It is very likely that you have heard the term “cryptocurrency” a lot recently with the popularization and increasing adoption of the blockchain-based virtual currency. With a lot of recent press around cryptocurrency, what exactly is it? In this blog, we will walk through what cryptocurrency is, the potential benefits and risks an investor could face, and why is crypto so popular now?
What is Cryptocurrency?
Cryptocurrency (crypto) is a digital currency that does not have a tangible form, unlike the US Dollar. The main characteristic of crypto is that it is decentralized – not controlled by one single entity but rather by blockchain, a distributed database shared across many individual nodes of a computer network. Therefore, crypto was created to circulate without the need of a centralized authority to monitor transactions. Cryptocurrency can be exchanged for goods and services, like Pacsun’s retail integration with Bitpay, but many use cryptocurrency as an investment vehicle itself. Increased market volatility with frequent shifts in the value of cryptocurrency can make it a high-risk but intriguing option for trading and investment.
Origins of Cryptocurrency
The origins of cryptocurrency can be traced back to the 1980’s when they were referred to as “cyber currencies”. However, the cryptographic protocols and software to further cyber currencies didn’t begin to be developed until the 1990’s. A paper published in 2008 under the pseudonym Satoshi Nakamoto coined the term “Bitcoin” and outlined a system for the digital currency without requiring trust in a third-party like banks or governments. This paper effectively launched the entire cryptocurrency revolution. In 2009, Satoshi Nakamoto went on to launch open-source software and the Bitcoin protocol, which became the foundation of cryptocurrencies to come. The moment in which the true value of cryptocurrency and bitcoin in terms of paying for products and services was realized came in 2010 when a person paid 10,000 bitcoins for delivery of two Papa John’s pizzas. With Bitcoin’s trajectory to date, those 10,000 bitcoins, worth around $40 then, would be worth millions of dollars today.
In early 2010, each Bitcoin was just worth pennies, and Bitcoin itself was the only cryptocurrency on the market. It wasn’t until late 2017 that cryptocurrency began to see exponential growth, and public interest soared. The market capitalization, the total market value of the cryptocurrency’s circulating supply, for Bitcoin reached $820 billion in January of 2018 before it crashed later that month. Despite this, interest in cryptocurrency continued to grow. Now, as of January 2022, there are nearly 17,000 cryptocurrencies according to CoinMarketCap’s market research.
As of January 27, 2022, the top 10 cryptocurrencies by market cap according to CoinMarketCap are as follows:
- Bitcoin (BTC)
- Ethereum (ETH)
- Tether (USDT)
- BNB (BNB)
- USD Coin (USDC)
- Cardano (ADA)
- XRP (XRP)
- Solana (SOL)
- Terra (LUNA)
- Dogecoin (DOGE)
Some popular cryptocurrencies include “meme coins” which are often created as jokes and then taken mainstream by internet popularization. Examples of meme coins include Dogecoin (DOGE), based off a popularized picture of a Shiba Inu dog lovingly nicknamed Doge by the internet community, Shiba Inu (SHIB), based off the same picture, or Mongoose Coin (MOONGOOSE), created after a US member of Congress made up the name during a hearing about cryptocurrency. Meme coins tend to be characterized by very high or unlimited supply, unlike Bitcoin which was programmed to have a finite number of units available. Because of the high supply, the demand and the cost of meme coins is typically very low.
Benefits of Cryptocurrency and Crypto Investing
Many see cryptocurrency as the currency of the future, mainly because of the lack of need for centralization from banks or governments. One of the biggest benefits cited by proponents of cryptocurrency investing is the potential for growth over time. However, this potential must be balanced by the significant risk inherent in cryptocurrency investing.
Another touted benefit of cryptocurrency is the fact that it is decentralized through the blockchain, a distributed database that is shared across many individual nodes of a computer network. This provides a secure, decentralized record of transactions. The biggest perceived advantage of decentralization is that it provides a layer of security in case of network failure. A centralized network can be taken down more easily by power failure or other events. The increased number of nodes means if one node goes down, the network will still be able to function normally.
Risks of Cryptocurrency and Crypto Investing
Cryptocurrency can seem idealistic, but like with all investment opportunities, it holds its own unique risks. The decentralized nature of hosting cryptocurrency on the blockchain can be seen as a benefit, but it also serves as a risk. Because there is no centralized governing body, there is no authority to take care of investors’ safety and interests. Crypto.com reported earlier this month that cybercriminals had hacked security systems and stole more than $30B in Bitcoin and Ethereum. More than 480 customers’ accounts were breached by bypassing the two-factor authentication. CNBC reported at the beginning of the year that scammers had taken home a record $14B in cryptocurrency over the course of 2021. This was an increase of 79% from 2020 in crypto-related crime. With double the cybercrime than all of 2021 within the first month of 2022, the risks of a decentralized network become apparent. U.S. regulators have taken note, and the subject of regulation has been included in bipartisan legislature talks. However, there is currently no framework intended to protect investors.
NFTs (Non-fungible tokens), a popular cryptographic asset that has also become more popular in recent years, have also been linked with cybercrime in recent months. An art dealer and gallery owner recently took to Twitter to declare “I been hacked. all my apes gone. this just sold please help me”. The “apes” the art dealer referred to are NFT art pieces that are part of a collection called the “Bored Ape Yacht Club”. The four virtual pictures from the Bored Ape Yacht club were in addition to 11 other NFTs the user had purchased. The total value of the stolen assets was $2.2M. With the help of NFT platform OpenSea, the gallery owner was able to recover several of the NFTs. This sparked a debate that NFTs were not truly decentralized because the platform “froze” the assets, pinning OpenSea as the centralized authority in this case. To learn more about NFTs and how they work, check out our recent blog post, NFTs Explained.
In addition to decentralization and cyber-crime, volatility serves as an additional risk to cryptocurrency investing. While meme coins and newer cryptocurrencies are especially volatile, values and worth are still subject to fluctuations even with more established cryptos like Bitcoin. In a December 2021 Bloomberg article, one analyst noted that Bitcoin’s 30-day and 180-day volatility was higher in 2021 than in five of the previous seven years. As with all investments, cryptocurrency investing has the possibility of total loss of investment. With the world of cryptocurrency ever evolving, it is important to weigh the potential benefits with the risks and make an educated decision if cryptocurrency investing is right for you and your portfolio.
Where to Invest in Cryptocurrency
If you decide the cryptocurrency investing is right for you, there are multiple exchanges and platforms to buy and sell cryptocurrency. Many apps also provide the opportunity to invest in cryptocurrency such as Robinhood, CashApp, and Venmo.
It is important to evaluate the exchange before selecting which one to buy and sell crypto through based on factors such as accessibility, security, exchange fees, the cryptocurrencies offered, and the amount of storage the exchange provides. It is also a good idea to look for a platform or exchange that prioritizes compliance with federal and state regulators.
It is too early to determine whether or not cryptocurrency will become “the currency of the future”. What we do know, is that it is a high-risk, potentially high-reward option that was not available just a few decades ago. Like all investments, it is important to thoroughly vet all cryptocurrency investments opportunities and consider the inherent risks that cryptocurrency investing holds.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.