Curious about crypto? Since cryptocurrencies are volatile and involve a high degree of risk, it can be a good idea to do some research. Learn the basics with this crypto guide.
Cryptocurrency, often abbreviated to “crypto,” is any type of decentralized, digital currency that’s based on cryptography. IIf you want to understand cryptocurrencies for beginners, these three principles—decentralized, digital, and cryptography—are key.
Decentralized means that the currency isn’t issued by a central authority like a government or bank. The currency is instead possessed, exchanged, and governed by those who use it.
And it’s digital, meaning that crypto isn’t based on dollars or coins or gold. Instead the currency is generated by a mathematical process done by a network of computers. This same network is then used to process and exchange the currency all around the world.
Cryptography refers to the mathematical and technical tools used to ensure that each unit of cryptocurrency is unique and can’t be copied. Cryptocurrency was designed to solve a problem in computer science: How to verify that a digital object is unique, and has not and can not be copied without using a central respiratory or databases. The technology used in cryptocurrencies, known as a distributed ledger, is based on cryptographic techniques. Cryptography is the field of communicating in codes that can be translated by two parties who are communicating with each other but are indiscernible from a third party. This matters for cryptocurrency because holders of it need a way of saying that the cryptocurrency they possess is uniquely theirs.
The “ledger” that records all Bitcoin and Bitcoin transactions is known as the “blockchain.” It was invented alongside Bitcoin as a decentralized way to transact with digital money. On the most basic level, it is the technology that enables Bitcoin to move about the Internet.
While different cryptocurrencies are based on different mathematical processes and have different user bases and networks which support them, they are all based on this principle. This guide to cryptocurrency is intended to be a resource for those just learning about crypto.
Ethereum is a computing platform that enables decentralized applications to be built. Its programming language is considered to be more flexible than earlier cryptocurrencies, and allows transactions to occur in seconds. As opposed to relying on a central company to play gatekeeper and run applications, ethereum utilizes a system of “nodes”—computers and servers that are independently operated.
Litecoin is based on blockchain technology like Bitcoin, with its main distinction being a faster time to confirm transactions. While Bitcoin’s average confirmation time is around 10 minutes, Litecoin is roughly 2.5 minutes. Litecoin is sometimes considered the “silver” to Bitcoin’s “gold.”
With all the different crypto options out there, it may be difficult to decide which ones are worth investing in. Before investing in any of them, you want to think about why crypto makes sense as part of an investment portfolio. No crypto guide would be complete without these helpful resources on the differences between cryptos.
By far the most popular cryptocurrency to invest is Bitcoin. While the price can fluctuate, there are currently several hundred billion worth of Bitcoin in circulation. Bitcoin saw some of its most extreme fluctuations in 2017 and 2018, when it rose in price from around $1,000 in the beginning of 2017 to almost $20,000 by the end of the year and then falling down to around $3,500 in 2018 before rising again. Bitcoin is the easiest crypto to buy and sell and, for most people who invest in a single crypto, Bitcoin is the one they have.
Bitcoin was the world’s first cryptocurrency, and it is created through a fairly complex process called mining. How bitcoin mining works is that miners are all racing to solve complex mathematical problems. When they do, the transaction is confirmed and added to the blockchain—and the miners get rewarded with new Bitcoin.
The popularity of Bitcoin drove technologists to invent new types of coins. A few of these are variants of Bitcoin itself, like Bitcoin Cash, which is optimized for faster processing speed. There were also entirely new coins based on similar underlying technology. These coins may not be a liquid as Bitcoin—meaning they are harder to buy and sell without moving the price. These coins that pop up are often known as “altcoins.” While all cryptocurrency investing is risky, investing in little-known and relatively new coins is especially so, as the markets may be quite small, leading to large price swings and difficulty of steady price rises as they compete for attention with other, similar cryptos.
To invest in Bitcoin or other cryptos you need to find a way to purchase it and hold it. You typically need to use a specialized cryptocurrency broker or exchange which can convert “fiat” (i.e. dollars or any other standard currency) into crypto and then also securely store your crypto in what’s known as a “wallet.”
But the “why” of crypto investing is just as important as the how.
One reason to think about investing in crypto is diversification. The theory of diversification holds that an investor can reduce the risk of their portfolio by investing in a variety of different assets, or a variety of securities within a certain asset class, or by increasing the number of assets or number of securities they’re investing in.
The oldest crypto, Bitcoin, is just over ten years old, meaning there isn’t much historical data to refer to compared to, say, the S&P 500. But crypto might still make sense to investors as an investment in a new technology or an asset that’s drawing intense interest both as a new way of conducting transactions online and as an investment product.
While cryptocurrency has become much easier to buy and sell thanks to widespread interest in it from the general public, the cryptocurrency rules and regulations are less well established than they are for other types of assets or currencies like stocks or dollars.
The Securities and Exchange Commission (SEC), which regulates the trading of many financial assets, has basically split the cryptocurrency world into two. Bitcoin is a “payment mechanism and store of value,” i.e. not a “security,” which is the type of financial asset used to raise money for a company, like a stock or bond, and come under much more strict scrutiny from the SEC. Many “tokens,” cryptocurrencies issued by companies to fund or pre-fund a business project, do fall under the SEC’s definition of “security” and thus face much harsher and strict regulation.
But even if the SEC is not as interested in mainstream crypto, the Internal Revenue Service is. The IRS has detailed guidance on the tax implications of buying and selling Bitcoin and other cryptocurrencies that should be reviewed before investing in them.
One of the biggest concerns with cryptocurrency investing is safety and security. While designed on the principles of cryptography, cryptocurrency—especially in its early days—was beset by hacks and can be more tricky to manage than, say, a bank account.
To store crypto securely, an investor needs to use a crypto wallet, a software program for managing the assets. But even if you have software you trust, you will be relied on to store and remember and secure a password that only you know. This is frequently an issue with crypto, as people who forget their passwords essentially have had their assets stranded.
To get crypto into the wallet itself, investors need to use a crypto exchange. How crypto exchanges work is that they provide a platform for buying and selling crypto—either by exchanging one type of crypto for another, or, more typically, using fiat money to purchase or receiving fiat money for crypto you sell. Even as crypto exchanges grow in popularity and more sophisticated security systems are designed, hacks and instances of theft still continue to take place.
SoFi secures all crypto holdings from fraud or theft—so your holdings are protected.✝
Bitcoin, Ethereum, and Litecoin are all tradable today through SoFi Invest®. Crypto is tradable 24/7 and is purchasable in dollar terms, allowing you to buy tiny fractions of coins. You must reside in a licensed state, and please note that while the crypto industry is evolving, it is still nascent and volatile—so be careful!