The world of Cryptocurrency is moving fast and developing fast. Even if you are not attached to new technologies or tech affine, you probably have heard about Bitcoin at least. The rabbit hole of the crypto world is deep.
My name is Leo, and I have been a tech entrepreneur for half my life. I had my first contact with Bitcoin in 2013, and for a year now, I have been working full-time in the crypto space.
This crypto guide is a gentle introduction for you to master basic concepts and terms around cryptocurrencies and actively start investing.
What is Cryptocurrency?
We start with the basics. Even if you do not have the time at the moment to dive deep, learning some of the basics and maybe making your first investment is probably a good idea. You can deep-dive later if you like, but getting started and getting aware of some topics can be very helpful.
Crypto or Cryptocurrency is a digital currency or medium of exchange based on cryptography. Cryptography is a mathematical technique to secure and verify transactions. Unlike Fiat money as USD or Euro, cryptocurrencies are not issued by a central authority like a bank or a government.
Cryptos are decentralized and only available in a digital form, which means there are no physical coins or banknotes. The fact that there is no central authority controlling cryptocurrencies makes it possible that there are no interventions or manipulations by a third party.
Bitcoin is the most known and famous Cryptocurrency, followed by Ethereum. The total market cap of all cryptocurrencies is about one trillion dollars; Bitcoin and Ethereum make up around 55% of the total market cap. Overall, thousands and thousands of coins are available on different blockchains and tradable on different kinds of centralized (CEX) and decentralized cryptocurrency exchanges (DEX).
Types of cryptocurrencies
There are different kinds of cryptocurrencies and many ways to classify a cryptocurrency.
One of the most high-level classifications is to classify into Bitcoin and Altcoins. Everything that is a cryptocurrency and not Bitcoin is a so-called "alternative coin." There are thousands of altcoins available. Some examples are Ethereum (ETH), Fantom (FTM), Avalanche (AVAX), Helium (HNT), and Mina (MINA).
Each network usually has its Token, which comes with a specific utility. Those programmable assets exist within the platform and can be, for example, used as money, or digital assets, to pay for computational power and voting power and can be transferred between users.
There are many other ways how you can classify cryptos; how Messari is doing it is one way. The category indicates the primary use case or application of a digital asset.
This category contains currencies, payment platforms, rewards, and stablecoins. Payment cryptocurrencies can be seen as digital money. Some see Bitcoin as digital money, others more as a store of value.
Stablecoins peg their value to fiat currency or assets like gold. Most of them are pegged with the US-Dollar.
Examples of Payment Cryptocurrencies are Bitcoin (BTC), Dai (DAI), Dash (DASH), Ripple (XRP), and Tether (USDT).
Infrastructure Cryptos are for application development, Blockchain-as-a-service (BaaS) for enterprises, Interoperability, Scaling Solutions, and Smart Contracts.
Usually, Infrastructure Cryptos are used to pay computers in the network to use provided resources. Ethereum is one of the most famous examples. To use the network, you need to pay with ETH (Ethereum) to create and use the network. There are many different use cases out there.
Financial cryptocurrencies provide tools for on-chain asset management, centralized exchanges, crowdfunding, decentralized exchanges, lending, and prediction markets.
The native tokens of centralized exchanges, for example, have different utilities like trading discounts; other projects can help to connect early-stage projects with investors. Also, the replication of classical financial services like lending, market making, or borrowing are financial crypto services.
Some examples of cryptocurrencies in the financial category are Nexo (NEXO), Augur (REP), Balancer (BAL), and Curve (CRV).
The services category contains Artificial Intelligence (AI), Data management, Energy, File Storage, Healthcare, Identity, Shared computing, and timestamping.
They offer tools for managing private and company data and linking the real world with the Blockchain.
Examples of Service Cryptos are Chainlink (LINK), Filecoin (FIL), or Storj (STORJ).
5. Media & Entertainment
Media and Entertainment include Advertising, Content creation and distribution, Collectibles, Gaming, Gambling, Social media, and Virtual and augmented reality solutions.
Collectibles are NFT or non-fungible tokens that give holders unique ownership of a digital asset. NFTs are one-of-a-kind assets and can not be replaced. On the other hand, Bitcoin is fungible, as our Fiat currencies are also.
