Every barbecue, every dinner party, and every elevator conversation seems to include cryptocurrency these days, whether it’s an old workmate showing you his portfolio of “coins” on the Blockfolio app or a 25-year-old beaming on television about the millions he made buying Bitcoin in 2009.
What is it, exactly?
Blockchain technology is what we’re talking about, and understanding it is the key to understanding what Bitcoin is (or Litecoin, Monero, Dogecoin — there are so many cryptocurrencies now).
Most people use analogies to explain it, but essentially, Blockchain is a decentralised digital ledger that records transactions in such a way that they can always be verified and — allegedly — can’t be altered. So if you make a deal with someone, it’s guaranteed that you’re both looking at the same data — which means you don’t have to trust each other.
Bitcoin is an example of Blockchain technology — it’s a decentralised currency that isn’t backed by a government or financial institution, and it uses an open source peer-to-peer protocol to conduct transactions. (If that went over your head, you can see why people fall back on analogies to explain this stuff.)
How can you use cryptocurrency? Can you actually buy things with it?
In theory, you can purchase things online with crypto — one of the benefits being that transactions are (supposedly) anonymous and untraceable.
Using Bitcoin as an example, the trouble is that there’s a limit to the number of simultaneous transactions that can take place globally. Which means you can end up paying a hefty “tip” to the miners who process them, or risk having your transaction delayed and delayed. Next-generation coins have improved on this, but it’s something to be aware of.
The main thing these currencies are used for at the moment is speculative trading. People buy them in the hope that they’ll continue to increase in value, with no intention of spending them as actual money.
Where can you buy, sell, and trade these currencies?
As you’d imagine, there’s no one central marketplace for crypto — and not every coin is on every market.
One of the easiest exchanges for us to access is the Australian-owned BTC Markets. Once your account is verified, you can transfer Aussie dollars from your bank account and use them to buy Bitcoin, Litecoin, Ripple, and some other currencies. From there, you can move your cryptocurrency — Bitcoin, for example — to a trading platform such as the Bitfinex exchange, and use it to purchase currencies that aren’t available on BTC Markets.
Of course, when you decide you want to sell the coins you bought on Bitfinex, you’ll have to trade them for a cryptocurrency that can be moved back to BTC Markets and sold for Australian dollars — which can then be withdrawn and transferred back into your bank account.
That sounds simple enough…
It is — in theory — but you have to pay more attention than you usually would with an online transaction. Because of the decentralised philosophy behind crypto, there’s no authority or ombudsman you can go to if someone hacks your account — or even if you type in the wrong 32-character alphanumeric “address” for your online wallet when sending those coins between exchanges.
Online wallet? Huh?
You can keep your crypto offline — which is why there are stories of people searching through the garbage for a discarded USB drive with millions on it — but most people keep their coins online, in virtual “wallets”.
For more information on how they work, and some recommendations on which ones to use, see TechRadar's roundup of the best cryptocurrency wallets.
I’m interested. How much should I invest?
As with any risky venture, only invest an amount you’re willing to see drop dramatically in the space of days — or even hours. It can be exciting to see your $4000 become $18,000 in a month, but it could just as easily drop back down to $3000 while you’re not watching the market. Also, be aware that prices continue to shift 24/7, which can make for sleepless nights.