Cryptocurrency
A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving prices skyward. The most popular cryptocurrency, Bitcoin has had volatile price moves in 2021, reaching nearly $69,000 in November 2021 before loosing more than 50% of its value in early January 2022.
What is cryptocurrency?
Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.
How many cryptocurrencies are there?
What are they worth? More than 15,000 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate. The total value of all cryptocurrencies on Dec. 10 2021, was about 2.3 trillion, having fallen off an all-time high above $2.9 trillion weeks earlier. The total value of all bitcoins, the most popular digital currency, was pegged at about $932.4billion.
Why are cryptocurrencies so popular? Cryptocurrencies appeal to their supporters for a variety of reasons. Here are some of the most popular:
• Supporters see cryptocurrencies such as bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable
• Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation
• Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems
• Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money.
Are cryptocurrencies a good investment?
Cryptocurrencies may go up in value, but many investors see them as mere speculations, not real investments. The reason? Just like real currencies, cryptocurrencies generate no cash flow, so for you to profit, someone has to pay more for the currency than you did. That’s what’s called “the greater fool” theory of investment. Contrast that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation. For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be noted that a currency needs stability so that merchants and consumers can determine what a fair price is for goods. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For example, while bitcoin traded at close to $20,000 in December 2017, its value then dropped to as low as about $3,200 a year later. By December 2020, it was trading at record levels again. This price volatility creates a conundrum. If bitcoins might be worth a lot more in the future, people are less likely to spend and circulate them today, making them less viable as a currency. Why spend a bitcoin when it could be worth three times the value next year?
How do I buy cryptocurrency?
While some cryptocurrencies, including bitcoin, are available for purchase with U.S. dollars, others require that you pay with bitcoins or another cryptocurrency. To buy cryptocurrencies, you’ll need a “wallet,” an online app that can hold your currency. Generally, you create an account on an exchange, and then you can transfer real money to buy cryptocurrencies such as bitcoin or Ethereum.
Here’s more on how to invest in bitcoin.
Binance and Coinbase are the two most popular cryptocurrency trading exchanges where you can create both a wallet and buy and sell bitcoin and other cryptocurrencies. In addition, Swan Bitcoin throughSwan Private Client Services, (SPCS) offers discerning investors white glove concierge services and peace of mind in the accumulation of Bitcoin. Owning Bitcoin hedges against inflation like no other asset can, its digital gold!
Are cryptocurrencies legal?
There’s no question that they’re legal in the United States, though China has essentially banned their use,and ultimately whether they’re legal depends on each individual country. Also be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors. As always, buyer beware.
Should you buy cryptocurrency?
Cryptocurrency is an incredibly speculative and volatile buy. Stock trading of established companies is generally less risky than investing in cryptocurrencies such as bitcoin.
What is ‘crypto’ and why does bitcoin matter?
“Cryptocurrency” is a name given to a broad group of digital assets that started in 2009 with bitcoin. There are thousands, but only a dozen or so have any appreciable size and potential future. There is a lot of hype around bitcoin. Some people claim it will become the world’s reserve currency.
Some fashion it as the new gold. Some people simply think it will keep rising in value and make anybody who holds it rich. Some people think it’s a fad or Ponzischeme. Setting aside for a moment bitcoin’s fundamental value or use case, the primary reason it matters is this: Bitcoin allows any two people, anywhere in the world with an internet connection, to make a transfer of value in a few minutes without any middleman. With bitcoin, you could send $1 million to somebody, pay a small transaction fee, and have the exchange settled in 10 minutes or less. No banks, no foreign exchange. With this technology, anything that can be digitized can be exchanged cheaply and quickly.
How does cryptocurrency work?
The basic idea is that cryptocurrencies operate on software networks, where myriad computers run separate copies of the same program. The computers are linked, but no one computer controls the network. In bitcoin parlance, it’s a “decentralized” network. These computer networks have two main functions: One is to process transactions, the other is to maintain the database that records and stores those transactions. In general, transactions are batched into “blocks,” which are then connected in chronological order in a long, unbroken “chain.” This is why the software became called “blockchain.”
