Personal Finance for Youth: Introduction to Cryptocurrency

Are you interested in cryptocurrency?

There has been a huge amount of hype about how cryptocurrencies are the “next big thing” in the digital revolution, and how they have the potential to transform not only traditional financial services, but other industries as well.

A number of notable celebrities have endorsed both crypto and cryptocurrency companies. There are also stories about water coolers that most of us have probably heard, like the one about the crypto millionaire who made a fortune overnight, and then lost it all just as quickly. Even the president of El Salvador had his crypto moment in the spotlight when he announced that bitcoin would be legal tender in his country.

But as many new crypto investors have learned, cryptocurrencies are very complex and difficult to understand, which can make them especially difficult for potential investors.

As with any investment, we recommend starting with the basics, which is why we’ve put together an overview of some basic cryptocurrency concepts to help you get started.

What are cryptocurrencies?

Bitcoin, the first cryptocurrency, was created by Satoshi Nakamoto, a pseudonym for the person or team who wrote about the technology in a 2008 white paper. The basic concept is relatively simple: Bitcoin is a form of digital cash that allows secure and seamless peer-to-peer transactions across Internet.

Cryptocurrencies are not issued by the government, and there is no central authority that provides oversight. Instead, cryptocurrencies are managed by peer-to-peer computer networks, which run on free, open-source software.

While Bitcoin is the oldest, largest, and most well-established cryptocurrency, there are now thousands of others. Some have a similar design and purpose to Bitcoin, while others are based on different technologies or built with other functions in mind. For example, Ethereum is a cryptocurrency that can be used to run applications and create contracts.

blockchain ledger

Blockchain is an essential feature of many cryptocurrencies. It is similar to a bank balance sheet or ledger in that it keeps a record of every transaction on the chain. However, unlike the banking ledger, the blockchain is distributed across the entire network of computers.

mining process

Most cryptocurrencies are mined through a decentralized network of computers. With Bitcoin and many other cryptocurrencies, miners work collectively to verify and record new transactions and create new units of cryptocurrency by solving complex mathematical equations using specialized computers known as mining rigs.

Define consensus and secure the blockchain

Since cryptocurrencies operate without central authority transaction processing, you must ensure that the same unit of cryptocurrency is not spent twice. They do this through a system called the consensus mechanism, which allows all computers in the network to agree on which transactions should be included in the blockchain.

Proof of Work and Proof of Stake are the two main consensus mechanisms that cryptocurrencies use to verify new transactions, add them to the blockchain, and generate new tokens.

proof of work

Proof of Work is the protocol used by Bitcoin and has been proven to keep the blockchain secure and decentralized. With proof of work, miners compete to solve complex mathematical puzzles. The winner gets a blockchain update and is rewarded with a cryptocurrency. However, proof of work requires a great deal of energy and can be difficult to measure.

proof of stake

Proof of Stake generally relies on a network of validators who contribute or subscribe to their cryptocurrency in exchange for the opportunity to validate new transactions and earn a reward in a process similar to Proof of Work. However, since blockchain proofing does not require miners to perform energy-intensive and multiplying operations (competing to solve the same puzzle), the networks require much less power to operate.

Where do cryptocurrencies get their value from?

The economic value of cryptocurrencies depends on supply and demand. Width indicates the amount available. In the case of Bitcoin, there is a limited supply – there will never be more than 21 million Bitcoins available. On the contrary, demand indicates how much people want cryptocurrency and what they are willing to pay for it. The value of a cryptocurrency is determined by the balance of these two factors.

Cryptocurrency risks

There are many risks associated with cryptocurrencies, especially for investors. Historically, cryptocurrency prices have been volatile, and extreme price fluctuations can lead to significant losses and stress.

Cryptocurrency transactions cannot be reversed, unlike banking transactions. This means that if you make a mistake and enter the wrong amount or address, you may risk losing your cryptocurrency and may not be able to get it back.

It is also important to note that cryptocurrencies are relatively new, and there are many nuances that are not yet widely understood. Issuance and circulation are not well regulated, which means that there is likely to be more oversight and regulation in the future.

Should you invest in cryptocurrency?

Bitcoin and other cryptocurrencies are speculative investments and do not fit into traditional asset allocation models. It is not a commodity (like gold), nor is it a traditional paper currency, backed by the government. In addition, cryptocurrencies are difficult to evaluate because most of the traditional evaluation metrics do not apply.

Although some traders have been successful in capitalizing on changes in the price of Bitcoin or other cryptocurrencies, we believe that most investors should treat cryptocurrency as a speculative asset class to trade outside of the traditional long-term portfolio.

CIBC Private Wealth Wealth your way The podcast series is an educational show on a variety of topics designed with our customers and younger generations in mind. You can listen to our talk about cryptocurrency with Dave Donabedian here.

Leave a Comment