Updated: Apr 29
Cryptocurrency has been a hot topic for some time now. Although we don’t professionally work in this space (so nothing in this article is advice or a recommendation to invest), we want our clients to go into any investment with eyes wide open. As such, here we explain the very basics of crypto. If this is something that interests you, we suggest checking out Crypto Casey who shares her experience and knowledge about crypto for beginners.
What is cryptocurrency?
The easiest way to get your head around it is to consider it digital cash. There is a lot of speculation about the beginnings of crypto. However, many investors will tell you that the very first cryptocurrency was BitCoin. Those days are long gone, and now there are hundreds of different types of cryptos on the market, a bit like there are different fiat currencies in ‘real’ life (Australian dollar, British sterling, Euro, etc).
What is the difference between BitCoin and cryptocurrency?
Whereas cryptocurrency is digital cash, BitCoin is a form of digital cash. However, just to complicate matters somewhat, BitCoin is not presently viewed as cash. Instead, it is seen more like digital gold. It is slow-moving compared to other digital coins, and transaction fees can be quite high. Typically, people investing in BitCoin would do so for the long-term (just like gold).
Cryptocurrency is incredibly volatile
Crypto makes stock market fluctuation look like it’s in slow-mo. For example, BitCoin last year dropped 31% over breakfast and rose 33% at lunch. This is largely because there is nothing of intrinsic value propping up cryptocurrency; it’s all based entirely on speculation. Hence how a tweet or two from Elon Musk can be enough to send values skyrocketing or plummeting.
Cryptocurrency is decentralised
This means there is no third party involved when we send this digital cash from person to person. If you think about finance in the real world, there is always someone in the middle of a transaction. For example, if you want to purchase something online, you need a bank credit card, PayPal, or payment provider to facilitate the transaction on your behalf. Even virtually handing money to a family member or friend involves you moving cash from your bank to theirs. Moreover, money in real life is governed by authorities like the Reserve Bank of Australia. Not so online (although governments are waking up to crypto and taxing citizens as they would with most other assets).
How does cryptocurrency work?
Here is where things get technical, and this answer can take you down a rabbit warren. So we just want to cover the basics here.
It all starts with blockchain technology, which is a sort of digital ledger accessed by authorised users. Every single crypto transaction is instantly and openly recorded in the blockchain. The moment it is recorded, no one can alter it. Furthermore, because crypto is decentralised (not governed by an authority), nobody can influence whether it goes up or down.
This term refers to how cryptos are made and recorded transactions are verified. Imagine an army of decentralised computers all over the globe run by ‘miners’ (individuals, groups and even businesses) who verify and secure blockchains. This requires enormous computing energy (giving crypto a bad name from environmentalists) and complex mathematical work. But, in exchange, the miners are rewarded with new coins that come into existence.
Can you make money with cryptocurrency?
You can make crypto - or lose it - by investing in it just as you invest in shares on the stock market. Unless you work for a company that pays employees in digital cash or someone gifts crypto to you, you have to purchase it (more on that below). Once you have some digital coins, you can begin to trade just as you would on the stock market. However, there are other ways to make crypto, such as curating crypto social media, staking, etc. We won’t go into these here but suffice to say that you have options if you are interested!
How do you acquire cryptocurrency?
So we’ve learned one way is to become a miner. However, if you’re just starting out in this world, this is an unlikely option (at least for now!). Other ways can be through payment. Indeed, more and more companies now accept digital cash payment for goods and services) and companies are increasingly paying staff in crypto as well.
You can purchase cryptocurrency with real money (like Australian dollars) through an exchange like Coinbase or Binance or appoint a broker. In theory, you can keep your money on these exchanges. However, this can be risky, making your money vulnerable to hackers. For more security, you would look to a digital wallet.
What are digital wallets?
Also known as an e-wallet, digital wallets serve as financial storage devices allowing you to store your digital cash, make transactions or track payment histories. Hot wallets like MetaMask or Electrum remain constantly online, meaning coins can be more quickly/easily accessed. Cold wallets like Ledger or Trezor are hardware devices that only connect to the internet when you plug them into a device and activate them.
Is cryptocurrency a safe investment?
All investment comes with risk, not least of all crypto. We mentioned earlier the incredible volatility. However, to answer this question, you also need to consider ‘safe’ in other ways. For instance, a potential security issue is where and how you store and transact this asset.
Whilst ActOn Wealth cannot assist you with any cryptocurrency activity, we are here to grow your wealth in plenty of other ways! If you’re looking to diversify your investment portfolio, contact us to discuss far less volatile options.
This information is not intended to be advice or to provide recommendations. You should not use the information herewith to make any decisions about cryptocurrency investments and instead should undertake your own due diligence. ActOn Wealth will not be held responsible for any cryptocurrency activity you initiate as a result of reading this article.