Jun 2023

Cryptocurrency—Is it a passing fad or here to stay?

Cryptocurrency represents a wide variety of interests for an ever-expanding group of people worldwide. Here are some of the ways people view cryptocurrency today:

  • Freedom from a repressive centralized banking system
  • A pathway to financial success
  • A long-term appreciating asset
  • A method that scammers use to extort others
  • A passing trend

Whatever it means to you (maybe nothing), it’s worthwhile to look at what it is, what it’s good for, and what some of the latest developments are.

What is Cryptocurrency? (Definition)

Cryptocurrency is a digital or virtual currency that uses cryptography for security. It is based on a decentralized technology called the blockchain, which is a distributed ledger that records all transactions across multiple computers.

Unlike traditional currencies issued by governments (such as the U.S. dollar or Euro), cryptocurrencies are typically not controlled by any central authority, such as a central bank. Instead, they operate on a peer-to-peer network of computers, where participants in the network verify transactions through a process called mining.

If you’ve heard of cryptocurrency, the first that comes to mind is likely Bitcoin. Bitcoin was the first cryptocurrency and remains the most well-known, but there are now thousands of different cryptocurrencies available, each with unique features and purposes. Some cryptocurrencies, like Bitcoin, aim to be a digital form of money and a store of value, while others serve specific purposes, such as facilitating smart contracts (e.g., Ethereum) or providing privacy features (e.g., Monero).

Additionally, unlike traditional currencies, cryptocurrency is not backed by any physical asset (gold, silver, government bonds, etc.). Rather, it is purely based on the supply/demand equation. This dynamic is what people see play out as there are, at times, wild swings in pricing based on investor sentiment. It’s worth mentioning that cryptocurrencies are still a relatively new and evolving technology, and their adoption and regulation vary across different countries. It’s always a good idea to do your own research and exercise caution when investing or transacting with cryptocurrencies.

4 Reasons Why Cryptocurrency is Here to Stay

#1 Decentralization through a peer-to-peer network

There isn’t a single governing body that controls the creation or transactions of cryptocurrency. This is because cryptocurrency runs on blockchain technology, which employs an extensive network of computers that constantly verify transactions. If you’re new to blockchain, know it’s used to store and transfer information securely and transparently. Think of it as a digital ledger that records transactions and data. Each block in the chain contains a unique code that connects it to the previous block, creating an unbreakable chain of information. 

Some of the benefits of decentralization:

  • All transactions are publicly stored on a vast network of devices, so errors or issues are uncommon. 
  • Cryptocurrency is created by “mining” coins, including many distributed devices solving increasingly complex cryptographic equations to create a new coin. 
  • No centralized body controls how many coins are in circulation, and no organization can manipulate the supply/demand balance.

Ultimately, decentralization is vital in ensuring the security, trust, transparency, and accessibility of cryptocurrencies. It empowers individuals, promotes innovation, and challenges the traditional centralized financial systems.

#2 Adoption and integration into our financial systems

There are thousands of different types of cryptocurrency, but the leading (Bitcoin) now has a market cap of over $500B, with many corporations holding assets such as Bitcoin. While many other startup coins (Dogecoin) may have already peaked, Bitcoin is here to stay and is becoming a more mature store of value each month. 

It’s worth noting that cryptocurrency adoption is an ongoing process, and challenges still exist, such as scalability, volatility, and user experience. However, with continued development, education, and evolving infrastructure, cryptocurrencies are gradually becoming more integrated into our financial systems, paving the way for broader adoption in the future. As time passes, it will be interesting to see how Bitcoin continues to evolve and adapt to the ever-changing landscape of cryptocurrency.

#3 Hedge against inflation

Some have considered cryptocurrencies like Bitcoin as a solid store of value and a hedge against traditional currency inflation. The limited supply and scarcity of certain cryptocurrencies can make them attractive assets for investors seeking alternatives to traditional investment options.

