10 Things to Know About Cryptocurrency

You’ve likely heard of Bitcoin, but did you know that it’s not the only kind of cryptocurrency out there? There are various forms of these digital "currencies," and while Bitcoin’s prices are soaring, there may be some others your want to buy into. However, there are some tips to keep in mind before buying into these investments, because while they seem like a “sure thing,” it doesn’t take long for someone to lose thousands of dollars thanks to their volatility. Here’s some info to know before buying.

People like Berkshire Hathaway CEO Warren Buffett and JPMorgan CEO Jamie Dimon are in charge of making sure their investors’ money is safe. So, when they publicly oppose Bitcoin and other cryptocurrencies, it makes sense. Any unsecured investment that loses or gains half its value in a day is not a conventionally smart move for investors. Dimon went so far as to say that people “stupid enough to buy it [will] pay the price for it one day.”

More recently, Nassim Nicholas Taleb, author of "The Black Swan," declared that cryptocurrencies are a "gimmick." Taleb elaborates that there is no relationship between inflation and Bitcoin, he also criticized it as too volatile to be an effective currency. International Monetary Fund Economic Counselor Gita Gopinath pointedly refers to cryptocurrencies as "a very speculative investment class" that cannot serve the purpose of money.

Even renowned businessman Jack Ma has speculated that cryptocurrencies like Bitcoin may be a bubble. However, that may not be entirely true.

There’s no predecessor to something like cryptocurrencies, and past results do not predict future returns, so there’s no saying how much investors might stand to lose or gain from it. So, while it’s smart to listen to the veteran investors, it’s also smart to make your own decision at the end of the day.

Once people find out how much these cryptocurrencies are worth, the next big question is, how do they work? The short answer is blockchain technology, but it’s not that simple. Some people have called blockchain the second coming of the internet, but for now, it’s how cryptocurrencies are bought and sold. While Jack Ma believes that Bitcoin may be a bubble, he has expressed great promise for the underlying blockchain technology.

In short, each currency has its own blockchain. It’s called this because when “miners” record transactions to the public ledger, they are adding another block to the chain. The coins themselves are also stored on this blockchain, and when new coins are released, they’re released on the chain for the miners to find.

With this in mind, each blockchain offers different benefits. Bitcoin is a bit more robust than Litecoin, which means transactions take a little bit longer. Additionally, some take huge amounts of energy for the miners, so some coins like IOTA or Chia pride themselves on being energy efficient. This is why some investors think certain currencies will perform better for actual transactions in the future than others.

Cryptocurrencies such as IOTA, Chia, Nano, or XRP are touted as more environmentally friendly by using far fewer Kilowatt hours per transaction. There is a new wave of eco-friendly cryptocurrencies on the horizon designed to address the issue of sustainability.

Unlike the stock market, which is only open during business hours Monday-Friday, cryptocurrencies can be traded any time of day or night, which makes them attractive to investors. If you see the price of Ethereum surging overnight, you can buy it right then. However, with the stock market, it’s not as simple to buy during off-hours.

This also works for casual purchases, because cryptocurrencies are universal. Instead of having to change US dollars into Euros, you can simply pay with whatever crypto is accepted where you are (as long as you have some of that coin to spend). This means that whether you’re sitting on a beach on vacation or at your desk, it’s simple to make a quick transaction.

Since you can buy and sell anywhere, anytime, there are fewer barriers to entry, starting with the amount that you need to invest. When people see the price for the larger currencies like Bitcoin and Ethereum, they’re put off by the steep cost. However, that’s not how much it costs to get started. Each of the coins in all currencies are broken up into millions of pieces, which means you can invest in Bitcoin for as little as ​$10​; however, with traditional investments, there’s often a minimum amount that must be invested in order to get started.

Another barrier that doesn’t need to be overcome is ease of use. While it’s still not super simple to buy currencies like Ripple, apps like Coinbase have made it easier than ever for investors to get their hands on some digital currency.

For a moment in ​December 2017​, Coinbase was the top iPhone app in the U.S., showing that there’s definitely an appetite for people to get onboard. In fact, during that same month, Coinbase had to halt buying and selling of a few currencies because so many people were buying and selling (which was a whole other controversy). In 2020, Coinbase earned ​$1.14 billion​ in revenue. Coinbase continues to be the most used cryptocurrency exchange in the United States and the company went public in ​2021​.

