Cryptocurrency has ushered in a revolutionary change to how people use money – so much so that understanding what it is and how it works is no longer optional.
In a nutshell, the crypto revolution is taking traditional financial concepts and making them digital and decentralized – outside the control of banks and the government.
Over the next decade, cryptocurrency will disrupt finance in the same way that the Internet disrupted the publishing industry and Amazon.com disrupted retail.
It represents one of the greatest investment opportunities we will see in our lifetimes.
And while it’s true that many cryptos such as Bitcoin (BTC) and Ethereum (ETH) have already soared many thousands of percent, this revolution is still in its early stages – which means it’s not too late to make your own fortune in crypto.
But before you get started, you need to understand exactly what it is you’re investing in so you can make the best possible choices.
I can’t emphasize this enough: Educating yourself is the key to success in crypto investing. It can mean the difference between generating life-changing wealth and losing it all.
That’s why we put together this guide to introduce you to the basic concepts of cryptocurrency – everything from how it works to why it has value and all the moneymaking opportunities that come along with it.
Don’t worry, it’s not as daunting as it might seem. Especially with American Institute for Crypto Investors in your corner.
Cryptocurrency 101: How It Works
Cryptocurrency is digital money. It only exists on the Internet, which each crypto uses to link the computers, exchanges, and wallets that connect to its network. Each one is controlled by its own code, which contains the set of rules that govern:
- How new units of the crypto are created…
- How many of those units can be created…
- How transactions on the network are verified…
- And management of the blockchain, a digital ledger that keeps a record of all the transactions.
The answers to those questions depend on the purpose for which the cryptocurrency was designed.
Bitcoin was designed to be scarce (only 21 million will ever exist) and require the use of an ever-increasing amount of energy to keep the network secure. Ethereum and other “platform cryptocurrencies” are designed to serve as “global computers” that can run “smart contracts.” (I’ll have more on that in a minute.)
There are also different methods of securing a network, such as proof of work (PoW) and proof of stake (PoS); you don’t necessarily need a full understanding on how those work to use crypto, but the more you know the better – so check out this breakdown to learn more.
The good news is that the code does all the work of running the network. While it can be amazingly sophisticated, what goes on “under the hood” is all invisible to the user.
To start using crypto, you need only open an account at a crypto exchange such as Coinbase or Kraken. Both of these United States-based exchanges allow you to link directly to your bank account to pay for your crypto purchases. At an exchange, you can buy, sell, and store cryptocurrencies. Many of our readers use Coinbase as a starting point for their crypto investing journey, and we’ll walk you through how to set up an account right here. For any cryptos not available on Coinbase, you can easily figure out what cryptos trade on what platforms with this trick.
Now, to send a cryptocurrency from one wallet to another, you need to insert the address of the destination wallet. A crypto address is just a long string of letters and numbers. But it’s important you get it exactly right (most folks use the copy-and-paste function) because sending crypto to a wrong address usually results in the permanent loss of those funds.
Although you can keep your cryptocurrency in your online wallet at the exchange where you buy it, crypto experts agree that it’s best to transfer your long-term holdings to a crypto wallet that you control on your personal computer. When sending crypto from a wallet you control, you also need to know your private key – a long password phrase only you know that prevents others from stealing your cryptocurrency.
Never, ever, ever share your private key with anyone. Ever. (Click here to access our full guide on how to protect your crypto.)
While it may seem complicated, crypto companies are working hard all the time to make buying and using crypto much less intimidating.
And clearly, plenty of people are figuring it out – as crypto continues to explode in popularity.
Now, let’s talk about those huge gains you’re always hearing about…
Cryptocurrency 101: A Wealth Creator for the Ages
For most people, the first thing about crypto that grabs your attention is the incredible gains.
When Bitcoin started out, it was worth less than a penny.
