Cryptocurrencies are a way of moving wealth, and in practice they are usually interchangeable. But they are not the same thing, and unless you plan to get rich by counterfeiting, talking about making money can make it harder to understand how to make money.
One of the most important parts of making money is deciding which investments to make. Cryptocurrencies provide a new way of doing that: computers running software write algorithms as if they were human beings, then we read their guesses about what will happen in the future. The algorithms are written by lots of people around the world who compete to produce the best guess; these compete against each other, and the best ones get paid.
Cryptocurrencies include Bitcoin, a popular alternative currency; Ethereum, a network for creating virtual machines that run programs; and XRP, used for sending payments between banks. The currencies are similar in some ways but different in others. They differ from one another in terms of the amount of energy used to process transactions and the rate at which transactions take place. With cryptocurrencies, anyone anywhere can move wealth without permission from anyone else; they are borderless and permissionless. They don’t require middlemen like banks or governments to move wealth around.
But before you buy them, you should be
A crypto-hacker is someone who breaks into a bank’s computer system and steals money. The break-in itself is relatively easy: all you need to do is sneak into the building, install malicious code on a computer or other device so that it infects every machine it touches, and then wait for the bank to go to sleep, at which point you can steal all the money in the vault.
But getting away with this requires technical skill–and a lot of luck. You have to know how to avoid catching any of your actions on video, you have to be able to keep your identity secret, and you have to be able to move large amounts of money without getting caught.
When you’ve done all that and stolen a few million dollars, what do you do?
The answer depends on where the money came from. Most people who stole just a few million dollars would probably just spend the money or hide it away in a safe place and then go back to their normal lives. But there are other options: you might try to spend some of it anonymously, or hide it away in different places so that if one gets discovered, the others will still be available. Or maybe you’d keep your cash in a cryptocurrency wallet like Bitcoin.
Cryptocurrency is the ultimate example of a bubble. It has no intrinsic value, but it’s very easy to trade, so there is lots of trading. When new people start trading it, the price goes up. People who have been watching it for a while start selling their coins because they are afraid the price will go up even more. That makes the price go even higher.
The only reason to get into cryptocurrency is to make money on its volatility. And when you look at cryptocurrency prices and ask “why?” you find that there is no good answer. It’s because people are willing to pay for it with money they think will lose value at some point in the future, or that they think someone else will pay them for in the future (they are called “hodlers”). But everyone is always pretending they know why they are paying anything at all.
I used to think cryptocurrencies were a pretty good deal: I got paid by my employer in bitcoins, which I could then spend as I pleased without worrying about government tax issues or corporate expense reports or getting scammed by credit-card companies. But I was wrong.
Lesson: beware of bubbles
The first thing to understand is that what you’re investing in is not a stock. At its heart, Bitcoin is just a set of numbers. It’s not even really a currency. It’s just an accounting system for moving money safely around the world without any middlemen getting in the way. The reason it works is because everyone who uses Bitcoin agrees to follow the same rules and accept the same accounting. Every transaction is recorded on a public ledger called the “block chain,” and everyone can see how much money someone has.
The block chain is like a giant spreadsheet that records every single Bitcoin transaction ever made. This makes it impossible to spend the same money twice (which would be fraud) but it also makes it easy to keep track of who owns what (which is why it’s called “crypto”).
“Cryptocurrency” is a little jargon-y. It’s a bit like calling “financial derivatives” or “bets on stocks.” You don’t have to know anything fancy, just know the meaning of “crypto-” and not that it has anything to do with getting crypto-encrypted.
It all depends what you mean by “crypto,” though. If you mean “encrypted,” then the bitcoin and ether you bought are encrypted; they are being stored in a way that makes it impossible for anyone to read them. And if you mean “digital currency,” then everything we’re talking about here is digital currency, as we think of it today.
So it’s important to know what you want to buy, and why you want it. This is a beginner’s guide, so let’s start there.
Cryptocurrency is a new gold rush. It’s like the gold rush, only it’s crypto and it’s digital
In the mid-1990s, when I started writing about the Internet, it was called e-commerce. The Internet was a wonderful invention. It made commerce easier, and it let people in different places communicate more easily. But it wasn’t e-commerce. It was only a very limited kind of e-commerce: computerized auctions.
My friend Ben Laurie said to me, “Why don’t you write a book about investing in the Internet?” I laughed and said that the Internet was not an investment market. But he insisted. He had been studying markets for years, and he knew it was possible to invest in financial markets without buying stocks or bonds or mutual funds or anything else that had already been invented. “Nobody knows what’s going to be valuable in ten years,” he said. “But these technologies are changing every day.”
This turned out to be true, and when I wrote The Age of Spiritual Machines in 1999, Ben’s prediction turned out to be wrong: we now know what will be valuable in ten years; but it won’t be new technologies. It will be old ones: we’ll be buying stocks again, and bonds again, even though they haven’t changed since they were invented 150 years ago!