Here’s a Simple to Understand “What You Need to Know” on Bitcoin and Cryptocurrency
I get a lot of questions regarding bitcoin and other alt-coins (cryptocurrencies).
So here’s a FAQ (frequently asked questions) I’ve put together to hopefully answer some of the questions you may have.
I’ll try to simplify the language as much as possible in order to make this topic understandable to as many people as possible.
For this reason, most of my explanations won’t be using the strictest of textbook definitions and will be generalized quite a bit.
What is Bitcoin?
Bitcoin is a type of digital money.
Who created Bitcoin?
No one knows. It’s a person (or group) named Satoshi Nakamoto; but again, no one knows his/her true identity.
What’s the difference between bitcoin and “normal” money?
Normal money (traditional currency) is backed by governments and banks.
For example, the US dollar is printed and controlled by the US government. Bitcoin is “decentralized” meaning that no single authority controls it. So in a way, it’s controlled by people like you and me, all over the world, that use Bitcoin.
I don’t have $17,000 to buy Bitcoin!
You don’t have to buy 1 full Bitcoin because it can be divided up.
You can buy as little as $1 in Bitcoin if you want.
Am I too late to buy Bitcoin?
Personally I don’t think any of us are too late to the game because I think Bitcoin will be around long-term.
I bought in late too and I’ve already made a lot of money.
But the problem is that it’s still so new that most of the world are still hesitant about it (the same can be said for cryptocurrencies in general).
Until it becomes more mainstream, Bitcoin will continue to be extremely up and down and should continue to go up in the long run. Again, if it stays around, I think it can go up to be $100,000 – $200,000 or more per Bitcoin, in the long run.
So how does it work? How do I buy?
For people like you and me, who are buying and/or selling Bitcoin, just use a cryptocurrency exchange (different from a wallet) to trade.
Some popular ones are Coinbase, Kraken, Bittrex, Poloniex, Gemini, Changelly, and Evercoin.
Coinbase is the most beginner-friendly, the most widely-used all over the world, and the one I myself use primarily (if you create an account using this Coinbase link, you and I both get $10 in free Bitcoin).
Can I sell it back after I buy because I don’t want to get stuck with it!
I get this question quite often as well. And the answer is yes, so no worries.
If you use normal money to buy Bitcoin or any other cryptocurrencies, you can sell it back for normal money, so you won’t be “stuck with it” if you change your mind.
Ok, I’ve decided to buy Bitcoin and some others; should I wait for a dip?
There’s no perfect time to go in. It’s like stocks. It’s impossible to time.
One good way to buy is called DCA (dollar cost averaging).
Which means you buy small portions in a scheduled and non-emotional way.
For example, if you want to buy $1,000 worth of Bitcoin, and you want to DCA, you can buy $100 worth every week for 10 weeks at the same time and day, without trying to “time the market.”
How does it work behind the scenes?
It’s different for each cryptocurrency but for Bitcoin, there’s a Bitcoin network. Every transaction is logged in a public ledger called the block chain. To keep it simple, just think of this network as something that “the people” own. Not a bank or government. And it’s open source, similar to software you would find on an android phone.
So what about banks? What’s their role in all of this?
There is no role for banks (FYI – some cryptocurrencies and blockchain technologies/protocols are starting to partner or are already partnered with banks, for example Ripple is not decentralized).
Banks are the “middleman” for your usual currency. Whenever you use normal money, the transaction always involves a middleman to “transact” the exchange of goods with money. But with Bitcoin, banks are taken out of the picture. So if you and I were to make a transaction, it’ll be only between you and me; and no one else will be involved. That’s the beauty of Bitcoin.
What’s a bubble?
A bubble is when something goes up in value by a tremendous amount and eventually pops (which is why it’s called a bubble), potentially going down all the way to zero. That’s the simplest way to see it. Often times, it’s used to describe something that doesn’t have any fundamental reasoning behind why the price is going up so high, so rapidly (so in other words, it’s all fluff and will eventually come crashing down). Most commonly used when describing asset categories such as stocks and real estate; or more generally when talking about “the market” or “the economy.”
Is Bitcoin a bubble?
No one knows. Only time will tell.
Ok, but what do you think? Do you think Bitcoin is in a bubble?
I lean more towards yes. But I’ve been proven wrong every single time for the past 5 years since I’ve first heard of Bitcoin (when it was around $30 per bitcoin). If I would’ve gone all in during that time, I would have just a little shy of $300 million right now! That said, just because it didn’t explode yet, doesn’t mean it will never explode in the future.
No one can predict the future; and if anyone says they can, steer clear.
How much money can I make with Bitcoin?
I get this question a lot.
But it’s a similar question as above. No one knows; and if someone says they know, they’re lying. They might have strong opinions (like I do), but they can’t say with absolute certainty.
Having said that, if it sticks around long-term (and I think it will), then it will continue to have value. Which means, it won’t go to zero. I can see it dropping 90% in value, but even if it did, it’s still higher than where it was just a year ago! And if that happened, there are a ton of people on the sidelines that’ll swoop in and buy Bitcoin at those prices, which will make it go up again.
