CRYPTOCURRENCY: AN EXPLAINER
The Ins and Outs of All Things Cryptocurrency
For most of us, cryptocurrency seems a bit of a mystery. It’s something that seems to be in everyone’s vocabulary these days, but doesn’t make a whole lot of sense. We aren’t shopping online using Bitcoin or getting Bitcoin gift cards (although that may be changing sooner rather than later) so what exactly is cryptocurrency and how is it being used both as an investment vehicle and as a payment option? Simply put, cryptocurrency is a digital form of currency but there’s nothing simple about it.
Who and what? Key cryptocurrencies to know about
First, it’s important to know that there are quite a few kinds of cryptocurrencies. No, it’s not just Bitcoin (BTC) although that is certainly the most well known and for good reason. BTC is just one of close to 7,000 types of cryptocurrencies on the market today. Compare that to the United Nations recognized 180 global currencies for use in 195 countries worldwide. For now, we’ll stay focused on just a few of the more popular cryptocurrencies.
The BTC market cap is estimated to be around $1,7 Trillion (as of February 2021 with approximately 18.6 million BTC mined thus far), representing about half of the cryptocurrency market. But although it is the dominant player in this space, that doesn’t mean it’s been the most stable. Since hitting a high of almost $20,000 in December 2017, it bottomed out to $3,000 by the end of 2018 and has since rebounded to record highs over $58,000 so while there is worldwide acceptance for BTC, investing in it is also not for the faint of heart. It’s important to know that blockchain technology is at the heart of all cryptocurrencies. This technology stores information about crypto transactions within ‘blocks’ of data and allows for more secure peer to peer transactions without a regulator (i.e. central bank) in the middle.
This data storage issue led to the creation of another cryptocurrency Bitcoin Cash (BCH). Created in August 2017, BCH is meant to be able to be more scalable than BTC because it would require less data to be stored for each block (which means faster transactions and less fees involved). Litecoin (LTC) was created in 2011 according to founder Charlie Lee to play the role of ‘silver to Bitcoin's gold.’ LTC adopted many of the best features of BTC, but with some differences such as much faster transaction times and lower system requirements (no need for specialized hardware).
While BCH (market cap of approximately $11.5 billion) and LTC (market cap of approximately ~$15 billion) were both created to improve on BTC which at its core is about the idea of decentralizing currency, Ethereum (ETH) was created on the idea of decentralizing the internet as a whole. ‘Ethereum is a software platform based off blockchain technology in which users can exchange a cryptocurrency called Ether. Ether has become one of the most popular cryptocurrencies in the world, with a market cap around over $200 billion that puts it second only to Bitcoin in market share. But the real draw is the platform itself, which has become wildly popular as a host for other cryptocurrencies – in other words, not only do investors profit from one of the best and most popular cryptocurrencies on the market, but also from the wider uses of Ethereum itself.’ So yes, Ether may be the cryptocurrency, but the platform Ethereum seems to be much more interesting in terms of evolving the basic premise of cryptocurrency even further.
And to get an idea of just how far cryptocurrency can go (and perhaps how it may go even further), there’s Tron (TRX) which is ‘a decentralized, blockchain-based platform for sharing content’ which means no user data is gathered or shared/sold. Tronix is TRX’s form of cryptocurrency for creators to be able to monetize their content. In a year of massive disruption in the entertainment industry, TRX is definitely a platform to keep an eye out on.
How and why? Investment opportunities or risky bets?
Investing in cryptocurrencies isn’t for everyone. It’s highly volatile (but what isn’t these days?), but that also means upside potential could be quite significant. Initially, traditional banks saw this new currency market as an existential threat, but some have since come around to look for ways to embrace it with big investment banks like Goldman Sachs opening a crypto trading desk with limited success (the 2018 crash curtailed some of this effort) and JP Morgan Chase even going as far as comparing Bitcoin to the new gold — the safe haven investment for long term growth. Many hedge funds are also making the same claim. Case in point: Bitcoin has grown 130% in 2020 compared to 30% growth for gold. Especially in regions like Latin America where there has been growing distrust with traditional banks over the past few years, cryptocurrency trading popularity has grown with many Latin American companies increasing their reliance on using cryptocurrencies for international transactions. And this past year rife with political tension, a global pandemic and economic slowdown has only fueled this trend.
So with all that in mind and 2021 looking to be as bumpy as ever, how can everyday investors even go about purchasing or investing in cryptocurrencies if they’re willing to take that risk? There are plenty of trading platforms available now that allow you to purchase certain cryptocurrencies – Coinbase being the most popular. There’s also Robinhood, eToro, Tradestation and Sofi Active just to name a few. But there are some caveats. While some cryptocurrencies like Bitcoin can be purchased using traditional means (i.e. good old US dollars), there are some that can only be purchased through Bitcoins or another form of cryptocurrency. Regardless of whichever trading platform you use and however you fund your crypto purchase, you will need to create an online wallet that can hold cryptocurrencies. And if needing to hold cryptocurrency in your own wallet isn’t necessary, then there’s also the option of investing in trusts like Grayscale Bitcoin Trust (GBTC), a publicly traded trust which pools private investors’ money to buy cryptocurrencies (holds 572,644 Bitcoin, $13.1 billion AUM).
As mentioned before, investing in cryptocurrencies isn’t for the faint of heart. But after the year we’ve had, this might be a worth risk taking…but only after doing some due diligence. Cryptocurrency does not seem to be going away anytime soon. In fact, it only seems to be growing and evolving so at the very least, learn about this space and get comfortable with hearing a lot more about it in the future. After all, this is the currency of the future…
We covered Cryptocurrency with former Invesco Global Strategist, Greg Brown, on our Whiskey Hue podcast last week. Take a listen!
This content was created and published by Atul Prashar & Ingrid Shieh.