How did this all start?
On Oct. 31, 2008, somebody using the pseudonym Satoshi Nakamoto released a nine-page paper describing a new system of “electronic cash” called bitcoin. What bitcoin promised was an alternative to the existing financial system, and it struck a nerve with a lot of people in the wake of the global financial crisis. “Bitcoin” became as much a social movement as a piece of technology. That’s one reason it has such a passionate following; crypto’s adherents believe they are willing a financial revolution into existence. Moreover, because bitcoin was released as opensource software, anybody can take the code and create their own version of it. They could tweak it to operate differently, or alter it for an entirely different use case. This is why there are thousands of different cryptoplatforms doing different things, everything from decentralized versions of operating systems (Ethereum), digitized banking services (DeFi), supply chain networks ( IBM and others), even new kinds of collectibles and art (NFTs, or nonfungible tokens). It’s a massive, live experiment in applying a new technology.
Bitcoin has become so expensive.
How can I afford it? Bitcoin rose to almost $69,000 in 2021. However, every bitcoin is divisible out to the eighth decimal place, meaning there are 100 million little units (nicknamed Satoshis) within one bitcoin. Therefore, you can buy pretty much any amount of bitcoin you want.
How do I buy one?
Originally, the idea behind bitcoin was that youdownloaded the software itself and ran your ownversion of it, “mining” new bitcoins yourself. You wereyour own banker, a “self-sovereign.” In practice, however, that’s too unwieldy—andexpensive—for most people. The most common way to buy bitcoin now is through a crypto exchange like Binance.US and Swan Bitcoin, an educational basedexchange that promotes both dollar cost averaging andself-custody. If you have a financial adviser, he or she might buy itdirectly for you, or put you into one of the new bitcoinexchange-traded funds. In the U.S. at least, these ETFsare based on bitcoin futures, not bitcoin itself. Thereare some bitcoin ETFs that trade outside the U.S. Exchanges and other intermediaries often actas custodians for your funds. This means they areresponsible for safeguarding your account—to adegree. If you allow access to your account tosomebody in a phishing scam for instance, that person can drain your funds, probably permanently. In bitcoin, there is no way to reverse a fraudulent transaction.
What should I be on guard against?
A lot. Because crypto is such a new area, and has largely been unregulated or only lightly regulated, cons and frauds are rife. The Federal Trade Commission warns investors to steer clear of any opportunities that promise you can earn lots of money in a short time, or that ask you to recruit other investors, that offer guaranteed money or free money, or that make exorbitant claims short on details. In general, it’s best to steer clear of any investment offer via social media, especially if it comes to you. I regularly get emails from readers who don’t heed this warning and got scammed. And do your research on any investment manager or offer. If you can’t learn enough to feel comfortable, move on.
How do I make money?
Buying bitcoin is not like buying a stock or bond. When you hold bitcoin, you don’t own a piece of a company. You make money with bitcoin in one way: by selling it to somebody else for more than you bought it for. There is one burgeoning part of the crypto market called “defi,” short for decentralized finance. These are bank like services that allow you to lend out or borrow against your crypto holdings. If you lend, you can earn interest that typically ranges from 5% to 20%. If you borrow, you can take the borrowed crypto and invest it elsewhere in the market, again hoping to sell it. However, defi is a new field, with virtually no business standards. Almost once a week, there’s a loss of funds. Very often, some malicious coder finds a flaw in a defi program and drains accounts. Sometimes, bad software crashes and erases transaction histories. Sometimes, the platforms were set up just to steal money (a “rug pull”). The research firm Elliptic estimates that about $10 billion has been lost in 2021 on defi platforms. This is a buyer-beware environment. Ultimately, you can make a profit in crypto, but know that you are putting money into a largely unregulated area with a lot of opaque corners and volatility. As with any investment, it’s important to understand exactly what you’re investing in before you start. That’s especially true when it comes to a speculative — and still evolving — asset like crypto.
