In our ongoing project to create an investment newsletter here is an article we would like to share about cryptocurrency. We think there is considerable interest in the topic. Without diving too deep, we’d like to offer an outline in question and answer form.
While it is always a good time to invest in real estate. We would like to explore other options. some options cross over into real estate.
Cryptocurrencies stand in for cash, check, or charge. Youcan trade them for profit like stocks and bonds. Here’s more about what cryptocurrency is, how to buy it and how to protect yourself.
What is cryptocurrency?
A cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their currencies, often called tokens. These can be traded specifically for the goods or services that the company provides. Think of them as you would arcade tokens or casino chips, or for that matter, a $20.00 bill is just a token of value. Of course, you’ll need to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manage and records transactions. Part of the appeal of this technology is its security.
How many cryptocurrencies are there? What are they worth?
More than 10,000 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate. The total value of all cryptocurrencies on Aug. 18, 2021, was more than $1.9 trillion — down from the April high of $2.2 trillion, according to CoinMarketCap. The total value of all bitcoins, the most popular digital currency, was pegged at about $849 billion.
Why are cryptocurrencies so popular?
Cryptocurrencies appeal to their supporters for a variety of reasons. Here are some of the most popular:
- Supporters see cryptocurrencies such as Bitcoin as the future currency. They are racing to buy them now, presumably before they become more valuable.
- Some supporters like the fact that cryptocurrency removes central banks from managing the money supply since, over time, these banks tend to reduce the value of money via inflation.
- Other supporters like the technology behind cryptocurrencies. For many applications, blockchain is appealing for security and transparency beyond its use in cryptocurrency.
- Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money.
Are cryptocurrencies a good investment?
Cryptocurrencies may go up in value, but many investors see them as mere speculations, not real investments. The reason? Just like real currencies, cryptocurrencies generate no cash flow, so for you to profit, someone has to pay more for the money than you did.
That’s what’s called “the greater fool” theory of investment. Contrast that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation.
“For those who see cryptocurrencies such as bitcoin as the currency of the future, that may be true. The question is, when will that future come? With swings in value leading to virtual runs on the bank, crypto needs to build public confidence. Confidence in currency derives from its stability.
Some notable voices in the investment community have advised would-be investors to steer clear of them.
Bitcoin and other cryptocurrencies have been anything but stable throughout much of their history. For example, while Bitcoin traded at close to $20,000 in December 2017, its value then dropped to about $3,200 a year later. However, by December 2020, it was trading at record levels again. This price volatility creates a problem. Suppose bitcoins might be worth a lot more in the future. In that case, people are less likely to spend and circulate them today, making them less viable as a currency. Why spend a bitcoin when it could be worth three times the value next year?
While some cryptocurrencies, including Bitcoin, are available for purchase with U.S. dollars. Others require that you pay with bitcoins or another cryptocurrency.
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To buy cryptocurrencies, you’ll need a “wallet,” an online app that can hold your currency. Generally, you create an account on an exchange. Then you can transfer real money to buy cryptocurrencies such as Bitcoin or Ethereum. Here’s more on how to invest in Bitcoin.
Coinbase is one popular cryptocurrency trading exchange. It’s where you can create a wallet and buy and sell Bitcoin and other cryptocurrencies. Also, a growing number of online brokers offer cryptocurrencies, such as eToro, Tradestation, and Sofi Active Investing. Robinhood offers free cryptocurrency trades (Robinhood Crypto is available in most, but not all, U.S. states).
Are cryptocurrencies legal?
There’s no question that they’re legal in the United States. However, China has essentially banned their use, and ultimately whether they’re legal depends on each country. Also, be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors. As always, buyer beware.
» Beyond Bitcoin: What are altcoins, and how do they work?
How do I protect myself?
If you’re looking to buy a cryptocurrency in an ICO, read the fine print in the company’s prospectus for this information:
- Who owns the company? An identifiable and well-known owner is a positive sign.
- Are there other significant investors who are investing in it? It’s a good sign if other well-known investors want a piece of the currency.
- Will you own a stake in the company or just currency or tokens? This distinction is essential. Owning a stake means you get to participate in its earnings (you’re an owner), while buying tokens 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 create it? The further along with the product, the less risky it is.
It can take a lot of work to comb through a prospectus; the more detail it has, the better your chances it’s legitimate. But even legitimacy doesn’t mean the currency will succeed. That’s an entirely separate question, and that requires a lot of market savvy.
But beyond those concerns, just having cryptocurrency exposes you to the risk of theft, as hackers try to penetrate the computer networks that maintain your assets. One high-profile exchange declared bankruptcy in 2014 after hackers stole hundreds of millions of dollars in bitcoins. Those aren’t typical risks for investing in stocks and funds on major U.S. exchanges.
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Investing in cryptocurrency takes insight and information. Fill out the online form to learn more about Entar and Entar coin.
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