Cryptocurrency Demystified

For the average cryptocurrency investor, seeing the value of your portfolio fluctuate by 20% is just what happens during a typical day.  Volatility, a hallmark of the cryptocurrency market, is likely the central point understood by the mainstream. Whether you are a student and follower of  digital currency or not, you are probably familiar with recent headlines like these: “Bitcoin price surges; passes records yet again”, “Tesla buys $1.5 billion in Bitcoin,” “India banks clamp down on cryptocurrency,” and “Price plummets; Bitcoin investors desperate to sell.” 

So, what does it all mean? Here’s an overview of the basics: 

A technical explanation of cryptocurrency 

A form of digital payment — Cryptocurrencies issue virtual coins or tokens. 

Anonymity— transactions are made anonymous through “cryptography,” a security practice of encryption and decryption. 

Online transaction records —  the time, date and quantity involved in a transaction are maintained online. Identities are protected, as data is encrypted and cannot be decrypted.

What you really need to know is this . . .

Cryptocurrencies are digital assets that are managed by a computer algorithm. Personal identities are not tied to transaction history. When you buy cryptocurrency, you are purchasing a virtual coin, or a fraction of a coin, for a fixed price. As more people buy, sell, or trade other coins of that cryptocurrency, the price changes. 

Currently, there are more than 6000 types of cryptocurrencies that offer secure, private transactions. Each has its own value and record-keeping ledger. The total value of all cryptocurrencies was more than $897.3 billion at the end of January 2021, according to CoinMarketCap. 

Bitcoin, which debuted in 2009 courtesy of an anonymous creator, is considered the first cryptocurrency and remains the most popular. In 2011, a single Bitcoin was worth $1. In early February 2021, the price surpassed $47,000 per coin.  If you had invested $100 in Bitcoin on March 1, 2012, you would have $700,044.43 on February 6, 2021. That’s a 699,944.426% total return on your investment. And, yes, we adjusted for inflation. 

Why does cryptocurrency exist? 

Cryptocurrency supporters offer a variety of reasons to explain their zeal. Beyond privacy and anonymity, a few of the most popular rationalizations include: 

  • Cryptocurrencies are the currencies of the future. As the global economy continues to operate without borders, a decentralized currency that does not require central banks is a more efficient way to manage the money supply. 
  • The decentralized ledger is an important technology. Many cryptocurrency supporters are attracted to the encrypted technology that supports the venture. They claim the private and secure system is a superior alternative to more traditional record keeping. 
  • Investment opportunities. Many investors who hold cryptocurrencies are interested in the market’s apparent upward rise. The market’s volatility offers retail investors a chance to triple, sometimes quadruple asset values. Conversely, however, that same volatility can contribute to equally extraordinary losses.

How to buy cryptocurrency  

Like “real money,” you need a (digital) wallet to buy, sell, trade, and hold cryptocurrencies. One way to acquire a digital wallet is to create an account on a cryptocurrency exchange, where you can use U.S. dollars to initiate purchases.. 

Demand has led CPAs, accountants, online brokers, and other financial professionals to assist clients with cryptocurrencies. Working with a trusted financial professional is a great way to get acquainted with the investment. As a bonus, they can assist with capital gains tax. 

Is cryptocurrency safe? 

Cryptocurrencies are a relatively new phenomenon and their values are volatile. It would be an understatement to refer to it as a “risky investment.” 

Cryptocurrencies do not have the legal protections offered by mainstream investments, and there are few regulations governing the marketplace, so you have no guarantee of your investment. 

In addition, scams and online thieves are rampant. You could also simply lose access to your wallet, resulting in the total loss of your investment. 

Still not dissuaded? Congratulations— you may be regaining that youthful enthusiasm. Just don’t spend all of that rediscovered youth on one coin. 

INFOGRAPHIC FODDER: 

Price on February 1, 2021 (in U.S. dollars): 

Bitcoin: $33,613.32

Ethereum: $1,315.24

Chainlink: $22.84

Litecoin: $142.16

Fun facts: 

* On May 22, 2010, two Papa John’s Pizzas were exchanged by an investor for 10,000 BTC. The value was $41 at the time. Those two pizzas would be worth $456,681,000.00 on February 8, 2021. 

* Bitcoin was created by a person (or group of people) under the pseudonym ‘Satoshi Nakamoto’. The mystery persists to this day. 

* There will only ever be 21 million Bitcoin.

* The Bitcoin blockchain has never been hacked.

* It is estimated that 4 million bitcoin are lost. 

* On December 7, 2018, the price of Bitcoin plummeted to $3,300— a 76% drop from the previous year.

* On December 22, 2017, the price of Bitcoin lost one-third of its value in 24 hours.

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