Since it’s as easy as downloading an app, linking a credit card or bank, and getting started, it’s easy to see why people are hopping aboard the cryptocurrency train.

This is where cryptocurrencies start to get a little dicey, literally. Investments are typically backed by something of value. Cash is (technically) backed by gold, stocks are backed by a company, but cryptocurrencies’ value are dictated by their demand. Because of this, there’s no security that an investment’s value will be retained.

However, cryptocurrencies do provide an inherent value that people see as worthy enough to go ahead and invest their hard-earned dollars. This value is the belief that we are moving to a more digital world, and transactions made with cryptocurrencies can be made relatively anonymously (depending on the purchase platform on which they’re used). Additionally, the universal nature of using cryptos for international transactions is another inherent value cryptos offer.

Billionaire Kevin O’Leary, also known as Mr. Wonderful on the TV show Shark Tank, recently explained what it was like for him to make a transaction with Bitcoin. Since the intended $200,000 purchase was overseas, he suggested they pay with Bitcoin, but due to its volatile nature, what would have been a simple $200,000 transaction could easily turn into one where the value of the coin went down to $160,000, so he’d have to insure the value of the Bitcoin, which isn’t possible and/or defeats the purpose of ease. In the end, he said, "I don't consider it a currency” for those reasons.

As of now, it’s true that it’s tough to use these coins as a true currency because the value fluctuates so much, but that may not be the case in the future.

Another reason some people trust cryptocurrencies more than actual currency is because there’s a finite amount of them available, whereas money can just printed for economic and inflation purposes.

For example, there will only ever be ​21 million​ Bitcoin in circulation. They’re set to release on the blockchain at a predetermined date, and once they're all mined, that’s all of the Bitcoin that’s available. What happens to the value from there on out is a point of speculation, but the point is that cryptocurrencies likely won’t be subject to inflation the way that traditional cash is, and some investors find comfort in this concept.

These are wise words from billionaire and fellow Shark Tank fixture Mark Cuban. Instead of telling people to avoid cryptocurrencies, Cuban instead advises investors to “pretend you’re already lost your money.” While it’s usually not good advice to think of investments as a roll of the dice in Las Vegas, that should be the thinking when it comes to cryptocurrencies.

Consider this: Bitcoin surged to a record high value of over ​$63,000​ in early ​2021​ just before Coinbase went public. In ​2010​, Bitcoin was selling for ​ten cents​ and you could have bought ​1,000​ coins with ​$100​. Those ​1,000​ coins would have been worth ​$48 million​ in early ​2021​.

However, there are new cryptos gaining steam every day, and while Bitcoin is still king, there’s no telling if it will retain that spot, or if another more nimble currency will take its spot. Also, if you aren’t watching the markets every day, then it’s easy to miss the downturn (if there is one), and you can lose your investment in a matter of hours.

This is maybe one of the scariest prospects of cryptocurrencies. Since their main offering is anonymity of purchases, the digital “wallets” where they are stored are very much like your own wallet. If you had ​$10,000​ in your wallet and lost it … it’s gone forever. That’s the case with digital wallets. Only you have the codes to crack them open, and if you lose those codes, there is no retrieval.

As anxiety-inducing as this can be, there are ways around this. Some trading platforms offer wallets that are associated with your account so you have access with your username and password. However, keep in mind that these wallets are subject to any security vulnerabilities that the hosting site may have, which is what happened in the infamous Mt. Gox hack, which lost users millions in Bitcoin.

ICOs, or initial coin offerings, are what companies do when they are introducing their coin to the market. There are thousands of cryptocurrencies in the world, each hoping to be the next Bitcoin, but logic would tell you that won’t happen for all of them. So, before you are ready to spend ​$100​ or more to buy into the “next big thing,” take a step back and really evaluate if you can afford to take that risk. In fact, ICOs are so risky that they’ve been banned in China.

If you’re itching to buy into a new coin before it goes mainstream, keep an eye on the headlines, and see what the pros are saying. We’re at the beginning of what could very well be the future of money, so don’t be in a rush, and spend your money wisely.