Cryptocurrency: What is Bitcoin? How do you make money?

About one in five young Australians already own Crypto and for those who don’t we have quizzed Finder’s cryptocurrency expert James Edwards to create this beginners guide.

Before you jump in and try buying, selling or holding coins you need to understand what it is, how it works and why it is valuable.

What is cryptocurrency?

In basic terms, cryptocurrency is a digital currency that works through a computer network. It is not reliant on any central authority like a government or bank to uphold it.

The currency’s most popular product Bitcoin is often described as being an electronic combination of cash and gold. Meaning it can be spendable like cash but also hold a lot of value like gold.

Like all currencies, it is exchanged or used to purchase goods or services. It is not just imagined or made out of thin air Mr Edwards explained.

“Bitcoin was the first currency built on a blockchain,” he told news.com.au.

How is cryptocurrency safe?

A blockchain works by keeping an unchangeable record of transactions through a consensus between computers, or nodes, on the network. If a change is made with one particular element of the blockchain that does not agree with the other parts of the larger chain it will not be allowed.

This has created unparalleled security measures for the currencies.

“Unlike the existing systems we have with banks or a person to person transaction there is no one institution or person who has authority over the exchange on the blockchain. Instead, there are five-thousand servers which all need to agree with each other,” Mr Edwards said.

Cryptocurrency is created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. It can also be bought from brokers or other people.

In essence, by owning cryptocurrency you own a key that allows you to move a record of unit measurement.

Crypto’s most popular coins

Bitcoin

This was the first crypto created in 2009 by Satoshi Nakamoto – which is widely believed to be a pseudonym for an individual or group of people who remain unknown. It is the most commonly traded coin.

Ethereum

It has its blockchain platform with its cryptocurrency called Ether (ETH) or Ethereum. It is the second most popular after Bitcoin.

Stablecoin

These are a class of cryptocurrencies that attempt to offer price stability as they are backed by a reserve asset. These can be pegged to another type of cryptocurrency or things like the US dollar.

How do you buy cryptocurrency?

Cryptocurrency can be bought from either an exchange or a broker. The two are quite similar except at an exchange you interact with other people in the market.

For beginners, using a broker is recommended as you are purchasing the coin at the market rate. You do not need to worry about paying too much or too little.

If you are buying through an exchange you can set prices for what you want to buy. An example of that you could set a buying price for a Bitcoin at $50,000 – once the coin hits that price you automatically buy it through the exchange.

The exchanges also allow you to sell coins similarly.

Mr Edwards said the easiest way to get your foot in the door with cryptocurrency is through Finder’s mobile application. 

“It is designed for people to buy and hold their coins. You can go on the app, purchase the coins you want at market price and keep them there,” he said.

“It is a simple way of starting off and can have long term benefits.”

If you are going down the route of using an exchange to purchase coins, he recommended doing thorough research before buying any products.

“It is really important to get your information through a trusted source, generally you should get your information not from one individual on YouTube, TikTok or Twitter. They normally have an agenda and if they are asking you to buy something that is generally a red flag,” he said.

“Using a website like Finder is a great place to start. It is very objective, there are no recommendations. What we try to do is give fundamental knowledge so you can develop your own strategy and your own thoughts.”

Finder recently analysed a wide range of exchanges and found Crypto.com to be the best for beginners.

How do you make money on cryptocurrency?

There is not just one approach to making money from cryptocurrency. At times it is a highly volatile market.

However, the most common formula for earning money, particularly with Bitcoin, is to buy and hold. This is buying when the price of the coin is low and selling it when the price is higher. This is typically a long-term investment.

Trading is the high-octane and sometimes high-risk way of earning cryptocurrency. Traders analyse the trading charts, study the market, evaluate external factors, and are ready to take risks.

They normally are done through these three different strategies.

Day trading –This is where you buy and sell within a single trading day. The major benefit of this is you do not need to pay the overnight funding charges on your position.

Hedging – In this strategy traders strategically open trades so that a gain or a loss in one position is offset by changes to the value of the other position.

Trend trading – This involves attempts to capture gains through the analysis of an asset‘s momentum in a particular direction.