Dear Happy Investor, In this article we discuss crypto currencies for dummies. Think of it as a beginner's guide with basic information about cryptocurrency. The purpose of this article is to get a first impression of how investing in crypto currencies works. Thus, we start with an explanation of cryptocurrency for dummies. We will look at how it works and we will give a step-by-step plan on how to start. Finally, we name the risks, since crypto for dummies can be quite a dangerous investment.
On to sustainable financial success!
Explanation of cryptocurrency for dummies
Cryptocurrency is a digital asset or currency that does not need transaction verification from banks or other centralised institutions. Cryptocurrency transactions are recorded on a public ledger.
Cryptocurrencies are kept in digital wallets (online or offline). The term "cryptocurrency," as the name suggests, uses cryptography techniques or encryption methods to validate transactions. This indicates that complex coding stores and sends transaction data across separate wallets and all public ledgers on that blockchain. This high degree of encryption is intended to ensure the data's security and safety.
Bitcoin was the first cryptocurrency, appearing in a whitepaper under an identity "Satoshi Nakamoto" around 2009. Most individuals we know who are interested in cryptocurrencies do so because of its speculative character rather than their complexity and financial uses. For dummies (novice investors), this is a risky game, about which more later.
How does Cryptocurrency Investing for Dummies Works?
Any layperson may claim that cryptocurrencies use blockchain technology without understanding what blockchain is. Many dummies who start investing in crypto currencies don't really know what they are getting into. For example, they cannot distinguish between new crypto with potential and "flop" crypto coins. First, let's go over the principles of blockchain. By understanding this, you will be better able to independently invest in crypto coins that actually have potential. Let's go through the principles of blockchain.
Blockchain for dummies
Blockchain is essentially a method of storing data. This digital record of transactions is subsequently replicated and distributed across the blockchain's computer network. An interesting element is that editing or hacking the system is practically impossible.
As the name suggests, blockchain is a collection of blocks linked together in the shape of a chain. Each block has a specific amount of transaction details, and when a block is filled, a new block is formed and linked to the preceding block.
DLT (Distributed Ledger Technology) is a digital database that is replicated and distributed over the blockchain network. The DLT is interesting in that it is not centralised. This implies that it is not managed by a single individual, but by a network of computers. Blockchain is a kind of distributed ledger technology in which transaction details are stored with an irreversible cryptographic signature. This cryptographic signature is referred to as a hash.
What does cryptocurrency mean to dummies? The short summary: it is a transparent database that cannot be hacked and is not controlled by anyone (decentralization).
The technology is revolutionary. More on that below. One problem with this for investing in cryptocurrency for dummies, is that it is quite easy to create a new crypto currency. This creates a proliferation of hopeless crypto coins that are worth nothing. Dummies who invest in these kinds of worthless coins will eventually suffer substantial losses.
How does Blockchain work?
Before we give a roadmap for investing in crypto for dummies, we will first go into more detail about how the blockchain works. Before a transaction can be stored on the DLT or blockchain, it must go through many critical stages.
Despite the fact that the revolutionary blockchain network operates without a central regulatory body, all transactions must be confirmed. This is accomplished via the use of cryptographic keys, which are data strings (similar to passwords) that recognise users and grant them access to the system.
Every blockchain participant has a private key as well as a public key. The private key is only available to the wallet's owner, but the public key is visible to everyone. These keys, when combined, aid in the processing of a transaction requiring a digital signature.
After the participants agree to perform a transaction, it must be authorised before its details are stored on the blockchain. For this purpose, a consensus mechanism is utilised. In essence, the consensus mechanism is the process that determines whether or not a transaction should be added to the blockchain.
The following are the two most prominent consensus mechanisms:
Proof of Work
Proof of Work (PoW) is a consensus mechanism that refers computers on the network to solve a difficult mathematical problem. Mining, on the other hand, is a difficult operation. It necessitates computational power, which necessitates a substantial quantity of electricity. The procedure of solving complex problems is also called as mining, and miners are usually rewarded with cryptocurrency in exchange for their efforts.
Due to the high energy costs of PoW, blockchain networks began to use the Proof of Stake (PoS) mechanism.
Proof of Stake
Participants in this consensus mechanism must stake their cryptocurrency in the blockchain in order to participate in the validation process. Blockchain technology has progressed to the usage of Smart Contracts, which establish a criteria. When certain requirements are satisfied, these smart contracts execute and validate transactions automatically. As a result, a large quantity of computational power or power utilised is saved.
Where to Buy and Store Cryptocurrencies?
Cryptocurrencies, like other assets, may be purchased, sold, or exchanged via brokers and crypto exchanges. The cryptocurrencies are stored on a blockchain, and the wallet software enables you to interact with the blockchain's balances. The wallet itself stores addresses and allows the owner can move them to other locations while enabling others to view the amount stored at any given address.
Most cryptocurrency wallets allow users to transmit, receive, and store cryptocurrency. Some have a feature that enables you to buy and spend cryptocurrency. However, some crypto wallets provide additional features such as coin/token exchange, staking for a fixed return, and access to dApps (decentralised applications) based on blockchain networks.
How does buying crypto coins work for dummies? As a beginner, it makes sense to first create an investment account. Then you look at which crypto coins you want to buy. You buy the coins quickly and easily through the investment account. From now on, you own crypto. You can sell it whenever you want, whether that is one minute later or not for 10 years.
Step by Step Way to Invest in Cryptos for Dummies
Dummies buy crypto through investment platforms that offer cryptocurrencies. This is really just the beginning. From here on out, there is a lot involved. For example, investing in cryptocurrency for dummies is anything but simple. Yes, anyone can create an account. No, not everyone can make a profit from crypto. Especially as a dummy, you run the risk of making a loss because you have too little knowledge. Thus, in addition to knowledge about crypto currencies, there is much more involved.
Here are some important steps for dummies who want to start with crypto:
- Choose one of the reliable crypto brokers to create an account
- Sign up and create a trading account through proper document verification
- Learn about trading strategies in crypto (e.g., short vs. long term)
- Practice first through a demo account with fake money. This can be done through popular brokers such as eToro.
- Gained enough experience? Then start with real money and invest in the desired crypto coins
- Use a digital wallet to store your currency (you can find this through the brokers)
- Stick to your strategy and keep improving continuously
It is important to have a good strategy. Crypto currencies for dummies is risky. It's not like stocks, real estate or ETFs. They have more certainty of long-term growth. With crypto currencies, however, this is still uncertain. And so you need to be primarily short-term focused, with the intention of investing for the long term.
This requires a different strategy. Want to know more? View examples of good crypto trading strategies here.
What are the Risks for Dummies Who Invest in Cryptocurrencies?
Unlike government-issued currencies, the value of cryptocurrencies is entirely determined by supply and demand. This can lead to huge changes in the short term. A disastrous consequence of this can be that you that dummies make significant losses with crypto. Moreover, compared to conventional financial assets such as stocks, bonds and mutual funds, crypto investments are subject to significantly less government oversight. Finally, it is still unclear how viable the crypto market is in the long run. It is, unlike stocks, not yet proven. For example, there are many worthless crypto coins out there today.
These are other potential risks that crypto dummies face when investing in cryptocurrencies:
- Highly volatile with potentially very high price losses
- Long-term viability is in question
- Legal risks
- Tax risks, as dummies often tend to evade taxes
- High cost of production/mining
- Mining is not energy efficient at all
- Limited regulation and protection of crypto investors
- Real chance of regulation of the crypto market
- Risk of scams, scams, phishing, et cetera
So to conclude: there are major risks related to crypto investing for dummies.