Saving money to prepare for the future is an important part of any responsible person's overall financial strategy. For most people, getting started means opening an individual retirement account (IRA) or a 401(k) through their employer. As you go through life and begin to want to further diversify your portfolio beyond stocks and bonds, you might choose to purchase some precious metals or other commodities, or even begin investing in real estate.
Today, however, a growing number of people are also adding the latest asset class, cryptocurrencies. Cryptocurrencies are a type of digital asset. The most valuable and popular of these is Bitcoin, but there are thousands of others out there. Cryptocurrencies are extremely volatile and come with a lot of risk, but may also produce massive returns on investment if done correctly. Anyone thinking about crypto should make sure they really understand what they are getting into. This article will give you a good high level introduction to this exciting asset class.
What is Bitcoin?
Bitcoin was the first cryptocurrency. It was first developed by an unknown person or group of people known as "Satoshi Nakamoto" in 2008. It uses advanced mathematical equations to allow people to digitally 'mine' new coins (though this process now requires extremely expensive equipment to perform). Mining new coins not only allows the miners to make money, but it is also the process that tracks and confirms all transactions on the blockchain. The new coins are found at a set rate, which prevents massive devaluation or inflation. There will never be more than 21 million Bitcoin.
The blockchain is the real technology behind Bitcoin and all cryptocurrencies. It is essentially a large database that cannot be edited once something is written to it. It is only possible to write new data, which means all transactions back to 2008 are publicly available to analyze. These transactions, however, are only identified by the 'keys' that are used, which allows Bitcoin to be used anonymously, unless a user voluntarily provides their information when purchasing. This combination of a public ledger and anonymity is a feature that makes it very popular.
One last thing to note about Bitcoin, and many other cryptocurrencies, is that they are decentralized. This means that no government or business actually controls the system, which is very appealing to many people.
What Other Cryptocurrencies Are There?
Soon after Bitcoin was launched, other technology and cryptography enthusiasts began looking into how to use the blockchain technology for other things. Today, there are thousands of cryptocurrencies out there. Many of them are designed to perform specific tasks, and others are purely speculative assets. Sadly, a significant number of them are outright scams created by people trying to take advantage of this rapidly growing market. Whether you are thinking about investing only in Bitcoin, or you want to add some of the other crypto assets to your portfolio, it is essential that you take the time to research what they are before purchasing so you do not get ripped off or take on more risk than you are comfortable with.
There are few assets in history that have had more volatility than Bitcoin and the other cryptocurrencies. Since its founding, Bitcoin has gone from being worth a fraction of a penny per coin up to around $20,000 per coin. During this time, it has had periods where its value grew by thousands of percent, only to drop in value just as quickly. It is not at all uncommon for a crypto asset to go up or down by 20%, 50%, or even over 100% in just days, or even hours.
There are many reasons that this can happen, including the fact that these assets are either not regulated at all by government agencies, or have very few regulations associated with them. Since it is a global system, even where there are regulations, people can get around them if they choose. “From my experience, Bitcoin resembles a bubble. Very much in the same territory as the Dutch tulip frenzy. This is where a single bulb was sold for many times the average annual salary of a skilled worker. However, Bitcoin is quite different, but I still struggle to find the clear value for Bitcoin other than speculation,” commented long time wealth manager and author Thane Stenner of Canaccord Genuity – an investment and wealth management firm. Because of this, many refer to cryptocurrencies as the 'Wild West' of finance. For some people, this means it is too risky to even consider investing in. For others, it is the massive potential for profit that draws them in. After all, where else could you have invested $100 in 2010 when Bitcoin was worth $.003 per coin, you would have gotten 33,333 Bitcoin, which in December of 2020 is worth over $633 million (assuming you didn't sell any)?
Easier than Ever to Invest
While crypto assets were once written off by reputable investors as either a fad, an outright scam, or just too risky, that is not always the case today. A growing number of major investors, investment firms, businesses, and others are getting involved with crypto. In addition, it has become easier than ever to purchase these digital assets. Today you can buy Bitcoin through simple apps like CashApp, or even your PayPal account. It is even possible to add a crypto fund to your IRA or 401(k) in many cases.
If you decide that you want to add Bitcoin or another crypto asset to your portfolio, make sure you do the research and know what you are getting into. Also, keep in mind that you do not need to purchase a full Bitcoin at a time. You can purchase fractions of them, which makes it much more affordable. Remember, this article is just an introduction to cryptocurrency and not a comprehensive explanation of this investment opportunity. Continue to do more research, and if you decide to invest, make sure you are ready for an exciting (and sometimes nerve-wracking) journey.
Published by Jacob Wolinsky