There are pros and cons to this unique brand of currency. But beware of the pitfalls before you invest.
According to Forbes.com, crypto’s market cap hit $3 trillion in a year, and the SEC approved its first bitcoin ETF and NFT. Also striking, the amount of funding cryptocurrency companies raised from venture capitalists reached $27,000,000,000 in 2021, more than the ten previous years combined.
More people are diving into the crypto craze — maybe you’re thinking about it for 2022.
What you need to know:
First, start by understanding what cryptocurrency is — and isn’t.
- Cryptocurrency (or “crypto” for short) is a medium of exchange but is virtual or digital. It uses encryption techniques to control the creation of monetary units and verify the transfer of funds. These cryptographic techniques enable people to buy, sell or trade them securely.
- Cryptocurrency can be used as a form of payment or investing and is difficult (some even say impossible) to counterfeit. NerdWallet adds that with crypto, there is no need for a central monetary authority such as a government or bank — and this lack of a centralized system appeals to some.
- Cryptocurrency is a digital asset based on a network distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities. ~ Investopedia
- Worldwide, cryptocurrency can provide a legitimate payment network. NerdWallet notes that “it’s becoming a key part of the operation of some decentralized financial networks, where digital tokens are an important tool for carrying out transactions.”
There is also a rise in individuals leveraging crypto as an investment tool — buying and then looking to resell at a profit. Like any investment, investing in crypto depends on your risk tolerance, though there is debate among financial experts as to its soundness.
That said, crypto is rising in popularity for assorted reasons:
- Some view it as a potential replacement for government-issued (“fiat”) currency. These commonly include the U.S. Dollar, Pound, or Euro, whose value is based on supply and demand.
- Many see crypto as a philosophical change while removing a country’s central bank or government from controlling the money supply.
- The technology, which embraces this decentralized processing system, is viewed by a particular segment as more secure than traditional payment systems.
- Others like cryptocurrencies purely because of their value, regardless of the currencies’ security or long-term future.
Cryptocurrencies are available to buy online. Some, including bitcoin (BTC), can be purchased using U.S. dollars. Others require you to use bitcoin or another cryptocurrency to complete the purchase. Because acquisitions are made online, you’ll need to open a digital wallet within an app to store your currency and make transfers and exchanges. There are many apps, including Coinbase, eToro, and Robinhood. Before committing, do your research into the app.
Is crypto legal everywhere?
It varies. Cryptocurrency is legal in the U.S., and some countries with economic turmoil use crypto as a monetary exchange. China, however, prohibits the use of cryptocurrency. Despite it not being legal tender in some parts of the world, Investopedia notes that Bitcoin is popular and has triggered the launch of hundreds of other cryptocurrencies, collectively referred to as altcoins.
As an investment, cryptocurrencies, like fiat currencies, do not generate cash flow alone. To profit, you need to buy crypto, then sell it to someone else for more than you paid. But do your homework and follow the rule of Buyer Beware.
There are no government protections:
"Here, EFTA protections do not apply."
Questions to ask:
Approach investing with crypto with prudence and education. NerdWallet recommends considering these questions before buying cryptocurrency:
- Who owns the company? A well-known owner is a positive sign.
- Are there other major investors who are investing in it?
- Will you own a stake in the company or just currency or tokens? Owning a stake means you get to participate in its earnings (you’re an owner) while buying tokens simply means you're entitled to use them, like chips in a casino.
- Is the currency already developed, or is the company looking to raise money to develop it? The further along the product is, the less risky it is.
- The more detail a prospectus has, the greater chance it’s legitimate — but even legitimacy doesn’t mean the currency will succeed.
More pros and cons:
Based on a forum of debate, the non-profit organization, Intelligence Squared, asked financial experts to debate the validity of crypto. “One perspective found the hype is warranted, and previous critics – including executives at JPMorgan and Goldman Sachs – are increasingly jumping on the Bitcoin (block)train. On the other hand, skeptics suggest this highly volatile digital currency offers a platform for illicit activity, including money laundering and trafficking of humans and drugs, free from government oversight and regulation. And, they argue, Bitcoin has no intrinsic value – the price is based on market enthusiasm rather than actual utility.”
The debate summarized the strengths and weaknesses of bitcoin, the most popular cryptocurrency:
|The Pros:||The Cons:|
|Bitcoin is going mainstream. The Cboe Chicago Board Options Exchange) and CME recently debuted bitcoin futures, and Wall Street giant Goldman Sachs has announced plans to launch a desk to trade bitcoin and other cryptocurrencies.||Bitcoin is a bubble. It’s extremely volatile and, though its creator set limits on its manufacturing, others could easily create bitcoin substitutes that drive down its value and render the cryptocurrency obsolete.|
|By placing control in the hands of users – not nations – Bitcoin proposes to revolutionize global finance. This decentralized currency is free from government oversight and thus not liable to political and corporate corruption.||The American dollar is backed by the full faith and credit of the U.S. government. Consumers are unlikely to adopt the cryptocurrency in the numbers necessary to challenge fiat currencies in the global market.|
|Bitcoin could be a force for good. The currency without a nation allows users to send money to friends and family across international borders instantly without paying high fees, which directly advantages low-income immigrants.||Bitcoin serves as a conduit to crime. Free from government oversight, bitcoin has been used to slight international sanctions and move funds to criminal groups, including terrorists, drug dealers, and human traffickers.
|Bitcoin offers an unprecedented opportunity to safeguard assets against rampant inflation, regulatory uncertainty, and political unrest for those living in unstable and unpredictable economies.||
Bitcoin’s benevolence is misguided. Unlike central governments and established global institutions, bitcoin creators and users face few consequences should they devalue the cryptocurrency for personal gain.
Bitcoin offers an opportunity for those who understand the risk — and it can be a legitimate payment option for those living in countries without a stable or centralized payment system. If you’re thinking of investing (and fully understand the risk), educate yourself first and keep your eyes open to the potential for gain or loss.
Sources and excellent reads:
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*This article is informational only and does not constitute investment advice from Kalsee Credit Union. Kalsee and its representatives and financial advisors do not work with or advise on crypto currency. Choosing to invest in crypto currency is at your own risk.