Crypto… What is it?

Cryptocurrency is often brought up in the media and around the dinner table with family, but the fact is that many do not understand what this technology is.

"Crypto" short for Cryptocurrency is a digital currency designed to act as a decentralized and encrypted median of exchange.

Decentralized: It's not controlled by banks or governments which makes it decentralized as there is no central authority.

Encrypted: Crypto uses cryptography to maintain it's security using mathematical techniques that conceal information and encrypt the data.

Most people are familiar with the name "Bitcoin".  Bitcoin was one of the first cryptocurrencies introduced in 2008 and is currently the largest cryptocurrency by market capitalization valued at $1.2 Trillion USD which is twice as large as companies like Walmart, Visa, Mastercard and Costco to name a few.

There are currently over 10,000 different cryptocurrencies in circulation.

Crypto can be used to buy goods and services.  The first and most famous cryptocurrency purchase was in 2010 where Laszlo Hanyecz a computer programmer paid 10,000 Bitcoin for two pizza's.  At that time the Bitcoin were only worth $25 USD vs. today where that 10,000 Bitcoin would now worth $608 million USD.

Myth's about crypto:

1. Crypto is mainly used for illicit purposes

According to a study conducted in 2023 by Chainalysis, the number of illicit activities conducted with crypto was .34% of all transactions on the blockchain.  According to the UN, it's estimated that between 2-5% of global GDP is connected with illicit activities.  This shows that the risk of unlawful activities is much more common with fiat currencies rather than cryptocurrencies.

2. Crypto has no real value

Crypto might not be backed by any physical assets such as gold, but neither is the US or Canadian dollar.  It used to be that our Canadian and US dollar were backed by a fixed quantity of gold, but this ceased to exist in 1929 for Canada and 1971 for the US.  Now governments can continue to print money are their own discretion.  The US for example plans to print up to 204.4 Billion dollars in 2024 which further dilutes the currency and it's purchasing power. 

Bitcoin is coded to have a finite supply of 21 million coins making it scarce.  There will never be more than 21 million coins as the supply is fixed.

3. Crypto is bad for the environment

Environmental impact largely depends on the source of the energy being used for the crypto mining activities.  Some activities take place using sustainable energy sources such as wind, solar and hydropower while others use fossil-fuel.  Crypto energy consumption is only estimated to be between .4% to .9% of total annual global electricity usage. 

If you're considering an exposure to Crypto assets there are various mutual funds and exchange traded funds (ETF's) available.

It's important to establish your investment goals and risk tolerance with your advisor prior to investing in Cryptocurrencies. 

Example) If you're looking to purchase a house in 1 years time, I would recommend cash-like investments with no volatility.  You don't want to risk your portfolio being 30% less than what it was worth when you need to take out the funds.

John your uncle who is fully invested into crypto might have a high tolerance for risk.  Everyone situation and life stage is different. 

One golden rule in crypto is not to invest anything you aren’t willing to lose.  Crypto is still a new technology and could just as easily go to zero as it could double in value.

With speculative assets such as Crypto, I wouldn't recommend holding a position of anything more than 1-3% just like you would with any other speculative asset.  Don't put all of your eggs in one basket.

If you're looking for a financial advisor I'd love to work with you and help you meet your goals.  I'm always open to chatting and you can book a call with me by clicking the link below.

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Scott Kok, PFP®