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Bitcoin, Dogecoin, Etherium, Altcoin, Ripple, Litecoin, ledger, blockchain, decentralization…
With all of these new terms, trying to understand cryptocurrency can feel like learning a new language. Cryptocurrency, also known as “crypto,” has been a popular topic of conversation for years with many believing it’s the next “big thing” in investing. But before you jump on the crypto bandwagon and decide to invest your life savings in Bitcoin, make sure you understand what cryptocurrency is and what is at risk.
What is Cryptocurrency?
Cryptocurrency is a digital form of currency and while Bitcoin is one of the most well-known currencies out there, there are thousands of them.
You can think of crypto as regular money but instead of having a tangible bill or coin, it only exists electronically. So, rather than handing a cashier a twenty-dollar bill for your groceries, you exchange a series of numbers and letters virtually.
Cryptocurrency gets its name from cryptography. Cryptography is essentially a secure method for sending and protecting information.
Unlike a regular currency that is tied to a central organization such as a bank or government, cryptocurrency is decentralized. Cryptocurrencies are tracked using a worldwide peer-to-peer computer network called a ledger. A ledger is a record-keeping system that is used to track all of the cryptocurrency trades taking place. Rather than one institution like a bank keeping score, thousands or even millions of people can keep track of all of the crypto trades on their computers.
What is the blockchain?
The blockchain is a digital database. It collects information from each transaction and stores them in what is called a “block.” Each block is connected to the next block which creates a chain of blocks referred to as the “blockchain.” So, the blockchain is simply a record of a series of transactions.
Instead of having one single database where all of this blockchain information is stored, millions of individual users are responsible for keeping a copy of these transactions on their computers. The idea is that with so many people keeping track of the transaction history, there is less of a chance of someone stealing, cheating, or tampering with the transaction record.
Are Cryptocurrencies a Good Investment?
With that quick background on crypto, you might be wondering, is crypto a good investment? Depending on who you ask, you will get a different answer. Like politics, cryptocurrencies are a polarizing topic. Some people believe crypto is the currency of the future and are willing to invest their money in the hope of a future payout. Others are skeptical of this new currency. Regardless of where you stand, there are several factors you should consider before you go investing in crypto.
Volatility is a measure of how much the value of a stock goes up and down over a period of time. Before you invest in cryptocurrency it’s important to consider volatility. A highly volatile investment has the potential to go soaring up, making you a load of money. But, it also has the potential to plummet, leaving you with nothing. Cryptocurrencies are one of the most volatile investments around.
Unlike a regular stock that is tied to a particular company that employs people and makes money, cryptocurrency has no intrinsic value. You can think of it as a paper cheque. It’s a vehicle for transporting value or money from one person to another. But, it in itself isn’t worth anything. Its value is entirely based on supply and demand. If crypto is the talk of the town and considered the “cool” investment, then its value goes up. However, if something new comes along and people lose interest, then its value can go to zero.
Lack of regulation
A general lack of regulation around cryptocurrencies means there isn’t as much security or protection for the consumer. So, if a hacker gains access to your crypto wallet (where you store the passwords to your cryptocurrency), then they can take all of your money and there’s no regulatory body there to help you get it back. Whereas, if your credit card number is stolen and you report it to your bank, the bank will often step in and reimburse the money.
With thousands of cryptocurrencies and new options coming available each day, there is a chance that some currencies are a complete scam. You might invest in a new currency only to have your money taken and be left with nothing. A lack of understanding paired with the popularity and hype surrounding crypto makes this area ripe for scams.
Should I Invest in Cryptocurrency?
If you are struggling to make your mortgage payments or you’re buried under a mountain of debt, investing in crypto is likely not the right choice. Because crypto is so volatile many people have lost their life savings when a cryptocurrency takes a major dip in the market.
If you want to invest in crypto because you think it is a sure way to make money, think again. There are absolutely no guarantees. Bottom line, if you are set on investing in crypto, only invest what you can afford to lose. If losing your investment means you can’t pay your kid’s school tuition or keep the lights on then opt for a safer investment option.
A safer investment
If you’re interested in investing, a safer option is to put your money into something less volatile like a blue-chip stock or an exchange-traded fund (ETF) that tracks a market index. A blue-chip stock is a well-established company with a long history of success in business. Examples of blue-chip stocks include Berkshire Hathaway, The Walt Disney Company, or Apple. An index ETF is an exchange-traded fund that tracks a benchmark index such as the TSX offering instant diversification and lower volatility.
Who Can I Talk to About Investing?
Due to its volatile nature, the lack of regulation, and its relatively short history, investing in crypto can be compared to gambling. There’s just no way to predict what can happen. Sure, you can invest all of your money and you might be one of the few lucky ones who hit it big. But, you also run the risk of losing all of your money and facing Bankruptcy. Don’t get caught up in the hype.
Before you invest in anything, make sure you fully understand what the investment is, and the risks associated. If you have any investment questions or concerns, reach out to a financial advisor who can help you understand the pros and cons of a particular investment decision.
If you’ve lost money due to a bad investment and are struggling to get back on your feet financially, reach out to a Licensed Insolvency Trustee (LIT). A LIT provides a number of debt management solutions and can help you develop a financial plan to sort out your debt issues and manage your personal finances. Reach out to a LIT today for a free, no-obligation consultation. Call us at 519-310-JOHN (5646), or reach us online.