By Thomas Kostigen
From January 2017 to December 2017, the price of bitcoin, the benchmark cryptocurrency, went from $800 to nearly $20,000. Banks, brokerages, and major financial institutions began to take the currency seriously. Cryptocurrency investment platforms were begun at brokerage firms offering individual investors the opportunity to get in on this relatively new, volatile, and opaque investment class. A year later, prices had dropped. Bitcoin traded at $3,300. In 2019, bitcoin prices zoomed again, tripling and ending the year at $9,300 — about where its price stands today.
The above is a concise lesson in volatility, risk, and—it should be noted—opportunity. The first question is: what is cryptocurrency, anyway?
“Cryptocurrency is any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions,” according to the Merriam-Webster dictionary. Cryptocurrency is complex, difficult to understand, and even harder to buy, sell, and cash out of. Before you consider investing in it, you should definitely speak with a professional financial advisor. For many, the tantalizing prospects of riches await by investing in cryptocurrency. Which is why professional advice is recommended. Too good a thing, especially in the crypto markets, usually is a highly risky investment that has more of a chance of failure than success.
Before getting into the different kinds of cryptocurrency, it’s important to understand how the currency is created, how it trades, and the technology behind it.
Developers create a block of computer code. This unique code is then issued to a network of users. Every user can be digitally traced, creating a record of transactions. This is known as blockchain. A blockchain can be used as a way to trace any chain of custody of the digital asset. It could keep track of financial records, or other forms of record keeping by keeping track of the digital footprint of the record. It’s a very neat and orderly, and efficient way of record keeping.
Combine the power of blockchain technology with a business idea, and instead of a company issuing stock, for example, they could issue cryptocurrency. No formal stock exchange is needed. No huge underwriting fees, or investment banks are required. A cryptocurrency replaces shares of stock and cryptocurrency exchanges provide a way to trade that currency.
And it doesn’t have to be a company. It could be an idea: You come up with a purpose for raising money and then mine cryptocurrency, (which is the way to verify and add the currency to the blockchain) to raise capital for your project.
Pegging cryptocurrency to a uniform value and receiving dollars, or yen, or any kind of traditionally accepted currency is the next phase in crypto trading. This is where bitcoin and Ethereum, another cryptocurrency benchmark, come in. They are the standard bearers of value in the cryptocurrency world. Your cryptocurrency holding might be worth a fraction of a bitcoin, or many times that amount. And since bitcoin is widely traded among millions of people, you can trade your cryptocurrency to a buyer for bitcoin. Then you’d own bitcoin. An increasingly number of businesses accept bitcoin and/or Ethereum as a form of currency. So, you could ostensibly use bitcoin or Ethereum to purchase things like you would with a credit card. (There is even a bitcoin ATM in Hollywood, Ca.) Still, most people are more comfortable with “fiat” currency such as US dollars. To trade bitcoin for dollars, you can link your bank account. (The conversion process is similar to trading in reward miles or points.)
There is quite a lot more to trading cryptocurrencies. At the end of the day, it’s a very speculative way to invest. Some might say, well, so is investing in the stock market.
In 2017, at the height of the cryptocurrency boom, there was even talk that crypto trading would replace the stock market. Some still hold out hope for that. Meanwhile, the cryptocurrency market bounces. In our next column we’ll look at some example of success in the cryptocurrency market, and which cryptocurrencies have performed best.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.