Crypto Terms You Should Know
Altcoin
An altcoin is any coin that’s not Bitcoin. Altcoins can be anything from the second-most popular coin, Ethereum, to any of the thousands of coins with very minimal market value. Experts say you should largely stick to the bigger, more mainstream cryptocurrencies as an investment.
Bitcoin
The first and most valuable cryptocurrency, launched on Jan. 3, 2009. While its value has climbed steadily since then, it has seen wild fluctuations. In the past months alone, the price of Bitcoin has fluctuated from a record high of $69,000 to below $30,000.
Blockchain
A digital form of record keeping, and the underlying technology behind cryptocurrencies. A blockchain is the result of sequential blocks that build upon one another, creating a permanent and unchangeable ledger of transactions (or other data).
Coin
A representative store of digital value that lives on agiven blockchain or cryptocurrency network. Some blockchains have the same name for both the networkand the coin, like Bitcoin. Others can have different names for each, like the Stellar blockchain, which has a native coin called Lumen.
Cold Wallet/Cold Storage
A secure method of storing your cryptocurrency completely offline. Many cold wallets (also called hardware wallets) are physical devices that look similar to a USB drive. This kind of wallet can help protect your crypto from hacking and theft, though it also comes with its own risks – like losing it, along with your crypto.
Cryptocurrency
A type of currency that’s digital and decentralized. Cryptocurrency can be used to buy and sell things, or as a long-term store of value.
Decentralization
The principle of distributing power away from a central point. Blockchains are traditionally decentralized because they require majority approval from all users to operate and make changes, rather than a central authority.
Decentralized Finance (DeFi)
Financial activities conducted without the involvement of an intermediary, like a bank, government, or other financial institution.
Digital Gold
Experts sometimes compare specific cryptocurrencies to real gold based on the way it can store and increase in value. Bitcoin is commonly referred to as digital gold.
Ethereum
The second largest cryptocurrency by trade volume, Ethereum is a crypto network and software platform that developers can use to create new applications, and has an associated currency called ether.
Exchange
A cryptocurrency exchange is a digital marketplace where you can buy and sell cryptocurrency.
HODL
Stands for “Hold On for Dear Life” though the term originated from a user typo on a Bitcoin forum in 2013. It refers to a passive investment strategy in which people buy and hold on to cryptocurrency — instead of trading it — in the hopes that it increases in value.
Halving
A feature written into Bitcoin’s code in which after a certain number of blocks are mined (typically every four years) the amount of new Bitcoin entering circulation gets halved. The halving can have an impact on Bitcoin’s price.
Mining
The process whereby new cryptocurrency coins are made available and the log of transactions between users is maintained.
Node
A computer that connects to a blockchain network.
Non-fungible Tokens (NFTs)
Non-fungible tokens are units of value used to represent the ownership of unique digital items like art or collectibles. NFTs are most often held on the Ethereum blockchain.
Peer-to-peer
Two users interacting directly without a third party or intermediary.
Private Key
The encrypted code that allows direct access to your cryptocurrency. Like your bank account password, you should never share your private key.
Satoshi Nakomoto
The pseudonymous creator of Bitcoin. No one knows the true identity of Nakomoto — or if it’s more than one person.
Smart Contract
An algorithmic program that enacts the terms of a contract automatically based on its code. One of the main value propositions of the Ethereum network is its ability to execute smart contracts.
Stablecoin or Digital Fiat
A stablecoin pegs its value to some other non-digital currency or commodity. A digital fiat represents a fiat, or government-backed currency on the blockchain.(Example: Tether, which is pegged to the U.S. dollar)
Token
A unit of value on a blockchain that usually has some other value proposition besides just a transfer of value (like a coin).
Wallet
A place to store your cryptocurrency holdings. Many exchanges offer digital wallets. Wallets may be hot (online, software-based) or cold (offline, usually on a device).