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.
With a little smart investing and a little luck you can make money online, even in 2021.
Cryptocurrencies are a decentralized form of payment you can use to buy goods online. There are thousands of different currencies from the popular Bitcoin, Ethereum and Litecoin to the meme currency Dogecoin.
Cryptocurrencies run on the blockchain, which is a digital ledger of the currency’s transactions and ensures the same coin is not spent twice. Transactions are processed on the blockchain network of thousands of machines – and in exchange for those computers’ hard work, owners have a chance at receiving a crypto coin.
The new coins are “mined” (meaning minted, or created) when computers solve complex mathematical problems to work out the legitimacy of transactions on the blockchain.
While many people do pay for their purchases with crypto, it’s more widely discussed as a form of investment – spurring whole websites that track the value of a single Bitcoin.
Using exchanges or wallet apps like Coinbase, Crypto.com and BlockFi, users will convert dollars to cryptocurrency and count on their investment increasing in value, just like a stock.
Also like a stock, you don’t pay taxes on crypto gains until you sell and cash out. The capital gains tax you would pay on Bitcoin or other crypto income will vary according to your income in that tax year – if you make under $40,000 per year, you would owe no tax on any crypto gains. They would be taxed at 15% if you earn up to $441,150 and 20% at any higher income, according to CNBC.
Many people invest in crypto because of the ease of buying, selling and trading on apps and websites, according to a CNBC survey.
A cryptocurrency could gain value if a major business announces they will accept it as a form of payment, when changes are made to the mining process, or when notable people like Elon Musk hype up a particular crypto asset. Additionally, value can go up if the demand increases while supply stays limited – for example, once there are 21 million Bitcoins in circulation, no more will be mined.
A cryptocurrency might lose value when a company no longer accepts it as payment, or when a lot of people try to sell at once.
Here are some scenarios to help understand dollars and crypto.
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 and most valued 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.
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.
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.
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.
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.