Confused about the ins and outs of cryptocurrency and what it means for RIA firms and your clients? Get some clarity here.
Bitcoin (BTC). Ether (ETH). Dogecoin (DOGE). Blockchain. Digital wallet. You may have heard these terms before, but for many, the words are just lingo for a high-tech, mysterious world of cryptocurrency we know little about. Elon Musk tweets about it. Tech companies like Microsoft accept it as payment. As cryptocurrency inches its way into our awareness, it inches its way into commerce too.
With crypto becoming more accepted as a form of payment by mainstream businesses, questions are bound to arise about how it will be used for commerce in the future. For those bewildered by the cryptocurrency market, exactly what is cryptocurrency and how does it work?
What is Cryptocurrency?
Simply put, cryptocurrency is a digital system of money that is decentralized, meaning there’s no central bank through which it is exchanged. The decentralized nature of cryptocurrency makes it harder to tamper with or counterfeit.
The main difference between cryptocurrency and the “regular” or fiat currency we deal with daily is the technology behind it: a distributed ledger. The Federal Reserve issues the U.S. dollar, which we typically access through a bank. Transactions through that bank are recorded on the bank’s ledger: if you take $100 out of the bank’s ATM today, that amount is subtracted from your account on your bank’s ledger.
With cryptocurrency, all transactions are duplicated and recorded across the entire network of computers in the system. This distributed ledger system means that once transaction data is recorded, it’s very difficult to change it, because it must be changed across the entire network. One specific type of distributed ledger employed by some cryptocurrencies uses an ever-increasing series of records called “blocks” that are cryptographically linked together. This type of distributed ledger frequently used with cryptocurrency is called blockchain.
Here’s a basic breakdown of some of the elements that make cryptocurrency work.
Getting Involved in the Crypto Market
Cryptocurrency isn’t available at your neighborhood bank. If you want to get involved in cryptocurrency, though, there are a few options. First, you need to decide which cryptocurrency you want. Bitcoin is just one type, but it dominates more than half the market. Ether is another type that uses the Ethereum blockchain, which is most closely associated with NFTs. Other types include Litecoin, Cardano, Dogecoin, and more. Some cryptocurrencies, like Bitcoin, are available to purchase with U.S. dollars, but others require buyers to pay with Bitcoin or another type of cryptocurrency.
Once you’ve decided which cryptocurrency you want, you’ll need to follow a few steps.
Buyer Beware
Hot and cold wallets are secure ways to store your crypto, but if you lose access to either one, you can lose your investment. Whether it’s losing the key code to a hot wallet, or the hard drive or USB breaks or otherwise fails on the cold wallet, you can be out the full amount in that wallet, so choose your storage carefully.
The cryptocurrency landscape is still in its early stages, and there are a number of risks to investing in cryptocurrencies. Because the market is unregulated and has been plagued by volatility, there’s the potential for large losses. In recent hacking and customer service scandals with platforms like Coinbase, individual investors have lost hundreds to hundreds of thousands of dollars. When that happens, there’s no recourse because blockchain transactions are irreversible once completed.
Cryptocurrency is also a boon for scammers. From October 2020 through April 2021, the Federal Trade Commission (FTC) fielded nearly 7,000 reports from consumers about scams. The median loss reported for these scams was $1,900. The FTC cautions people interested in cryptocurrencies to look for these signs of a scam:
- Someone insisting on cryptocurrency for payment
- A guarantee you’ll make money
- A promise of guaranteed returns and big payouts
Scammers also make big claims but don’t provide details about how the investment works or where your money is going.
The Currency of the Future?
Cryptocurrency isn’t just for buying and selling. With cryptocurrency becoming more readily exchanged and accepted, several major companies are coming around to this new type of currency. Microsoft, Overstock, Whole Foods, Starbucks, and Home Depot are just a few of the companies who now accept Bitcoin as payment. As more and more businesses adopt crypto as a payment form, questions arise about how it will be used for commerce in the future and how it will interact with regulatory compliance.
As always, our experts at Joot are here to help you navigate this new terrain. Get in touch with any questions you have.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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