Cryptocurrency Basics | Introduction to Cryptocurrency
Introductory video on cryptocurrency. The basics as well as some considerations prior to investing.
Hello ladies and gentleman welcome to the Elias Talks money v-log where I talk all things money. Today I'm going to talk about investing in cryptocurrency. What it is and how it originated, as well as some of the basics of investing in it.
Cryptocurrency is a digital or virtual currency that is secured by cryptography. They are normally decentralized networks based on block-chain technology.
Block-chain technology is a new method of record keeping, in which there is no one central entity that is doing the record keeping. Instead there are many computers that work in concert to produce a distributed or shared ledger.
The computers simultaneously through consensus algorithm come to an agreement on what they think the truth should be. Multiples on the same records being collectively produced.
This duplication of provides security in the event there is an attempt to manipulate the digital records, and is a key feature. Additionally, the decentralized nature of block-chain helps to protect against a corrupt centralized authority.
In applying this to cryptocurrency it cuts out the heavy fees that banks charge, as well as the power & control they and the centralized financial system have. Hence a major criticism of cryptocurrency is that it's the currency of criminals by allowing them to circumvent the oversight of governments and financial regulators.
In practice the level of anonymity in transactions varies by different types of cryptocurrencies. Bitcoin transactions have been traced in the past to prosecute criminals, and probably isn't the ideal choice of criminals. A quote from qz.com reads:
"Laundering money through bitcoin is like pulling off a jewelry heist, but leaving a map to your apartment at the scene of the crime. You can shred the map into tiny pieces—by sending bitcoin through multiple wallet addresses, or accounts, to hide your tracks—but with sufficient time and data-crunching power, it’s possible for other people to reassemble the clues."
Other types of cryptocurrencies like Monero, Dash, and Zcash are considered more private and harder to trace. Monero for example uses an obfuscated public ledger, meaning that is is harder for those outside of a transaction to tell the source, amount, or destination.
Criminals who have less private cryptocurrencies like bitcoin have used Monero to break the link between transactions. They take the other crypto currency and then convert it to Monero, then after some delay covert it back and send to another address unrelated one used previously.
So what to look for when you buy a cryptocurrency? Aside of from the security and privacy features?
Firstly, you want to look at market capitalization of the currency, which you can find on-line. The larger the market cap the less volatile the price usually is. Smaller cap currencies can have wilder swings and this is no different than small cap versus large cap stocks. There is no right answer to this question, but you want to understand what you're getting into.
Secondly, you want to ensure there is enough liquidity in the cryptocurrency. So while you might want to trade in a smaller currency that is more volatile, and has more potential upside, you still may want to ensure that you can fulfill orders. i.e. So you can buy and sell when you want. If you are buying one of the top 10-20 currencies you should be able to avoid this issue.
Thirdly, how are you going to store your cryptocurrency? You could look at buying through a cryptocurrency exchange, which usually supports a limited range of currencies. This can offer some convenience, and allow you to sync up and transfer funds from your bank accounts. The issue here is counterparty risk. There have been cases of a few exchanges being hacked, and it is important that you look into the history of the brokerage and their security track record. If something happens with the custodian you may or may not be reimbursed.
If you want to take control in your own hands you can use a hardware wallet like a Trezor to keep your currency. It's a device that you physically plug into your computer, supports a number of currencies, and has a password manager with 2 factor authentication. There are some protections against lost passwords and devices.
The other option is a software wallet. Electrum is an example of a software wallet. Using the electrum software you store your crypto in a set of encrypted files on your computer. Electrum can be used in combination with hardware wallets like a Trezor.
The problem with this is if your computer gets hacked or your hard drive fails you could lose your coins. You will need to make sure that you have some sort of contingency setup to prevent this. The app does have a recovery process which allows you to create a "cold storage" with printed or handwritten keys, which is referred to as a "paper wallet".
So those are my thoughts and considerations for getting started in cryptocurrency investing. In a future video I'll be going over the different types of the major cryptocurrencies, and their pros and cons. If you enjoyed my video please like and subscribe to the Elias Talks Money YouTube channel or follow me on the Elias Talks Money Facebook Page. Keep your feet on the ground and your head in the sky over and out.