From Bitcoin to Ethereum to ‘meme’ coins like DogeCoin, cryptocurrency has taken the financial world by storm over the past few years. Originally conceived as a way to decentralize payments, crypto continues to evolve as a space, prompting many to ask, “Is this something I should get in on?”
Of course, before you start diving into the world of cryptocurrencies, you must understand the basics of why they were created, how they work, and what the future (potentially) has in store for them.
First thing’s first: the basics.
What is crypto?
Before Elon Musk became synonymous with ‘altcoins’ like DogeCoin, cryptocurrencies had been causing a stir for quite some time. The first crypto, Bitcoin, started in 2009, sparking new conversations about what money is and how regulated it should be. Over 10 years later, and those conversations are still happening – all on a much larger, more global scale.
Now onto the basics: Cryptocurrency is a digital payment type that can be traded for profit or used to buy things online. And now more than ever, big brands like Tesla and Starbucks accept crypto as a viable payment method.
Unlike traditional currency, which is stored in banks, crypto is stored on secure online ledgers. This means that you can access your funds anytime, anywhere, as long as you have a smartphone – no need to go to the bank or use an ATM. This is all made possible through blockchain technology, which helps keep transactions secure and discreet.
That sense of anonymity made cryptos like Bitcoin super popular for online transactions on the Deep Web. For a while, cryptocurrency was largely seen as something used by criminals for purchasing illegal goods and services.
Thanks to crypto gaining more mainstream attention from big names in tech and finance, more people than ever now see these currencies as a real and safe way to pay for goods – and, more importantly, make a profit. Reaching a peak of $65,000 per coin in April of 2021, Bitcoin has proven to be a lucrative investment for savvy individuals.
Still, before you even think about investing in Bitcoin and other emerging currencies, we need to go over a few things and address some common misconceptions.
7 things you need to know about cryptocurrency in 2021
- It’s totally different from traditional currency
Like we mentioned earlier, crypto is a completely digital currency, which means it only exists online. You’re not going to be carrying any BitCoin around in your wallet. But that’s not the only way cryptocurrencies differ from traditional coins and paper money.
Crypto is decentralized, which means that no government or central bank is overseeing it. This, of course, comes with its own perks and drawbacks. For example, if the brand that runs the crypto you own goes bankrupt, there’s going to be no way for you to get your money back (the opposite of what would happen if a bank failed).
Crypto brands use blockchain technology to create a decentralized currency that doesn’t rely on any central authority. Simply put, a blockchain is a digital ledger of transactions that is organized and distributed across an entire network of computers that make up the blockchain.
Ultimately, it’s a way to build security and trust within a system that handles highly sensitive financial information. This is all made possible through cloud-based infrastructure, which has made incredible leaps in the past decade.
To put this into context, the cloud as we know it today was just getting off its feet in the mid-2000s with the help of digital giants like Google, IBM, and Amazon. The pace of innovation and evolution within the cloud through blockchain is a big reason why blockchain-based cryptocurrency is labeled as part of “Web 3.0”.
- Bitcoin isn’t the only big player
One of the biggest misconceptions about crypto is that it’s Bitcoin or bust. While Bitcoin may be the name most people are familiar with, it’s by far not the only big name in the crypto world. Around 10,000 unique cryptocurrencies are floating around, with some of the biggest being Bitcoin, Ethereum, Binance, and of course, meme coins like Dogecoin.
If the sky-high price of Bitcoin is off-putting to you, or you’d just like to get in on the ground level of something, there are a variety of other options to check out. Just make sure you’ve got a healthy risk appetite first!
- It’s not all anonymous
One of the biggest draws of crypto from the beginning has been its claim of digital anonymity. Making anonymous transactions is a pretty handy thing in and of itself – not just for criminals and Dark Web prowlers. But the thing is, anonymity isn’t crypto’s strong suit at all.
Yes, some coins like Monero prioritize keeping users’ transaction amounts and destinations private; most others don’t operate that way. These currencies are organized and kept track of on public blockchains, which means that while they may be secure from cyberattackers, your information will never truly be anonymous.
For example, here is a website where you can view Bitcoin transactions taking place in real-time. Depending on the type of coin you use, that coin’s blockchain may include information such as your specific transaction amounts as well as your wallet address. This is a string of characters linked to your digital wallet – which others use to identify you, especially if a seller collects your shipping address.
If privacy and anonymity are a priority, you’ll want to do your research to find those cryptocurrencies that operate on private blockchains.