It took two years to reach $1.00, but even that represented a gain of 10,000%. Two years later, in 2013, Bitcoin reached $1,000 for the first time. That’s a 100,000% gain. In 2017, Bitcoin zipped past $10,000 and nearly hit $20,000.
And over time, it just keeps powering higher – surpassing $68,000 in November of 2021:
It’s no wonder cryptocurrencies have attracted the interest of such investing gurus as Stanley Druckenmiller, Cathie Wood, and Paul Tudor Jones.
Of course, crypto’s huge price rallies are often followed by nasty plunges of 30%, 50%, or more. But over the long term, the prices of the top cryptocurrencies like Bitcoin and Ethereum go up.
Just bear in mind that this is an extraordinarily volatile asset class. And that volatility hasn’t stopped hundreds of billions of dollars from pouring into this asset class over the past few years.
In 2016, the total value of all cryptocurrencies was about $12 billion. In early 2021, when crypto prices were at a peak, that figure climbed to $2.5 trillion – more than a 200X increase.
All that said, it’s fair to question why this is happening. Or, more to the point, what makes cryptocurrency valuable? Exactly why are people investing so much money in them?
Let’s find out…
Cryptocurrency 101: Why It Has Value
Critics of crypto like to say it has “no intrinsic value,” that the true value of all cryptocurrencies is zero. But these critics are judging crypto by outdated rules.
Cryptocurrency is a technological innovation with capabilities beyond that of any previous form of money. Here’s what makes it unique.
Decentralization: Most cryptocurrencies are controlled by code, unlike fiat currencies like the U.S dollar controlled by a government or central bank. It means users can transact directly with each other – peer-to-peer – without the need for a third party like a bank.
Transparent: All transactions are broadcast over the network and become part of a public digital ledger known as the blockchain. Anyone can view these transactions on one of many blockchain explorers on the Internet.
Privacy/anonymity: Although each transaction is public and linked to a wallet address, each user’s personal data is not linked to that address. This provides a much higher level of privacy than the U.S. banking/credit card system.
Borderless: Since crypto uses the Internet, national borders have no meaning. Users can transact directly with a person in another country without jumping through the hoops of the global financial system. This is especially useful for cross-border transactions like remittances.
Deflationary: Most cryptocurrencies have a fixed total supply, like Bitcoin, or have a way to “burn” tokens to control supply. These rules prevent cryptocurrencies from becoming devalued by the creation of more coins. Compare that to the endless money-printing of central banks. Since 1913, the year the U.S. Federal Reserve was created, the U.S. dollar has lost 96% of its buying power.
Verified ownership: Because blockchains are secure digital ledgers, they give cryptocurrencies the ability to provide proof of ownership of an item in either the digital or physical world.
Smart contracts: Some cryptocurrencies, such as Ethereum, are programmable. That means they can run smart contracts – a program that executes on the network when specified criteria are met. It runs on the blockchain as if the blockchain were a giant global computer. The smart contract checks with a trusted online source called an “oracle” to determine how to settle the contract.
Smart contracts have launched several major phenomena, including decentralized finance (DeFi) and NFTs (non-fungible tokens). Both of these have proven to be major drivers of cryptocurrency value, so let’s take a closer look at them…
Cryptocurrency 101: DeFi and NFTs
Let’s start with DeFi, which is short for decentralized finance. It’s a crypto phenomenon that is already making its disruptive potential felt.
In DeFi, basic financial functions like borrowing and lending – as well as exchanging assets – take place completely outside the realm of traditional financial institutions.
Strangers interact with each other with only the software as an intermediary.
At a decentralized exchange like UniSwap, people can swap one cryptocurrency for another using trading pairs. It’s a lot like foreign exchange trading, but all done automatically.
On a decentralized exchange, anyone can create an account and start swapping cryptocurrencies in minutes. There are no forms to fill out. No Social Security number is required. You don’t have to provide your address or a photo ID.
However, it’s important to note that DeFi exchanges are unregulated – so users are taking on a certain amount of risk.
