Cryptocurrency Investing: A Beginner’s Guide

If you ask someone if they know what Bitcoin is, they will probably say yes. But if you ask them to explain it, they may suddenly remember a vital dentist appointment. Even seasoned investing professionals are often reluctant to start buying crypto because they’re not sure what it is or how it works as a part of cryptocurrency investing.  Bitcoin is a type of cryptocurrency, and people can purchase coins and “invest” in the currency. But cryptocurrency didn’t even exist until a few years ago, so it’s harder for people to comprehend than a more familiar system, like buying stocks and bonds through the market.

Cryptocurrency Investing – Where Do Baby Bitcoins Come From?

Bitcoin and other cryptocurrency are produced through a process called mining. If you learned about gold mining in school, you can probably understand how cryptocurrency mining works. Just like the miners in the California gold rush sifted through dirt to find gleaming nuggets of gold, so Bitcoin miners sift through complicated mathematical puzzles. Or, more accurately, their computers do.  The puzzles that they solve are the encryption that keeps a Bitcoin transaction secure.

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Of course, they don’t solve the puzzles themselves. People used to answer them, but then the problems got to be too complicated, and now only very robust computer hardware can manage it. The user assigns this hardware to analyze an encrypted transaction and make sure that it is authentic. The user’s payment for this process is the cryptocurrency that he or she is analyzing. The blockchain creates the coin to distribute it, and more currency comes onto the market.

Wait, What’s a Blockchain?

A blockchain is a chain made out of blocks. (Wait, stay with me.) A “block” is what the cryptocurrency world calls a transaction. When a user participates in a transaction, his or her computer sends out a long string of random numbers and letters, sort of like a randomly assigned password on a WiFi network but even longer.

The address travels to a global computer network. The computers on that network have to solve a puzzle that determines whether the transaction came from the place and person as it claims it did. Once the network has verified the address by solving the puzzle, it sends the verification information to an even bigger network. The computer on this network that solves the puzzle receives coin in payment, and the transaction is officially verified.

The network then records the results of the verification as a block. The blocks are stored on the network in a sequence, which is the blockchain.

What’s So Special About the Blockchain?

A traditional database lives in a single physical location, usually either a computer or a server. Even large companies tend to only have three to five backups for their data, and this is why it costs so much money for them to protect it. If those computers are compromised, that data is gone forever.

Blockchain, however, backs up its data on thousands of computers all over the world.  A file may be stored all in one piece or multiple pieces so that hackers can never get the whole picture.

If a hacker does succeed in getting through and changes some data, all of the other computers on the network come together to evaluate the change, as though it were a block. If the rest of the system doesn’t agree that the difference is valid, it is officially rejected and changed back so that all backup computers are in agreement.

How Can I Get In On This?

Cryptocurrency investing is not just for computer whizzes and their fancy machines. Thanks to the power of the Internet, ordinary non-whizzes can invest in various forms of cryptocurrency. You do this on cryptocurrency exchanges, which work like stock exchanges.

For example, if you intend to buy or sell Bitcoin stock on the exchange, you pay common currency or “fiat” for it, just like you would do with traditional securities on the New York Stock Exchange.  Your Bitcoin goes into a wallet, which exists as an address on the blockchain just like your website exists as an address on the Internet.  You can either keep your coin or use it to pay for things on cryptocurrency platforms, such as bitcoin or Ethereum.

If you’re not ready to take the plunge into cryptocurrency investing because of some of the risks it presents, we have an alternative. Invest in fractional shares of bitcoin owning companies. Stockpile offers GBTC, BLCN, and BLOK. A diversified portfolio is a healthy portfolio.

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/meghan Gardler