Cryptocurrency (or "crypto") is a digital currency that can be used to buy goods and services but uses online books with strong cryptography to secure online transactions. Most of the interest in these unregulated currencies is to trade for profit and sometimes speculators raise prices.
The most popular cryptocurrency, Bitcoin, has had volatile price movements this year, hitting nearly $65,000 in April before losing nearly half its value in May. By mid-October, prices had risen again rapidly: always rising above US$66,000 before dropping slightly.
What is cryptocurrency?
A cryptocurrency is a form of payment that can be exchanged for goods and services online. Many companies have issued their own currency, often referred to as a token, and they can be traded specifically for the products or services the company offers. Think of it as arcade tokens or casino chips. You need to convert the real currency to cryptocurrency to access the product or service.
Cryptocurrencies work with a technology called a blockchain. Blockchain is a decentralized technology common to many computers that manage and record transactions. Part of the appeal of this technology is its security.
How many cryptocurrencies are there? How much does it cost?
According to CoinMarketCap.com, a market research website, more than 13,000 different cryptocurrencies are publicly traded. And cryptocurrencies continue to multiply and raise money through initial coin offerings or ICOs. The total value of all cryptocurrencies was more than $2.5 trillion as of October 22, 2021, down from a record high of over $2.6 trillion a few days earlier. The total value of all bitcoin, the most popular digital currency, has been set at around $1.2 trillion.
Why are cryptocurrencies so popular?
Cryptocurrencies are favored by their supporters for many reasons. Here are some of the most popular:
- Proponents see cryptocurrency like Bitcoin as the currency of the future and are racing to buy it now, possibly before it becomes more valuable.
- Some proponents like the fact that cryptocurrencies remove central banks from money supply management because these banks tend to depreciate in monetary value through inflation over time.
- Other proponents like the technology behind cryptocurrency, blockchain, as it is a decentralized system of processing and record keeping and can be more secure than traditional payment systems.
- Some speculators like cryptocurrencies because of their increasing value and are not interested in the long-term adoption of currencies to move money around.
Is Cryptocurrency a Good Investment?
Cryptocurrencies may become more expensive, but many investors see them as pure speculation rather than real investments. The reason? Just like real currencies, cryptocurrencies do not generate cash flow. So to win, one has to pay more for the currency than you do.
This is known as the "bigger stupid" investment theory. Compare this to a well-run business whose value grows over time by increasing profitability and operating cash flow.
"For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be noted that a currency needs stability."
Several prominent voices in the investment community have advised potential investors to stay away from them. It should be noted that the legendary investor Warren Buffett compared bitcoin to paper checks: “This is a very effective way to transfer money, and you can do it anonymously and so on. Checks are also a way to transfer money. Do checks cost a lot of money? Just because you can give money?"
For those who see cryptocurrency like Bitcoin as the currency of the future, it should be noted that the currency needs stability so that merchants and consumers can determine reasonable raw material prices. Bitcoin and other cryptocurrencies have been far from stable for most of their history. For example, when Bitcoin traded for nearly $20,000 in December 2017, its value dropped to around $3,200 a year later. In December 2020, trading will return to record levels.
This price volatility creates a mystery. If bitcoin could be more expensive in the future, people are less likely to spend it and circulate it today, making it less useful as a currency. Why spend Bitcoin when next year could cost three times as much?
How do we buy cryptocurrency?
While some cryptocurrencies, including Bitcoin, are available in US dollars, others require you to pay with Bitcoin or other cryptocurrencies.
To buy cryptocurrencies, you need a "wallet", an online application that can hold your currency. Usually, you create a swap account, and then you can transfer real money to buy cryptocurrencies like Bitcoin or Ethereum. Find out more about investing in Bitcoin here.
Coinbase is a popular cryptocurrency trading exchange where you can create a wallet as well as buy and sell Bitcoin and other cryptocurrencies. More and more online brokers are also offering cryptocurrencies such as eToro, Tradestation, and Sofi Active Investing. Robinhood offers free cryptocurrency transactions (Robinhood Crypto is available in most, but not all, US states).
Are cryptocurrencies legal?
There is no doubt that although China has essentially banned their use, they are legal in the United States, and whether they are ultimately legal depends on the individual country. Also, think about how you can protect yourself from scammers who see cryptocurrencies as an opportunity to attract investors. As always, buyers beware.
How do we protect ourselves?
If you want to buy cryptocurrency in an ICO, check out the fine print in the company prospectus for this information:
- Who owns the company? A recognizable and well-known owner is a positive sign.
- Are there other big investors investing in it? This is a good sign if other big-name investors want something from the currency.
- Will you own shares in the company or will you only own the currency or tokens? This difference is important. Having a bet means that you can take part in the winnings (you are the owner) while buying tokens means that you have the right to use them as chips in the casino.
- Is the currency already developed or does the company want to raise money for development? The further away the product is, the lesser the risk.
Reading the prospectus can be exhausting; The more details there are, the better your chances of being legit. But legitimacy does not mean that currency will also succeed. This is a very separate topic and requires a lot of market knowledge.
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