What is Cryptocurrency? And Why Should You Care?
Cryptocurrency is a digital asset that operates as a medium of exchange. In a similar fashion to traditional currency, the value of cryptocurrency is based upon the overall demand, scarcity, and utility. The difference between the two however is that cryptocurrency is decentralized. This means that when crypto data is entered into the blockchain, it is irreversible. Decentralized exchanges allow for a more seamless peer to peer transaction online as the transaction is not dependent upon a central bank or governing body acting as a third party in the exchange.
Cryptocurrency is based upon the blockchain technology and is secured by something called cryptography. Cryptography is what keeps the transactions private and secure. Cryptography literally means “secret writing.” The privacy that cryptography and blockchain offer, makes cryptocurrency well immune to any sort of government control or manipulation.
Although there are some cryptocurrencies that have now been integrated into the physical world through crypto credit cards, most cryptocurrency remains intangible meaning that you cannot physically touch it. It is completely digital.
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How is Cryptocurrency used?
There are so many people that get excited by the idea of cryptocurrency as they watch the value of it soar and are very quick to purchase it, without knowing what they can use it for. The three most common uses of cryptocurrency include investing, spending and asset storage.
Once you have developed a solid understanding of how to start investing in 2021, most people purchase cryptocurrency for investing purposes. You can think of any cryptocurrency such as bitcoin, in the same way you would a stock. Buy low, sell high. You do however have to be a lot more careful when it comes to investing in crypto because it is extremely volatile. Don’t be surprised if you lose 50% of your money overnight! On the flip side, with high risk is high reward. If you had been an early bitcoin adopter and bought $100 worth back in 2010 when it was only 10 cents, you would now have over $48 million as of February 2021 when bitcoin reached an all-time high. Since Bitcoin has been so volatile since 2010, the number of people who held onto it throughout that entire time period is very small.
As for spending your cryptocurrency, unfortunately there are very few ways that you can do that right now. As crypto becomes more popular, more retailers will begin to accept cryptocurrency as a form of payment, but until then people are mainly spending their crypto on NFT’s. The final way in which people use their cryptocurrency is for the pure sake of storing wealth, while keeping it liquid.
In recent months, various online platforms are also beginning to accept bitcoin as a method of payment. Shopify was one of the first largest e-commerce companies to start accepting cryptocurrency as a trusted form of payment. They currently accept just over 300 different types of crypto with the most popular being Bitcoin, Litecoin and Ethereum.
Will Cryptocurrency Ever be Regulated?
In recent weeks, the Biden administration has taken a more hands on approach to the cryptocurrency industry when a particular offering called Lend from Coinbase caught their attention. Coinbase is currently the largest cryptocurrency exchange in the United States, and it seems as though Lend has met the criteria to technically be labelled as a security.
The Lend program that Coinbase is planning on executing, will allow Coinbase customers to earn interest on various assets on Coinbase, beginning with a 4% APY on USDC.
The SEC, which is currently led by Gary Gensler, has stated that if they can prove that this offering meets the definition of a security, they will do everything in their power to step in and regulate it accordingly. The SEC has even signaled their intent to take Coinbase to court over this issue, threatening to sue if they move forward with the new program.
Following the SEC’s threat of suing Coinbase, the CEO quickly took to twitter to make the following statement:
In a separate blog post, published on September 8th, 2021, the chief Legal Officer of Coinbase Paul Grewal stated that the SEC had issued a Wells notice. He continued to make the following remark:
“They have only told us that they are assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves. The SEC won’t share the assessment itself, only the fact that they have done it.” – Paul Grewal
How Many Types of Cryptocurrencies Are There?
As of 2021, there are currently just over 10,000 different types of cryptocurrencies in circulation with the most popular ones being Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) and Cardano (ADA).
According to CoinMarketCap, As of August 2021, the total value of all cryptocurrencies was just over $1.9 trillion. The total value reached a peak in April of 2021 at $2.2 trillion. The following image is also taken from CoinMarketCap to display the 10 largest cryptocurrencies being traded based on market capitalization.
How Can I Buy Cryptocurrency?
With the entire world turning digital, cryptocurrency has become increasingly popular, which means there are now plenty of options in terms of where you can purchase it from.
Your first step to be able to purchase cryptocurrency is to create a virtual wallet and then choose an exchange. The following are a few examples of some of the most popular and safe crypto exchanges of 2021. Check out this article on how you can stay safe while purchasing cryptocurrencies.
Coinbase: Best overall Exchange
Cash App: Best Exchange for Beginners
Binance: Popular for investing in altcoins
Bisq: Top decentralized platform for crypto
Shakepay: #1 exchange for Canadian Investors. Shakepay even gives you free satoshis every day when you go into their app and shake your phone.