- Payments aren’t reversible (most of the time)
When it comes to making payments with crypto, it’s important to understand that once your money is spent, it’s unlikely that you’ll be able to get it back if something goes wrong. There aren’t typically many safeguards in place if you get scammed or sent the wrong product, meaning the only way you can get paid back is if the seller actually sends your money back directly.
Before you make any purchase, make sure to research the seller, their location, reviews, and where/how to contact them if something goes wrong with your purchase. This will save you a lot of headaches when you’re dealing with smaller sellers.
- Tracking is everything
When you start buying and investing in cryptocurrency, it can be easy to get wrapped up in the newness of it all that you lose track of where you have gains and losses. The thing about crypto is that it’s one of the most volatile spaces to invest in.
Prices can change at the drop of a hat (or as soon as Elon Musk hits ‘send Tweet’). At the speed this market moves, you’ll probably need help keeping track of everything, especially if your portfolio involves several coins.
We recommend tracking your investments and transactions with CoinMarketCap. It’s manual, but that’s not necessarily a bad thing, especially if you like taking ownership and accountability over your spending.
- Owning crypto is all about trade-offs
Remember those digital wallets we mentioned earlier? You have to have one to purchase things with crypto, but entrusting those strings of letters and numbers to a third-party online exchange is considered a big no-no in some crypto spaces.
For the most part, these exchanges are unregulated and have been subject to various cyberattacks in the past few years. And if you lose your coins, you’re out of luck because the current holder is always presumed to be the owner. But, a lot of people might not be comfortable being the sole keeper of their digital wallets.
Writing it down on a piece of paper and stashing it away may sound like a secure, analog way to keep cybercriminals out of your account, but if you miss a character or lose that paper, you’ll be the one locked out of your account. So when it comes to keeping up with that information, you have to be willing to make a trade-off.
Do you trust yourself enough to keep track of your information on your own, or will you place your trust in a third-party entity in exchange for convenience?
The good news is, if you’re especially concerned about security, you can create a multi-signature digital wallet. This means that more than one person – such as a spouse, business partner, parent, etc. – must also sign off on each transaction to release funds from your wallet. If you want to make sure you carry the keys to your wallet at all times, this might be the strategy to go with.
- Not all cryptocurrencies are valuable
Crypto is risky. It’s one of the most volatile markets and is poised to stay that way as it continues to grow and become more mainstream. And like many emerging trends, it has a legion of spokespeople behind it, extolling it as the future of money while trying to sell you their latest altcoin.
While it’s true that it’s not just the big players like Bitcoin that you should be paying attention to, you’re much less likely to experience a big loss if you’re investing in one of these more well-known and established players. A celebrity investor may claim that a small coin is the next big thing, yet you could very well end up investing in something that will go nowhere – or worse, end up losing most of your money.
A good rule of thumb to keep in mind when looking at emerging coins is this: it’s likely valuable and will continue to grow in value if a) enough people own it, b) businesses accept it as payment, and c) people trust it.
Do your research before you put your money into anything. And what’s more, don’t put in more than you’re comfortable with losing. There are a dozen untold stories of people losing big for every ‘get rich quick’ story you hear about crypto.
Investing in crypto is not the same as putting money into an ETF for retirement. The only thing you can (and should) expect with crypto is volatility and its ability to change course at a moment’s notice.
The future of crypto
For some, the future of money lies in cryptocurrencies. But what exactly would that future entail? Well, it could go a few different ways. If cryptocurrencies continue to grow, they could eventually displace traditional forms of government-backed currency as the main form of payment people use.
For millions of unbanked people across the globe, gaining more access to crypto could be life-changing. And, to create more resiliency within these currencies, they could be backed with assets that hold real value, like gold or silver. While there are still inherent problems with this approach, creating “stablecoins” is one of the more likely futures that could happen.
However, these “trustless” currencies aren’t exactly trustless after all. For example, Bitcoin is still dependent on the underlying digital infrastructure powering it – much of which is located in China. If the Chinese government – or any other government – wanted to change these currencies, it could. Government interference could wind up having a devastating effect on not just the value of these currencies but their ability to be sent quickly and easily across borders.
Ultimately, the future of crypto is still very much in the air. Various factors could impact it, including bitcoins massive energy usage and efforts to make it more green. It’s important to underscore the volatility of these currencies (at least as they stand today) and reiterate that they’re not yet a replacement for “real” money or a foolproof investment.
Want to learn more about cryptocurrency and what it could mean for you? Check out our podcast with the founder of The Ivy Investor, Courtney Richardson, on what you need to know before you dip your toes in this emerging field.