Why is understanding cryptocurrency so complicated? A simple search of the word “cryptocurrency” or “digital currency” brings up a plethora of information, articles and opinion pieces from every corner of the universe. Most of the articles dwell on the technology that is behind this unfolding world of currency. Truth be told, most of us simply do not grasp technology well enough to understand as it relates to Bitcoin, Etherium, etc. In order to put this into context, let’s look at how we are surrounded by technology that we don’t understand but use it anyway.
You walk into your garage in the morning, push a button on the wall and watch the door open, step into your car, pat your pocket to confirm that your key fob is there, step on the brake pedal and push a button on the dashboard. If all of that technology worked, your car starts and you slide the gearshift into reverse and back out onto the street, making sure you watch the screen that shows the backup camera so you don’t drive over your kid’s bike. What if one of those steps doesn’t work? What do you do? Lift the hood and fix it? How many of us even know where to start? If you are like me, you now grab your cellphone, call the auto association or the dealership (or your much smarter brother-in-law) and ask for help. By the way, what is the technology behind that cell phone again? How does that work? We are inundated, if not overwhelmed, by technology everywhere.
We could go on, do you actually know how email works, how about that GPS, wifi, the internet itself, changing the clock on your microwave, hell – the microwave? The point is that we use technology all day long in every facet of our lives without knowing all the intricacies of how it works. The nerds of this world have created digital currency, just like they created GPS, the internet, etc. They are being asked to explain how it works and can do so only in their own language – a language we mere mortals have no hope of understanding. Should that prevent us from enjoying the benefits of using what they have created? Five years from now we won’t give a second thought to paying for something using whatever currency we choose and won’t turn down a payment for something in the same way. We certainly won’t be thinking about how that currency works, or gets created, or controlled, or accounted for. So, that’s our pitch for crypto currency but this series is about investing and how does the average person do that?
Digital currencies have now advanced to the point where there are several simple ways to invest through the stock exchange. It is no harder to buy some of the major currencies than it is to buy a stock. Do you remember our chapter on ETFs? Most of the major stock exchanges now offer multiple ETF’s for both Bitcoin and Etherium with more coming on stream all the time. We no longer need to understand or involve ourselves in crypto wallets, blockchains, or long and tedious passwords that might allow someone to steal our money. Search on your favorite stock exchange for an ETF that offers to mimic the price of the underlying cryptocurrency and you are ready to invest. There is a safety factor involved in using an ETF to invest because the company backing and managing it has to be certified by the exchange itself. The usual cautions need to be exercised since this is a very volatile market, especially in its infancy. You will also find common shares offered by many of the companies that provide various services to the cryptocurrency market.
The story about digital currencies is just beginning, but for the purposes of this writing, we will end with a couple of situations that we need to bring to your attention: I am sure that virtually everyone reading this has used, or at least, heard of PayPal. Recently, the Los Angeles Times interviewed its CEO, Dan Schulman, about the changes occurring in the financial markets. It is definitely worth reading.
If you are a subscriber to this site, you may remember that a few weeks ago I added an item about my friend James Renouf and an excellent offering about NFTs. You remember NFTs. They garnered so much publicity when someone sold one for $69,000,000. Well, James has created another masterpiece and this time it is about creating crypto for yourself. He is not talking about buying crypto or investing like mentioned earlier. He shows you how to earn crypto without investing any money. It is definitely worth a look.
Coming next will be a few nuggets of wisdom gleaned from many years as an investor, investment consultant and tax advisor to offer some advice on how to enter the stock market and we will include some words from a few legendary voices to keep us on track.
Cryptocurrency, Bitcoin, Elon Musk, digital currencies, Etherium, Mark Cuban, fiat currency, NFT’s and the list goes on. Following the world of investing is a challenge today, with everyone being obsessed with these new and confusing terms and concepts. You are forgiven if you have thrown your hands in the air and said, “I have no idea what is going on so I will simply bury my head in the sand and hope it all goes away!” Understanding cryptocurrencies may be difficult for newbies but that has not eliminated the world of opinions being expressed by famous and infamous voices alike. On the one hand, the world is being brought to an end with digital currencies and we will all return to the stone age while others tell us this is the dawning of a new age. Yes, I have my opinion but that is not the point of this session. We are here to understand this world and let you form YOUR own opinion.
We promised a shallow dive into this world and consequently; we leave a lot of the more detailed information for further research. We will include several links for those of you who are interested in more information. According to Investopedia, these are the keys to understanding cryptocurrencies:
“KEY TAKEAWAYS
A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies.
Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.
Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.”
What does that mean in plain language? Let’s use Bitcoin as the leading cryptocurrency for explanation purposes. In an excellent article in MoneyWeek, March 1, 2021 Dominic Frisby wrote, “Bitcoin is a new system of money designed for the internet. Let’s shorten that to: bitcoin is money for the internet. The internet is, essentially, a borderless medium. I’m in the UK. I can communicate with someone in the US, Australia, South America, Asia or Africa as instantly as though they were in my own country. I can send them messages, photos, videos, any kind of content, and they receive it instantly. Yet, until bitcoin, I couldn’t send them money with the same ease. I would have to go through Paypal, or a bank or a credit card company. There would be foreign exchange costs, money transfer costs, regulatory processes.
With bitcoin I can send money across the net, direct from person A to person B, just as I send messages. It might be tiny sums, but it could also be billions. (For example, only recently, I saw that somebody had transferred 14,892 bitcoins. That’s over half a billion dollars in value. I know that that value was transacted – the transaction was broadcast on the blockchain. But I have no idea who sent the money, or to which location it was sent. I rather suspect it was Elon Musk – but who knows? I also know that the cost of the transfer was a few dollars, and that the transfer was almost instantaneous).”
Another point that is important to understand about digital currencies and Bitcoin in particular is that there is a finite number of Bitcoins available, which is why we see the value fluctuating so much. With conventional currencies, there is no finite number. Central banks and governments simply crank up the printing presses and increase the number of dollars, euros, etc. with no restraints or controls. We have seen this happen during the pandemic as countries around the world tried to prop up businesses and individuals by simply passing out more money to help them survive. While it may not be polite to ask, you might wonder where the money came from?
Let’s look at this in everyday terms. Suppose you have 10 apples and there are no other apples in the entire world. The value of your apples is determined by the demand of the market. In other words, the more people who want to have an apple, the higher the value of the 10 apples you hold. Now suppose that someone else comes along and they have also got 10 apples. What happens to the value of your 10 apples now that there are twice as many? It would make sense that the value of your apples will drop in half. In simplistic terms, the same happens with money. If you double the money supply (the number of dollars in existence), what is the real value of the money you currently hold?
Simply put, crypto, or digital currencies, are an alternative to existing currencies, like dollars and euros. The biggest difference is that governments or central banks do not control digital currencies and for those institutions, this represents an enormous challenge and risk to their control over our financial lives.
Many articles and opinion pieces talk much about the technology that creates digital currency and we will look at that in the next section. We will also look at some investing possibilities if you are interested in how you can take part in this new world. In the meantime, I encourage you to take a look at the links provided above to become more familiar with something that does not seem to go away – no matter how much some people wish it would.
