I’ve been trying to avoid crypto like I’ve been trying to avoid Covid. I have nothing against cryptocurrency. I’m actually super into the idea of other types of financial industries and currencies. Especially ones that look to include many groups traditional finance leaves behind. The financial industry hasn’t changed much in like, the entire time of its existence, so it feels about time something came along to shake up the status quo.
My hesitancy mainly stems from never having enough time to properly look into it. I’m not the most tech-savvy person (though I try real hard I promise!) and after reading multiple articles about blockchain, I’m still just as confused.
I figured now was the perfect time to dive in and document a normal person trying to understand wtf crypto is and how to get some.
Starting out with zero clue what I’m doing with crypto
I should have paid more attention to the crypto ramblings of my boyfriend over the last year instead of looking at him with my, “pretend to be listening” face while the soundtrack to Moulin Rouge plays in my head. But alas, I cannot go back in time.
To start, I had to figure out what the hell blockchain is. According to Investopedia, “As its name indicates, blockchain is essentially a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.1The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.”
Does this make sense to me? Absolutely not. But apparently, it’s a really good thing.
As Kenneth explains in this article, “Essentially, you would have to fool the individually logged blocks of, at this point, millions of people around the world. Spoiler alert, it’s not happening.”
He goes on to explain it this way: “Basically, imagine this – when you get your monthly account report for your debit or credit card, it gets locked and no one can change it. That would be the block. The code used to lock that report is used to connect to next month’s report and then that report gets its own code when it’s locked. Those connecting blocks create a chain and attempting to change anything in those blocks is all but impossible. Security, thy name is confusing coding.”
Decentralization of Currency with Crypto
Another apparently really cool thing is that cryptocurrencies are decentralized, meaning no one central authority controls, distributes, or regulates it. This is supposed to help prevent market manipulation as well as prevent a small group from holding most of the assets. Unfortunately, crypto is still operating within capitalistic society and where there’s money to be made, big business will surely follow.
A study done by MIT in 2021 looked to analyze certain traits of crypto and found that specifically Bitcoin, “is still dominated by large and concentrated players, be it large miners, Bitcoin holders or exchanges. This inherent concentration makes Bitcoin susceptible to systemic risk and also implies that the majority of the gains from further adoption are likely to fall disproportionately to a small set of participants.”
Because it’s still relatively new-ish (crypto has been around since 2008), US-based agencies like the SEC and IRS are still trying to figure out which laws and regulations are applicable to the rapidly growing crypto market and what will need to be created to avoid things like market manipulation from the whales (casino term for someone who drops big, BIG money), other large corporations, fraud, and other illegal activities.
To summarize what I understand so far is that crypto is basically another stock market where people with a lot of money own most of it, but regular people can still make money and it’s like, really really secure. I’m sure that summary has the crypto bros fuming, but whatever.
May I please have some crypto?
Now that I read a definition and barely understand what I’m doing, obviously, the next step is to buy some. To do this, I need to find a crypto exchange. Now, this part I understand a little bit better because it’s kind of like figuring out what company you want to set up your investment accounts with, like Fidelity or Vanguard. You have to compare fees, account minimum requirements yadda yadda.
If you’re wanting to buy crypto, go to an exchange built for crypto. Yes, a site like PayPal or Venmo is easy to jump on, especially if you already have an account. However, these sites tend to have extra fees, limits on what you can trade in a year, and restrictions on where and how you can transfer your crypto.
My top two choices, as advised by the boyfriend I should have listened to, were Coinbase and Binance. There are a bunch of other exchange options and your choice will depend on what exactly you want to do in the crypto world. Seeing as how my experience level is limited (a generous term) Coinbase and Binance were the better choices for a novice like myself. After checking a quick comparison from The Motley Fool, I went with Coinbase.
The actual buying process.
Signing up for Coinbase was simple enough. Again, much like signing up for an IRA through Fidelity. You create a login, answer a few questions, verify a few things and your account is up and running.
To actually buy crypto, you need to link a payment option. Most of your usual options are available like bank transfers, wire transfers, transfers from your debit card, from Paypal, and a few more.
Once I linked a payment option, it was time to figure out which coin I wanted to buy. There are a crap ton of options. You have the popular Bitcoin and Ethereum, the meme ones like Dogecoin and Shiba Inu, and everything in between. Bitcoin felt a little too mainstream for me so I went with Ethereum. Since this is just an experiment (and I’m between paydays) I only bought $10 of Ethereum. It was exactly like purchasing a fraction of an ETF. Coinbase allowed me to select how much I wanted to buy, which coin I wanted, if it was a one-time or recurring purchase and which payment option to pull from. The actual purchasing of Ethereum took less than 5 minutes.
You obviously have the option to sell as well as convert from one coin to another. There are other features, like being able to transfer crypto to and from other people, that require you to verify your identity by submitting your ID, which took another few minutes to upload and maybe 20 minutes to be verified.
Overall, Coinbase was straightforward, easy to use, and easy to set up. After cruising through the site, it seems like everything is set up in a very user-friendly way. They even have educational sections where you can earn crypto by going through educational modules pertaining to certain coins. I also peeped a tax-specific section that offered document preparation, transaction history, and other tax resources since that can get very involved.
Once I got the account set up, I figured that was a good time to try and learn more about what I just did. Here are some of the miscellaneous things I came across that are probably important.
There’s a difference between an exchange and a wallet. This was SUPER confusing but as far as I can tell based on using Coinbase is that Coinbase is the exchange. Meaning it’s where all the buying, selling, and trading happens. Coinbase Wallet is the uber-secure place that it’s stored per individual.
