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Cryptocurrency, Blockchain and Bitcoin: We Answer 6 FAQs about Crypto

Cryptocurrency, Blockchain and Bitcoin: We Answer 6 FAQs about Crypto

May 12, 2021

What is Cryptocurrency?

Cryptocurrencies have been described as a decentralized, peer-to-peer digital currency that is used like money: it can be exchanged for traditional currencies like the U.S. dollar or used to purchase goods and services. According to the U.S. Federal Trade Commission, cryptocurrency is a type of digital currency that generally only exists electronically.1 You can think of it like digital cash that is encrypted. However, unlike the U.S. Dollar or the Euro, there is no central authority that manages and maintains the value of a cryptocurrency. 

Because “Bitcoin” is nothing more than digits in a computer program, it has absolutely no intrinsic value. What determines the price is only what another person is willing to pay for it. The Wall Street Journal states that "the most concrete definition of Bitcoin is this: It is software, a program designed to allow people to exchange value directly with each other."2

Why is There a Sudden Popularity in Cryptocurrencies?

Cryptocurrencies continue to garner attention in the media for many reasons, including 1) their unique features that are enabled by technology, 2) their perceived possibility to be the "next big thing" and 3) increasing dissatisfaction among certain investors against inflationary pressures fueled by the actions of governments and central banks. The most well known cryptocurrencies are Bitcoin, Ethereum, Litecoin and Bitcoin Cash. Cryptocurrencies are making headlines for their volatility and because of celebrities and influencers like Tesla's CEO, Elon Musk, who recently invested $1.5 Billion in Bitcoin.

What is a "Blockchain?"

Perhaps the main technological leap proposed by cryptocurrency advocates is the use of "blockchain" technology which is a specific type of database that enables cryptocurrency users to transact securely. Blockchain has been proven to be a promising technology that may transform a variety of industries, including banking and finance. Around-the-clock and around-the-world availability, negligible transaction costs, and absolute privacy (especially from the government) are just a few of the reasons why investors are embracing cryptocurrencies and blockchain technology to potentially disrupt the global currency market. 

Is a Cryptocurrency an Investment or Money?

What may be confusing to some is that cryptocurrency can be an asset while others use it as digital cash. You can use crypto to buy regular goods and services; although many people invest in cryptocurrencies as they would in other assets like stocks or precious metals. The investing app Robinhood started offering the ability to buy several of the top cryptocurrencies, including Bitcoin, Ethereum and Dogecoin, without the fees of many of the major exchanges.3 While cryptocurrencies haven't yet become mainstream, some larger retailers like Etsy and Overstock.com are starting to accept cryptocurrencies like Bitcoin.

What are the Dangers of Cryptocurrencies?

Investing in or using cryptocurrencies carries substantial and numerous risks. Cryptocurrencies are not considered legal tender and there are no laws that require companies or individuals to accept them as a form of payment (unlike with many standard forms of government issued currency.) The exchange rates for cryptocurrencies like Bitcoin have been extremely volatile and subject to wild price swings.

Think of it like this: Coca-Cola is a tangible product with a massive following. If the market crashes tomorrow or a war breaks out, people are still going to buy a Coke. For the foreseeable future, Coca-Cola stock will essentially never become valueless. With Cryptocurrency, the price is based only on what other people are going to pay for it. This means that cryptocurrencies can become completely worthless at any point in time if no one accepts them.

 

The online exchanges where cryptocurrencies are traded are a further source of risk. Such exchanges can fail or be hacked and consumers would lose access to trading and/or the use of the cryptocurrency. Because they are not backed by any government or bank, cryptocurrencies do not enjoy the protections and guarantees afforded by national currencies. When cryptocurrency exchanges are hacked, their systems fail or transactions are completed by mistake, there is no recourse for the consumer to recover the funds. 

Is Bitcoin a Good Investment? 

Bitcoin is extremely volatile. In the last year, Bitcoin lost 26% of its value within a 2 week time period. On 04/14, the cryptocurrency reached a record historical price of $ 64,339 per unit. Then, on Sunday, 04/25, it plummeted to $ 47,777 per unit, according to data from CoinMarketCap.Certain types of high-stakes, risk-seeking investors like it because they are eager for the potential of a big payoff. However due to its volatility, investing in cryptocurrency is like gambling. You might as well go to Vegas and bet on black or red in roulette.

There are a number of considerations you should weigh when deciding whether to invest. Chief among them is what your financial goals are. We believe long-term investing is always best and would not recommend making a volatile short-term investment for quick cash. 

A word to the wise: Don’t let a fun hobby get in the way of the serious work involved with your financial strategy. However, as with any aspect of your financial life, we welcome you to talk with us about any items you may be curious about.

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1. FTC.gov, https://www.consumer.ftc.gov/articles/what-know-about-cryptocurrency-and-scams, April 2021

2. Wall Street Journal, https://www.wsj.com/articles/bitcoin-what-to-know-before-investing-11613498045, February 2021

3. Forbes, https://www.forbes.com/advisor/investing/what-is-cryptocurrency/, December 2020

4. Yahoo Finance, https://finance.yahoo.com/news/15-biggest-companies-accept-bitcoin-165115491.html, February 2021

5. Entreprenuer.com, https://www.entrepreneur.com/article/370418?fbclid=IwAR130usVWsqWPEd3VHewyLFg1YKw2xyxp_2VIm6un_S889pBXM_cZ5DaopQ, April 2021

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.