An Introduction To Cryptocurrency, With Ledger

Welcome to the first guide in a series of four that have been written and produced in partnership with Ledger. These guides will lay out the things you should consider as you enter the world of cryptocurrency investing – including how to buy and store your crypto and, importantly, how to safely take action today.

We’ll kick things off by explaining what cryptocurrencies are, how they work, what all the hype is about, and how you can safely buy and sell them.

Part 2️⃣: Storing Cryptocurrency: Digital vs Hardware Wallets

Part 3️⃣: How To Hold Cryptocurrency Safely

Part 4️⃣: The Most Popular Cryptocurrencies

How does a cryptocurrency work?

Let’s ease in gently, shall we? If bonds are the traditional gentleman in a top hat and stocks are the pushy loudmouth with a phone to his ear, cryptocurrencies are the kid in a hoodie who sits at the back of the class coding and doodling heavy-metal album covers. Crypto has been around for over 10 years, but it only broke through to mainstream consciousness in 2017 as prices surged.

Cryptocurrencies facilitate payments – or other exchanges of information – between people, without the oversight of a central body (like a government or a bank). Many people had tried to create digital cash before, but all had failed – until bitcoin was launched in 2008.

What’s special about bitcoin?

Bitcoin runs across a distributed network of computers – as opposed to a centralized set of servers, like those used by traditional banks. All transactions are recorded on an immutable ledger (basically a long list that can’t ever be changed), which goes by the technical name “blockchain”.

While bitcoin has taken on digital money, many other crypto projects are applying blockchain technology to different areas: everything from social media to file storage has blockchain-based projects seeking to disrupt established industries.

You’ll also hear the word token in the blockchain world. These aren’t the tokens you might use at an arcade. Rather, these tokens are digital assets that exist on the blockchain and can operate as anything from a currency to a digital good or service.

Why do cryptocurrencies have any value?

It’s all about supply – which for several major cryptos is deliberately limited – and demand. If a token can attract users, it will rise in value. So if there’s demand to use bitcoin to transfer monetary value, its value’s likely to go up. Digital tokens can also be tied to – and derive their value from – real-world assets like real estate or a barrel of oil. The crypto transactions that have gotten the most media attention, though, have been the most outlandish – like the time somebody paid $170,000 for a token representing a digital kitten.

Why should I care?

After this introduction, you’ll naturally ask yourself whether cryptocurrencies are a worthwhile investment. And while your answer will depend on your investment goals and risk appetite, the market is still in its early stages – which means it’s mostly unregulated – and prices can swing wildly. But cryptocurrency enthusiasts point to its potential as an “inflation hedge” and a currency in its own right as reasons digital currencies may soon rise in value overall.

Watch this space – and the rest of this series – to see if you agree.

How do I buy cryptocurrency?

The most popular method is via crypto exchange, so you’ll probably want to find one. These let you buy cryptocurrencies with your pounds, euros, or dollars (a.k.a. your fiat currency) – and let you trade between different types of crypto.

Cryptocurrency exchanges come in all shapes and sizes, so picking one isn’t necessarily straightforward. You’ll want to make sure your chosen exchange allows you to trade the crypto tokens you’re interested in and lets you convert to or from fiat currencies. You should also look at exchanges’ transaction fees, if applicable, and make sure you’re comfortable paying them.

What else do I need to know?

The most important thing to know is that owning crypto comes down to owning public and private keys. A public key’s like an email address: you share it to send and receive funds (or emails). And – just as you’d never share your email password – you should never share your private key: that’s what allows you to actually access your funds.

Leaving your funds on a crypto exchange is risky. You’re effectively entrusting your private key to the exchange, and if anything goes awry, you’ll be kissing them goodbye (that’s the unregulated part coming into play). From a security standpoint, though, it’s better practice to transfer your funds to a “wallet” – where you can store and manage your crypto. In other words, a wallet lets you take that private key into your own hands for safekeeping Wallets also come in different shapes and sizes: some will have support for just one cryptocurrency while others will be compatible with several, alongside a variety of other services.

Is it safe to buy cryptocurrency?

Unfortunately, the cryptocurrency market is notorious for scams. One reason for that is the “immutability” of blockchain transactions: there’s no reversing them.

Watch out for “social engineering” and phishing scams. These trick you into divulging personal information – which allows a hacker to steal your identity – or into entering your password or private key on, for example, a fake version of a real website. To stay protected, verify that anyone who contacts you is legit – and steer clear of promised returns that seem too good to be true.

Hackers might also try to break into an exchange and steal the tokens stored there. That’s one reason you might want to consider keeping your tokens in a separate wallet.

Wallets, you say…

Remember the private keys to wallets we mentioned earlier? Unless safely stored offline, someone who isn’t you could potentially use your key to gain access to your funds.

