You’ve undoubtedly heard about the price of Bitcoin, that mysterious electronic money, and its roller-coaster ride over the past decade. From zero to tens of thousands of dollars, up and down, it’s tempting to fantasize what it would be like holding a few Bitcoin in your wallet or purse, and even more tempting to want to get it on the ride.
But what exactly is Bitcoin, and crypto? And what about these new NFTs? What exactly are all of these things? How do they work? What should you look out for? In this post, all of this and more will be revealed.
This guest post was submitted by pharmacist Samantha Brandon. We have no financial relationship.
Her disclaimer: I am not a financial advisor, and this content is for general informational purposes. Anything you do with your money is your responsibility and I cannot be held liable for your decisions.
One evening, my husband and I met up with friends for happy hour, which turned out to be a stimulating crypto talk. The entire time I sat there sipping my Kilt Lifter and throwing in words like “dogecoin” to pretend I could contribute to the conversation. I realized on the drive home that it was time to stop pushing off the inevitable. I needed to learn what crypto was and figure out if I should invest, or at least be able to keep up with the conversation. So I went home and got to it.
DeFi. Crypto. NFT. dApps.
All these acronyms were starting to make me feel like I was a first-year student again with my eyes glued to a medical terminology book. But instead of being a young, bright-eyed twenty-something, I felt like I related more and more to my parents who still ask me how to download an app to their smartphone.
I always wondered how using a computer or smartphone was not intuitive, and now I get it. These teenagers with their Axie’s and Coinbase accounts were lightyears ahead of me. The tables have turned and now I had two options: be a part of the digital revolution as it grows or be that person convinced that the internet was just a fad (“Yes, dad, I NEED a computer,” my high-school self had to explain back in 2006).
Okay, maybe that’s a bit extreme, but here’s your decentralized breakdown for all those that want to jump on the blockchain train while it’s still at the station.
What is Blockchain Technology?
We first need to start off by nailing down the blockchain basics. I know, I know. But trust me, once you understand the basics of blockchain technology, everything else will make a lot more sense. So let’s take a step back and start from the beginning.
Blockchain is a new type of distributed ledger technology, or DLT for short. In basic terms, this means that instead of having one central server that stores all the data, the data is spread out across many different computers. This makes it a lot harder for hackers to get their hands on your information, because they would have to hack into every single computer that stores the data.
The blockchain is a continually growing series of blocks that are verified and added to the ledger through consensus. So in simpler terms, you have a piece of data (say, information about a transaction), which is then validated by thousands of computers simultaneously. Once validated, that information is packaged up into “blocks” and added or linked to the previously validated blocks. The entire unit as one cohesive entity is known as the blockchain. So the blockchain is just a chain of blocks of information.
As simple as this technology sounds, it’s revolutionary. That’s because it’s very difficult to alter any single block without affecting all other blocks, making it nearly tamper-proof. If an individual tries to change something on their own version of the blockchain database, thousands will find out.
The “decentralized” architecture is what makes blockchain technology incredibly secure.
Now let’s see how blockchain is used to create cryptocurrencies.
All about DeFi
DeFi is short for decentralized finance. But first, it’s probably easier to think about what centralized finance is.
Centralized finance is the current financial system. It’s what we all use now and most of us are already familiar with. There are banks, credit unions, insurance companies, and other financial services that act as middlemen between you and your money. This means they take a cut when you withdraw or transfer funds.
We use these intermediaries to secure our money, but it is usually associated with fees. If you want to trade stocks or take out a car loan, there’s usually an additional charge on top of what you’re paying the broker. In addition to that, if you try using your credit card abroad or transfer funds internationally, you can be hit with a fee.
Decentralized finance is different, because well, it’s decentralized. There is no middleman or governing body. So, in other words, it’s a financial system that operates directly between users without a third party. There are no banks. No regulations. It’s just you sending your money directly to someone else, and this system has both pros and cons to consider.
Okay, so we’ve talked about DeFi and blockchain, but what is cryptocurrency?
Cryptocurrency is a digital or virtual currency that utilizes blockchain technology.
Really, you can think of cryptocurrencies like the digital form of cash and the blockchain like a giant ledger where you publicly write the transactions down for everyone to see. Except it’s all digital, and the blockchain technology makes it nearly tamper-proof.
Types of Cryptocurrencies
Now, there are many different types of cryptocurrencies similar to how there are many different types of national currencies.
Each individual cryptocurrency utilizes its own type of blockchain technology to keep its currency secure.