Media and entertainment cryptocurrencies try to reward creators and users for content, games, gambling, and social media.
The Basic Attention Coin (BAT) is an excellent example of distributing value between creators and consumers.
This should give you an idea of what kind of cryptocurrencies exists. Now, let's look at how all this works.
How does Cryptocurrency work?
Today, when you talk about crypto, it usually refers to the whole universe, including blockchains, digital currencies like Bitcoin, DeFi (decentralized Finance), Web3, and Non-fungible Tokens (NFTs).
Thousands of cryptocurrencies do not require an intermediary like a bank or government, and the cryptocurrency market is running 24/7/365. The systems are trustless and self-governing, which means no third party is required to verify transactions. All this is based on a decentralized technology called a blockchain.
Blockchain is an essential part of Cryptocurrencies, but they are not the same. Let's see what a blockchain is first.
What is a blockchain?
At an elementary level, blockchains are shared databases that store and verify information cryptographically and securely. You can think of the Blockchain as a Google spreadsheet that is not running on a company's server but maintained by a worldwide computer network. This network is provided by network participants that are called miners or validators.
Each miner or validator is responsible for storing their copies of the whole database containing all the entries that were ever added. Besides storing those network participants are also protecting the database against villains and verifying new entries to the database. For their efforts, they get a reward, mainly in the form of the native Cryptocurrency.
One central part of the Blockchain is a consensus algorithm, which helps to agree on a single data value in a distributed network. Two of the best-known consensus mechanism categories are proof-of-work (PoW) and proof-of-stake (PoS). The Helium network, for example, uses proof-of-coverage (PoC).
For beginners, PoW is formed through a distributed computer network that solves complex mathematical problems to get a reward. The process is called mining, and the participants are called miners. Bitcoin and Ethereum are two of the main PoW-based Blockchains. Ethereum is in the process of switching to PoS. PoW is criticized because of the high energy consumption to secure the network.
PoS or proof-of-stake means that the network is validated by network participants holding or staking the native Token. PoS reduces energy consumption to a minimum. Ethereum is in the transition from PoW to PoS. Other well-known proof-of-stake currencies are Solana ($SOL), Fantom ($FTM), AVAX ($AVAX), Cardana ($ADA).
Let's have a look at the characteristics of a Blockchain.
Characteristics of a Blockchain
Decentralization is one of the core ideas of the whole crypto space and simply means that there is no need for a company like Google, Amazon, a bank, or Facebook, to oversee and control the service. This work is done by a network of computers, source code, and the before-mentioned consensus mechanism.
The consensus mechanism replaces the "neutral judge" with a complex algorithm. The algorithm decides what is written to the database and stored there forever.
The records written into the Blockchain are public and can be inspected by anybody. That does not mean that your name is written on the Blockchain. Not everybody sees who is sending your Bitcoin or how you are spending it, but your public key (hashcode) is written there. Bitcoin is not anonymous but pseudonymous. The address where you receive your Bitcoin is your pseudonym. A Bitcoin address is alphanumeric, this is an example address 3FZbgi29cpjq2GjdwV8ayHuJJnkLtktZc5
There are also private blockchains, but no, we talk about the most popular blockchains here.
After your record makes it to the Blockchain, it is permanent and can not be altered anymore. This is considered more secure than one person (e.g., Zuckerberg / Facebook), or a company can take down or change the content. At the state of today, altering the Blockchain is almost impossible and not reasonable from an economic perspective.
The Bitcoin blockchain is a distributed ledger that keeps track of transactions. For the first time, people can transfer money over the internet without needing to involve centralized financial services like Paypal, Curve, Wise, Revolut, or N26 as an intermediate. This is huge.
But enough. Let's have a look at how actually to invest in cryptocurrencies.
Getting serious with investing in cryptocurrencies
We already covered a lot about the basics of Blockchain and cryptocurrencies. It's time to get your hands dirty and do your first cryptocurrency transactions. After that, you can still decide if you want to go into cryptocurrency trading or if you want to buy and hold your financial asset.
There are many ways to make money with cryptocurrencies or earn cryptos for your services. We wrote a detailed article about how to make money with cryptos.
Next, we will have a look at:
- Get your mindset right. What to consider when you start investing (in Cryptos)?
