Intro To Crypto

Since the launch of Bitcoin in 2009, cryptocurrency has seen a significant rise in popularity across the globe. This is especially true in recent years, as it has become more accessible and also more widely accepted as payment. Many governments have been implementing regulations for crypto, and El Salvador has even made Bitcoin legal tender. Still, it is often seen as a dangerous place to invest money. Numerous high profile bankruptcies, scams, and hacks have occurred over time, lowering trust in crypto. This article will cover basics and give you some of the information you need to decide whether investing in crypto is a good idea for you.

What is crypto?

Cryptocurrency is decentralized digital money, meaning that it isn’t controlled by a central authority such as a government. It doesn’t exist physically like normal currencies do. The underlying technology behind crypto is blockchain, which is a digital ledger that records transactions involving crypto and secures them with cryptography. 

How does blockchain work?

In a blockchain, the job of storing records is shared in a peer-to-peer network, which is a network of computers that each have a copy of the ledger. They exchange data with each other instead of getting it from a central server, which is what most traditional systems use. Because of this, the ledger is public and records are easily accessible by anybody.

Another feature of blockchain is that it is immutable, or unable to be changed. Records are stored in ‘blocks’ that also contain information about the previously created block, and a timestamp. All of the data is then encrypted by a hash function, which outputs some string of letters and numbers (called a hash). It links the blocks to form a chain where altering one of them ‘breaks’ it - the hash changes with the block’s data, so the altered block’s hash no longer fits with the others.

Blocks themselves are created with a consensus mechanism - this is a process in which all of the computers on the network agree to validate and add transactions to the public ledger. Blockchains can have different consensus mechanisms. For example, Bitcoin uses a mechanism called proof-of-work, which involves computational resources being used to solve a mathematical puzzle. When computers put in that work, it proves to the Bitcoin network that they are not bad actors and gives them the right to validate and add transactions to the ledger. Proof-of-work makes it almost impossible for people to alter the blockchain for their own purposes, since a majority, or more than 50%, of the computational power on a network is needed to approve any transaction.

As a minor, can I invest in crypto?

Technically, anyone can legally buy and trade cryptocurrency. However, it comes with significant risk, and a large part of trading often comes down to speculation. Many coins are highly volatile, and it is easy for them to lose a lot of value in a matter of minutes. Furthermore, a multitude of scams and fraudulent schemes exist on the Internet. The people behind them try to attract investors to what seems to be a lucrative opportunity, only to run away with all of the money afterwards. In other words, crypto investors should always be cautious, and know exactly what they are investing in. 

There are definitely other, potentially safer places to put money. For example, buying stocks, bonds, and mutual funds are some options that minors can access by making a custodial brokerage account. Savings accounts are another choice, and are virtually risk-free since they are insured by the federal government. Even though savings accounts tend to have low interest rates, younger people who start early have a lot of time to earn interest. Given enough years, an account with compound interest will return exponential gains. 

All of this being said, crypto has a lot of potential for profit. If you have a little spare money and some free time, you can consider some of the following ways to try crypto.

How can I get started with crypto?

A good way to get started is to make an account with a broker like Robinhood or a centralized exchange like Coinbase. With both, you can convert dollars into a cryptocurrency of your choice. Some payment apps like PayPal or Cash App even allow you to buy it directly. However, all of these require you to provide ID verification, so minors can’t make accounts on their own.

Age limits don’t exist on many decentralized exchanges (DEXs), where crypto transactions are performed without a middleman. At a centralized exchange, transactions typically need to go through a company’s servers in order to be executed. At a DEX, though, computer programs called smart contracts are used to automatically facilitate trading between two users.

Thanks to the versatility of smart contracts, a variety of ways to invest in crypto through DEXs exists. Yield farming is one - essentially, you can earn interest on your crypto by lending it out for a period of time. However, its value will likely fluctuate while it is being lent out, making it possible to end up losing money. A process called stablecoin yield farming can help mitigate this risk by using stablecoins, cryptocurrencies designed to maintain their value, to yield farm. Of course, there is still a chance of losing all of the money that you lent out, so make sure to do your own research beforehand.

You may have heard about crypto mining, where you can earn rewards by running a computer to solve mathematical puzzles. Setting up a mining ‘rig’ and buying the necessary equipment, however, can be a complicated and expensive process without related experience. Additionally, mining takes a lot of energy and has a significant impact on the environment, which is why some countries have banned it.

There are also ways to invest in crypto indirectly. Blockchain companies are involved in crypto, so the values of their stocks generally reflect trends in the crypto market. Blockchain ETFs and crypto funds exist as well, and are ways to get exposure to crypto without actually buying any. 

To conclude, the world of crypto is quite wide. This article is by no means comprehensive of all of the different methods of making money through crypto. Hopefully, though, you now have a basic understanding of how it works and how you can get started if you are interested.