You should also know that two people with a private key to the same wallet have an equal claim to control those funds. So if your key falls into the wrong hands by any method – online or offline – that’s a problem. And as cryptos are decentralized, there’s no third-party authority to resolve disputes or enforce ownership, which is why making sure you’re the only one who can access your private key is so important.

Can I make money from cryptocurrency?

Cryptocurrencies have only been around in a big way for little over a decade. So for investors with a long-term prospective, it’s probably too soon to say one way or another. But there are a handful of ways some optimistic investors seek to profit from crypto.

Speculation

Cryptocurrency prices – like those of financial assets – are a function of supply and demand. And several investors think that as cryptocurrencies become more and more mainstream – that is, attract more retail investors (individuals like you) and institutional investors (large investment firms like Fidelity and Goldman Sachs) – their value will rise. Crypto investors betting on such an outcome are called speculators. They keenly follow news that suggests increasing adoption of cryptocurrencies and high-profile crypto-based projects, partly in the hopes it encourages other investors to buy in – pushing up the value of their stakes, all else equal.

Inflation hedge

Optimistic investors (who may also be speculators) see cryptocurrencies as having the potential to redefine payments – by acting as a currency, enabling transactions, and storing value. It’s that potential role as a place to keep cash safe that’s earned crypto a place in some stock market investors’ portfolios.

Their argument, simply put, is that bitcoin and other cryptocurrencies act as “digital gold”: their value should rise if the prices of goods and services (a.k.a. inflation) pick up significantly. That’s because the supply of cryptocurrencies is limited by design (like physical gold, albeit by happenstance), and cryptos’ increased utility versus gold – in that it’s easier to buy, transfer, and store – should mean it’s more valuable.

Recall: high inflation reduces the value of your cash since it can’t buy as much when prices increase. So putting that cash into assets (like gold or crypto) whose value will rise with inflation theoretically helps it – and your “spending power” – keep pace.

Decentralized finance

Decentralized finance – a.k.a. DeFi – is a fast-growing sector of the cryptocurrency industry whose potential has gotten several enthusiasts excited. Part of cryptocurrency’s initial attraction was its decentralized nature, and DeFi takes that a step further by creating financial instruments that stand to benefit.

Most DeFi platforms take the form of decentralized apps, known as DApps. These DApps use a series of smart contracts to automate financial transactions – making them faster, more efficient, and often more affordable than their centralized counterparts. Likewise, because DApps are governed by computer code – which is inherently neutral – there is no issue of bias.

Much of the interest around DeFi has to do with giving people more control over their money, and more interesting ways to use it – as well as improving accessibility for those with more modest sums of wealth and in far flung regions typically ignored by large financial institutions. Lending platforms, cryptocurrency coins whose values are tied to existing fiat currencies, and decentralized exchanges and insurance are just some of the ways in which crypto hopefuls think the technology can change the finance world – and vindicate their investments.

To HODL or not to HODL?

By now, you’re probably feeling pretty caught up. You know what cryptocurrencies are, how to buy and safely store them while avoiding the most common pitfalls, and why people buy into crypto in the first place. That’s as good a place as any to start making informed financial decisions in the crypto universe, even if we do say so ourselves. The remaining three guides will dive into some of those topics in more detail – but before you go, we wanted to leave you with a few further thoughts…

Hodling crypto

“Hodl” is a common word in the cryptocurrency universe – and while we’re typically not fans of jargon, this one’s worth knowing about. You see, after a post in a crypto forum in 2013 featured a typo in the word “hold” when discussing a “buy and hold” long-term investment strategy, “hodl” became the tongue-in-cheek term for holding on to what you buy come what may, ignoring the ups and downs of the market.

Some investors think the potential reward from hodling outweighs the risks: if a small crypto allocation in your portfolio goes to zero, you (hopefully) haven’t lost much. But if crypto does take off as hoped, it could be worth a lot, lot more.

How can I get involved?

There are a few different approaches to cryptocurrency investing. The approach that suits you best will probably come down to whether you want to actively trade or simply track cryptocurrencies’ broader rises or falls.

The difference? Active traders buy and sell regularly, trying to catch the dips and the peaks – just like people who speculate in any other market, from oil to orange juice. They’ll try to analyze projects and may generally have a good knowledge of the overall industry. Many will use technical analysis techniques, where past price data is studied to assist in making decisions about the future.

Passive investors, on the other hand, are perfectly happy to just buy crypto and keep hold of it in the hope it will climb. One popular way to do that is via cryptocurrency bundles or index funds that track the value of the most popular cryptos. But buyer beware: these fund fees can be high, so check what they are and see if you’re comfortable paying them.

That’s all for now! But you can discover more in part two of this series…

Part 2️⃣: Storing Cryptocurrency: Digital vs Hardware Wallets

This guide was produced in partnership with *Ledger**.*

Check out Ledger’s mini-website at finimize.com.