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What is cryptocurrency?
What is cryptocurrency, and how can you invest in it?
From Elon Musk tweeting about Dogecoin to the wild fluctuations in the value of bitcoin, cryptocurrency has been in the news lately. All that publicity has many people wondering, “What is cryptocurrency? How does it work? And does it make sense for me to get in on this investment?” The honest answer is that it depends. Before you dive in, avoid costly investing mistakes by learning everything you can about crypto.
What is cryptocurrency?
Cryptocurrency is a form of digital currency. Unlike the dollar, which is “fiat money,” or government-backed currency, cryptocurrency is decentralized and based on blockchain technology. A blockchain is a system of verifying and recording transactions through a digital “ledger” that’s distributed among many computers.
This system makes cryptocurrency more secure than other digital currencies. Plus, because no one is in charge of a central database, there is no danger of someone stealing your cryptocurrency, and it isn’t as affected by fluctuations in the value of the dollar.
All of these features help to answer the question, “Why are cryptocurrencies so popular now?” Crypto is a “store of value” investment similar to gold, so many people are wondering how to invest in cryptocurrency as a hedge against inflation. Some people believe that virtual money will eventually replace fiat currencies as we move into the digital age – and what is cryptocurrency if not a chance to get ahead of that trend? Only time will tell if investing in crypto is a smart move.
How does cryptocurrency work?
Cryptocurrency is based on cryptographic proof, or verified transactions recorded in code on the blockchain. To verify a group of transactions, any computer on the network can solve a mathematical puzzle. There are two ways to solve these puzzles: proof of work and proof of stake. In proof of work, these “miners” compete against each other to solve the puzzle the fastest. The first to do so gets a small amount of cryptocurrency as payment. In proof of stake, miners “stake” a certain amount of their cryptocurrency, and the system then chooses which miner will validate a group of transactions.
You can see that the answer to “How does cryptocurrency work?” is somewhat complicated. Still want to know how you can mine cryptocurrency? It’s becoming difficult for individuals to mine in proof of work systems, which require huge amounts of energy and therefore large networks and sophisticated technology to mine. You may be able to mine cryptocurrency under a proof of stake system, but you’ll need to already own crypto. If you want to mine, it’s time to learn how to invest in cryptocurrency.
Types of cryptocurrency
It’s estimated there are anywhere from 5,000 to 10,000 types of cryptocurrency. While they all work in essentially the same way, there are differences in the ways transactions are verified.
Bitcoin is easily the most popular and established cryptocurrency. There are more than 18.5 million bitcoin tokens in circulation – and there is a capped limit of 21 million. Limiting the number of bitcoin that can be mined helps ensure its value.
Ethereum has a slightly different answer to the question “What is cryptocurrency?” Ethereum is a software platform for decentralized production of apps, and “ether” is the token that these apps run on. It can be used to buy other cryptocurrencies, making it popular with investors.
Created partly as a joke, Dogecoin quickly became one of the most popular types of cryptocurrency. There’s no cap on the number of Dogecoins that can be created, so it’s popular with miners who are richly rewarded for their work. This also means it isn’t a good store of value investment, so cryptocurrency investors beware.
How can I spend cryptocurrency?
If you want to cash out your crypto, you have a few options. The most popular is to connect it to a debit card, which allows you to spend it anywhere. There are also a number of companies that accept crypto directly, including Microsoft, Virgin Galactic, Expedia, NewEgg and Overstock.com. However, these options are generally only for bitcoin, not other types of cryptocurrency. Can you convert cryptocurrency to cash? Usually, yes. You can transfer it to your bank account in the form of cash through a crypto exchange like Coinbase or Kraken.
What to know before buying cryptocurrency
- Do your research. While you don’t want to live with a fear of money, you don’t want to jump into something you don’t understand either. The key to how to invest in cryptocurrency is research, research and more research. Read and ask questions in online forums, reviews and social media groups. Listen to podcasts, read industry magazines and feed your mind with the content it needs to make sense of it all.
- Protect yourself. Thorough research also helps to protect you from scams – and scammers abound. Always research any offer you get and transact through verified and trusted platforms. And beware of exchanges that offer too much leverage. Borrowing a high percentage of the cost of an investment is a dangerous game. While you want to create a money machine, you must be smart about it.
- Keep a long-term view. If you have high risk tolerance, a volatile market like crypto may not bother you. But investing in crypto as just one part of a diverse portfolio is a move that anyone can make, as long as they keep a long-term view.
How to invest in cryptocurrency
1. Determine what you can spend
Before you get in the game, you need to know how much to invest. Experts usually recommend that you invest about 2% to 5% of your overall portfolio in crypto, because it is so volatile and the market is evolving.
2. Choose your crypto
Bitcoin is a safe bet, there are other types of cryptocurrency. Be on the lookout for a dedicated community, a strong company vision, innovative technology, an active GitHub repository and a solid pricing history. If you don’t know how to determine these things, you’re not done with your research.
3. Choose your exchange
Some traditional online brokers like Robinhood, eToro and Sofi Active Investing are starting to get involved in cryptocurrency. You can also use exchanges like Coinbase and Gemini, which allow you to buy and sell crypto and hook up a “wallet” where you will store it.
4. Buy crypto
Hook up your bank account or payment method to your wallet, and you’re ready to start buying.
So, what is cryptocurrency? It’s either the money of the future or a fad that is destined to disappear. Only time will tell whether learning how to invest in cryptocurrency is worth it.