The OG crypto, as many of you know, is Bitcoin. Founded in 2008, it was the first to introduce a decentralized coin. Then many others followed suit, such as Etherium, Litecoin, and Tezos. But really there are now thousands of cryptocurrencies.
How do you measure the worth of the coin? For example, when we take a look at the worth of the US dollar, it fluctuates based on the state of the economy, the cost of goods, and a million other factors. A paper dollar has value because we’ve given it value as an acceptable form of payment.
But, how does cryptocurrency have value? Unlike the US dollar, it’s not an acceptable exchange for goods or services. My Bitcoin won’t buy me a Starbucks latte. Therefore, at this time, Bitcoin has value because its users give it value as a limited commodity. Think of this like gold. We all feel gold is valuable, but I can’t take a gold bar to the grocery store to pay for my food. The US dollar used to be backed by the gold standard, but that’s not the case anymore.
So that begs the all-important question: will cryptocurrencies become an exchangeable currency in the future? The technology is certainly there, only time will tell.
Alright, time to pivot over to NFTs.
What are Non-Fungible Tokens?
First, what does fungible mean? Fungible means two assets are the same and interchangeable. One bitcoin is just as valuable as another bitcoin. One dollar is just as valuable as another dollar.
Non-fungible tokens (NFTs) are then the opposite of this. One NFT is unique and cannot be exchanged for equal value for another. What makes an NFT valuable is that it can be attached to a digital or physical asset.
When an NFT is created or “minted” to the blockchain, the creator can attach any item to it. Once an NFT is minted, no one can tamper or alter it, just like we described above. This makes it a great way to document ownership of an asset.
Types of NFTs
NFTs can attach all sorts of digital assets such as images, songs, and videos, as well as physical assets like real estate or art. Here are a few examples:
- NBA Top Shots: The NBA has minted their own top moments, player achievements, and video loops. Think of these NFTs like a digital pokemon card.
- Bleeple’s Everydays: This digital art piece was sold by Christie’s for a record $69 million dollars.
The beauty of blockchain is that every NFT transaction or sale has an open history. If you want to buy and sell, all your items’ details are right there for the world to see!
So you may be asking, why would anyone want an NFT? What’s its purpose?
NFTs are a way to authenticate an item, prevent forgeries, take ownership of digital art, and streamline the transaction process. Previously, digital art had no way to prevent someone from just copying an image. But now, the artists can mint it, and you know you are purchasing an authentic piece of art because you can see that it was minted by that artist in the transaction history.
Collectibles like the NBA Top Shots now don’t have to worry about forgeries. All you do is check the transaction history and make sure the NBA minted it. Think about all the forgeries with physical assets like collectible cards or comic books; there’s no way to say with 100% certainty that your Babe Ruth card is authentic. There have been thousands of forgeries put on the market.
The future of NFTs looks very promising as its being talked about expanding into the entertainment center, sports, and luxury brands.
Investing in Cryptocurrency and NFTs
Now that you have all the basics on what cryptocurrency and NFTs are, the real question is how and should you invest in them?
Here are some reasons to consider investing in cryptocurrency:
- Security: As mentioned earlier, blockchain is a secure technology that makes it difficult for hackers to steal your information. Although you should still follow normal safety protocol such as a hardware wallet.
- Decentralization: Bitcoin and other cryptocurrencies are not controlled by any government or financial institution. This makes them less susceptible to inflation or economic crashes.
- Opportunity: Cryptocurrencies are still in their early stages, so there is a lot of potential for growth in the future.
Here are some reasons to consider investing in NFTs:
- Unique: As mentioned earlier, each NFT is unique and cannot be substituted for another. This makes them very valuable and desirable.
- Versatility: NFTs can attach all sorts of digital and physical assets. This makes them very versatile and opens up a lot of possibilities for their use case.
- Immutability: Once an asset is registered on the blockchain, it is impossible to change or delete it. This makes them very reliable and safe to use.
- Ease of Use: It’s easy to buy, sell, or trade NFTs with other people online. This makes them convenient and user-friendly.
Now, let’s talk about the different ways to invest in crypto or NFTs.
General Crypto Investment
Now, the easiest and most straightforward way of investing in DeFi is to get on a crypto exchange platform and start buying some bitcoin. I’m sure we all wish we had bought some bitcoin back in 2008 as we would be living the FIRE life up strong right now.
CryptoStaking is a process where you lock up your cryptocurrency in a wallet and receive rewards for validating transactions. The best way to think of this is like locking up your money in a CD for higher rate of returns.
