Cryptocurrency – your questions answered
When we say the word cryptocurrency, what thoughts spring to mind? Quick buck. Passing fad. Don’t understand it. The future.
All of these thoughts are pretty common, and remain part of the mystery of cryptocurrency since it first surfaced in a white paper in 2008.
But there’s no denying the momentum is building, especially with the likes of Elon Musk now reportedly owning over $5 billion in bitcoin via Tesla, SpaceX, and his own purchases. Even some countries like Venezuela whose economy is in free fall, have now turned to cryptocurrency as a lifeline for their country.
So should it be taken seriously as an investment opportunity? We asked one of our advisor’s, Matt Rea, to help shed some light on the ever expanding world of cryptocurrency.
Read more about Tesla’s move into cryptocurrency here.
What is cryptocurrency?
It’s fair to say cryptocurrency comes up in most of the conversations I’ve had with my clients over recent times, especially those under 40. Before I give my thoughts on whether it’s a viable investment opportunity, I think it’s important to talk a bit about what it is, and why people are using it.
The simplest explanation is that it’s a form of digital money exchange between two parties, which you can use to pay for goods and services. It’s why it’s called peer-to-peer as it takes out the middle man. No banks or institutions charging you fees or holding up transactions in red tape – you can see why it’s become pretty attractive.
A good analogy I read (and appropriate considering the speculative nature of crypto) is to think of it like holding casino chips – you need to exchange real currency for the cryptocurrency to access the good or service.
Watch this short video for more background on cryptocurrency.
Is it safe?
One of the real appeals of cryptocurrency is its level of security. Without getting too technical, it works by using a technology called blockchain (you may have heard of it).
Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. Think of it as a digital ledger of transactions that is duplicated and distributed across an entire network of computer systems in multiple locations. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is instantly time stamped and added to every participant’s ledger. This means that the records are public and verifiable. With no central location, it’s harder to hack as the information exists simultaneously in millions of places.
While it can be difficult to get your head around the science of blockchain technology, all you need to know is that it is incredibly secure, which is why it is now being widely used to aid international trade, insurance and money laundering protection.
How many currencies are there?
It’s fair to say cryptocurrencies are growing – everyday. According to market research website CoinMarketCap at the time of writing this article, there were 9162 listed currencies.
No doubt you’ve heard of the most popular of these, namely Bitcoin. Other names that also rank highly include Ethereum, Tether, Cardano, Polkadot, XRP and Litecoin.
It’s staggering to consider that the total market capitalisation of cryptocurrencies in supply is $1.98 trillion as of early April. But with this figure also comes uncertainty, given the dramatic highs and lows experienced within the market.
For example, the value of Bitcoin has fluctuated greatly since 2017. In that year it was near $20K USD in December, dropping to just over $3K USD a year later, to steadily increase back to $20K USD by Dec 2020, to then experience a surge to current levels just under $60K USD.
This volatility is exciting to some; alarming to others.
Who uses cryptocurrency?
Just like the currency itself, its users and uses are constantly changing.
A lot has changed from the first recorded use of cryptocurrency – two pizzas paid with bitcoins. Now you can buy a brand new Tesla electric car or purchase goods and services across a variety of online retailers. Names like PayPal, Visa and Microsoft are now accepting this currency across their vast networks. Charities are also making it widely available to use as a method for donations.
So it is certainly a legitimate form of payment, although as we always recommend at Tribeca – if you’ve got cash, use cash.
And then there’s the many speculators who are in it out of curiosity, fun, Fear Of Missing Out and/or to try and make a quick buck or two. This is where you need to be very clear as to why you’re using cryptocurrency, and the pros and cons if you choose to trade with it.
Read our recent article on smart investment advice.
Is it a good investment?
My simple answer is it’s still too early to consider it as a mainstream investment. It’s speculative. Until it’s used more widely in society it relies on the ‘greater fool’ theory – you buy it now and wait for the greater fool to come along later and pay more for it. And unlike shares (where you get a dividend) and property (where you receive rental income), it’s a non productive asset so you’re purely relying on its value increasing.
If you’re happy to speculate, that’s fine. Just be clear on why you’re doing it, and only use an amount of money that you’re prepared to lose. Definitely not for investing life savings or taking out loans.
In my case, I’ve traded on a small scale as I wanted to learn more about it. And I’m in for the long-term. If you buy now and intend to sell in three months – that’s speculation. It’s a gamble, not an investment.
What will really determine if cryptocurrency becomes a viable alternative asset class option to property, shares, fixed interest and cash is the ongoing demand for it. If economies like Venezuela become reliant upon it, if banks and governments are required to hold more of it, and if more and more companies like Tesla choose to make it a clear alternative to cash or credit, then it’s likely that fund managers and asset allocators will begin adding it to niche portfolios.
Based on cryptocurrency’s trajectory since launching in 2008, I can definitely see a future where cryptocurrency forms a part of person’s portfolio, potentially as an alternative asset used to further diversify risk.
When that time comes is hard to say. What we can say is that cryptocurrency looks like it’s here for the long-term.
Whether that’s as viable long-term investment is still the big question.
Like to ask Matt a question regarding cryptocurrency. Click here.
Please remember we’re always here to help. Talk to your advisor or any of our Tribeca Tribe if you have a question or need you wish to discuss.
