(Photo | Courtesy of Rosell Wealth Management )
The unofficial start to summer begins here in Central Oregon on Memorial Day. Mt Bachelor closed for the season last Sunday as skiers and snowboarders now transition to the mountain bike trails, golf courses and the Deschutes River for fun in the sun. BBQ season is also upon us where small talk with friends and family often takes place. Over the past year conversations were monopolized by the presidential election and COVID. Are you prepared to navigate the latest subject matter of small talk? As many clients and friends have been asking questions about the latest hot topic — cryptocurrency, I thought it would be beneficial to share with you a brief introduction on this hot topic.
What Is Cryptocurrency?
A cryptocurrency is a “digital currency,” and, in some cases, it can be used as an alternative form of payment rather than traditional dollars, euros or yen. Most are created by a process called “mining” using encryption algorithms. Similar algorithms are used for processing transactions with the currency. Cryptocurrencies are stored in digital wallets, which is just a particular computer code that designates the ownership. Cryptocurrencies or “crypto” have many names, but the most common you will hear is Bitcoin.
For a bit of recent history (no pun intended), Bitcoin was invented in 2009 by Satoshi Nakamura whose true identity remains a mystery as this is the name of the person or persons who developed the first crypto. Bitcoin has the symbol ₿ and as of May 20, 2021 has the highest market cap of any cryptocurrency with $720 billion in total value. Nakamura’s own digital wallet contains 1.1 million bitcoin, worth $43 billion, making him/them the 33rd-richest person globally. Bitcoin was the first use of a technology called “the blockchain.”
Wait, What is Blockchain?
Blockchain is a new system for accounting cryptocurreny. It is a list of transactions available to the public where you may verify crypto ownership. Before blockchain was invented, crypto legers were kept and verified by a single source, usually a bank or a credit card company. This information was guarded and usually backed up. Still, a hacker could potentially get into the system and change the data, or they could interrupt or change the info going to or coming from that single source to make it a fraudulent transaction. Blockchain revolutionized the former accounting style because it utilizes a “distributed” system, meaning that multiple copies of the ledger are stored on a chain of computers. The accuracy of these ledgers is constantly being verified. This does take a considerable amount of computing power. Every cryptocurrency transaction is published on the blockchain and scrutinized, leaving no room for transaction manipulation, changing the money supply or altering the information. The blockchain’s software is free and open source, allowing anyone to review and propose an improvement to its code.
What makes the blockchain so exciting is that it allows the secure transfer of value online, without the need for an intermediary like a bank. The cryptographic nature of blockchain networks can make them even more secure than standard debit/credit card transactions. Blockchain transactions do not require sensitive information transfer, just a digital wallet number and the desired amount. Having these attributes, you can understand why banks are against cryptos that would cause them to lose out on their transaction fees and why nations who want to control their money supply would also be against them. There could be a safe and open alternative to nearly every financial service, accessible to all with smartphones and an internet connection. The use of blockchain technology has expanded beyond crypto, and now it is used for medical records, supply chains and much more. But that’s another small talk conversation.
What About the Inflation of Bitcoin?
One thing that makes bitcoin of interest is that it has limited inflation. There are roughly 19 million bitcoins already mined and the code states that only 21 million total bitcoins can be mined. That is it! In contrast, fiat currencies such as the U.S. Dollar, euro, pound and yen are not backed by a physical commodity like gold, but instead by the government that issued it. These currencies can continue to be produced to an infinite amount, causing inflation. Unlike a nation’s currency, Bitcoin’s inflation rate is known. This attribute makes it attractive as a Store of Value (SOV). An SOV is an investment for wealth like gold that is generally resistant to inflation. It is important to note that not all cryptocurrencies have a cap on the amount of coin that can be mined. For example, the infamous Dogecoin does not have a cap on inflation.
An altcoin is an alternative to bitcoin — the crypto that started it all. As bitcoin has become widespread, other cryptos have been introduced to try and cash in on the crypto craze. The three most prominent of these by their market caps are Ethereum, Tether and Binance. These different cryptos have a goal to distinguish themselves from Bitcoin by providing new or additional capabilities. One example is company called Cathio, which says it “provides Catholic organizations with a payments platform that aligns with Catholic values, provides the tools necessary to increase donations and connect with both local and global Catholic communities.” I cannot write this article without mentioning Sh*tcoins. These are purely speculative altcoins. Dogecoin, being the most famed Sh*tcoin, is incredibly volatile as they really don’t have any true value to them other than that perceived by the buyers and holders with much lower liquidity. If you’re getting overwhelmed already, keep in mind that according to CoinMarketCap there were almost 9,000 cryptocurrencies as of March 2021.
Some Recent Crypto News
One of the reasons this topic has been making headlines recently is because nearly all cryptos fell quickly on a single announcement [recently]that the Chinese Central Bank made banning all financial institutions for conducting business with cryptocurrencies. I find this most interesting as the Chinese Central Bank is currently piloting its own introduction of a digital yuan they call e-CNY and have recently started trials in several Chinese cities. What makes this Chinese variation different from Bitcoin is the e-CNY is controlled by a single entity — the Chinese central bank — as opposed to a decentralized network. Following this announcement, cryptocurrencies such as Bitcoin and Ether tumbled to their largest one-day loss in over a year.
In February of this year Elon Musk announced that Tesla had purchased $1.5 billion worth of bitcoin for “more flexibility to further diversify and maximize returns on our cash.” Tesla also simultaneously announced that it would start accepting payments in bitcoin from consumers purchasing their automobiles. In the spirit of an undulating rollercoaster, cryptocurrencies plunged recently after Musk said Tesla would stop accepting bitcoin as payment for its vehicles because of the massive amount of energy needed to mine bitcoin.
Summary and Investment Warning
Cryptos can have volatile swings in prices from unexpected news and are not recommended for any investor as a large proportion of their portfolio. When your cousin starts talking you up at the BBQ and tells you to put all your investment money into Dogecoin, remember before investing in any cryptocurrency, understand how it works, if it has a use and how liquid it is. Store your crypto in a trustworthy digital wallet, which depends on the chosen crypto and if you want to trade in it regularly. Have a backup for your wallet if it is lost, stolen or you lose access, as you could potentially lose everything you invested. Whether this topic excites or overwhelms you, I believe cryptocurrency is here to stay. Hopefully this brief summary can help you impress Uncle Bob or even your mother-in-law with your knowledge of cryptocurrency as you gather around the BBQ this summer.
David Rosell is President of Rosell Wealth Management in Bend. RosellWealthManagement.com. He is the host of the Recession-Proof Your Retirement Podcast and author of Failure is Not an Option — Creating Certainty in the Uncertainty of Retirement and Keep Climbing — A Millennial’s Guide to Financial Planning. Find David’s books on Audible and iBooks as well as Amazon.com
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