By now you have likely heard of bitcoin and cryptocurrency, even if you haven’t started adding them to your portfolio. It may seem as though you have already missed out on the cryptocurrency rush because you didn’t buy bitcoin years ago, but the industry is just getting started and there is still potentially huge room for growth (and, of course, huge room for movement in the other direction, too). ‘
You are not alone in thinking you missed the boat. Although around around 79% of Americans are now familiar with cryptocurrencies, 87% of people who say they have heard of bitcoin have not bought, sold, or mined it. Despite the low number of people invested, 36% of Americans believe that cryptocurrencies will be widely used for transactions within the next decade.
Cryptocurrencies are not without risk, however. Yes, all investing comes with risk, but cryptocurrency is uniquely risky, due to both its volatility and the fact that it isn’t regulated by securities laws or consumer protections. Because of this, it may be even more important to understand it in depth.
What Is Cryptocurrency?
Cryptocurrency is a digital currency which is created and secured using cryptography. The way cryptocurrencies are designed can make them difficult to counterfeit and steal, if secured properly.
Some consider cryptocurrencies to be a form of currency, while others see them as a store of value similar to gold. In order to understand why cryptocurrencies hold value and to decide what type of financial asset you consider them to be, it can be helpful to first think about the nature of all money. Money is a representation of value which we exchange with one another for goods and services.
Paper money does not necessarily have intrinsic value; it only has value because the people using it agree that it does. Gold has actual value as a manufacturing material as well as a medium of financial exchange. Bitcoin is similar in some ways to gold in that there will only ever be so much of it in existence. But not all cryptocurrencies are like Bitcoin.
We already use “digital money” in the form of credit and debit cards and services like PayPal. Little by little we have been phasing out our use of paper and metal money. Some countries, like Sweden , are even planning on phasing out paper money altogether and even launching their own cryptocurrencies.
What Is Blockchain Technology?
Not every cryptocurrency is built using blockchain technology, but some of the largest ones, such as Bitcoin, are.
Financial record-keeping has been done for hundreds of years . In order for a monetary asset to maintain its value and function as a form of currency, there must be a level of trust between those using it.
Users of a currency need to agree on its value at the time of exchange and have some way of confirming that the transaction took place. This prevents later disputes from occurring, allows businesses to function, governments to collect taxes, and keeps the currency stable.
A blockchain is an unchangeable record of transactions. These transactions don’t have to be monetary in nature. Blockchains can be used to create contracts, to track the movement of products, to record votes, to prove that property transfers took place, and much more.
Cryptocurrencies and blockchains work hand in hand. For example, Bitcoin is created through the process of maintaining the accuracy of its blockchain. Miners use computing power to solve complex cryptographic equations. As these equations are solved, they prove that all of the transactional information on the bitcoin blockchain is accurate.
As a reward for maintaining the blockchain, bitcoins are created and given to the miners. There are approximately one million individual people mining bitcoins and maintaining the network around the world. The bitcoin blockchain is public and decentralized. This means that anyone can view any transaction between two bitcoin addresses. However, you don’t know who owns those addresses.
The decentralization of the blockchain means that there isn’t a single individual, company, or government in charge of bitcoin and the blockchain. Changes to the blockchain code can be proposed and adopted by the miners. 51% or more miners must opt into a change in order for it to be implemented, otherwise bitcoin splits into two assets. These splits—known as “forks”—have happened multiple times already.
Basic Cryptocurrency Terminology to Know
As cryptocurrency has been growing over the past decade, industry jargon have developed. This terminology is important to know when starting to purchase and store cryptocurrencies. Here are some of the most commonly used words in the crypto space:
If you’re using bitcoin, you have a public “address” where people can send you bitcoins. If you send someone bitcoins, they will see that they received them from your public address. Anyone can look up that public address and see how many bitcoins are in it.
You also have a private address, which is how you secure your bitcoins. Never give anyone your private address. Addresses are generally made up of a string of alphanumeric characters.
Any cryptocurrency that is not bitcoin is called an altcoin.
