Cryptocurrency for dummies
What is cryptocurrency?
The definition of cryptocurrency: Cryptocurrency is digital currency built on blockchain technology. Essentially, cryptocurrencies are decentralizers and digital money or assets that can be used by anyone and sent freely and directly between people as long as they have access to the internet. The word "crypto" comes from the fact that the concept of cryptography is central to blockchain technology.
Cryptography and blockchain technology
Cryptography is used to secure the information stored on the blockchain. Cryptography is used everywhere on the internet to ensure safe communication and that information does not end up in the wrong hands, but has also been a subject for a long time before the internet. If you have seen old spy movies, you probably also remember that they send each other secret messages which one can only read by cracking the code of the messages. Blockchain technology is central to understanding cryptocurrency and you can read more about blockchain technology here.
Cryptocurrency vs stocks and other investment instruments.
Cryptocurrency is a separate asset class. It is therefore not the same as shares or other securities. There are many types of cryptocurrencies with different characteristics, and it is therefore very important to be aware that they are not exactly alike. They can have their own advantages and disadvantages. That said, one can find several similarities between cryptocurrency and traditional investment instruments. Here are some examples of what cryptocurrencies might look like:
- Raw materials
- Precious metals such as gold and silver (Bitcoin is often compared to gold) Property
- Stocks (perhaps especially technology stocks)
- Bonds and other interest-bearing instruments
Is cryptocurrency legal in Norway?
YES. It is perfectly legal to own and trade cryptocurrencies in Norway and most other countries.
Some crypto exchanges, such as Firi, are also registered with Finanstilsynet and can help you with both the storage and tax calculation of your crypto.
How to buy / invest in cryptocurrency?
It is possible to agree to buy crypto directly between private individuals. But the most common and safest way to trade cryptocurrency is through a cryptocurrency exchange such as Firi. It is easy to register and get started trading cryptocurrency. You can read more about this in our guide here. Then you can be confident in the trade, get a competitive price, and not least get help securing your cryptocurrency. If you want to create an account with Firi, you can register easily with Vipps.
How many cryptocurrencies are there?
There are thousands. Here at Firi, we offer well-known and respected cryptocurrencies such as Bitcoin, Litecoin, Ethereum and more. You can see a complete overview of which cryptocurrencies we offer here.
New cryptocurrencies are constantly appearing, and you can see a larger overview of all known cryptocurrencies on sites such as Coingecko.com
How is cryptocurrency taxed?
You have to pay tax on the gain you get on cryptocurrency just like other forms of investment. When you buy and sell cryptocurrency, every trade is taxable. You can read more about the tax rules for cryptocurrencies here.
What gives cryptocurrency value?
Since cryptocurrencies have different characteristics, it is difficult to give a definitive answer to this that applies to everyone. First and foremost, they gain value because we humans attach value to them. The price of most cryptocurrencies is driven in part by speculation, which in turn results in large price fluctuations. This is something you also occasionally see with stocks, such as in the famous "dot com bubble" in the early 2000s. BUT that does not mean that all cryptocurrencies are really worthless. There are also fundamental reasons why people buy crypto. In terms of underlying value, it can vary. There one must distinguish between the different types of cryptocurrencies that exist.
Here are some examples of things that can give different cryptocurrencies fundamental value
- The cryptocurrency is the central currency in a decentralized ecosystem / network, and is therefore linked to the growth and success of this network.
- You buy part of a network or you buy digital property. (Yes, it is actually possible).
- The cryptocurrency has little or no inflation and is not controlled by any central entity.
- The cryptocurrency can be used for fast and cheap payments and cheap transfers across borders all over the world.
- The cryptocurrency is deflationary (that it becomes rarer over time, ie the opposite of inflation).
- The value of cryptocurrency is linked to an underlying investment vehicle. (Derivative)
- The cryptocurrency can be used as an exchange currency to invest in other cryptocurrencies.
- The cryptocurrency gives you rights such as voting rights, the right to invest early in a project, or the right to income from interest, commissions and transaction fees.
- The cryptocurrency gives you rights or acts as assets in a videogame.
- The cryptocurrency gives you membership in an exclusive club.
- The cryptocurrency is a rare collectible, art or the like.
- The cryptocurrency represents a physical asset in the real world (Everything from real estate to expensive antiques
Also, many cryptocurrencies are ONLY driven by speculation, and have no underlying value in any way. These are therefore only worth something because people want to speculate. As an investor, we recommend that you research the fundamental reasons for investing in a cryptocurrency, and not just look at what's trending on social media.
Which cryptocurrency should you buy?
This is a question that Firi can not give you an answer to. We do not make investment recommendations, but rather can help you understand more about cryptocurrency and blockchain technology, so that you can be better equipped to make your own decisions. You should also be aware that unfortunately there are rogue players who want to take advantage of the lack of knowledge of new investors. We therefore encourage you to learn the basics of how cryptocurrency works.
What is a crypto-exchange?
A cryptocurrency exchange, such as Firi, is a marketplace that facilitates the purchase and sale of cryptocurrencies. It is also common for you to get help securing and storing your cryptocurrency at such an exchange, although you can also choose to store the cryptocurrency in your own decentralized wallet.
Cryptocurrency and energy consumption.
You have probably heard of how Bitcoin mining uses large amounts of power? This is done to secure the blockchain, and has an important function in ensuring that Bitcoin is decentralized and can withstand attacks. The debate about energy consumption is often about how much electricity is used and how it is harmful to the environment. It is true that cryptocurrency mining is energy intensive. There are probably not really that many who disagree, but what is perhaps more important is to debate whether the value Bitcoin can contribute is worth the energy consumption. All activities we humans do on a large scale use a lot of energy, but some of these activities have benefits that we as a society believe justify the use of energy. There are probably also disagreements here about what to spend energy on. For example, how much energy do we spend lighting up Las Vegas? And is this a necessary consumption of energy?
In the same way, theres is a questions if Bitcoins pros can outweight its cons. Many people will say its worht it to spend energy on maintaining a network like Bitcoin, while others will say its not worth it.
We will not go too deep into this debate here, but would encourage you to read more about this and listen to different voices.
Furthermore, there are many ideas and solutions on how to reduce energy consumption or use green energy for crypto mining. Among other things, in 2021 we saw an example of how volcanic energy was used in El Salvador to mine Bitcoin.
Do all cryptocurrencies use mining?
No. In fact, most cryptocurrencies use other methods to secure the blockchain. The second largest cryptocurrency Ethereum, for example, is in the process of switching to a solution called "proof of stake" where they do not use mining, and do not have the high energy consumption. This solution is also used by a large proportion of the other cryptocurrencies on the market.
Why then do some projects still use mining?
Which solution is the best and most effective for securing the blockchain is disputed by the professionals, and that is why some cryptocurrencies such as Bitcoin still retain mining. There are pros and cons to each method. It is worth mentioning that there is reason to believe that Bitcoin is the most secure of the blockchains in terms of decentralization and resistance to attack.