Curious About Cryptocurrency
You may have heard people talking about Bitcoin or Ethereum and wondered what it was or what they were talking about. Bitcoin and Ethereum are both forms of cryptocurrency. Cryptocurrencies are a form of payment or digital currency that can be used online for goods and services. There are over 10,000 different cryptocurrencies otherwise known as “coins”. There are few barriers to creating new coins although there is no perceived or calculated value to them. The market value for Bitcoin and Ethereum is over one trillion!
Bitcoin and Ethereum
Bitcoin is the most common and widely used form of cryptocurrency. It is used with what is known as a blockchain which is required to carry out its transactions. The blockchain can be compared to a train. The train holds records of every bitcoin transaction that is accessible to the public. Every time a trade is carried out through a cryptocurrency platform, the specifics of the transaction are recorded and sent with several other transactions, to a large network of users called bitcoin miners. The miners compete against one another to add the next car to the train by putting together several transactions into what are known as blocks for the blockchain. Miners use a formula that assigns the specific block a code that it is known as or goes by. The chosen block is sent and approved by all the miners affiliated with crypto and is then added as a part of the blockchain. One block is allowed at a time meaning it is the only way to add a new coin into circulation and allows it to be checked for legitimacy and gives proof of validity. The technology is created to operate without a central authority so the records created cannot be duplicated or changed. Ethereum is used with an open-source blockchain network. It is primarily used for the built-in function to create “smart” contracts that can be carried out without a mediator. Life insurance is an example of a “smart” contract. If someone passes away with an insurance policy, the notarized death certificate would allow the contract to release the payments to the beneficiaries listed. Ethereum is the cryptocurrency that allows smart contracts to be utilized.
Comparing Cryptocurrencies to Traditional Currencies
Cryptocurrencies are not backed or supported by government authorities like traditional currencies are. They are unregulated and have no claims against any assets. Cryptocurrencies are also all digital so there is no physical coin to represent its value like traditional currencies have. They are rarely used to conduct financial transactions which makes them not widely accepted although there are a few companies that accept them as a form of payment. There
are some similarities to traditional currencies. Often Bitcoin is compared to gold. There is a limited supply because the creator only allows for 21 million coins to be in use. The coins must also be mined by the digital extractors. Most of the interest in cryptocurrency comes from the speculation that its value will increase due to supply limitations and the popularity of blockchain technology.
Benefits and Risks
There are many benefits and risks when dealing with cryptocurrency transactions. One of the major benefits of cryptocurrencies is the cross-border transactions that can happen any time of day throughout a week, month, or year. As the market develops, the value of cryptocurrencies increases although there is not a correlation between blockchain adoption and the value of cryptocurrencies. With the benefits, there are also risks. A few of the risks are that cryptocurrencies are not regulated by government agencies or a central bank. The currencies are bought, sold, and stored online meaning they are vulnerable to cyberattacks and hackers. The custody and standards used to trade have not been implemented by cryptocurrency exchanges. An abundant number of cryptocurrencies are owned by early adopters who are unlikely to trade or sell, which creates price volatility. Overall, there are positives and negatives to cryptocurrencies, but it is up to you to decide if you will jump on the trend or not.
Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete and does not constitute a recommendation. Some investments mentioned may not be suitable for all investors. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss.
Before making an investment decision, please consult with your financial advisor about your situation. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are very speculative investments and involve a high degree of risk. Investors must have the financial ability, sophistication/experience, and willingness to bear the risks of an investment, and a potential total loss of their investment.