Cryptocurrency is part computer science and part finance, but don’t let that intimidate you. It’s simple to get started and you don’t have to be an expert.
With a little smart investing and a little luck you can make money online.
First, learn what cryptocurrency is and how it works
Cryptocurrencies are a decentralized form of payment you can use to buy goods online. There are thousands of different currencies from the popular Bitcoin, Ethereum and Litecoin to the meme currency Dogecoin.
Cryptocurrencies run on the blockchain, which is a digital ledger of currency transactions and ensures that the same currency is not spent twice. Transactions are processed on the blockchain network of thousands of machines and in exchange for the hard work of those computers, the owners have the opportunity to receive a cryptocurrency.
New coins are "mined" (ie minted or created) when computers solve complex mathematical problems to determine the legitimacy of transactions on the blockchain.
Although many people pay for their purchases with cryptocurrencies, it is more widely discussed as a form of investment, spurring entire websites that track the value of a single Bitcoin
Using exchanges or app wallets such as Coinbase, Crypto.com and BlockFi, users will convert dollars into cryptocurrencies and rely on their investment to increase in value, just like a stock. Also, like a stock, you don't pay taxes on cryptocurrency earnings until you sell and withdraw the money. The capital gains tax you would pay for Bitcoin or other cryptocurrency proceeds will vary based on your income in that fiscal year; If you make less than $ 40,000 per year, you won't have to pay any cryptocurrency earnings tax. According to CNBC, they would be taxed 15% if you earn up to $ 441,150 and 20% on any higher income. Many people invest in cryptocurrencies due to the ease of buying, selling and trading on apps and websites, according to a CNBC survey.
A cryptocurrency could gain value if a large company announces that it will accept it as a form of payment, when changes are made to the mining process, or when important people like Elon Musk promote a particular crypto asset. Furthermore, the value can increase if demand increases while supply remains limited; for example, once there are 21 million Bitcoins in circulation, they will no longer be mined.
A cryptocurrency can lose value when a company no longer accepts it as a payment or when many people try to sell it at the same time.
Here are some scenarios to help you understand dollars and cryptocurrencies.
- Having cryptocurrencies in a software wallet is like carrying cash into the real wallet. It is at your disposal and waits for you to spend it. Putting cryptocurrencies into a savings protocol is like putting cash into a savings account. The savings protocol pays you interest for using their service, similar to how banks pay interest on some savings accounts. Depositing cryptocurrency in a vault and borrowing yourself is like putting cash into a retirement account and taking out a loan. Trading tokens on a cryptocurrency exchange is like trading stocks on a stock exchange. Tokens represent blockchains and protocols, like stocks, represent companies. Do your research on cryptocurrency jargon
- It's good to know what a blockchain is and how it works, but it's not a necessity. Think about what happens when you buy something online - do you know how an automated clearinghouse works? How well do you know the system of banks and payment processors that make up traditional finance? Lack of this knowledge doesn't stop you from using dollars and it doesn't stop you from using cryptocurrencies either.
- That said, what you need to know is that a cryptocurrency is based on a blockchain, a special type of digital network. There are several blockchains, such as Ethereum, Cardano and Stellar. They work in a similar way, but have different characteristics.
What is Bitcoin?
Bitcoin [BTC] is the most popular and valued cryptocurrency. BTC transactions are processed and verified by people called miners. When miners process a sufficient number of transactions, using specialized computers, they are rewarded with some BTC. In essence, the act of verifying transactions is what creates the most BTC. So, as long as miners want more cryptocurrencies, the blockchain will work.
For more about bitcoin, check out this article.
Also Read: What Is BitCoin? - All you need to know
What is a savings protocol?
Blockchains use special apps, called protocols, that put your crypto to work. So in traditional finance you might have a savings account, but in crypto, you’d use a savings protocol. The language of crypto is rooted in computer science.
Get a crypto wallet for buying, trading and storing
You’ll need a place to store your crypto – a wallet. You can choose a software wallet – like an app, or a hardware wallet – an offline device sort of like a flash drive.
Most software wallets can be recovered if you lose your phone
Most hardware wallets can’t be recovered if you lose them
Since software wallets are online, they’re potential targets for hackers. Hardware wallets are offline and can’t be hacked, but they can be lost or stolen like a real wallet.
You can skip this step by downloading an exchange app like Coinbase, eToro, or Gemini, then connecting a debit card or bank account. This is the fastest way to start buying and trading crypto. Your assets will be stored in a wallet managed by the exchange, which adds some risk.
Think about it, if you’re a hacker trying to steal millions, your time is better spent hacking large exchanges to access thousands of wallets. Hacking a single software wallet is probably a waste of time. To learn more about crypto wallets check out this resource.
Also Read: The Best Crypto Wallets You Need To Know Right Now.
Put your crypto earnings to work
If you only want to trade crypto, a wallet and exchange is all you need. But there are other ways to use crypto to make money.
Decentralized finance [DeFi] is a system of peer-to-peer finance tools that provide options like interest accounts, loans, and advanced trading for people with crypto. DeFi disrupts traditional finance by removing middlemen [bankers, lawyers, brokers] from finance processes. DeFi advocates say this makes finance faster, more affordable, more transparent, more democratic and eliminates in-person discrimination.
Getting started in DeFi takes more research. You can learn about different DeFi protocols on the web starting with The DeFi List. There, protocols are sorted by function, making it easy to understand what they do. Protocol developers share their mission statement by distributing a white paper. Here’s the white paper for Compound, a popular protocol, as an example.
To use DeFi protocols, you’ll need access to the decentralized web [dWeb]. To learn more about DeFi protocols, their history, and how they work, check out Finematics on YouTube.
Keep learning from cryptocurrency experts
There are a lot of experts on YouTube and Reddit. To get you going, here are some free online resources ranging from the basic to the meta.
- FREE COURSE FROM PRINCETON // Bitcoin & Cryptocurrency Technologies:
- This video lecture series features 5 experts including multiple Princeton professors. They discuss the book "Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction" and unpack complex topics like decentralization, how mining works, how transactions are kept anonymous, how the currencies are regulated and what is next for crypto's future.
- SciShow on YouTube // Bitcoin Basics: