You probably know a bit about cryptocurrency. The Bitcoin phenomenon is mainstream enough to inspire breathless articles in newspapers and excited conversations in pubs. But what does any of it actually mean?
That’s not an easy question, because there’s a ton of information out there on crypto that is either deathly dull, mind numbingly complex, or just plain wrong.
Which is where we come in. Pretty much our job definition at Ledger’s School of Blockis to cut through the confusion, ignore the shouty headlines and keep everyone up to date with a fast moving subject in a fun, easy-to-understand way. With that noble purpose in mind, here’s your essential crypto starter for ten….
Let's go back to where we started. Cryptocurrencies like Bitcoin, Ethereum and Litecoin are types of digital money – watch the School of Block explainer here. You already use digital money, everytime you make a credit card or PayPal transaction. So what’s special about crypto?
The big difference is the technology behind it. You’ve probably heard of blockchain. The important bit as far as we’re concerned is that blockchain is a dispersed ledger that lets cryptocurrencies cut out the financial middlemen.
That’s really important, because with traditional (aka fiat) currencies - like pounds, euros and dollars - the middlemen are banks and governments. They’re there because, if you think about it, the very concept of currency is like a weird fairy story that only works if everyone believes in it.
That piece of metal in your pocket isn’t really worth the value of a tin of baked beans. It has that value because the government says it does, and everyone trusts everyone else to honour that valuation. We trust other authorities - usually banks - to authorise transactions and maintain records.
In other words, we pass control of our money to central authorities, without whom the whole house of cards comes tumbling down. So how does Bitcoin work without them?
That’s the magic of blockchain. A blockchain is a ‘decentralised’ network, which means that every time a Bitcoin transaction happens a public record is simultaneously created on every computer in that blockchain network, making the system almost impossible to defraud. Still a little confused? Check out the School of Block guide to blockchain.
Anyway, the upshot is that cryptocurrencies don’t need central authorities to authorise transactions, maintain records, or guarantee value. Blockchain does it. Nor does a government or central bank need to issue cryptocurrency. In the case of Bitcoin, the currency is ‘mined’ by very powerful computers solving very complex mathematical problems, but that’s another story. And you can find out more about Bitcoin in School of Block.
But, er, why bother?
So that’s the what, but what’s the why? We’ve got cash, credit cards and PayPal. Why do we need crypto?
Partly, cryptocurrency came about because some people decided they wanted more control over their money. Fiat currencies are subject to the whims of a very small number of people. In theory, your government could devalue your savings by printing lots of extra cash, deny you access to your bank account, abolish banknotes or something else equally extreme. It may sound unlikely, but all of those things have actually happened.
Then there’s the costs associated with traditional currency transactions. All those middlemen want a cut. Everyone from banks and credit card companies to foreign exchange rates are constantly nibbling away at the value of your cash.
So traditional currencies have lots of flaws. We’ve just come to accept them as the price we pay for the way we save, spend and invest. But with financial freedom in mind, maybe they shouldn’t be the only game in town?
Getting started with crypto
If you were starting from scratch, you’d want a currency that is secure and non-inflationary, that no central authority controls, and that isn’t subject to all the traditional banking fees associated with pounds, euros and dollars.
Or to put it another way, hello Bitcoin!
So we’ve cracked it, right? Problem solved. Well, not quite. Cryptocurrencies have their own issues. For a start, they’re quite a new concept, and that makes them volatile. Values rise and fall sharply.
And perhaps even more importantly, you can’t do everything with Bitcoin that you can with a fiat currency. Or at least, not yet. As Bitcoin moves into the mainstream, that’s beginning to change.
So Bitcoin isn’t a straight replacement for your cash, but it is a serious option in some circumstances. Millions of people now invest in cryptocurrencies and make crypto transactions. The problem is knowing where to start. Find out about the different coins at the School of Block…
Start with security
As with all things digital, the very best place to start is with security. To store and trade crypto you’ll need a crypto wallet, which holds the ‘keys’ associated with your funds. To all intents and purposes, keys are your funds, so you really don’t want to get them stolen. With that in mind, your first investment should be in a ‘cold’ wallet like Ledger, which is the safest way to store funds.
‘Cold’ just means it’s not connected to the internet, so hackers can’t get at it. Instead, Ledger is a special kind of secure external storage device (like a USB stick) specially designed to hold crypto keys.
Next, you’ll need to get hold of some funds. Big exchanges like Coinbase and Binance let you buy crypto with a credit card. Buy some coin, stick it in your Ledger wallet and you’re ready to go. And with the Ledger Live service you can swap one crypto for another in a few clicks. One simple-to-use app gives you access to crypto services letting you swap, buy, sell, lend and stake.
There’s no room here to go into all the subtleties and strategies of crypto trading, but general investment advice applies. Start small. Be patient. Understand that crypto is not a short-cut to vast wealth and that knowledge is power.
That last bit is essential. Crypto is far from the financial Wild West you might have heard about, and with the right knowledge and the right tools it’s a perfectly legitimate investment option. But you have to know what you’re doing, and keep in touch with developments.
Subscribe to School of Block on YouTube to enjoy fun, informative lessons that will set you off on your crypto journey. With episodes on the basics of blockchain and cryptocurrency to understanding the hype around Bitcoin and NFT - there’s easy to understand answers at the School of Block.