Cryptocurrency: Breaking Down the Basics
If you asked 10 random people if they ever used cryptocurrency, you’d likely get 10 nos, but it seems like the digital alt-money is trending more every day. It’s easy to understand why. Bitcoin, the first and most famous cryptocurrency, is the investment story of the decade and perhaps of all time. Bitcoin was worth a fraction of a cent when it first emerged in 2009. In March 2021, it peaked above $60,000. When a penny turns into a Porsche in a little more than a decade, it tends to draw attention. Here’s what you need to know about cryptocurrency.
Cryptocurrency: The Basics
Cryptocurrency is often described as a “digital asset,” but don’t mistake it for a digitized version of cash like the kind you spend with PayPal. You can pay for things with Bitcoin and other cryptocurrencies, just like dollars, yen and euros, but the difference is that those and all other traditional currencies are issued and backed by central authorities like governments or banks.
Cryptocurrencies like Bitcoin are not. Instead, they’re awarded as digital tokens to “miners” for their work in maintaining blockchains, the encrypted ledgers where cryptocurrency ownership is recorded, stored and validated.
- Decentralized, traded on a peer-to-peer basis and exchanged with neither the scrutiny nor the security that comes with a central authority like a bank or government
- Anonymous — privacy is one of crypto’s primary selling points
- Secured in a special digital wallet, not a bank account
Crypto Is Coming Into Its Own — and Bitcoin Is Still Boss
Cryptocurrency is not yet a realistic day-to-day alternative to money as the world knows it for the average person, but it has certainly come a long way from its early days in the online underground. Most recently, Visa announced it would accept cryptocurrency. Before that, PayPal added crypto capabilities to its own platform. Everyone from Burger King to Overstock.com accepts it as payment and several big, publicly traded companies — most notably Tesla — have added large crypto positions to their portfolios.
But it’s not just big corporations. A 2020 HSB study found that more than one-third of small- and medium-sized businesses accept cryptocurrency, too.
Bitcoin was the first cryptocurrency and it’s still the most widely known and widely used by far. Its success has spawned thousands of crypto spinoffs. Among the best-known challengers are Ethereum and Binance Coin, but Bitcoin is still the king of the hill. In fact, all cryptocurrencies that aren’t Bitcoin are known collectively as “altcoin.”
Should You Invest?
Bitcoin’s first decade was a story of fairytale gains spun out of pinball-machine volatility that would send the average investor scrambling for cover. Along with wild price swings, the first years of cryptocurrency were riddled with headline-grabbing cases of fraud, theft, hacking and other scandals.
Not only is crypto investing a highly speculative and turbulent undertaking, but the actual process of investing is unfamiliar and outside the mainstream. Unlike the stock market, which is heavily regulated by the Securities and Exchange Commission, there is no central authority that oversees the exchange of cryptocurrency. Some crypto exchanges are regulated, some are not. Big ones like Coinbase and Kraken are located in the U.S. Many others are scattered across the globe.
Since the SEC doesn’t recognize the exchanges where cryptocurrency is traded, there are no ETFs that track cryptocurrency directly the way there are for gold and traditional currency. So-called crypto ETFs only track companies that are indirectly connected to cryptocurrency.
In short, crypto is still fast-lane investing that constitutes a minority position, if any, in most portfolios. What can be said today that could not in years past, however, is that it’s now clear that cryptocurrency is here to stay.