- Where and to buy cryptocurrencies?
- How to open an account?
- How to buy cryptocurrencies?
- Different options for investing
What to consider when you start investing?
Before you start, you should get aware of
- what you are investing in
- how your willingness to take risks looks like
- what kind of investor you are
Understand what you are investing in
Maybe you hear it a lot, but you need to do your own research and try to understand what you are investing in. If you hear about a Coin on TikTok or Youtube that changes that you are late to the game or somebody just shilled, a shitcoin is relatively high.
Doing your own research and checking a project is a time-intensive process but necessary if you put more extensive parts of your hard-earned money into an asset. Maybe you will need to add some skills in Fundamental Research or/and Technical Analysis (e.g. with Tradingview).
If you want to learn about Crypto Indicators and Metrics and how to start building your own strategy, you are right here.
Crypto assets can be crazy volatile, and you need to have the stomach for daily price changes of more than 10% per day. While writing this, we are in a bear market, and most cryptocurrencies are down 90%+ down in the last couple of months. Can you deal with that?
Usually, the smaller the total market capitalization of a coin is, the more significant the volatility. In this article, I explain how market cap and price correlate and how you can categorize them. This volatility leads many beginner investors to forget about the number one rule of investing anymore
Buy low and sell high.
Prices start to drop, and investors panic and blindly sell when they should not. This is the moment where more experienced investors are making money out of the noobs.
Manage your risks
This often happens if you are over-exposed, which means you put money in that you can not afford to lose. Are you usually sleeping like a baby, but recently you are waking up regularly bathed in sweet? Maybe another sign that you might have risked too much. You need to control your risk.
Start to invest correctly, and keep track of your total investment sum and trades in a journal from the beginning. Never put all your money in only one asset. Of course, it depends on your hunger for risk and many other factors. If you are using cryptocurrencies for diversification, get excellent interest rates for staking, or you want to make ten or 100x on your investment.
I never put more than 3% of my total investment in smaller, speculative projects that can easily make 10 to 100% but also go to zero.
Risk management also includes where you hold your virtual currencies and which exchange, broker, or (hardware) wallet you use. Lately, Celsius (a crypto lending platform) was freezing payouts and accounts of their users; if you would have 100% of your investment on this one account, you are in big trouble. Be smart, and do not put all your eggs in one basket.
Bear market vs. Bull market
If the market is going up (or down), emotions are sometimes taking over, which is never a good thing. Try to take profits when the prices are rising, and you are in the profit to hedge the risk. No asset is going up only and forever. Also, many first-time investors maybe have significant gains but also lose their first bag over some years.
We are in a bear market now; everybody is shouting SCAM, we are going to zero, and similar things. Bear markets are also a great time to learn, build, and be ready for the next bull run. The real heroes and rich are born in the bear market. Everybody feels like a king when everything is going up, no matter where you throw your money. That's easy.
Let's look at how and where you can buy Bitcoin, Ethereum, and other types of crypto.
Where to buy Cryptocurrency?
There are numerous ways how and where to buy the most popular cryptocurrencies. You can see our curated list of the best cryptocurrency exchanges here. You can choose a suitable cryptocurrency exchange for yourself, depending on where you live and your needs. Usually, platforms offer purchase options via bank transfers or credit cards.
Besides exchange, you can also use Fintech Bank like Revolut or soon N26 to buy Cryptocurrency. In the United States, you can even buy Bitcoin and Ethereum with your Paypal account.
In many countries, you can also find Bitcoin ATMs to use cash to buy Bitcoin and sometimes Altcoin. After exchanging your Fiat money for the crypto asset, you can send it to a wallet of your choosing. Keep in mind that usually, you pay 9 to 12 % fees to buy Bitcoin if you use an ATM.
The number of Bitcoin ATMs around the world. Data via coinatmradar.com
There are also more niche solutions like exchanging your cryptocurrencies for gift cards or meeting with someone in person to make a direct peer-to-peer exchange of your crypto assets.
What is a Cryptocurrency Exchange?
A cryptocurrency exchange is a place for buyers and sellers to meet to trade digital financial assets. Here you find a curated list of different crypto exchanges.
