This story originally appeared on LX.com
Cryptocurrency is part computer science and part finance, but don’t let that intimidate you. It’s simple to get started and you don’t have to be an expert.
Do Your Research
It’s good to know what a blockchain is and how it works – but it’s not a necessity. Think about what happens when you buy something online – do you know how an Automated Clearing House works? How well do you understand the system of banks and payment processors that make up traditional finance? Lacking this knowledge doesn’t prevent you from using dollars, and likewise won’t prevent you from using crypto.
That said, what you need to know is that a cryptocurrency relies on a blockchain, a special type of digital network. There are different blockchains – like Ethereum, Cardano and Stellar. They work similarly, but have different features.
Bitcoin [BTC] is the most popular cryptocurrency. BTC transactions are processed and verified by people called miners. When miners process enough transactions, using specialized computers, they’re rewarded with some BTC. Essentially, the act of verifying transactions is what creates more BTC. So as long as miners want more cryptocurrency, the blockchain will function.
Blockchains use special apps, called protocols, that put your crypto to work. So in traditional finance you might have a savings account, but in crypto, you’d use a savings protocol. The language of crypto is rooted in computer science.
Get a Crypto Wallet
You’ll need a place to store your crypto – a wallet. You can choose a software wallet – like an app, or a hardware wallet – an offline device sort of like a flash drive.
- Most software wallets can be recovered if you lose your phone
- Most hardware wallets can’t be recovered if you lose them
Since software wallets are online, they’re potential targets for hackers. Hardware wallets are offline and can’t be hacked, but they can be lost or stolen like a real wallet.
You can skip this step by downloading an exchange app like Coinbase, eToro, or Gemini, then connecting a debit card or bank account. This is the fastest way to start buying and trading crypto. Your assets will be stored in a wallet managed by the exchange, which adds some risk.
Think about it, if you’re a hacker trying to steal millions, your time is better spent hacking large exchanges to access thousands of wallets. Hacking a single software wallet is probably a waste of time. To learn more about crypto wallets check out this resource from Benzinga.
Put Your Money To Work
If you only want to trade crypto, a wallet and exchange is all you need. But there are other ways to use crypto to make money.
Decentralized finance [DeFi] is a system of peer-to-peer finance tools that provide options like interest accounts, loans, and advanced trading for people with crypto. DeFi disrupts traditional finance by removing middlemen [bankers, lawyers, brokers] from finance processes. DeFi advocates say this makes finance faster, more affordable, more transparent, more democratic and eliminates in-person discrimination.
Getting started in DeFi takes more research. You can learn about different DeFi protocols on the web starting with The DeFi List. There, protocols are sorted by function, making it easy to understand what they do. Protocol developers share their mission statement by distributing a white paper. Here’s the white paper for Compound, a popular protocol, as an example.
To use DeFi protocols, you’ll need access to the decentralized web [dWeb]. To learn more about DeFi protocols, their history, and how they work, check out Finematics on YouTube.
Finally, here are some scenarios to help understand dollars and crypto.
- Holding crypto in a software wallet is like carrying cash in your real world wallet. It’s readily available to you and waiting to be spent.
- Putting crypto in a savings protocol is like putting cash in a savings account. The savings protocol pays you interest for using their service – similar to how banks pay interest for some savings accounts.
- Depositing crypto in a vault and borrowing from yourself is like putting cash in a retirement account and taking a loan from it.
- Trading tokens on a crypto exchange is like trading stocks on a stock exchange. Tokens represent blockchains and protocols like stocks represent corporations.
There are a lot of experts on YouTube and Reddit. To get you going, here are some free online resources ranging from the basic to the meta.