Cryptocurrency All-in-One For Dummies. Peter Kent

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Making a Plan Before You Jump In

      If you’re interested in cryptocurrency investing, you may just want to buy some cryptocurrencies and save them for their potential growth in the future. Or you may want to become more of an active investor and buy or sell cryptocurrencies more regularly to maximize profit and revenue. As discussed in Book 5, Chapter 4, you can select cryptocurrencies based on factors like category, popularity, ideology, the management behind the blockchain, and its economic model.

      Even if your transaction is a one-time event and you don’t want to hear anything about your crypto assets for the next ten years, you still must gain the knowledge necessary to make the following decisions:

       What to buy

       When to buy

       How much to buy

       When to sell

      

If you’re not fully ready to buy cryptocurrencies, no worries. You can try some of the alternatives to cryptos: initial coin offerings and stocks (see Book 5) or mining (see Book 6). To learn more about two well-known cryptocurrencies — Bitcoin and Ether — before investing in either one, head to Books 3 and 4, respectively.

      Over 5,000 cryptocurrencies are out there at the time of writing, and the number is growing. Some of these cryptos may vanish in five years. Others may explode to over 1,000 percent of their present value and may even replace traditional cash. Chapter 4 of this minibook covers all different types of cryptocurrencies, including Ethereum, Ripple, Litecoin, Bitcoin Cash, and Stellar Lumens.

      

Because the crypto industry is pretty new, it’s still very hard to identify the best-performing cryptos for long-term investments. That’s why you may benefit from diversifying among various types and categories of cryptocurrencies in order to manage your risk. By diversifying across 15 or more cryptos, you can stack up the odds of having winners in your portfolio. On the flip side, overdiversification can become problematic as well, so you need to take calculated measures. Flip to Book 5, Chapter 5 for more on diversification.

      

When you’ve narrowed down the cryptocurrencies you like, you must then identify the best time to buy them. In 2017, many people started to believe in the idea of Bitcoin and wanted to get involved. Unfortunately, many of those people mismanaged the timing and bought when the price had peaked. They had to settle for buying fewer bits of Bitcoin (pun intended) and also had to sit on their losses and wait for the next price surge.

Chapter 2

      How Cryptocurrencies Work

      IN THIS CHAPTER

      

Understanding the basics of how cryptocurrencies function

      

Deciphering important terminology you need to know before investing

      

Seeing how new cryptocurrencies are born from old ones with forks

      Cryptocurrencies, and more specifically Bitcoin, have been one of the first use cases for blockchain technology (covered in detail in Book 2). That’s why most people may have heard about Bitcoin more than they have about the underlying blockchain technology.

      This chapter gets into more detail about how cryptocurrencies use blockchain technology, how they operate, and how they’re generated, as well as some crypto geek terms you can impress your dates with.

Explaining Basic Terms in the Cryptocurrency Process

      Cryptocurrencies are also known as digital coins, but they’re quite different from the coins in your piggy bank. For one thing, they aren’t attached to a central bank, a country, or a regulatory body.

Here’s an example. Say you want to buy the latest version of Cryptocurrency All-in-One For Dummies from your local bookstore. Using your normal debit card, this is what happens:

      1 You give your card details to the cashier or the store’s point-of-sale system.

      2 The store runs the information through, essentially asking your bank whether you have enough money in your bank account to buy the book.

      3 The bank checks its records to confirm whether you do.

      4 If you do have enough, the bank gives a thumbs-up to the bookstore.

      5 The bank then updates its records to show the movement of the money from your account to the bookstore’s account.

      6 The bank gets a little cut for the trouble of being the middleman.

      Now if you wanted to remove the bank from this entire process, who else would you trust to keep all these records without altering them or cheating in any way? Your best friend? Your dog walker? In fact, you may not trust any single person. But how about trusting everyone in the network?

      

Blockchain technology works to remove the middleman. When applied to cryptocurrencies, blockchain eliminates a central record of transactions. Instead, you distribute many copies of your transaction ledger around the world. Each owner of each copy records your transaction of buying the book.

      Here’s what happens if you want to buy this book using a cryptocurrency:

      1 You give your crypto details to the cashier.

      2 The shop asks everyone in the network to see whether you have enough coins to buy the book.

      3 All the record holders in the network check their records to see whether you do. (These record holders are called nodes, and are explained later in this chapter.)

      4 If you do have enough, each node gives the thumbs-up to the cashier.

      5 The nodes all update their records to show the transfer.

      6 At random, a node gets a reward for the work.

That means no organization is keeping track of where your coins are or investigating fraud. In fact, cryptocurrencies such as Bitcoin wouldn’t exist without a whole network of bookkeepers (nodes) and a little thing known as cryptography. The following sections explain that and some other important terms related to the workings of cryptocurrencies.

      Cryptography

      Shhh. Don’t tell anyone. That’s the crypto in cryptography and cryptocurrency. It means “secret.”