Article by: Lillian Kazmierczak - Finance Writer for Toarc United
In the last decade, the cryptocurrency space has increased so much that if you include its innovations and the corporate market cap, it’s worth is 2.5 trillion dollars (not bad for something that looks like a coin you can get in a Mario Bros video game). So, if you don't know much about cryptocurrency or its investing potential, I'm going to dive really deep into this.
If you're new to this blog or toarcunited.com in general, you'll need to know that we are here to Motivate, Innovate and Elevate. My goal is to give you enough information to get you talking, thinking, and doing, so you can live your best life!
A Brief History of Cryptocurrency
Cryptocurrency is distributed digital money that is used over the internet. Bitcoin, Ethereum, and Litecoin are the most widely used. While they are similar, their technology is different, and the features that allow them to be used are also different.
Online transfers using cryptocurrency require no middleman (no bank or processor), so they can be transferred almost immediately, anywhere in the world, 24/7, and with low fees. There is no company, country, or third party involved in this.
Cryptocurrency is managed by peer-to-peer computers and is kept secure by blockchain technology. Each currency has its blockchain technology that records every single transaction, allowing anyone to use it. Blockchain also gives you complete control over your money.
The Good and Bad in Cryptocurrency
Cryptocurrency makes transfers easy with blockchain technology ensuring your personal information is safe. Furthermore, it's not tied to an institution making it portable (if you have read my blogs, you know that I am big on portability, see my Pension Portability blog) and can be accessed from any computer or phone. Each transaction is publicly published making, it transparent.
Crypto payments are one and done, with no reversibility, so merchants don't have to worry about fraud. In addition, you and I aren't charged a processing fee (like the ones that the credit card companies charge). So far, none of the cryptocurrency networks have been hacked (no doubt due to publishing all transactions). This is internet money, no touching it, saving the coins in a jar, or putting it in your actual wallet.
Cryptocurrency is frequently called "Money 2.0" because it is the first alternative to the banking system.
It can be used to buy goods, services and to invest with. So, no matter what the global economy looks like, your cryptocurrency is safe (we will revisit this in a bit). Cryptocurrency has the potential to be used all over the world for investments.
When Bitcoin first arrived in 2008, it was worthless; today, each coin is worth thousands of dollars.
Why Cryptocurrency Investing?
Cryptocurrency is bought and sold just like stocks. It's quick and easy to create an account on an online platform. You can purchase whole coins or a fraction of a coin for as little as $25. Many of these platforms even offer holder rewards for having cryptocurrency. For example, you generally earn 1% - 5% APR on the cryptocurrency, according to Coinbase. Cryptocurrency is easy to transfer from person to person as well.
Cryptocurrencies such as Stablecoin are value backed by a currency like the US dollar or a commodity like Gold. Thus, making their value more stable, minimizing day-to-day value shifts.
Understanding How Blockchain Works in Cryptocurrency
Understanding cryptocurrency starts with a knowledge of blockchain. I'm using Bitcoin in my examples, but it works the same in all cryptocurrencies. Every single transaction is recorded, which is what makes it so secure. This also gives it transparency. Blockchain is so secure that the Healthcare industry is looking to use it for medical research and health records.
Here's where this will get a bit more technical. The blockchain is so secure because the blockchain ledger (the technological ledger of transactions) splits across every computer, tablet, and phone on the web. So, there is no single database, institution, or vault for anyone to hack, break into, manipulate, or steal from.
Just a little bit more technical…To transfer coins on a blockchain ledger, cryptocurrencies must use public-private key passwords. These private keys are an ultra-secure password that never needs to be shared!
This technology lets you send coin value (as you would send a PayPal transaction). The receiver gets an associated public key so they can receive the deposit (accept the transaction). Using the public key keeps anyone from guessing your private key.
I’m about to muddy the water while I talk about mining Cryptocurrency. Most cryptocurrency gets mined peer-to-peer (your computer to mine) over the internet. Mining does not create coins, but it helps keep the network secure through the blockchain ledger. I realize this is a lot to take in, but if cryptocurrency is going to be around and used for investing, we all need to know our way around this.
So, if you have a computer, tablet, or phone and an internet connection-you, could be a miner. Before you even consider mining, know that you will probably spend more money on electricity than you earn mining; it's dependent on your internet connection. My advice to you is to let the big companies do the mining!
The cryptocurrency network is ingenious about getting miners to maintain the blockchain…they hold a lottery for mining rigs (a machine/computer designed to mine Bitcoin). Everyone races to solve a math problem and the first one with the answer is awarded coins. Then, the miners distribute the Bitcoins as they use them.
