Wouldn’t it be great if you could just invent money? Whenever you were a little short of cash or wanted to make an extravagant purchase, you could solve a math problem and poof! The cash would show up.
That’s how cryptocurrency started. It’s digital currency not backed by a hard asset or a government, literally invented by a person or group using the name Satoshi Nakomoto. The paper that introduced Bitcoin into the world included a process for mining it by solving a series of increasingly complex equations. There are 21 million units of Bitcoin in the world, 18.6 million of which have been found. Bitcoin ownership is tracked through a digital key known as a blockchain.
I don’t own Bitcoin or other cryptocurrency. To be honest, I don’t see the point, but plenty of people disagree with me. If you want to buy cryptocurrency, you need two things: cash and a cryptocurrency wallet.
It would be a good idea to learn what it is and how it should be valued, too.
What Is Cryptocurrency?
Cryptocurrency, also known as crypto, is any alternative electronic currency that is found by solving programming problems. No government or bank has oversight or control. Ownership is tracked by a digital key known as a blockchain, and transactions are anonymous. Each unit is known as a token. It is different from most currency, known to economists as “fiat currency” and backed by the resources of the issuing government.
There are several cryptocurrencies, each of which has different features. Ethereum was founded on a different blockchain technology that could track assets other than cash. Dogecoin was started as a joke. (No, really, it was created by two programmers who thought cryptocurrency was funny, so they created their own as a joke and it took off.) Who knows about the others.
Well, someone knows about the others, but I’m not sure you need to know about them right now.
Why Is Cryptocurrency So Hot Right Now?
The main reason to own a cryptocurrency is to settle specific types of transactions—like paying ransom—or to make purchases in places that have unstable currencies—like Venezuela. One reason that cryptocurrencies are hot is that people are finding more uses for it and for blockchains.
The buzz around cryptocurrency right now is a classic feedback loop: it is going up because it is going up. As new people find out that the price is going up, they jump in, raising the price.
What is Cryptocurrency Worth?
]If I knew the answer, I would be retired and living in a beachfront mansion on Maui. The short answer is that cryptocurrency is worth whatever someone is willing to pay for it.
In the long run, there are agreed-upon measures of foreign exchange based on purchasing power parity, which in theory means that the same items should have the same price anywhere in the world, and the international Fisher effect, which is that differences in exchange rates are explained by differences in interest rates. There aren’t enough transactions in cryptocurrencies to really know what it is worth for purchasing or lending, so the valuation can’t be looked at the same way as for other currencies, at least not right now.
Right now cryptocurrencies trade on their ability to be widely used, either for purchasing or for their blockchains. There’s the Crypto Moon project, which looks at how valuable a currency would have to be to match the distance to the moon. That’s not really a method of valuation. The World Bank has pegged the total value of all the goods and services in the world, also known as gross world product, at $87.799 trillion US dollars for 2019. If all 21 million Bitcoin were to replace all of the currency currently used in the world, then a single token would be worth $4,179,952.38, a considerable increase from its current $37,730 price.
Where Can I Buy Cryptocurrency?
Cryptocurrencies are sold on exchanges. Three of the better-known ones are Kraken, Binance and Coinbase. Each offers a different assortment of currencies, has different transaction fees, and different transaction times. None of the exchanges is regulated by any government except against fraud.
The most popular cryptocurrencies are Bitcoin and Etherium. These also fluctuate in value, sometimes wildly. This may be fun for people who own the coins, but it makes merchants really leery about accepting them. An alternative are any of the stablecoins, which are designed to maintain their price relationship to the dollar or other asset while keeping all the benefits of blockchains. All other coins are known as altcoins. There are thousands of these, some of which have a legitimate basis and others are scams.
How Do I Buy Bitcoin or Another Crypto
Once you identify an exchange and a currency, all you have to do is exchange your money. Well, actually, it’s a little bit more complicated, but not much more. Here are the steps:
1. Sign Up for An Exchange
Find an exchange that meets your needs and open an account. Unlike a traditional brokerage account, you will not need to submit extensive documentation to prove who you are. Because cryptocurrency attracts hackers, be sure to use secure non-public WiFi when signing up or making transactions.
You will be asked to set a password and seed phrase. The usual advice is not to write passwords down. But here’s the thing: because there isn’t much documentation of who you are, there is very little in the way of password recovery. Many, many people have sad stories of owning a fortune in crypto that cannot be accessed. Make a record of your password and keep it somewhere safe.
2. Connect Your Bank Account
The exchange will have you connect your bank account so that you can pay for the coins you buy.
3. Transfer Funds
Once your account is hooked up, transfer your fiat money into the cryptoworld.
4. Buy the Coin You Want
Easy, peasy.
Where Do I Store It?
Once you have your coins, you want to transfer them to a wallet. This is a special type of account, not made by Louis Vuitton, where you hold your cryptocurrency and related keys. Although you could store it in your exchange account, that’s not a good idea because exchange accounts have been known to be hacked.
Investopedia has a list of crypto wallets. Look for companies that have insurance.