Once you’ve signed up to your desired crypto platform, its relatively straight forward! Your chosen application will often prompt you to make your first cash deposit, which you can do by directly linking your bank account. The transaction time often takes around 3-5 days so do ensure that you take this into account when you’re ready to start purchasing crypto. Once the money has successfully been deposited into your account, you can go ahead and convert your dollars into your desired cryptocurrency.
There is no minimum or maximum to how much money you must spend buying cryptocurrency, but a good starting point would be making a $500 – $1000 investment. If you are looking for some extra funding and have already established a strong credit history, you may want to consider looking at BlockFi. BlockFi is a lending platform which provides financial solutions for anyone who wants to start investing into cryptocurrency. This company will allow you to get loans with interest rates as low as 3% to 8%.
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Why has Cryptocurrency Become so Popular?
There are many reasons why cryptocurrency has recently become so popular among investors, but the most popular reasons include the following:
- Many people believe that we are heading towards a 100% digital future. If this is the case, then they believe that we will no longer have a use for physical currency as cryptocurrency provides the digital alternative. These supporters are buying as much cryptocurrency as they can now as an investment for when crypto becomes more popular and therefore more valuable.
- Another reason for cryptocurrency being so popular among investors is because it is not regulated by any governing body or authority. Without any government manipulation or control, the value of cryptocurrency will not be able to be reduced by purposeful inflation.
- What excites many people about cryptocurrency is the actual technology behind it. They love the idea of the blockchain and cryptography, as it is an extremely secure system with decentralized processing powers. Some may argue that this system is far more secure than the system we currently have in place.
Is Cryptocurrency Even Legal?
The legality of cryptocurrency is determined by each country. Cryptocurrency has always been legal in North America; however, China was quick to ban the use of all crypto, with many countries following closely behind them.
Some countries that have been very positive on the use of cryptocurrency include, The United States, Canada, Australia, The European Union, and El Salvador.
Countries that have been extremely against the use of cryptocurrency have been China, Russia, Vietnam, Bolivia, Columbia, and Ecuador.
Is Cryptocurrency a Good Investment?
This is a highly debated topic, but the most realistic answer is we don’t know. Before we can jump into changing an entire currency, we need to ensure that the currency has stability. All cryptocurrencies that currently exist are extremely volatile as they have no regulation. For example, back in 2017, bitcoin was trading at around $20,000. Just one year later in 2018, the price of bitcoin dropped as low as $3200. Now, in 2021 the price of bitcoin is currently $45,000.
Without some level of stability in a currency, it would make it near impossible to know what a fair price would be for goods and services. This price volatility also forces people to not spend the currency. People would rather hold on to their bitcoin in case it pikes the following year. They also don’t want to hold it for too long in case it plummets the next year. The volatility certainly makes it tough to consider cryptocurrency as a valid currency ready for daily use by an entire population.
One of the most notable and famous investors to date, Warren Buffett has made many statements as to why he does not support cryptocurrency. Buffett's 3 main reasons behind not supporting the digital currencies are because they hold no intrinsic value, he “only invests in things he understands,” and because it is “not a durable means of exchange.” On the other hand, the infamous founder of SpaceX and Tesla Elon loves and publicly supports the rise of cryptocurrency. In fact, there have been periods of time where Tesla accepted bitcoin as a form of payment.
So, let’s cut to the chase, is cryptocurrency a good or a bad investment? Unfortunately, there is no easy answer to this question other than the classic ‘we will just have to wait and see.’ Anyone who tells you that they have a sure-fire answer to this, is probably also certain of the fact that we will all be moving to mars one day. It’s just impossible to know until we have more information. The best thing you can do is to educate yourself on the things you should consider before making any purchases or large investments in cryptocurrency.
If you’d prefer to play it safe with your investments, then you may want to consider looking into some less volatile stock options. If this sounds like you, take a look at this video, which is one in a four part series that I’ve created in partnership with The Motley Fool to help start your investing journey and build out your portfolio. I’ll be putting all four videos into a special playlist on the channel called ‘Ultimate Guide to Start Investing’.
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Read the Entire Investing in Cryptocurrency Series
- Buying a $65,000 Porsche with $6,028
- How to Buy Cryptocurrency Safely | Step-by-Step Guide
- BlockFi Review: Investing in Cryptocurrency the Right Way
- Cryptocurrency Risks: The Do’s and Don’ts in Cryptocurrency Investing
- Unboxing the New Bitcoin Credit Card | Why You’ll Want One
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.