If you understand supply and demand (where there is a demand created, a supply will fill it), you must wonder where the need for cryptocurrency is coming from. The value of cryptocurrency is based on supply and demand.
People are shopping with it, and they are gifting cryptocurrency. In addition, the low fees associated with cryptocurrency encourage people to shop with it. There is a movement to have businesses start using cryptocurrency as well.
How to Get Bitcoin Without Mining
Since you and I aren't mining Bitcoin, we are going to have to buy it. But we are going to need to know what we are going to do with it. Remember that different coin uses different technology. The technology is specific to how the coin can be used. We also have to have somewhere to store it. Can it be turned into real money? Coming from a background of don't count the money until it is in your hand, I have many reservations about cryptocurrency.
What you want to do with the coins determines the currency you are going to buy. If you want to purchase goods, you will need a cryptocurrency that merchants accept. Likewise, you can play on gaming sites with the right cryptocurrency.
As I am writing this, Bitcoin is worth $58,900 per coin (yep, that just one coin) but Tether is only worth $1. The price difference is why you can purchase a portion of a coin (like buying a portion of a real estate investment or a share of stock).
Once you’ve purchased the coins, they need to be securely stored, sent to someone, received from someone, or converted. Coins can even be moved from your Crypto wallet to a bank account; it’s as easy as using an ATM.
Without going into a lot more detail, you can use cryptocurrency to shop at over 8,000 merchants globally and donate to charities; you can tip someone if they have an online connection with a crypto address. Use it to invest, travel, and virtually game (at least if you lose big, no goons will be coming after you, although you may have to look over your shoulder for Mario and Princess Peach, lol!
The Ups and Downs of Cryptocurrency
In 2013 Bitcoin peaked at $266 per coin with a value of over 2 billion dollars at its highest. Unfortunately, shortly after, it was only worth 1 billion dollars after it plunged by 50%. Bitcoin was the first Cryptocurrency, but it has more competition than you might think. With all the cryptocurrency flooding the market, it makes me wonder how long it will last and if it was just a fluke.
There was so much speculation about whether the cryptocurrency will become a verified investment on the Nasdaq. Bitcoin is being mined at a rate of about 37.5 coins every hour with 6.25 coins being rewarded for each block. A block (which is essentially the newest leger entry from all the transactions that have taken place since the previous block, 10 minutes prior) is rewarded to miners every 10 minutes; that’s $2,212,050 in 60 minutes based on the value of one coin at $58,988. Bitcoin is expected to cap at twenty-one million coins by 2140.
The truth is Bitcoin is only worth what you and I are willing to pay for it. You can say that Bitcoin is worth $10,000 a share, but if no one is buying it, it isn’t worth much. Besides, if the exchange closed tomorrow, we couldn’t get our cryptocurrency out! This is why some caution against holding your crypto on an exchange, as opposed to holding it in “cold storage”. Cold storage, in its simplest form, is an offline digital wallet where your cryptocurrency is protected against hacks and theft. While you protect yourself from outsiders, you much ensure you don’t personally lose the codes necessary to access the digital wallet yourself. If you were to lose these coins, there is practically no way to recover these funds. Offline digital wallets or cold storage, is a space where innovation is growing and enabling more user friendly technology, while at the same time not sacrificing security.
Bitcoin’s technology has been its blessing and its curse. In 2013 the FBI, the Financial Crimes Enforcement Network (FinCEN), and Homeland Security (DHS) decided cryptocurrency fell under government regulation after investigating Mt. Gox (Bitcoins largest exchange). Mt. Gox broke anti-money laundering laws. It was later discovered that cryptocurrency was used in drug peddling, weapons deals, and smuggling. However, the encryption technology made it impossible to track the money’s owner.
Cryptocurrency faces a few challenges before most people will use it; acceptance by everyday people will be its biggest hurdle. The Gen Y and Z’s are most likely to embrace this. Their love of technology and continued exposure throughout their lives will have them using it. Baby Boomers and the Silent Gens are less likely to embrace it. Most lack the technology skills (though, in fairness, many of them have learned to use technology, albeit kicking and screaming), but they don’t understand cryptocurrency, and at their age, many just don’t care. Finally, Gen X ‘ers who are good with tech and understand cryptocurrency will be the ones investing the most, based on their income.
Cryptocurrency will have to become very mathematically complex to remain free from fraud and hacker-proof. It will be much easier for consumers to understand, and that consumers' cryptocurrency is safe and crime-free. That is really going to be challenging in this global tech world.
