Investing in Cryptocurrency
There are thousands of cryptocurrencies in the world, including the likes of Bitcoin [BTC], Ethereum [ETH], and Tether [USDT].
As of June 2021, the market value of every cryptocurrency in circulation exceeds US$1.6 trillion, with bitcoin making up 45% of the total.
While it is the dominant and oldest cryptocurrency, there’s more to crypto than just bitcoin.
Cryptocurrencies and the blockchain technology underpinning it are no longer fringe topics.
Crypto: what is it?
So, what exactly is a cryptocurrency?
A crypto is a digital form of money. You can’t physically hold or touch this money, as it is only stored and recognised online.
Cryptocurrencies like bitcoin aim to shift away from a trust-based model, where financial institutions like banks act as trusted third parties processing payments.
Take the Reserve Bank of Australia’s explainer on money. In it, the RBA stated, ‘Money derives its value from the trust people place in it.’
But this trust can be lost if, for instance, too much paper money is printed and issued. This happened in Zimbabwe in the late 2000s, leading Zimbabweans to abandon the Zimbabwean dollar altogether.
Cryptos allow direct person-to-person transactions without requiring a central party (like a bank) to verify or record the transactions.
This is unlike most conventional payment methods, such as electronic bank transfers, which rely on a central party to keep and update records. For example, commercial banks maintain a record of their customers' account balances, deposits, and withdrawals.
What makes cryptos unique is that they use a system called the ‘blockchain’.
This blockchain is a digital record of every transaction ever made for a crypto. It operates on a peer-to-peer network, making it completely decentralised. What this means is that you don’t need a third party, like a bank, to facilitate a transaction.
The First Crypto
The first cryptocurrency was created in 2009 — bitcoin.
In 2009, the pseudonymous Satoshi Nakamoto — the secretive person or group who developed it — released a white paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’.
Satoshi claimed to have developed bitcoin in part as a response to the 2008 global financial crisis.
Bitcoin was meant to be impervious to the whims of governments and central banks, controlled entirely by a tightly-bounded computer code.
Bitcoin’s protocol specifies that only 21 million bitcoins will ever be mined, with the last batch expected in the middle of the 22nd century.
This fixed supply should, proponents theorise, protect against inflation. This contrasts with fiat currencies, where central banks can issue new money as a form of stimulus.
We have seen this happen worldwide during the COVID-19 pandemic. For example, the US’s Federal Reserve purchased trillions in government securities with newly created dollars to prop up the economy.
Bitcoin is the most well-known crypto and also the most valuable. As of June 2021, bitcoin has a total market value of US$726 billion.
Bitcoin had small beginnings. In June 2009, one bitcoin was worth US$0.0001.
At one stage in 2021, bitcoin reached as high as US$63,000.
As can be expected, it’s made some people very large sums of money.
However, at its core, bitcoin isn’t meant to be a financial asset. It’s meant to replace fiat currency.
And to an extent, it already has.
Today you can purchase goods from some retailers online or in-store using bitcoin. You can even buy a luxury car or house with bitcoin. And every day more goods and services are being listed in bitcoin.
Who knows, maybe one day we may be using bitcoin for all our financial needs.
Bigger than Bitcoin
However, there is more to it than just bitcoin. As we’ve mentioned, there are now over 5,000 cryptocurrencies in circulation and new ones are added almost every day.
Now, not all of them are successful and most have a small market value. About 75 of all cryptos in circulation have a market value over US$1 billion.
But the fact remains that any one of these cryptos could take off.
The reason for both the volatility and impressive gains is down to the fact that the blockchain technology, which underpins all cryptos, is still very new.
One brilliant idea could result in the next Amazon.com, Inc [NASDAQ:AMZN] or Facebook, Inc [NASDAQ:FB]. The potential is huge.
It’s why cryptocurrencies have earned a reputation for being the single most exciting financial opportunity around right now.
But, of course, there are significant risks.
There are no ifs, buts, or maybes; cryptos are very risky. No regulators, no safety net, and no rules. We call it the Wild West of investing — and for good reason. We’ve never seen volatility like this.
This isn’t the investment to put your life savings into. This is like nothing you will ever see in the stock markets. The gains are potentially big, but so too are the losses.
But if you’re willing to learn, and willing to take on some risk, this could be an astounding opportunity — a cryptocurrency revolution.
Investing in cryptocurrency
How do you classify a cryptocurrency?
It may sound like a weird question for some. After all, isn’t the answer in the name? Shouldn’t we classify the likes of bitcoin and Ethereum as currencies?
The landscape right now is more complicated.