There are three different categories of exchanges, Centralized (CEX), decentralized(DEX), and hybrid exchanges. Hybrid exchanges try to combine the liquidity of a centralized exchange and the security and anonymity of a DEX. Since hybrid exchanges are not so common, we mainly focus on DEXes and CEXes here.
Comparison between CEX and DEX
Centralized exchanges are more user-friendly and easier to get started with. After some time, when you are more experienced, you can also use a DEX to buy or sell your crypto coins. Most of the time, centralized exchanges (CEX) guarantee liquidity, and you can usually buy cryptos with your fiat money. A DEX gives you complete control over your funds and keys and can stay fully anonymous. Fees are generally much cheaper on the centralized version.
A decentralized exchange is more aligned with the core idea behind cryptocurrencies, to have a decentralized solution for directly trading with each other without a middleman.
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What is a Cryptocurrency Broker?
A broker offers you an easy-to-use interface to buy and sell Cryptocurrency. The prices are set by the broker, which interacts for you with the cryptocurrency markets. If you are buying and selling at an exchange, you are trading your crypto coins with other traders directly. The exchange is the intermediary and gets a fee for handling the transaction.
Before you buy your cryptocurrencies, check with your broker if you actually can move off your assets from the platform. Some Brokers are not allowing that.
Robinhood, SoFi, and eToro are well-known Brokers offering Cryptocurrencies.
How to buy your first Cryptocurrency?
After you have one or more favorite exchanges, it's time to open an account.
Create and Verify Account
With centralized exchanges usually, you need to verify your account and identity after signing up. This is essential to prevent fraud and meet federal regulations. With some platforms, you cannot buy or sell cryptocurrencies by going through the Know-your-customer (KYC) process.
This process can be completed within a few minutes, usually by a video call where you show your id and take a selfie. Some exchanges require proof of residence others do not. The exchange staff needs to confirm your account, and you're ready to go. You can deposit FIAT money or cryptocurrencies to your account now.
Deposit Cash to Invest
Depending on the exchange or broker, you can link your bank account, use your credit or debit card, or transfer crypto to your exchange. A wire transfer can take up to a couple of days, while credit card and crypto transfers are usually almost instantly available. Fees for credit card deposits are generally more expensive but of course, depend on the platform.
After your deposit arrives, it's time.
Choose your coin and buy it.
Always do your own research. We prepared a guide on how to do fundamental project research. You can also discuss projects in our Discord community. Do not put your life savings into an influencer-shilled coin before even looking at the charts and fundamentals. After doing your research, I also mean that you should not be putting your life savings into one coin. :P
The first step is to check Coinmarketcap or Coingecko to find out the price, market cap, and official website of the coin you are looking at. The higher the coin is up in the list (Bitcoin No 1), the higher the market cap and the less volatile the coin is usually.
Not you can use the simple buy or trade function of your exchange and just buy your first tokens.
Congrats, you just bought your first Cryptocurrency.
After you are more familiar with the user interface of different exchanges, you could also try to send your cryptos to one of your other exchanges or your hardware wallet and store your crypto asset in the centralized exchange.
How to store your cryptos?
After buying your first coins, you need to decide how you want to store your coins. You can keep them on the platform if you buy on a centralized exchange. Do not forget that you do not hold your own private keys if you are storing them there, and in case of a hacker attack, bankruptcy in the worst case, your assets are gone.
There are different ways where you can store your cryptocurrencies.
You need to ask yourself some questions to figure out which is the right wallet for you:
- How often do I want to buy and sell?
- What is more important, convenience or security?
- What is my budget?
There are hardware wallets, also called cold wallets, such as Trezor or Ledger, which are considered the most secure but come with a price starting at around $60.
Software wallets, also called hot wallets, are considered secure but not as secure as hardware wallets. The reason is simple, they are connected to the internet and therefore more vulnerable to remote attacks. Software wallets like Metamask, ZenGo, Wirex, or Nuri have usually hosted a mobile or desktop application or a browser plugin.
Two other wallet categories are custodial and non-custodial wallets. The simple difference is that with non-custodial wallets, you hold your private key and are fully responsible for your assets. Custodial wallets that come with a cryptocurrency exchange take care of your keys. It's up to you to decide how much you trust a central authority with your assets.