What is Bitcoin mining?
It’s exactly like what it sounds like. You can “mine” for Bitcoin and other crypto-currencies that follow the “proof of work” protocol. I’m not going to get too much into this because for the average person, this doesn’t make much sense to do; and it doesn’t make sense for anyone when it comes to Bitcoin at this point in time because it’ll cost too much in electricity and hardware to set up.
What is Ethereum, Litecoin, Ripple, Bitcoincash, and others?
These are other cryptocurrencies that are out there (also referred to as alt-coins – or alternative coins).
Here’s a link that shows all the Cryptocurrencies, by market cap.
Ok, so which ones should I buy?
No one should be advising you literally on what to buy. Because fact of the matter is, in a worst case scenario, you can lose all your money. That’s a fact. My personal opinion (and what I’m doing with my crypto portfolio) is investing in the top 10 cryptocurrencies, by market cap.
Should I mostly buy the lesser known cryptocurrencies? Because I feel like I’ve missed out on Bitcoin
My personal opinion is no. And here’s why:
I think 99.99% of cryptocurrencies will go to zero. There are just too many out there. And new ones are coming out all the time. A lot of people are feeling like they’ve “missed out” on the bitcoin run-up, since the price has risen so fast; so they’re resorting to buy these unknown cryptocurrencies in hopes to “strike it rich.”
The chances are though, you’ll lose all your money, strictly from a statistical standpoint; because again, most of these will go away, so you’re risking quite a bit by speculating on them.
What if I want to day trade? Which ones should I trade?
If you really want to day trade (which means you’re not holding your investment, you want to go in and out very quickly to make quick money), you should become more educated in crypto in general.
Watch a lot of videos and read up on it. Don’t just gamble your money away.
My personal preference when it comes to trading is going with the ones in the middle. I never go with the unknown ones because that’s where 99.99% of the time, you will lose all your money.
I’d go with the ones after the top 10. So the ones ranked 11 – 30, or so, in market cap; because they have a higher market cap and enough trading volume (I won’t get any further in explaining this since you shouldn’t be day-trading crypto unless you’re advanced).
How many different cryptocurrencies are out there?
A lot. Well over a thousand, and new ones are coming out all the time.
What is an ICO?
When a new cryptocurrency comes out, it’s typically through an ICO (initial coin offering), which is kind of like an IPO (initial public offering) when a private company goes public and sells shares.
But cryptocurrencies are not like stocks. Stocks are ownership stakes in real companies (in companies like Apple or Amazon). Bitcoin and other cryptos are not companies. They’re digital money.
What does market cap mean?
Put in a simple way, market cap is the total dollar value of a certain cryptocurrency that is in circulation (available to purchase).
So for example:
If there are 16 million bitcoins that are currently “out there”, and each bitcoin is worth $17,000 on that given day, then the market cap would be $17 billion (price multiplied by circulating supply).
What is a Bitcoin wallet?
Bitcoin wallet (or crypto wallets) are digital wallets that keeps the addresses and keys to your bitcoin (or other cyrptocurrencies).
Simply put, just think of it as a wallet for your Bitcoin.
What is cold storage?
Cold storage is when you store away the cryptocurrencies that you have, offline. In something like a USB type device.
If you end up having a substantial amount of cryptocurrency in an online exchange or online wallet, then it’s good practice to move the bulk of it to cold storage in order to reduce the risk of being hacked. That said, just like “real money” or physical metals (like gold), you want to put it in a fire-proof/water-proof safe or safe deposit box in your bank. If you lose it, you lose your digital money.
Is there a chance I will lose money?
Yes. Absolute worst case scenario, you’ll lose everything. My personal opinion, however, is you won’t go to zero if you stick with the top 10 cryptocurrencies; because cryptocurrencies, as a category, are here to stay.
Is there a chance I will make a lot of money?
Yes. Just like you can lose all your money (which I doubt), you can make a ton of money.
There are a lot of people out there making enormous sums of money with cryptocurrencies.
There are Bitcoin millionaires and billionaires out there. Same can be said for the other cryptocurrencies.
Oh no Bitcoin is down 10%/20%/30%/90%! What do I do?!?!
If you’re in it for the long-game, you just hold and wait until it goes back up.
Even the stock market drops between 10 – 20% quite often. And sometimes it drops as much as 50%, and even up to 80 – 90%. And cryptocurrencies are probably 100x more volatile than the the stock market.
This means it can go up a lot very quickly, and go down a lot very quickly.
I heard Bitcoin is used for illegal activities! Is this true?
Yes, it’s true.
But so is regular money.
Saying Bitcoin is bad because it’s used for illegal activities is like saying cars are bad because bank robbers use them to make their get-away.
Why do people keep saying HODL, what does that mean?
Means “hold on for dear life.” Because that’s what a lot of us are doing with our crypto holdings!
CNN Money – What Is Bitcoin?
Investopedia – Bitcoin
Coindesk – What is Bitcoin?
What are your thoughts on the future of Bitcoin and Cryptocurrency as an asset class? Was your stance on it different before, and if so, what made it change? And lastly, are you invested in any cryptocurrencies, and why?