To be considered money, cryptocurrencies must be 1) widely accepted means of payment, 2) units of account and, 3) stores of value.
Can cryptos be used to buy and sell things? Can their purchasing power be maintained over time? And are they a common way to measure the value of goods and services?
It is contentious — right now — whether cryptocurrencies satisfy all three requirements.
As the Reserve Bank of Australia wrote, bitcoin, and other cryptos, ‘Fulfil some of the attributes of money, but not all of them.’
Shops are yet to quote prices in bitcoin and the infamous volatility of cryptos — which can lose and gain 10–20% (or more!) in a day — make them an unstable store of value.
Of course, that can change, but for now when people consider buying cryptos, they frequently consider them investments or assets.
Since cryptocurrencies are not traditional assets, their fundamental values are not measured in traditional terms.
One can’t perform equity analysis on bitcoin as successfully as one can on a stock like Apple. So that’s something to keep in mind.
Another thing to note when considering investing in cryptos is their volatility: big price swings are common.
For instance, in the first weekend of 2021, bitcoin rose 20%. But by the following Sunday it fell 20%.
Since cryptocurrencies are not tied in a fundamental way to governments or central banks, their value is solely the result of what investors are willing to pay.
And that means cryptocurrencies are more of a sentiment-driven market, with fewer limits on how high – or low — they can go.
Buying cryptocurrencies is different to buying shares — one can’t simply open a brokerage account with CommSec and be done with it.
One must remember that cryptocurrencies are decentralised, so there is no customer service helpline to call if something goes awry.
If one wishes to buy a cryptocurrency, they should consider things like gateway on-ramps, exchanges, and wallets.
On-ramps facilitate the depositing of Australian dollars in exchange for digital assets. On-ramps are a way for new users to enter the crypto world.
Some popular on-ramps include CoinJar and Independent Reserve. Independent Reserve has been around since 2013 and part of Blockchain Australia. That said, it pays to look around to see what suits one best.
A crypto exchange, in turn, can refer to a variety of cryptocurrency brokers, trading platforms, and other services.
For instance, beginners may use brokers like CoinSpot to make their first purchase, buying directly from crypto dealers.
Additionally, services like Square’s Cash App, Robinhood, and PayPal now allow users to buy or sell big cryptos like bitcoin directly inside their accounts.
More experienced crypto investors could buy and sell cryptocurrencies on an open market via trading platforms like Binance.
For more information, one can read Finder’s detailed breakdown of cryptocurrency exchanges.
Finally, if one becomes seriously involved in the crypto world, they are likely to have a hardware wallet.
Hardware wallets allow investors to store their cryptocurrency offline.
If one invests in a hardware wallet, they should remember to store their recovery phrase somewhere safe and have multiple copies.
Cryptocurrency news is reported almost daily by all major outlets ever since the bitcoin rally of 2021 that saw bitcoin reach all-time highs.
However, when reading this coverage, it is important to note that there are a lot of differing opinions in the media on the worth and potential of crypto.
You will likely read about the death of bitcoin on the same day you read about it being the future of the financial system.
For instance, bitcoin has been declared ‘dead’ over 400 times since 2009.
Cryptocurrency is newfangled while blockchain is still an emerging technology. It is hard to predict the future mass applications of blockchain, let alone which cryptocurrencies — if any — the financial world will settle on.
As with any new idea, there will be ardent proponents and sceptical naysayers. It will be up to you to steer through the frenzied hype and undue scepticism.
You can access crypto news and commentary from reputable financial news outlets like Bloomberg, The Economist, The Financial Times, and The Wall Street Journal.
Make sure to counterbalance this by reading the coverage from crypto-focused sites like CoinDesk, CoinTelegraph, and Bitcoin Magazine.
And, of course, we analyse cryptocurrency developments daily here at Money Morning.
We’re committed to bringing you all the latest developments and news. We aim to keep it simple and avoid the jargon. Crypto news for the average Aussie — because you can’t afford to miss out.
Money Morning has a resident crypto expert in Ryan Dinse, who also runs a crypto trading subscription service called Crypto Flip Trader.
- Bitcoin White Paper: The nine-page paper introducing bitcoin and its justification, written by its creator Satoshi Nakamoto. Ground zero for cryptocurrency, its technology, and its ethos.
- Bitcoin 101: An in-depth guide to bitcoin from CoinDesk.
- Messari: A research site with data and research on hundreds of cryptocurrencies.
- Central Banks and Digital Currencies: A good primer on why the world’s major central banks are exploring issuing their own digital currencies, and what that could mean for existing decentralised cryptos.