Crypto is simply a shorter name for cryptocurrency.
As mentioned above, blockchain isn’t owned or controlled by anyone, making it decentralized. Many people in the blockchain space feel that decentralization creates more fairness.
A dispersed recording of replicable, synchronized data. In the case of cryptocurrencies, the blockchain is a distributed ledger shared across many different computers and networks.
Websites where you can purchase and sell cryptocurrencies are called exchanges.
A “fork” is when a blockchain permanently splits into a new version. This can take place when miners vote on a change, when a group takes over 51% of the network and changes the blockchain, or if there’s a bug or more commonly a new set of consensus rules come into existence.
Fear, uncertainty, doubt. FUD describes the emotions that can create panic and cause people to make decisions that affect the market.
The philosophy of holding onto and not selling cryptocurrencies. A misspelling of “hold,” this was a joke that became a common term.
ICO is short for initial coin offering. An ICO is held when a company is raising funds and sells tokens to public or private buyers who then become backers of the project.
The computing process used to create crypto tokens. Not all cryptocurrencies are created using mining, but it is a common method.
There are ways that you can set up a cryptocurrency transaction which require multiple people to sign off on the transaction for it to go through. This is called a multisig transaction.
Peer to Peer
A peer-to-peer (more commonly abbreviated as “P2P”) system doesn’t have a central controller; instead, users interact directly with one another. For example, there are peer-to-peer exchanges where you can sell your bitcoins directly to someone in your local area.
When cryptocurrency information gets sensationalized f up in the media to raise its price or popularity, this is called pumping.
Smart contracts are coded contracts written into blockchains that allow automated transactions to be executed.
Cryptocurrencies are stored in virtual “wallets.” If you keep your cryptocurrencies on an exchange, that exchange controls your wallet. You can also use a digital wallet such as an app on your phone or computer.
One popular form of wallet is a hardware wallet, which is like a flash drive that stores your cryptocurrencies offline but allows an easy connection to your computer for transacting. There are also paper wallets, which are (belive it or not) simply written records of your public and private addresses for your cryptocurrency. Online wallets are called hot wallets, while offline wallets are called cold wallets or cold storage.
A person who owns a significant amount of a cryptocurrency. When that person trades it they can actually affect the market price. These people are called whales.
A Very Brief History of Cryptocurrency
Bitcoin turned ten years old in 2019. In just one decade, an entire global industry has emerged along with thousands of other cryptocurrencies.
In 2008, Satoshi Nakamoto published a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Satoshi, the inventor of bitcoin, is a person or group of people who have not been identified and remain anonymous to this day.
In 2009, the first bitcoin transaction took place between Satoshi and programmer Hal Finney. The first altcoins were released in 2011, including Litecoin and Namecoin.
As more people began to use bitcoin, news started getting out that it was being used on the dark web for illegal activity. It got a bad rap and the price became volatile. A few major scams and company failures also contributed to its volatility .
By 2016, countries were passing regulations about cryptocurrencies, bitcoin ATMs were popping up around the world, and some mainstream companies began accepting bitcoin as payment.
In 2018, hundreds of ICOs were taking place and mainstream investors were getting more heavily involved. Then the crypto winter market crash hit in 2018/2019—many crypto-related companies went out of business, and the market is only starting to recover now.
Historical Performance of Cryptocurrencies
Some call bitcoin a bubble, others think it’s the future of money.. Steps have been taken to form a bitcoin ETF , but the Securities and Exchange Commission (SEC) has not approved it as of this writing.
Over the past decade, cryptocurrencies have seen some astounding gains, as well as some brutal crashes. In 2018, cryptos fell 80% from their January high. Again, the crypto market’s volatility—as well as the lack of government regulation—makes it a highly risky venture. It is yet to be seen which cryptocurrency companies, and which cryptocurrencies, will stand the test of time.