Some DeFi sites let customers borrow crypto with few or no questions asked. Other customers provide the crypto that gets loaned out in exchange for impressively high interest rates.
Rates on cryptocurrencies like Bitcoin and Ethereum range from 1% or 2% up to 6%. Rates on stablecoins – cryptos with a value tied to the U.S. dollar – can go as high as 10% to 12%. You can see why DeFi presents a threat to the traditional banking system.
All of this is possible thanks to the power of smart contracts, which ensure all that financial activity takes place in a way that no one is cheated. The rules are baked into the code right from the start and can’t be altered by anyone.
Now, let’s talk about NFTs.
There’s been a lot of hype around NFTs, with the prices for some of them going for millions of dollars.
But what are they?
NFT stands for non-fungible token. That’s just financial-speak for a unit of exchange that’s unique.
Pretty much anything that can be used as money is fungible. That includes U.S. dollars as well as cryptocurrencies like Bitcoin. Any bitcoin can be exchanged for another. Any dollar can be exchanged for another.
But an NFT is a one-of-a-kind token or piece of data stored on a blockchain. It usually represents a single object, which could be a physical object in the real world or a digital object on the Internet, like a video or a piece of art.
While the NFT market has at times gotten overheated, the underlying technology holds great promise.
For instance, NFTs can revolutionize how artists can get paid for their work. And not just for an initial sale. An NFT can be programmed to send a royalty to the artist every time a copy is sold.
The digital nature of NFTs also makes them perfect for buying and selling virtual assets in video games. Game makers are already incorporating NFTs. Several cryptocurrencies, such as Enjin Coin (ENJ), are actually designed for this purpose.
NFTs can also be used to track collectibles, like digital trading cards, or to create digital certificates of authenticity. NFTs can even be used to generate tickets to events like concerts and sporting events.
(You can learn even more about NFTs in this special edition of American Institute for Crypto Investors LIVE.)
NFTs and DeFi are prime examples of the practical, real-world applications that make cryptocurrencies valuable. It’s why so many people see them as attractive investments.
Now, for the ultimate question…
Should I Invest in Crypto?
Cryptocurrency is truly a new asset class. You should think of it as a different category of investing, just as stocks, bonds, and precious metals are all different categories of investing.
It’s also very new, and much of it is unregulated. That makes crypto riskier than other types of investments.
But as is often the case, higher risk can bring higher rewards. And with cryptocurrencies, the long-term rewards will be extraordinary.
In fact, we believe that cryptocurrencies will be the biggest investment opportunity of the 21st century.
And you don’t need to go “all-in” on crypto to benefit from it. Most retail investors should start out by allocating about 1% to 2% of their portfolio to crypto. As you learn more about this asset class, that can increase – but unless you become an expert, you probably shouldn’t devote more than 5% or 6% of your investments to crypto.
Then, there’s the issue of what to buy. Chief Crypto Strategist Nick Black recommends the following six cryptos for beginners to start their portfolio with:
- Cardano (ADA)
- Polkadot (DOT)
- Cosmos (ATOM)
- Fetch.ai (FET)
However, many lesser-known cryptocurrencies are likely to bring you even higher percentage gains – if you know where to find them. See, there’s a new class of “penny coins” that could deliver dozens of “Bitcoin-like” windfalls as early as 2022… Most folks have never even heard of them, but you have a huge advantage today. Because my colleague (one of America’s first Bitcoin millionaires, in fact) will show you which of these “penny coins” could break out next right here.
Congratulations on starting your journey to becoming a seasoned crypto investor! There’s plenty more to learn, and we’ll be here to guide you all along the way.
Make sure you join Nick Black tomorrow at 11:30 a.m. E.T. right here for American Institute for Crypto Investors LIVEto get the latest crypto market analysis. You can also subscribe to his calendar here so you never miss a stream.
Advisory Board Member, American Institute for Crypto Investors
Follow me on Twitter @DavidGZeiler.