Derek: can you explain what cryptocurrency is?
If the investment advisors from 50 years ago could have seen into the future they would likely be awestruck at how technology has changed the business. Long gone are the days of trading pieces of paper back and forth and handwriting orders. Like any industry, technology has made a profound impact on the way things are done. While cryptocurrency trading is still very much in its infancy, it may be something we all rely on in the future.
The term cryptocurrency refers to a “digitized” currency. Said another way, the currency has no paper form and is essentially virtual. Part of the name comes from the word cryptography which is the term used to secure any transaction and control how more of the currency is created. One of the more common cryptocurrencies is called Bitcoin, although there are others.
Buying cryptocurrency can be accomplished by trading actual currency for virtual currency using exchanges found online. You may even earn bitcoins by “mining” using a computer and properly installed software. While outside the scope of this article, your computer would then be used to solve calculations and you would be rewarded bitcoins for providing that service.
Similar to actual mining, mining for bitcoins can take a long time and requires reasonably sophisticated equipment. Beyond this, the reward for mining becomes less and less as time progresses. This process allows for the control of supply and creates scarcity.
The scarcity and resulting demand thus determines the value. In fact, the total number of bitcoins available will be capped at 21-million. It is estimated that the final bitcoin will be mined in the year 2140, assuming computer processing remains static. As of today, there are roughly 17-million bitcoins.
Cryptocurrencies are considered to be decentralized currency, as in there is no central group controlling the currency. Whereas the supply and flow of our Canadian dollar is managed by the Bank of Canada, cryptocurrencies are not. Keeping track of the transactions is handled by a public ledger whereby computers that have the proper software installed from around the world are busily handling and monitoring the calculations. The computers that handle this process are generally awarded a transaction fee.
Cryptocurrencies can be spent like actual currency via many online retailers such as Expedia, Shopify, and even Microsoft. Bitcoin users have a digital wallet that can be used to make purchases just like using your credit cards online.
The attractiveness of cryptocurrencies is intended to give consumers an option to have their money linked to a decentralized currency. This eliminates concerns about government policy changing the value of your hard earned dollars. Whether that is a legitimate concern is best left up to our individual preferences.
There are concerns about the safety of cryptocurrencies and a number of thefts have been widely reported. The largest theft involved approximately 850,000 bitcoins from the largest exchange and intermediary which had a US dollar value of more than $450-million. Beyond theft, there is concern of these virtual currencies being used for illegal activity and money laundering.
Finally, the value of bitcoin has skyrocketed as of late leading some to worry that the price is a bubble waiting to pop. The current price of 1 bitcoin is roughly $6,000 USD compared to $700 in November 2016 with some volatile trading along the way.
Before rushing out to exchange your government backed dollars for a virtual currency I strongly recommend you take some time to learn more. This article was only meant to touch on the topic as there is far more to understand. As always, understand the risks prior to acting.
Happy investing,
Derek Fuchs
Senior Wealth Advisor
Scotia Wealth Management