What is Cryptocurrency… and How Does it Work?




Cryptocurrencies: A General Overview.

This may be a bit techie for some folks, but this is taken directly from a Forbes article back in 2014, when cryptocurrency was becoming somewhat popular, right before Bitcoin’s big run.

They said…

“A cryptocurrency – or crypto – is a collection of binary data, which is designed to work as a medium of exchange where an individual coin ownership records are stored in a ledger, which is a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins and to verify the transfer of coin ownership.”

In simple terms, a cryptocurrency is a digital asset. And, it can be used to transact monetary value, or in a lot of cases, it can be used to transact data, which is a very key point that we’ll touch on later.

Life is Going More Digital.

Since our world is becoming more and more digitized, a lot of the goals of the cryptocurrencies that are being created is to revolutionize the way we transact data.

Some are made for monetary value. However, what you’ll notice as we go deeper is that a lot of these coins have value beyond just transacting money or value in the terms of “I’m buying this from you,” “you’re selling it to me.” It goes much further beyond that.

Cryptocurrency is really a second layer to the technology that’s actually working here.

Cryptocurrency is built off blockchain, and it is an emerging technology.

At the end of the day, the blockchain serves as a public transaction ledger that records every single transaction that takes place for each one of these cryptocurrencies.

The cool thing about blockchain – and this is a very key point – is that any transaction that’s recorded in this public ledger cannot be retroactively modified.

So, when you’re talking about making high-level transactions, big money transfers – or anything that needs some form of security – they can’t be modified once that transaction takes place. That’s it. It’s public record. It’s there for everybody to see.

The layer of security you get from blockchain completely dwarfs that of using chip cards and their ability to:

  • Verify those transactions
  • Record when they took place
  • Document which parties took place in them
  • Prevent transactions from being retroactively modified.
  • Etc.

Because of these qualities, blockchain – and cryptocurrencies that run on it – are arguably the most secure and verifiable transaction technology we have today.

In fact, the technological implications and the revolutionary ideas that a lot of these cryptocurrencies offer is so far reaching that any industry you can think of is trying to learn more about blockchain, and how they can implement it in their own businesses.

And once that happens, you’ll see a lot of people interested in investing in these coins because they view them as businesses.

What Types of Cryptocurrencies Are There… And What do They do?

One site that I like to use for researching cryptocurrencies and finding out about what they were created for is CoinMarketCap.com.

Now, this isn’t the only website out there that does this.

But, I’ve found that it’s pretty straightforward.

You can research a coin to learn about:

  • What’s trending
  • What’s moving in the markets
  • A description of what the coin was made for
  • Who the founders are
  • Where they started from
  • Etc.

An Example of Investing in Crypto You Can Get Behind.

An example I like to talk about is the coins made for cloud computing.

There’s medical technology like medical records that blockchain technology and cryptocurrencies are being used to transact those records more securely and more efficiently.

There are cryptos for digital advertisements, online messaging gaming, and the list goes on.

And that’s what makes cryptocurrencies extremely cool.

It’s not just transacting value, it’s transacting data.

When you’re talking about transacting data, there may be more efficient ways to do it for different industries. This is the reason why different coins have different use cases.

When you’re talking about why cryptocurrencies grow in value, it’s because of the perceived value of what the technology is going to be used to do. However, many of these coins are limited by number of coins created.

The Safest Crypto for Your Self-Directed Account?

The number one example of this is Bitcoin.  There’s only so many Bitcoins that can be created, have been created, or ever will be created.

When Bitcoin was first created, there was a hack of one of the cryptocurrency exchanges.  As a result, a lot of Bitcoin got lost.

Arguably, this is what has driven the price up so high, because there are Bitcoins out there that will never be accessed again. They are essentially lost.

With a limited supply, demand goes up naturally such as with assets like gold or silver. They’re mining more of it every day, so the value still goes up, and it’s still a rare precious metal.

With that said, assets like these will still never compare to Bitcoin because there is a finite supply. And just like Bitcoin, other cryptocurrencies also have a finite supply as well.

The more people that realize that supply is limited, the higher that demand will grow.

And this is why sometimes you see such rapid appreciation of cryptocurrency assets.

Add to this the fact that there’s perceived value in the use cases of these cryptocurrencies, and you’ve got the perfect storm.

Where To Start Looking for Cryptocurrencies to Invest in.

Visit CoinMarketCap.com.

Do your research on the different coins.

Find something the same way you would research an asset in the stock market.

Find something that you believe in.

If you think it is going to be around a while, look at who the founders are.

If there are any board members, are they from companies you know?

(Think of names like JavaScript, IBM, Microsoft, etc.) They know blockchain is an emerging technology, and that it’s going to be here to stay.

Oftentimes you’ll see those people start their own cryptocurrency projects.

Follow the Real Money

Now compare that to other coins. Dogecoin and Shiba Inu are basically coins that are memes themselves. They were birthed on the internet.  They came from Reddit. People just pumping them all day long.

These coins, they get the hype and the percentage runs, but are they actually going to be around in 10 years?

That’s the big question. Is that something that you want to invest in using your tax-sheltered retirement funds?

Are you going to put your Roth IRA in Shiba Inu, a coin that’s based off of a dog just like Dogecoin, or do you want to put it in something like Bitcoin?

People are using it to pay for things. People can buy houses with Bitcoins. They can buy cars with Bitcoin.

Don’t ask me how, because I’ve never done it, and I don’t exactly know where to start.

But, there are people out there that would accept Bitcoin as a form of payment.

So, do your research before picking something to invest in using your tax advantaged dollars in a Roth IRA, traditional IRA, or any other the employer plans, HSAs, etc.  

Just don’t invest your child’s ESA or their college savings in Dogecoin or Shiba Inu, and have it possibly evaporate overnight, which is entirely possible.

Once again, thanks for tuning in. Check out our next video for more on how to invest in cryptocurrency using your self-directed IRA.

If you’re interested in learning more, contact us. We’re here to help.

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