Most crypto investors have more than one wallet. I have, for example, multiple hardware wallets for security, storing my long-term holds or some coins that I am staking on my Trezor. For experimenting with DeFi (decentralized Finance) applications and exchanging assets that are not listed on centralized exchanges, I am using hot wallets like Metamask. For the part of my portfolio that I am trading, I usually hold on an exchange like KuCoin, Binance, Kraken, or Bybit.
For coins that I am not planning to hold long-term but more short or mid-term gains, I usually hold on exchanges, where I also can set Stop-loss or take profit orders. To earn interest rates, I am holding assets on Nexo and BlockFi. Be careful with that and never put all eggs in one basket. (see Celsius) Long-term investments that I also plan to hold through a bear market I keep in my hardware wallet.
Even if you are not interested to deep dive into the world of cryptocurrencies right now, it’s a wise thing to do to learn about the basics at least.
In my opinion Blockchain technology and Cryptocurrencies are here to stay. Thank you for reading though our guide, I hope it was useful and you learned something new.
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Frequently Asked Questions
How to make money with crypto?
There are many different ways how you can earn money in the cryptocurrency space. You can, for example, trade, mine, or stake your cryptos for passive income, also work for a company in the cryptocurrency space or accept cryptocurrencies in exchange for your services.
We wrote an article on how to make money with cryptos, where you find even more ways to earn money in this space.
What is cryptocurrency mining?
Mining is the contribution with your own computational power to solve complex mathematical functions to confirm recent transactions and get rewarded with Cryptocurrency. The process is called proof-of-work (PoW) and is the underlying consensus mechanism of Bitcoin and other currencies.
Proof-of-work-based cryptocurrencies require immense amounts of energy and are under critics for that reason. One of the best-known cryptocurrencies that are changing from PoW to Proof of Stake is Ethereum.
What is cryptocurrency staking?
What are NFTs?
Non-fungible means that they are unique and can not be simply replaced by something else. Bitcoin or Ethereum, for example, are fungible and can be replaced by each other. A piece of art or a collectible like a Pokemon card is different and can not be so easily exchanged.
How to use your Cryptocurrency?
You can do several things with cryptocurrencies, for example, send value (cross border) from person to person to pay for goods and services, or use it with your Crypto Credit cards like the one from Binance or Crypto.com and shop with it like with any other Visa or Mastercard. You can also trade it on an exchange or stake it and get interest rates for it. Giving access to financial services to people who do not have a bank account is also a critical use case.
Are there Cryptocurrency Rules and Regulations?
Crypto adoption is spreading, and it has become much easier to buy, sell and use cryptos as a form of money. Depending on where your live cryptos are somehow regulated, or not or even banned. There will be more regulations in the following years, and it's wise to keep an eye on that.
We are still early, and the regulators are not known for moving fast. By design, blockchain technology makes it hard for governments to control them.
Why get started with Cryptocurrency?
Cryptos are offering a lot of opportunities to make a lot of money. The underlying technology of the Blockchain has great potential to create a more transparent, trustless internet with a fairer distribution and access to services. In this world, we do not need intermediaries.
The crypto market has become an open field for new opportunities and technologies, and we are just at the beginning.
Do you have to pay taxes for your Cryptocurrency?
This highly depends on your residential location. You should check with a local tax adviser if you are holding privately held cryptocurrencies.
What is a DAO?
A decentralized autonomous organization, or DAO, is a community-led organization without a central authority. Smart contracts are the foundation and help to be fully autonomous and transparent.
A DAO is run entirely by its individual members. Together they make decisions about the future of their projects, such as technical improvements and treasury allocations.
What is DeFI?
Decentralized Finance short DeFI is a new form of decentralized banking and financial services. They are based on peer-to-peer payments through blockchain-based technology. DeFi is trust-less banking and removes middlemen like banks, exchanges, and brokers.
What is Web3.0?
Web3.0 is the third generation of the World Wide Web, a decentralized web. It allows users to interact with each other permissionless without a central server or organization in control.
This website includes information about cryptocurrencies and other financial instruments. All these areas are complex instruments and come with a high risk of losing money. We are NOT giving financial or investment advice; this page is for educational and informational purposes only. Please be careful and make sure that you understand how these instruments work. Also, think about whether you can afford to take the risk of losing your money.
Weirdo.Rocks encourage you to do your own research before you make any investment decision.