Understanding the Origins of Cryptocurrency
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“PayPal had these goals of creating a new currency. We failed at that, and we just created a new payment system. I think Bitcoin has succeeded on the level of a new currency, but the payment system is somewhat lacking. It’s very hard to use, and that’s the big challenge on the Bitcoin side.”
Peter Thiel, a Co-Founder of PayPal
What is cryptocurrency?
Really, cryptocurrency is a funny thing. It’s made headlines for making people millionaires overnight, and companies worth billions that haven’t even launched a service or product. Of course, what doesn’t make the headlines are the countless other millions of people who have lost their fortune in literally seconds.
According to Merriam-Webster the word cryptocurrency was first used in 2009. It was coined from the Greek root κρυπτ- (“hidden”) and the Latin currēre (“to flow”). It’s dictionary definition is (though remember that usage determines meaning…):
Any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions
Cryptocurrencies run on what is called “blockchain” technology, which is used to create publicly available ledgers that are (virtually) tamperproof. The most popular by far is Bitcoin with over 70% of the market cap, but others like Ethereum and thousands of other contenders are rising (and falling).
Bitcoin’s origin is shrouded in mystery. Satoshi Nakatomo is the alleged creator as someone claiming this name released a whitepaper in 2008 that explained its potential use. But his identity (perhaps ironically) remains unverified. In 2013 one coin was worth pennies. Now in 2021 one coin is worth tens of thousands.
Why do people buy these digital coins? In short, because more and more believe in its market. And when people believe something is worth something, it becomes valuable. Of course, most “tokens” are not backed by fiat-currencies.
How is cryptocurrency made?
Where does cryptocurrency come from? Well, you’ve probably heard of “mining” for it. What is cryptomining? It’s nothing like groups of people covered in soot taking axes into dark caves. It’s an immensely energy intensive calculation procedure performed with dedicated cloud computing and custom-build machines.
Remember, the ledgers of cryptocurrency are maintained with blockchain technology, which by its very design is highly complex and algorithmic. You see, all transactions are grouped into “blocks” that are appended to “chains” that link to a “Genesis Block.” And these are validated through deep, algorithmic puzzles that have the effect of keeping the blockchain secure since each miner needs to calculate the same number of block transactions for them to be valid.
So, solving these puzzles, which again takes an enormous amount of power and now time, can result in producing valid coins. And here’s the thing. The more miners there are, the more intensive the process becomes, making mining less and less viable from a resource perspective.
The market of cryptocurrency
Is it legal to have cryptocurrency? In most places it is legal, but since it’s so new and by its very nature non-traceable and not monitored by centralized financial institutions, regulators are unsure how to handle it. Remember, cryptocurrencies are not securities.
99% of the trading occurs on exchanges. This is because exchanges enable you to withdraw cryptocurrency to fiat in large amounts. On CoinMarketCap you can see the thousands of coins trading right now. Know that as of now only about 900 coins trade more than $1 million per day. Here are some of the major coins to pay attention to:
- Bitcoin. The major cryptocurrency since its inception.
- Ethereum. The emerging second, likely due to its popularity with developers.
- Cordano. This is an open source “proof-of-stake” being developed for “smart contracts.”
- Tether. This is a “stablecoin” network for if you want to trade the same amount of money as, say, the US dollar.
- Dogecoin. A “joke” coin based on the popular “doge” meme that’s risen in value in recent weeks.
What to do with cryptocurrency
What can you do with cryptocurrency? Like any currency, you can use it in transactions to buy and sell products and services. Years ago cryptocurrency was known for its illegal use on the “dark web” for things like drugs or weapons or human trafficking. But in recent years legitimate uses have become more and more commonplace. An increasing number of retailers accept them, and some salaries are even paid, at least in part, with cryptocurrency.
However, it is increasingly being seen as an investment vehicle (and in my experience the source of constant scamming on forums and Social Media). To be sure, there is easy anonymous access into the market, which is a key factor in its astronomical volatility and lack of regulation. So, nothing is certain. In fact, a 2019 SEC report showed that around 95% (!) of cryptocurrency trading volume reported was fraudulent, that is, bought and sold by the exchanges themselves. Famously, the owner of QuadrigaCX, at the time Canada’s largest exchange, died and took the keys to the funds with him, resulting in $190 million of investor money in limbo, likely forever. Largely due to Bitcoin’s rise many have invested in Initial Coin Offerings (ICOs), hoping to be early adopters. But this is again speculative by orders of magnitude. Algo and HBAR were two potential successes with backing by large cap companies like Deutsch Telekom and Boeing. But within months more than 90 percent of the value was lost. So, buyer beware.
Should you invest in cryptocurrency?
As always, this is a question that largely depends on your own goals, cashflow, and primary risks to manage. And more practically speaking it’s important to become familiar with cryptocurrency tools. You should also seek advice from cybersecurity specialists on how to keep the “keys” to your “wallet” secure.
But for everyone right now, cryptocurrency investment represents an extremely risky kind of investment far FAR beyond that of the most aggressive growth funds of any regulated stock market or ETF exchange, and still far more speculative than most real estate transactions. So, like any gamble one should only invest an amount of money they can afford to lose.
Now, this isn’t meant to suggest that it’s always a bad investment. If you’ve determined what reasonable percentage of your portfolio you can comfortably put into speculative investments, it can be a strategic decision. But keep in mind the risk/return comparison with other opportunities out there. It’s much harder to rebuild wealth from scratch than to simply do a proper risk analysis.
Be Informed
If you are not 100% where cryptocurrency might fit in your financial plan or want to explore other kinds of speculative (high risk, high reward) opportunities out there with a human, consider becoming informed and taking advantage of a no risk 30 minute Strategy Session with David Sigrist.
His team can analyze your cash flow and investment holdings, identify your primary risks to manage, and based on your personal goals determine an optimal percentage of your portfolio to put into speculative investments.
PS: Just in case you skimmed the entire article or just scrolled to the bottom (I’m guilty of this from time to time 😆), here’s a summary: Cryptocurrency is a very recent application of blockchain technology that presents itself as an alternative to government regulated “fiat” currencies. Better markets are emerging and its practical uses will likely increase. However, the technology and its applications are in their infancy, and any investment in cryptocurrency carries extremely significant risks. While investing in it can be a strategic move, it should be viewed more as a gamble with funds you can afford to lose.
I am offering a 30 minute Strategy Session for those wanting a professional, no risk consultation to see how it could play a strategic role in your investment portfolio. Register for your session, or email me at david.sigrist@ig.ca for more information.
