It’s hard to ignore the rapid rise of cryptocurrencies.
Numerous investors are interested in this new asset class as a way to enhance and diversify portfolios because it has introduced a number of opportunities. It also carries significant risks, which market watchers should fully comprehend.
What exactly is crypto?
Cryptocurrency, more commonly referred to as “crypto,” is decentralized digital money that uses blockchain technology to make peer-to-peer payments. Although it can be used for other purposes, cryptocurrency Mining is the process by which a fixed supply of virtual coins, such as Bitcoin, is produced by solving complicated math problems with the help of computers. While many cryptocurrencies are produced in a similar manner, others may be produced in different ways.
Bitcoin, the first cryptocurrency, debuted in 2009 and is still the most widely used digital currency. There are approximately 10,000 alternatives, including Ethereum, Tether, Binance Coin, and Dogecoin, to name a few, despite the fact that Bitcoin holds approximately two-thirds of the cryptocurrency market.
Today, some cryptocurrencies could be considered more of a currency, while others could be considered more of a security, with others falling somewhere in between.
Top 10 cryptocurrencies by total network value or market cap
A system of payments that is decentralized
Cryptocurrencies, in contrast to the US dollar, do not have a physical form, are not stored in a central location, or are governed by a central authority like the Federal Reserve.
Cryptocurrency’s decentralized nature relies heavily on the blockchain. A new “block” is added to the chain that contains the most recent crypto transactions for each transaction that is recorded in the blockchain, which is a public ledger that is accessible to other users. Blocks happen every ten minutes in Bitcoin, but this varies from cryptocurrency to cryptocurrency. The blockchain file is extremely difficult to alter because there are thousands of copies of it on computers all over the world.
Cryptocurrencies rely on a network of computers to confirm the spender’s coins and the transaction, whereas traditional currencies use a trusted third party like a bank or credit card company to confirm that the funds are available to complete the transaction. A consensus mechanism is the process by which a specific cryptocurrency network guarantees the legitimacy of its transactions.
Evolution
Since Bitcoin made its way into the mainstream media in 2013, cryptocurrency has undergone significant change. It has experienced both failures, such as increased adoption by institutions, and successes, such as hacking and regulatory issues.
Mt. Gox, once the largest Bitcoin exchange in the world, was hacked in 2014, widely revealing the industry’s security flaws. But over the next two years, blockchain became more and more recognized as a significant technology, and startups in the sector received significant funding from venture capital firms.
When China rattled the market by shutting down Bitcoin exchanges in 2017, investors were reminded that government action could have an impact on cryptocurrency. In the meantime, two major exchanges in the United States started offering Bitcoin futures.
In 2020, cryptocurrency made further progress toward mainstream acceptance. A major payment processor began allowing customers to purchase Bitcoin, and a technology company with a mid-cap reported adding $250 million in Bitcoin to its balance sheet.
Since entering the mainstream media in 2013, crypto has developed.
Investing risks
Investing in cryptocurrencies carries risks just like any other asset. Investing in cryptocurrencies may result in significant losses, despite the fact that some investors have experienced significant gains due to their notoriously volatile nature.
Cryptocurrency-specific dangers include, but are not limited to:
- It is possible for cryptocurrency laws to change. The price of cryptocurrencies may fall if new laws make it harder or more difficult to hold them.
- There may be no recourse in the event that cryptocurrency is lost or stolen because it is neither issued nor controlled by a specific individual or group.
- If there is no longer a market for a particular cryptocurrency, investors could lose their entire investment because the value of that cryptocurrency could be determined solely by supply and demand.
- Fraudulent investment schemes frequently make use of cutting-edge technologies like cryptocurrency. Before investing in a cryptocurrency with which they are unfamiliar, investors ought to carry out their due diligence.
- Due to fraud, hackers, or malware, cryptocurrency exchanges or wallet services may cease operation or be permanently disabled.
Additionally, given that cryptocurrencies are still in their infancy, there may be unanticipated dangers in the not-yet-determined future.
Key considerations
Investors interested in cryptocurrency opportunities should exercise caution. Investors should educate themselves and consider how and whether cryptocurrency exposure might fit into their portfolio in accordance with their risk tolerance and financial objectives before beginning.
Disclaimer
This material is for informational purposes only and does not constitute financial, investment, or other professional advice. The information contained in this presentation is not intended to be used as the sole basis for making investment decisions. The views and opinions expressed in this presentation are those of the authors and do not necessarily reflect the official policy or position of any financial institution. The information in this presentation has been obtained from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Past performance is not indicative of future results. All investments involve risk, including the loss of principal. You should always seek the advice of a financial advisor and/or conduct your own research before making any investment decisions. The information in this presentation may be subject to change without notice. The authors of this presentation shall not be liable for any direct, indirect, incidental, special, or consequential damages arising out of the use of the information contained herein.
