use is transferring money from one person to another across national borders without those countries’ approval or interference. Cryptocurrencies like Bitcoin have no government or central bank regulating them: their value fluctuates based on how much people want to use them and how many people are willing to accept them in exchange for goods or services.
Crypto-currencies, also known as crypto-assets or crypto-tokens, are digital currencies that use encryption techniques to create a secure database that prevents people from spending the same money twice.
Crypto-currencies are similar to regular currencies in many ways. Both are based on trust: a central organization holds the data and (usually) the power to produce more of them. Both have value because enough people accept them as payment. But they are different in important ways.
Crypto-currencies allow almost instant transfer of funds from person to person anywhere in the world, without going through any kind of bank or clearinghouse. This makes it easy for criminals to move or launder money, even if they don’t have much of it; it also makes it easy for them to pay for illegal goods and services.
In the summer of 2012, ethereum was a side project for nineteen-year-old Russian programmer Vitalik Buterin. The blog post announcing its launch was written in the tone of a college sophomore brainstorming over how to spend his spring break: “As a student, I have worked on many different cryptographical systems and protocols, but always with a specific application in mind. That is not the case with Ethereum.”
Bitcoins were already trading for less than $10 each. Buterin’s idea was to create a new kind of cryptocurrency that could do useful things. Unlike Bitcoin, it would be open-source and accessible to anyone. It would have its own currency (the “ether”), which would be transferable like dollars or euros.
Ethereum’s start was almost as auspicious as its founder’s youth, but it didn’t take long for the developers to turn on one another. The tension spilled into the open after Buterin announced plans to rework the Ethereum code base and take control of it himself. Only later did they settle their differences, and Ethereum became the most popular and successful altcoin.
Buterin has since gone on to lead projects at both Coinbase and Microsoft Research, where he has collaborated with other engineers at Ethereum’s
Cryptocurrencies are the most recent type of money. They are not backed by a central bank, and they are not issued by a government. Each coin is a piece of code written on a computer, and they can be used to pay for things at settlement times.
The one thing that makes cryptocurrencies different from all other types of money is that they aren’t really money at all.
In the olden days, people had gold and silver coins. The United States still has dollars and euros and yen; but gold and silver are no longer legal tender. Governments can’t force you to give them your money; so it is harder for governments to control who has what money you have, or how much you can spend it on.
When paper money was first introduced in China in the 1170s, it was like gold and silver coins before it: pieces of paper made out of cloth or bamboo or animal skin. But once paper money grew popular, it wasn’t long before some clever person realized that you could make more than one kind of paper money. So there were then copper coins, silver coins, jade coins, silk coins, ivory coins, and so on. All these were just as valuable as each other; but they were not all equally valuable against