The Top Five Largest Cryptocurrencies
There are thousands of cryptocurrencies on the market today. Each of them offers different characteristics in their transaction times, liquidity, privacy, and other factors. Currently, these are the five cryptocurrencies with the largest market caps:
As the first to market, Bitcoin (BTC) continues to be the most popular and highest valued crypto. Any new industry development—including physical ATMs and crypto credit cards—generally works with bitcoin first.
More than 50 major companies companies now accept bitcoin—Mozilla, Shopify, Microsoft, Expedia, and more. However, some claim that other cryptos are more usable than bitcoin, and bitcoin does have some flaws. Bitcoin has a scalability issue, in that it currently can only process seven transactions per second. Visa®, by contrast, can process a maximum of 24,000/second. Work is being done to improve this transaction speed, but for now bitcoin may not be the best long-term store of currency to buy your latte with, even though you can now use it at Starbucks.
Although ethereum (ETH) is a cryptocurrency—also known as ether—its main appeal stems from its software platform. The ethereum network allows for the creation of smart contracts and decentralized applications to be built on it. The cryptocurrency is used to develop and run applications on the software platform, and by investors purchasing other tokens using ether.
Start buying Bitcoin, Ethereum,
and Litecoin today.
Ripple (XRP) was created to be used by existing banking institutions. It offers low-cost and instant transactions, and allows banks to improve their international money transfers. Ripple doesn’t use mining, which sets it apart from other major cryptos. By the end of 2019, over 200 banking organizations will be utilizing Ripple.
Often referred to as the silver to bitcoin’s gold, Litecoin (LTC) was one of the earliest altcoins created back in 2011. Although very similar to bitcoin, Litecoin offers faster transaction times and is now accepted by numerous merchants.
Bitcoin Cash (BCH) was the result of a hard fork of bitcoin in 2017. This occurred when fewer than 51% of miners adopted a code change and the coin split into two blockchains. Bitcoin Cash aims to have faster transaction times than bitcoin.
Cryptocurrency Regulations and Taxes
Each country has their own rules regarding cryptocurrencies, some fully embracing them and others banning them completely.
Currently, the U.S. government views cryptocurrencies as property and taxes them as such. This means that purchasers of cryptocurrencies could pay capital gains taxes on them. There are certain restrictions on investing in ICOs and U.S. citizens are not allowed to use some exchanges.
New regulations recently passed by the Financial Action Task Force require exchanges to acquire customer identification information for certain transactions. This makes maintaining anonymity more challenging for crypto users.
The vague stance by the U.S. up until now has caused many companies to base themselves elsewhere and to ban U.S. citizens from investing. Other regulations are likely to pass in coming years to further clarify the U.S. government’s stance on cryptocurrencies.
Downsides of Investing in Cryptocurrencies
Every investment comes with risks, and cryptocurrencies are no exception.
Cryptocurrencies are similar to traditional stocks in that their prices rise and fall as supply and demand changes—as well as through the cycles of hype and media attention. However, every mention of an exchange getting hacked, a famous person investing in bitcoin, or a country banning ICOs can affect the market in wildly unpredictable ways. It can be stressful to be invested in cryptocurrencies and see the value of your portfolio rise and fall so dramatically week after week.
The industry is still new, has seen lots of volatility, and there is limited regulation, but that doesn’t mean there couldn’t be some opportunities.
Investing in Cryptocurrencies
If you are ready to start purchasing cryptocurrencies, there area few options. Cryptocurrencies can be purchased on major cryptocurrency exchanges by connecting a bank account and going through a simple identity verification process.
There are thousands of crypto ATMs around the world where cash, or debit or credit card can be input and bitcoin can be sent to a wallet. Some ATMs require users to set up a wallet address first. Generally, ATMs have higher fees for this process than exchanges.
New Tools for Crypto Investing
One way to start purchasing cryptocurrencies is to use a platform like SoFi Invest®. You don’t need to have any technical knowledge about creating wallets and securing addresses, and you can start out with just a small purchase.
Members are able to quickly add cryptocurrencies to an overall portfolio with zero transaction fees; and members can stay up to date on industry news and get industry insights. The SoFi team is available to answer any questions and help you get started.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.