This can be a passive form of income and can easily be accomplished by joining a cryptocurrency exchange that will do the legwork for you. The rate of returns can often be very high. But, with high rewards usually comes high risk. Say the value of the crypto starts going down while you’re locked in, then you can’t sell. So maybe you make a 6% return, but if the value of the crypto drops by 20%, you lost money.
Now Bitcoin ETFs have taken off in the last several months, and they are one of the newest ways to invest in the crypto market. An ETF (exchange-traded fund) comes in many varieties, but for our purposes, let’s just say it is a security that tracks the price of an underlying asset. A popular example of an ETF is the S&P 500, which holds 500 different company stocks. This allows you to diversify your investment.
In this case, the bitcoin ETF tracks the price of bitcoin. But where it differs, is that the bitcoin ETF does not actually own any bitcoin as of yet. And this is because the Security and Exchange Commission (SEC) has not yet approved it, but many speculate it’s just a matter of time. For now, the bitcoin ETF is based as a “future” ETF, meaning it will buy the bitcoin at a future date.
Now, ultimately, I think it’s best to purchase the cryptocurrency yourself. But for people that want to participate in cryptocurrency investments without having to go through the process of getting a cryptocurrency exchange account, worrying about securing it, and more, then this is a way where you can get involved. Proshares BITO is an example of a bitcoin ETF that’s traded on the New York Stock Exchange (NYSE). GBTC is another.
Crypto and NFT Stocks
The next option is to invest in companies that are delving into the crypto and NFT space. With this new technology, you would be surprised just how many new industries have been created. Therefore, an easy way to invest in NFTs indirectly would be to invest in the companies that are pioneering its technology. Now, I’m not a financial advisor, but you can do a quick Google search of “best NFT stocks” and you will find tons of options.
Remember how I said NFTs will likely change the way we do tedious transactions in the future? There’s no better transaction needing to be revolutionized than purchasing a home. The first house has already been sold as an NFT in Florida in 2021. The group behind this transaction was Propy. So if you want to invest in new NFT start-up companies, this is one way to do it. Always keep in mind, investing in a new startup company is another high risk, high reward game.
NFT Collectibles and Art
If you’re collecting NFT art, I would approach it as purchasing any other piece of art or collectible: do it because you love the product. If you’re purchasing an NFT you will need to decide which NFT marketplace you want to purchase from (think of this like the Amazon and Ebays of NFTs). You’ll also need to download an NFT wallet to access your assets.
Now, many people report becoming overnight millionaires by buying and reselling NFT artwork, but that’s a high-risk game and not likely to pay off.
The Risks of Investing in Cryptocurrency and NFTs
Now, there are very real risks in investing in crypto and NFTs. For this reason, I do not recommend investing anything you wouldn’t be okay with losing. Here are some things to consider:
- The volatility of the market – the prices of cryptocurrencies and NFTs can go up or down very quickly, so it’s important to be aware of the risks involved.
- Lack of regulation – since cryptocurrency is a relatively new technology, there are few regulations in place governing it.
- Scams – unfortunately, there are many scams taking advantage of people who want to invest in cryptocurrency or NFTs. It’s important to do your research before investing any money into this area.
- Taxation – since cryptocurrency is considered property, it’s subject to taxation in most countries. This means that you may have to pay taxes on any profits you make from investing in crypto or NFTs.
- Gas Prices: Every time you conduct a transaction, you have to pay a fee or ‘gas’ to process that. So if you want to buy a $20 NFT and there’s a $10 charge, that presents a real problem.
I hope you enjoyed my introductory lesson on the basics of DeFi investments.
The Good: I believe the technology potential behind crypto and NFTs is more valuable than the current NFTs on the market. The potential to revolutionize transactions such as real estate through a more streamlined and efficient process could be a game-changer in the future. I could see NFT technology being the norm in 10 to 20 years as we explore the possibilities and get through the regulatory hurdles.
The Bad: We’re are still very early in the DeFi game. There’s no crystal ball to tell where and how quickly things will move.
The Ugly: With extreme volatility, I would not bet my life savings. Any amount you invest you should be okay with losing, but I think it should be a small part of your portfolio.
Overall, experts typically recommend putting around 1 to 3% of your portfolio or net worth into crypto. I think this is fair, and would probably stick to the lower side of that range.
Have you invested in cryptocurrency or other digital assets? What do you see as the best use case for blockchain technologies?