Cryptocurrency As an Investment
Only 11% of Americans have invested in cryptocurrency; those investments seem to have done well, though I could not find any solid numbers to back this, in part due to the lack of consistent regulation, which is rapidly changing in today’s environment. However, investing requires diversity, and cryptocurrency offers another asset class to invest in. So, if you do your homework and are cautious, you could get a decent return and, over time, maybe a pretty good return. BUT…and it’s a big but, cryptocurrency has not been around long enough to have an investment history that gives a realistic picture of its performance. So, if you choose it as an investment, do so cautiously in small amounts you can afford to lose.
Cryptocurrency has done very well in the last decade, so it's not a stretch to think that it will continue to do as well. As a result, there is a potential for investments in cryptocurrency to do well. However, many cryptocurrencies are volatile, coming in at a different value, and lacking solid assets.
People have a habit of investing in ‘the next great thing” based on social media influencers or celebrity endorsements. If you can’t afford to lose the money, you shouldn’t invest in cryptocurrency. Although investments that are so much safer than cryptocurrency can bring you significant returns, sometimes the tried and true are the way to go.
October of this year, the ProShares Bitcoin Strategy (BITO) began trading at forty dollars a share; by the end of the day, it was up by 5%. The value mainly surged because large institutional investors were buying and investors with brokerage accounts (investment accounts that buy and sell a variety of investments) and people who are incredibly comfortable with buying ETFs.
It's important to understand that both ProShare and certain other cryptocurrency-based ETF’s need SEC approval and will be investing in Bitcoin through contracts. Some funds you invest in will not own any actual Bitcoin or other crypto coins. I need to slow this down a sec. Does this sound shady? I feel like it’s a “want to buy a bridge?” investment. How do you invest in something that an ETF doesn’t even have? Why are large institutions investing in this? Welcome to the futures market.
Recently Grayscale Bitcoin Trust (GBTC) is attempting to create a Bitcoin-backed ETF. Although they are currently a trust that holds Bitcoin, their stock price does not reflect always reflect what Bitcoin is worth from the amount they hold. Currently it is trading at a large discount to NAV, however earlier this year it was trading at a 40% premium. A conversion to an ETF would convert this trust’s structure to actually track bitcoin “penny for penny”. If you’d like to hear more about GBTC please check out the investing edition episodes on Thoughts of a Random Citizen Podcast. (Episodes 38,23,7).
The price for Bitcoin has been fluctuating with all-time highs followed by plunges since April, taking the price of Grayscale along for the ride.
In mid-July, Tesla began taking Bitcoin payments, and hope to add digital currency and blockchain experts to their team.
Morgan Stanley is the first bank to offer three Bitcoin funds that allow only wealthy clients to invest ($2 million in assets) is the requirement.
PayPal, Square’s Cashapp, Venmo, and Revolt let customers buy and sell cryptocurrency on their apps; PayPal can even convert the cryptocurrency into real currency so merchants can be paid in the US dollar.
While investment options involving cryptocurrency are popping up nearly weekly, it is still too early to tell if it will be a long-term investment. It is impossible to tell what it will be. When you think about Elon Musk being so upset about Bitcoin’s effect on the environment due to how its mined, then stating that he has a large amount of Bitcoin in his portfolio and plans to leave it in there long-term as he is hoping that Bitcoin does well.
Elon can afford to do that, but you and I will not be investing in the magnitude he does, so our outcome may be much different. He can also afford to take a considerable loss where we can’t either.
I am a fangirl of Elon’s because he could make a $1.1 billion profit in one quarter (that’s four months) by rewriting software to create the chip he couldn’t get for the TESLA production. You have to give it to him; it is genius (out of desperation or not); he was the only car manufacturer to continue selling autos during the pandemic.
Globally, China made Crypto transactions illegal in China July, as they are attempting to rollout their own digital currency that has the potential to be tracked, taken and blocked from any citizen, at any time. This is quite the opposite to bitcoin’s decentralized mantra, a large reason for cryptos ban in China, and another telling act of how the CCP continues to restrict the individual freedoms of its citizens. They are the first country to ban this, but they may not be the last.
El Salvador, however, went the opposite route a few months later making it a government backed legal tender in the country alongside the USD. All shops, restaurants, or any business accepting payments now legally have to accept bitcoin as legal tender.
Even the IRS is getting in on the cryptocurrency; they are working to track crypto gains for taxes. At this point, they have a form but no regulations.
If you’re going to invest in cryptocurrency, you’ll do best to invest small amounts and leave it, ride the ups and downs (as you would any other investment). There is a lot of time-proven, wealth-building investments you can earn real money in. But the scary truth is after investing in cryptocurrency, you could wake up one morning to find your country has banned it, or it has become worthless overnight!
If you're looking for more Thoughts of a Random Citizen, head to the podcast section. I think you'll find some fascinating podcasts to listen to.