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Intro to Investing: Cryptocurrency

Written by Josh Coley and Will Hodgson

Cryptocurrency is a digital currency secured by blockchain technology. The blockchain secures the currency through the process of cryptography, which makes it extremely difficult to counterfeit currency. Blockchain technology decentralizes the monetary system by distributing spending ledgers through separate networks of computers.

One goal of cryptocurrency is to render government interference through a central authority relatively useless. As a result of not having a central monetary authority, cryptocurrency can make payments much faster, cheaper, and be much more reliable. However, as there is no central authority, the price of cryptocurrency is highly reliant on consumer demand and sentiment which creates a lot of implied volatility within the currencies. Furthermore, the decentralization of cryptocurrencies makes it very difficult for central government agencies to track, making it an ideal vessel for criminal activity.

How are they made and how do you get them?

Cryptocurrencies are commonly created through the process of “mining” data nodes which have a certain amount of currency contained within it. However, one drawback is that this method of supply management consumes a lot of electricity. If the individuals mining the currency are not using sustainable energy, it can be detrimental to the environment and expedite global warming.

As aforementioned, one way of generating crypto is to set up a computer to mine the data algorithms. A more accessible way to invest and hold a wallet of cryptocurrency is to purchase currency on an exchange platform. Common examples of which are Coinbase and Coinspot.

Capital growth is the main way in which people can make money off investing in cryptocurrency. Some cryptocurrencies will offer incentives for holding the currency; akin to dividend payments that some companies offer.

Pros and Cons of Cryptocurrency

Unlike regular shares on the stock market, which provide stable but often smaller returns, the volatility of cryptocurrency prices creates the potential for higher returns. For example, since Bitcoin’s (the world’s first cryptocurrency) inception in 2010 at a price of $0.0008, the coin has increased in value by 850 million percent to a peak of around $68,000 at the end of 2021, cementing crypto’s status as a ‘get rich quick’ scheme. Because it is a decentralized currency, cryptocurrency is also unable to be influenced by monetary policy, meaning that other than capital gains, there is no viable way that taxation could be implemented.

However, on the other side of the coin, crypto’s volatility also means that the downside risk (potential to lose money) is much greater than most other asset classes (stocks, bonds etc). Crypto also has limited uses as an actual currency at current time, with only a limited number of stores (Microsoft, Subway, AT&T) accepting payment in Bitcoin, ultimately relegating the coin to an investment instrument rather than an actual currency that can be exchanged for goods.

Further Reading

You can also check out our Fintech Friday series, where we talk a lot more about cryptocurrency, amongst other things.

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