We often diversify with our clothes, food, friends, and activities, but many people need help diversifying their investments and finances. Diversification is an essential part of growing as an individual, as well as saving money and growing assets.
This is how I ended up investing in crypto and earning passive income –I was looking for ways to diversify my investments and build assets. I want to share with you what I’ve learned to empower you to make informed decisions around crypto.
In this wild world of digital currencies, there is so much information to wrap your head around. It took me a while to learn, too! In this blog, I’ll go into what crypto, blockchain, and verification methods are and how these digital tools work together to create incredible opportunities for investing.
What is Crypto?
Cryptocurrency is decentralized digital money designed to be used online. Crypto enables near-instant transfers globally without middlemen like banks or payment processors for low fees.
Cryptocurrencies allow individuals to take complete control over their assets. They are usually not issued or controlled by any government or central authority. They’re managed by peer-to-peer networks of computers running free, open-source software, and anyone can participate.
You’ve probably heard of the first cryptocurrency, Bitcoin. It launched in 2008 and has remained the biggest and most well-known. Bitcoin and other cryptocurrencies like Ethereum have developed as digital alternatives to government-issued money.
There are still no uniform international laws regulating cryptocurrencies, but some governments have embraced their use. There are currently 103 countries with regulations to work with Bitcoin, 42 countries with implicit bans on specific cryptocurrencies, and nine countries with absolute bans. El Salvador is the first country in the world to legalize Bitcoin as a national currency.
What is blockchain?
A blockchain is an open ledger that records transactions in code.
Thanks to blockchain technology, all transactions are secure. Think of cryptocurrency blockchain like a bank’s balance sheet. Each currency has its own blockchain, a constantly updated record of every transaction using that currency.
Transactions are recorded in “blocks” and linked to a “chain” of previous cryptocurrency transactions. Everyone who uses a cryptocurrency has their own copy of this universal transaction record. Each new transaction gets logged live, and every copy is updated simultaneously with the latest information, keeping all the records accurate. Each transaction is checked using a validation technique (either “proof of work” or “proof of stake”) to prevent fraud.
What is “proof of work” vs. “proof of stake”?
Proof of work and proof of stake are the most used consensus methods to verify transactions before adding them to a blockchain. Computers are rewarded with cryptocurrency for their verification efforts.
Proof of Work
This method of verifying transactions on blockchain involves constant math competitions between computers. An algorithm essentially provides a math problem, then participating computers –called “miners” –solve the problem to help verify a group of transactions called a block.
Whichever miner solves the problem first is rewarded with a small amount of cryptocurrency for its efforts, and the transaction is added to the blockchain ledger. Proof of work is very labor-intensive for computers and can require a lot of power and electricity. Bitcoin uses proof of work.
Proof of Stake
With proof of stake, miners pledge an investment in digital currency before validating transactions. This verification method reduces the amount of power needed to check transactions. Rather than forcing computers to use energy-intensive means to solve equations like proof of work, proof of stake uses crypto as collateral in a communal safe to fuel equations. Each person who stakes crypto is eligible to verify transactions, and the odds the algorithm will choose a person for verification increase the more a person stakes.
Proof of stake is not only less energy-intensive, but also more efficient than proof of work. It allows for faster verification times for transactions. The average transaction speed for Bitcoin is 10 minutes, whereas Solana –a crypto platform that uses proof of stake –averages 3,000 transactions per second (TPS).
Bitcoin mining currently consumes electricity at a rate that annually exceeds Norway’s total electricity consumption. Bitcoin’s biggest rival, Ethereum, plans to switch entirely to proof of stake and estimates that their energy usage will decrease by 99.95% when all is said and done.
How does mining cryptocurrency work?
Mining is how new units of cryptocurrency are produced. These new units typically come from validating transactions. The average consumer could mine cryptocurrency when Bitcoin was new, and the network was much smaller. But now, mainly because Bitcoin uses proof of work, it’s too expensive for the average consumer. Computers and equipment have been optimized to outcompete.
With proof of stake, the average consumer has way more opportunity to mine, as the algorithm chooses miners randomly, weighted on the amount they stake.
How can you use cryptocurrency?
You can purchase goods and services with cryptos like Bitcoin, Ethereum, or Litecoin. You’ll need a cryptocurrency wallet that allows users to send and receive your stored cryptocurrency.
But you can also use crypto as an alternative investment option. You can purchase cryptocurrencies through crypto exchanges like Coinbase, Kraken, or Gemini. Just watch for fees because some crypto exchanges charge prohibitively expensive costs for small purchases.
Some brokerage firms like Robinhood and eToro also let you invest in crypto. Remember that buying individual cryptocurrencies is like buying individual stocks –it’s a higher risk. If you want to dip your toe into crypto investing with less risk, you can invest in big companies adopting blockchain technology, like Microsoft or Bank of America.
You can also venture out to platforms offering PAMM (Percentage Allocation Management Module) accounts, which is the route I’ve taken and the subject of an upcoming blog.
Some experts don’t recommend investing in cryptocurrencies because it’s a highly speculative investment with the potential for intense price swings. This is undoubtedly a risk, but just like any other investment, you should be safe if you’re not putting in more than you can manage were that investment to drop to zero. Play it smart, start conservatively, and do your due diligence!
More resources for learning about crypto.
Want to learn more about earning passive income through crypto? Check this out.