Here are some of the reasons people use cryptocurrency to hedge against inflation:

  • Limited Supply: Many cryptocurrencies have a predetermined maximum supply. This means that there is a finite number of coins that can ever exist. Unlike traditional fiat currencies, which can be subject to inflationary pressures due to central banks increasing the money supply, cryptocurrencies maintain their scarcity. 
  • Store of Value: Cryptocurrencies are often seen as a store of value or a digital asset class. During periods of inflation, where the purchasing power of traditional currencies decreases, some investors may turn to cryptocurrencies as an alternative store of value. 
  • Accessibility and Global Reach: Cryptocurrencies offer accessibility to a global market. They are not tied to any specific country or central authority, allowing individuals to transact and invest across borders without restrictions. This accessibility can be advantageous during inflationary periods when individuals seek to diversify their investments and protect their wealth across different currencies and assets.

It’s important to note that investing in cryptocurrencies comes with risks. The cryptocurrency market is highly volatile, and prices can fluctuate dramatically. 

#4 Investment and speculation

Cryptocurrencies have gained significant attention as an investment asset class, attracting individual investors and institutional players. The potential for high returns has drawn interest and investment from various sectors. 

Some of the advantages of investing include:

  • Potential for Innovation: Cryptocurrencies are part of a broader technological revolution driven by blockchain and decentralized applications. Investing in cryptocurrencies allows individuals to support and participate in this innovative ecosystem. 
  • Liquidity: Major cryptocurrencies like Bitcoin have many buyers and sellers, facilitating easier trading and converting into traditional currencies when desired. Improved liquidity can enhance the ease of buying, selling, and managing cryptocurrency investments.

While the market experiences volatility, the long-term potential of cryptocurrencies as an investment instrument continues to attract interest. Many liken it to the beginning days of the stock market, where a few solid bets on stocks could end up creating generational wealth. Cryptocurrencies are still relatively new and evolving, with regulatory and legal considerations varying across jurisdictions. As with any investment, consulting with a financial advisor or professional is advisable to gain personalized guidance based on your financial goals and circumstances.

What is the Current State of Cryptocurrency?

The current state of cryptocurrency has seen its share of growth, but it doesn’t lack its challenges regarding regulations.

Growth: The leading cryptocurrency, Bitcoin, has been around since 2009 but has gained popularity in the past few years. Partially fueled by the work-from-home shift, individual investors now make up a significant portion of crypto’s market cap. In a recent survey, over 20% of all adult Americans own some cryptocurrency, with the percentage growing regularly.

Challenges: Currently, the cryptocurrency sector is experiencing some challenges following the collapse of many of the most prevalent exchanges (Voyager, FTX, Kucoin, etc.). Many of these changes offered “staking” rewards for holding your cryptocurrency with their exchange. What the exchanges did with these customer funds was invest them into highly risky funds and coins to return a high yield to their customers. However, what wasn’t clear to their customers was that when the downturn in the cryptocurrency market came, these exchanges were becoming ill-liquid and failing. Customer funds were basically on loan to these exchanges, and individuals lost a lot of money. It was a clear picture of what an unregulated financial system can create.

Due to these recent events, the SEC is investigating the two largest remaining exchanges (Binance and Coinbase). The hope throughout the industry is that these lawsuits help clarify customer protections and define a bit more regulation in a space that desperately needs some.

Cryptocurrency Conclusion: What Does this Mean for You?

Cryptocurrency is here to stay, but it is not without its risk. As many smart equities investors will say, “Only invest what you can comfortably lose.” Long term (5-10 years), the leading cryptocurrencies will continue to play an ever-increasing role in our economy.

Here are some things to consider as you decide whether or not to invest in cryptocurrency:

  • Diversification: If you decide to invest in cryptocurrencies, consider diversifying your portfolio. Cryptocurrencies can be volatile, so spreading your investments across different assets can help mitigate risk.
  • Risk Tolerance: Assess your risk tolerance and financial goals before investing. Cryptocurrencies can experience significant price fluctuations, and there are no guarantees of returns. Understand that investing in cryptocurrencies carries inherent risks and only invest what you can afford to lose.
  • Long-Term Perspective: Cryptocurrencies are still in their early stages, and the market is evolving. If you choose to invest, adopting a long-term perspective and preparing for potential ups and downs may be beneficial. Some believe that cryptocurrencies have the potential for substantial long-term growth, but market volatility should be taken into account.
  • Seek Professional Advice: Consulting with a financial advisor or professional experienced in cryptocurrencies can provide valuable guidance tailored to your specific financial situation. They can help you navigate the complexities of the cryptocurrency market and assist in making informed investment decisions.