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May 12, 2022
Cryptocurrency is bringing investment opportunities to people around the world. Today, in part one of a four-part series, we explore the basics of blockchain, tokens and NFTs—and the upsides and downsides of putting your coin into crypto.
– with reporting by Jesse Seaver
You might have a 401(k) retirement account but most of the world doesn’t—and not for lack of interest in retirement savings. Much of the world’s population has never had the opportunity to invest their spare change in the hope of building wealth for tomorrow. Thanks to cryptocurrency, that’s changing.
Cryptocurrency has created global, decentralized investment markets that are open to anyone with internet access and pennies to invest. Worldwide, billions of people with a smartphone can potentially devote a fraction of a dollar to purchasing and trading digital currency. This low barrier to entry and widespread access have allowed a massive new population to become players in global financial markets. Many cryptocurrency enthusiasts consider this the whole point: to bank the unbanked.
“The blockchain is a more efficient way to transmit value compared to legacy banking infrastructure,” says Ian Kane, co-founder and CEO of Unbanked. “If someone, anywhere in the world, has a mobile device then they can set up a blockchain wallet and begin participating in the global economy that previously had a large barrier to entry or was unattainable.”
Enthusiasts like Kane contend that the blockchain is more efficient than other types of banking or investing because it doesn’t require human oversight. In cryptocurrency transactions there is no third-party approval or signoff: it’s direct from sender to receiver.
For some, this might be the most exciting monetary development since humans first hammered metal into coins. But if you’re considering buying into crypto markets there are a few things you might want to know first.
Blockchain is a public digital ledger: a list of accounts, balances and ownership. However, unlike the lists of accounts held by traditional banks and credit card companies, the blockchain isn’t owned by anyone. It’s operated by a network of global computers, and anyone can lend their own computer’s processing power to serve the blockchain. As long as the internet is online, the blockchain is online.
What’s more, the blockchain is more transparent than traditional banking because, once something is added to the blockchain, it cannot be removed. Account balances change but you can always see what a balance was at any given point in time. No one can go back in time and change what was. In a sense, what’s written on the blockchain is written in stone.
Okay, so what’s cryptocurrency?
A cryptocurrency is a digital currency secured by cryptography. Cryptography uses complex algorithms to transmit information such that only the intended recipient can read and process it. Thanks to the security of cryptography, cryptocurrency cannot be counterfeited or double-spent.
The term coin is used interchangeably with cryptocurrency. The most famous cryptocurrency, or coin, is Bitcoin. When you buy and hold Bitcoin, you own an account balance on a digital ledger. There is no physical coin or other material asset associated with Bitcoin ownership.
Is cryptocurrency the same as crypto tokens?
Not exactly; tokens are a type of cryptocurrency. As with Bitcoin, token ownership is represented in an account balance on a digital ledger. But in addition to that account balance, tokens can have other assets attached to them. For instance, a token can be associated with a physical asset–like an ounce of gold–or provide access to a members-only website.
Anyone can mint and launch a token and thousands of new tokens appear on cryptocurrency markets every month. Most amount to nothing but some find their way to a global audience and snowball to total market valuations in the billions of dollars, as in the case of the famous Ethereum token Shiba Inu, which is now accepted as payment at retail outlets like Nordstrom’s and Whole Foods.
Why does one token become successful while so many others flop? Part of the answer is community: If a strong circle of developers and enthusiasts support the launch of a given token, it’s more likely to find a wider audience and gain value. Sometimes celebrity endorsements lead to a token’s success. There’s also a certain x-factor, an unknown element of why any one thing becomes popular while other similar things do not.
NFT stands for non-fungible token. To understand what that means, recall that when you buy Bitcoin, what you actually own is an account balance on a digital ledger. Bitcoin is not associated with any physical asset, and any one Bitcoin is equivalent to any other Bitcoin. This means that Bitcoins are fungible, or interchangeable.
Unlike Bitcoin, every NFT is distinct and therefore non-fungible. Basically, “NFT” is a complicated way of saying a token is unique. How can each and every NFT be unique? Well, think of this way: Every NFT is like a collectible card and a concert ticket, wrapped into one. Further imagine for a second that you collect baseball cards and you happen to have a rookie Mickey Mantle card worth hundreds of thousands of dollars. Now, imagine that the Yankees suddenly announce that all rookie card holders can enter into a draw for season box seats. Now that Mickey Mantle rookie card is even more valuable because it also provides entry into an exclusive offer.
NFTs are a bit like that. Every NFT is a unique asset that combines rarity—a particular baseball card—with proof of ownership that can be used for admittance into an exclusive event, sale, concert, raffle or anything else.
How do people buy and sell cryptocurrency?
There are many ways to exchange traditional money for cryptocurrency, including at in-person ATM-like machines. (Search bitstop.co for a machine near you.) But the primary way to acquire cryptocurrency is via online exchanges like Coinbase, Binance, Uniswap and many other platforms. When you buy crypto on one of these platforms, you’re provided with a unique wallet that gives you proof of ownership.
Essentially, buying and selling crypto boils down to two individuals agreeing on an exchange rate and then trading one type of currency for another at that rate.
Should I buy crypto?
While it’s exciting that cryptocurrency has opened global financial markets to the previously unbanked, it’s important to understand the risks before making any type of investment. Nobody should invest more than they can afford to lose, and remember that markets—especially crypto markets—can be very volatile. Many have learned this the hard way and have lost money.
Crypto is different from traditional stock markets in that it has democratized value for much of the world, but in some ways crypto investing is very similar to playing the stock market. Whether you’re buying stocks, bonds or crypto, it pays to be patient.
There’s a popular saying among crypto enthusiasts abbreviated as HODL: Hold On for Dear Life.
How big is the market?
According to Forbes, global cryptocurrency markets topped $3 trillion in late 2021. By way of comparison, the New York Stock Exchange had a market capitalization of around $27 trillion.
How does cryptocurrency fit into your investment strategy?
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