Investing in Cryptocurrency: What you Should Know
Sebastien Chevrier - Jul 07, 2021
Everything you need to know about the new buzz in the investing world: Cryptocurrency.
It’s a term that you’ve likely begun seeing more and more often over the last year. It’s gone from being discussed on internet blogs, to financial channels, to recently, mainstream news: Cryptocurrency (crypto).
Most often, it’s associated with names like Bitcoin, but as its popularity grows, terms such as Ethereum and even Dogecoin (mostly thanks to Tesla and SpaceX CEO Elon Musk) have become more commonplace in public discussion. The internet and social media are full of investors guaranteeing a path to riches through crypto, while other financial experts claim it’s nothing more than a passing fad that will lose a lot of people a lot of money.
While so many investors remain divided, how does the regular person decide whether crypto is worth investing in? While that’s a personal choice, it never hurts to be informed. So, let’s start at the top.
What is cryptocurrency?
Investopedia refers to cryptocurrency as: “A form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities. The word ‘cryptocurrency’ is derived from the encryption techniques which are used to secure the network.”
Crypto is designed to work as a medium of exchange (just like traditional currency), but instead of dollars changing hands or being deposited in a bank, crypto allows for individual coin ownership, where records are stored in a “ledger” (hosted by a computerized database), where transaction records are secured, creation of additional coins are controlled, and any transfer of coins is verified.
Blockchains ensure the integrity of the data behind these transactions. A blockchain is a system in which a record of transactions are maintained across several computers that are linked in a peer-to-peer network. They are seen as an essential component for many cryptocurrencies.
Basically, many see crypto as the heir apparent to fiat currency (such as the U.S. or Canadian dollar), but outside of the typical control associated with today’s options, due to these peer-to-peer networks and digital ledgers. Others are not so sure.
Bitcoin, Ethereum and Dogecoin are all just different types of cryptocurrencies. Bitcoin is arguably the most famous of all cryptocurrencies (there are thousands), mainly due to its reputation as a trendsetter (it’s existed for over a decade), its market capitalization (it traded over $60,000 per coin this year), user base, scarcity (only a limited number of Bitcoin will ever exist) and general popularity. “Altcoins” (as those cryptos formed after Bitcoin are often referred), have positioned themselves as having additional features that Bitcoin doesn’t have, with Ethereum often listed as the runner-up in the popularity race.
Also, a decentralized software platform, Ethereum uses this decentralization to provide access to a suite of financial products that anyone in the world can freely access, regardless of geographical identification or infrastructure. Regardless, it still lags quite a ways behind Bitcoin in terms of total market cap.
As for Dogecoin, well, that’s a prime example of why so many are distrusting of cryptocurrencies as an investment.
Popular fans and critics of cryptocurrency
As with all new products or services that begin taking the financial world by storm, crypto has its proponents and its critics. Some have even been both.
Charlie Munger, the long-time investing partner of the legendary Warren Buffett, calls Bitcoin “Disgusting and contrary to the interests of civilization.” Alluding to its virtual anonymity, he says “I don't welcome a currency that's so useful to kidnappers and extortionists and so forth…”
Elon Musk, known to freely share the odd inappropriate joke and tweet about all kinds of things unrelated to the businesses he runs, took a liking to the crypto Dogecoin, originally created for fun, and his online popularity led to a surge of over 5,000% since he started tweeting about it earlier this year. His lighthearted backing does seem to be rooted in belief, however, as he’s stated that in a battle of crypto vs. fiat currency, he’s on crypto’s side.
Then there is Jamie Dimon, the CEO of big-time bank JP Morgan. After previously stating that Bitcoin was a “fraud’ in 2017, and that if any of his traders were caught trading it, they would be “fired in a second,” That same bank came out recently with an official Analyst report that said the very same crypto may hit $100,000 per coin. They also launched a crypto investment product which tracks public company stocks with Bitcoin exposure and are rumored to soon provide clients access to Bitcoin investments.
In addition, companies like Square, run by Twitter CEO Jack Dorsey, and Tesla, run by Musk, have purchased hundreds of millions and billions, respectively, in Bitcoin recently, something many see as a tipping point in its mainstream acceptance.
So, what does all of this mean for you?
Investing in cryptocurrencies
The decision to invest in cryptocurrencies is a personal choice, but one that a dedicated advisor can help you make. Many may feel that after doing their research, it has the potential to change the way financial transactions are made in the future and want to profit from the results. Others may fear its volatility and the fact it isn’t backed by anything physical (like gold), worrying they could lose their hard-earned money if they choose to invest.
Yet let’s say you do want to get involved as a crypto investor, even if it’s just dipping your toe in the proverbial waters (which is now possible, as you can buy a fraction of one Bitcoin). How would you do it?
There are various platforms that exist to help investors buy and sell crypto, including Coinbase, Binance, Kraken and Gemini (depending on your region). After properly registering with your chosen platform and purchasing a particular type of coin (or coins), your crypto will then typically be stored in a “wallet,” which is a software program that stores the keys that connect you to the blockchain where your crypto exists. From there, you can begin selling your crypto(s) of choice as you see fit or continuing to accumulate more.
Regardless of what you choose, it’s important to speak with an advisor to ensure any decision you make is done with a full scope of information in front of you in advance.
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