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Cryptocurrency Explained

This piece is for those who are inquisitive about how cryptocurrency works and if it is a suitable investment for their financial goals.  

This new investment class has already shifted the traditional practices of financial institutions and even governments globally.  

To give you an understanding of how cryptocurrency could work for you, we go over some specific components of the technology, which is called blockchain, and then give some understanding of what cryptocurrency is.  

What is blockchain?  

Blockchain is a new technological innovation that holds great potential for how businesses and individuals operate in the future.  

It is the technology that cryptocurrency is stored on but is yet to be harnessed to its full potential, as it is so new.   

“What the internet did for communications, I think Blockchain will do for trusted transactions.” – IBM CEO Ginni Rometty

Blockchain technology automates transactions and record keeping processes to create a public ledger that is instantly available to everyone and is done in a decentralised way geared towards disrupting financial intermediaries.  

It can timestamp and notarise, reduces possibility of fraud and third-party interface.  

Bitcoin and other cryptocurrencies were the first adopters of the technology because of its ability.  

There are also blockchain tokens which are a digital security tag that is issued off a real tradable asset.  

What is cryptocurrency?  

Cryptocurrency is a digital asset that is designed to store the asset value and is a medium of exchange that uses the technology to secure and verify all transactions.  

Some people compare certain cryptocurrency like bitcoin to digital gold, because like gold it is finite and therefore grows and falls in value, with movements in supply and demand.   

Being a currency, crypto is tradable and is becoming increasingly more accepted as a means of payment. There are lots of places now accepting bitcoin as a payment method for example, with a high profile example being Tesla.   

All cryptocurrencies and tokens are stored in digital wallets that pairs two uniquely generated linked keys that gives you access to your digital assets.  

There are two keys that make up your wallet. One private wallet and one public, which will secure and facilitate all cryptocurrency transactions. 

Then there are utility tokens, which work in a similar way to cryptocurrency, but is usually created to perform a specific function related to a blockchain project and gains value from the growth of the underlying project leading to increased demand for the token.  

Types of Crypto  

Some of the most well-known cryptocurrencies that you may have heard about include Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP).  

These also help explain the difference between cryptocurrencies and utility tokens, which often get lumped together as one.  

Bitcoin was the first of the cryptocurrencies and is currently the most valuable. 

 

Bitcoin has continued to dominate the cryptocurrency sector in its market cap, media attention and liquidity for transferring between other cryptocurrencies.  

Bitcoin’s supply is contained to 21 million units and the remaining units will only be released through an expensive and complex system called “mining” which ensures the security of the network.  

Ethereum and Ripple are considered as utility cryptos.  

Ethereum is an open-source computing platform and operating system that features “smart contract” functions.  

cryptocurrency explained

 “Smart contracts” automatically perform certain transactions under conditions you have set.  

For example, a user could send money to someone else in a week’s time, but only if a company’s share price goes above a certain level that you have decided on.  

Ripple works to revolutionise the 40-year-old banking system by playing a pivotal role in providing liquidity to accommodate foreign exchange transactions.  

 Advantages of Crypto  

Blockchain technology has been created for a global decentralised financial system.  

The technology allows for settlement efficiency by removing traditional business dealings, brokers, agents, and legal representatives and in turn lowers fees for users.  

The nature of the system also provides greater security and privacy protection with secure cryptography technology that makes transactions as discreet as cash if users do not publicly share their identity.  

There is also no counterparty risk with cryptocurrency either, because as users own the public and private key that creates their wallet, this protects their assets in the event of economic instability outside of the financial system.  

Where to from here 

If you think that crypto is just a passing fad, El Salvador is the first country to adopt bitcoin as its national currency.  

It is reported that some citizens from countries like Afghanistan that have lost faith in their government and the financial system are starting to invest in crypto as an alternative to holding cash in their own countries banking system. 

Furthermore, banks the world over are looking to the technology and considering how it can be applied in their framework, including central banks.  

At this very early stage for crypto currency and given the unregulated nature of it currently, it is very likely to change rapidly and evolve in its use.  

With change will come risk and opportunity, but one thing appears clear and that is that blockchain technology is here to stay.  

Yield Financial Planning is Here To Help

We hope this provided you with some clarity in relation to how cryptocurrency operates. If you have any queries or require assistance with any of the topics above, please feel free to get in touch with one of our financial advisors.

This blog was provided by Ainslie Wealth.
Important Note
Any information provided here is general advice only and does not consider your objectives, financial situation or needs. This information should not be taken as comprehensive and does not constitute legal or financial advice. You should seek legal, financial or other professional advice before relying on any content. Yield Financial Planning is not responsible to you or anyone else for any loss suffered in connection with the use of this information. Information is only current at the date initially published.

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