There are cold wallets and hot wallets. One of the biggest selling points about crypto is its security. While it’s not 100% fraud-proof, the wallets add another layer of protection. A hot wallet is one that’s stored online. Kind of like an online bank account. It’s easy to transfer money, buy stuff and all that. A cold wallet is one that’s not stored online, but rather in hardware that’s more like a USB drive only it’s not a regular USB drive. These cold wallets are more for people looking to hold crypto for the long term rather than regular trading.
Private keys are the ultimate password. There are two kinds of keys, private and public. Public keys are derived from your private key and it’s a very complicated mathematical process, but basically the public key verifies that it’s you using your private key. So like, when you use your debit card, the card number is you and your pin number to the card is verifying that it is you making the purchase. Only with crypto, that pin is super top secret and you only get one and if you lose it you’re screwed because you cannot “reset password.” Just ask Stefan Thomas who lost about $280 million in Bitcoin because he lost the private key to access his wallet.
The market is volatile. Most days, the stock market is relatively calm. Sure, it has its tumultuous moments but more often than not, it’s pretty steady. Crypto, however, can have extreme swings multiple times a week. If you are the type that dreads investing because you’re scared to lose money, crypto is going to be one rough trip friend. Make sure you know your own risk tolerance before you plunk down money in an exchange. Or if you do, make sure it’s an amount you’re more than comfortable possibly never seeing again.
Some coins offer staking. It seems to me that staking is like a stock dividend or the interest you make from a high-yield savings account. You’re letting the exchange put your holdings to work in other areas and they give you a little kickback. Coinbase has a much more industry-worded explanation here.
More exchanges are offering their own interest savings accounts, credit cards, and debit cards with crypto rewards. Companies like BlockFi have their own credit card while exchanges like Gemini and Coinbase offer interest for money that’s parked in certain coins long term. These kinds of accounts are NOT FDIC insured and the interest typically does not compound.
A bit of the ugly truth.
A lot of people have a lot of opinions on cryptocurrency. A lot of those opinions have merit and there should be more open conversations around them because truly amazing things can happen when we innovate and experiment rather than simply shout at each others echo chambers.
The impact of crypto on the environment
The environmental impact is a large concern. Mining for cryptocurrencies takes a lot of energy. Like A LOT. Somewhere in the realms of what entire countries use in a year. It also creates physical waste in the way of computer hardware and components that become obsolete due to how fast tech improves. This has been a major no-go for potential investors considering the burning of fossil fuels is accelerating the climate crisis. Personally, other than not having the time to dive in, the environmental impact was the biggest reason I didn’t want to actually invest in crypto. Especially when large companies aim to make big bucks by operating their own mining facilities with little regard to environmental consequences.
After some research, there have been improvements to the energy consumption required to mine crypto. For starters, green energy alternatives are becoming more accessible which reduces the amount of fossil fuels being used in the mining process. Other improvements in how crypto transactions are validated and transferred are also improving which reduces the energy used throughout millions of transactions. It’s not perfect and there’s no one solution to this issue, but it is improving.
Crypto Culture is yuck
You know how there are certain bands that you really love, but you’d never go to a concert because the fans are just ick? Yea, that can definitely happen with crypto. Tech and finance are notoriously white male dominated industries. Considering crypto is a marriage of the two, finding educators and communities that are inclusive can be tricky. Especially with how aggressive and hive-minded “Crypto Bros” become when people try to ask questions or have legitimate concerns.
Luckily, as more people indulge in their curiosities about crypto, it brings more people from POC and LGBTQIA+ communities into the fold. This is especially true for NTF’s, which will be a whole other topic for another day.
Crypto is legally complex
Crypto also carries with it some confusing legal questions. Because it’s grown so quickly, government agencies across the world are still trying to work out how and where crypto fits in with current finance and tax laws or if it even fits in at all. There’s no one central bank or controller of any crypto coin and it’s completely digital with no physical ties to any country or jurisdiction. Solidifying procedures for what would be considered stuff like fraud or money laundering ends up being pushed into very complicated legal territory.
One of the more talked about crypto issues within personal finance spaces is its scheme-like vibes. Which are 100% there. There’s concern that crypto investors tout this new market as the easiest way to make millions of dollars. Just invest all your money in a few strategic coins and boom! You’re filthy rich. Yes, there are people making beaucoup bucks rather quickly, but more often than not, it’s people making average or negative returns. Because of cryptos volatility, it cannot be timed, just like the regular stock market.
As far as crypto goes, I don’t hate it. I see the pros and cons and if we zoom way out, I think it will at the very least, lead to some changes with mainstream finance which is desperately needed. Those changes could possibly ripple out into other industries as a lot of tech advancement does. I don’t think it’s a cure-all for all of the issues of the finance industry though.
Will I keep investing in it? I’ll probably keep throwing a few bucks in here and there. It’s still a little too wild wild west for me to feel comfortable investing more than that. Me and my damn low-risk tolerance. I live in Vegas so I personally look at it like taking a $20 down to the slot machines at the grocery store to pass the time. Yes, we have slot machines in grocery stores and gas stations. But you catch my drift. It’s all money I’m mentally and emotionally prepared to lose. It’s not going to be where I park my emergency or retirement funds.
Crypto, like anything money related, can be as complicated or as simple as you want it to be. You can be like me and understand the bare minimum (again, a generous term here) and only invest enough to get your feet wet and see what it’s all about. Or you can go on to learn about staking and DOAS and smart contracts and gas fees. It’s all up to you. Just remember it’s not a get-rich-quick investment and you need to be prepared for the downs and well as the ups.
Okay crypto bros, I think I’ve given you enough aneurysms for one day.
Mackenzie Stewart launched her site Life at 23k to fill a void for the people who can’t afford to invest or start an emergency fund. She wants to find and give financial advice that the underemployed minimum wage worker can use – not just those making great salaries with marketable degrees already.