Crypto is an emerging technology that’s changing the way we invest and spend money. But there’s a lot to know about it before you jump in.
Bitcoin is the world’s most well-known cryptocurrency, launched in 2009. It was created by a pseudonymous person or group known as Satoshi Nakamoto. Cryptocurrency is different from traditional currencies, which are backed by tangible assets like gold or controlled by central banks. Instead, the value of some cryptocurrencies is determined by how many people are willing to buy them. These are called ‘unbacked’ cryptocurrencies because they have no physical backing, like cash or gold, and their prices depend on demand and competition from other cryptocurrencies.
Blockchain technology is what enables cryptocurrencies to function. A blockchain is a continuously re-verified record of transactions that’s decentralized and open to anyone who wants to participate. It’s made possible by decades of computer science and mathematical innovations.
Unlike traditional currency, which is printed by governments and stored in bank vaults, cryptocurrencies are digital and stored in “wallets.” They can be used to purchase goods and services online or at some stores that accept them. The ability to make instant, global payments can be very useful, especially for international travelers.
While the volatility of some cryptocurrencies can make them unattractive as investments, others are stable. Stable coins are a type of cryptocurrency that seeks to minimize volatility by pegging their value to existing currencies, like the US dollar. They do this by keeping a fixed amount of dollars in reserve or by being audited regularly. However, some stablecoins have lost their value in the past, demonstrating that they can still be volatile even though they’re marketed as less-volatile investments.
Some cryptocurrencies are built to solve real-world problems. For example, some cryptocurrencies can be used to pay for health care services without having to share personal information. This could help keep medical records private and reduce identity theft.
Other cryptocurrencies combine money with technology to create unique products, like Orchid, which is a VPN app and a cryptocurrency at the same time. Using it can save on money transfer fees when traveling abroad and can also cut down on expensive data roaming charges.
Regardless of how you use crypto, it’s important to treat it as a high-risk investment and only include a small portion of your portfolio in it. One common guideline is to limit it to 10% of your overall portfolio, with the rest being invested in more-stable products like stocks and bonds. If you’re interested in adding crypto to your portfolio, our brokers can provide guidance on how to do so safely. Contact us today to learn more.