The latest hype and excitement is around the buzz-word “cryptocurrency”. What is cryptocurrency and should you invest?
Cryptocurrency is a digital or virtual currency which uses a decentralized model. The first cryptocurrency which came about in 2009 is Bitcoin. Today, there are more than 1,500 different types of cryptocurrencies.
One of the questions that people are asking about cryptocurrency is “how is the currency backed up?”. Because it’s a virtual currency, potential buyers are looking for some kind of assurance that the currency won’t default. What many people do not realize is that all currencies are not backed up by anything. Even our Canadian dollar, the US dollar and the Euro are not actually backed by anything. These currencies are actually called Fiat. Fiat currency has been declared by the government as “legal tender”. It’s not connected to how much gold or any kind of asset that the government has.
Bitcoin and other cryptocurrencies are similar in that they are valid currencies, just not backed by the government or the banks. Cryptocurrencies can be held, used to buy goods and services or traded on exchanges, just like regular money that we already use.
In more traditional forms of investment like trading on the stock market or buying real estate, these investments are backed by actual assets. If you’re investing in a stock, it will actually be connected to a company on the back end, which is hopefully generating a good profit margin. In this case, the stocks will go up. Similarly, in real estate investments, hopefully the value of the property goes up and there will be an actual tangible asset, which one can hold on to or sell.
Cryptocurrency in many ways is similar to a stock, excepting without any tangible assets. There has been a great deal of volatility surrounding crypto investments. Bitcoin started at cents on the dollar and made its way in the end of 2017 all the way up to $20,000 U.S. per single Bitcoin and dropped significantly since then. So as we can see, the value goes up and down just as with a stock.
Another similarity that cryptocurrencies have with stocks is that it also can be traded on an exchange. Typically, companies are traded on one or two different stock exchanges. However, crypto-currencies are traded on many, many different exchanges, with more popping up every day. Different from stock investment, which you have to sell in order to use the funds or money made or lost, depending on the stock, you do not need to sell the cryptocurrency, tokens or coins in order to use the currency. The currency itself can be used to “barter” for goods and services.
The next issue to consider when wanting to barter or purchase goods and services is that merchant acceptance is not yet where we want it to be. So you cannot as yet, walk into a Starbucks or Walmart and make purchases with cryptocurrencies, however, these alternate currencies are quickly becoming a big part of the direction to which our economies are moving.
As with other speculative investments, one can buy for the short term and try to make a quick “buck” or one can buy and hold, hoping for larger growth in the future. We’re hearing a lot of the buzz about people really making a great deal of money in the cryptocurrency world, and this so in many cases, but bear in mind that people seldom disclose their losses!
Essentially the hope and belief is that the direction that we’re moving to is embracing the digital world on a much more global scale. This will be a world where most purchases can be made via cryptocurrencies, transaction fees will go down and international transactions will happen faster and with ease, without intermediaries, in the non-centralized world of finance.
My personal advice to you, is to bear in mind that investing in cryptocurrencies is speculative and a huge gamble. I would not suggest that anyone invest money that they need for their mortgage, rent or living expenses, in crypto-currencies. If you are curious about the topic after hearing so much about this fascinating form of currency, do some research first and only invest with monies that you have already put aside and not money that will hurt you if you lose it.
I believe cryptocurrencies are here to stay, so it’s best to get comfortable with them!