Beyond Bitcoin: What You Need To Know about Dogecoin and Other Cryptocurrencies

Bitcoin has been around as an extremely volatile but potentially lucrative investment or currency alternative for a decade now, and with Bitcoin surging in value lately and other cryptocurrencies making noise, you may be wondering what they are all about.

In this article

    What is a cryptocurrency?

    Let’s start with the basics. A cryptocurrency is a digital item that people can use to exchange for goods and services, if both parties are willing to accept it. If you have some cryptocurrency and another person is willing to accept that as payment for a good or service, then you can make that exchange. Often, if people are willing to accept a cryptocurrency in that way, a broker will be willing to exchange money directly for cryptocurrency, which is how people make money buying and selling it.

    There are a couple of key features that most cryptocurrencies have. Every single piece of cryptocurrency is registered with a central ledger, which anonymously specifies who the rightful owner is. The owner is usually identified with a hidden passcode that they keep, which identifies them as the owner of a certain amount of cryptocurrency. When you buy some cryptocurrency, the ledger marks that currency with your private passcode. When you sell it, the ledger marks someone else as the new owner. These transactions are usually facilitated by an online cryptocurrency broker like Coinbase.

    The value of a cryptocurrency is wholly based on what people are willing to pay for them. They’re simply an agreed-upon means of exchange between two people or groups. If all parties agree that the cryptocurrency has a certain value, then it can be used to exchange things between those parties.

    How do you ‘hold’ cryptocurrency?

    Cryptocurrency is held in a digital wallet. This digital wallet is protected by a password that only you know and contains a secure private key that identifies you and allows you to access any cryptocurrency you own.

    Think of the private key as being like your finger, which then provides a “fingerprint” to the cryptocurrency ledger identifying you. You keep that private key safe by having a preferably complex password that only you know, so that others have no chance to access your private key.

    There are several desktop programs that work as a cryptocurrency wallet. You keep these on your computer (or, ideally, on a secure external device, like a thumb drive). You can also keep your wallet on a secure third-party service like Coinbase.

    What is Bitcoin?

    Bitcoin is a specific type of cryptocurrency, the first one to become well known and popular. Like most other cryptocurrencies, it has a central ledger that marks the owner of every single Bitcoin (or fraction of a Bitcoin). You have a hidden passcode that identifies you as the owner that only you can unlock. A digital “thumbprint” of your passcode is used in the ledger to identify you, so that it is publicly known that the person with that digital “thumbprint” owns these specific bitcoins.

    One key feature of Bitcoin is that there is a finite number of them. New Bitcoins are created or “mined” at an increasingly slow rate and eventually there will be no more produced.

    What is Dogecoin?

    Dogecoin is very similar to Bitcoin, but is a bit more lighthearted, as it is often represented with a picture of a cute dog. Functionally, it’s similar to Bitcoin, but unlike Bitcoin, there’s an infinite number of Dogecoin, as 10,000 new ones are created or mined every minute. Dogecoin is intentionally designed to have a much lower value than Bitcoin, making it excellent for things like tipping. However, with big fluctuations in the value of Dogecoin, some people seek to invest in it by buying and selling large quantities of Dogecoin.

    Why are there so many different cryptocurrencies?

    While Bitcoin and Dogecoin are among the most well-known cryptocurrencies, there are many others. Why? One reason is that it’s relatively easy for a few well-trained programmers to create a new one, as most of the computer code needed to create one is easily available. Because of that, many people view a new cryptocurrency as a potential opportunity to get rich quickly, as they can “mine” a bunch of coins for themselves, and if they can just convince others to accept them as a medium of exchange, they’ve just created money.

    Are cryptocurrencies a good investment?

    All cryptocurrencies are very volatile investments. Well-known ones, particularly Bitcoin, are very likely to retain some value as so many people have agreed to use Bitcoin as a medium of exchange. However, the value of even Bitcoin fluctuates wildly, even from day to day. Lesser known cryptocurrencies can see their value drop to virtually nothing, as there aren’t nearly as many people who are using it as a means of exchange.

    In short, don’t invest in any cryptocurrency unless you are in a secure enough position that you can afford to completely lose any money you invested. Highly volatile investments like cryptocurrency, for most people, should be treated as entertainment spending, akin to spending money at a casino.

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    Trent Hamm

    Founder & Columnist

    Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.