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Tag: Cryptocurrency

Insights from a 13-Hour Training Course on Cryptocurrency, Part 2 – Should You Invest?

Written by support@seostats.com on . Posted in Digital Assets, Investing.

After reading our first article regarding cryptocurrency, you probably want to know if I think of this class of investment options: Thumbs up or thumbs down?

Sorry. There’s no easy answer. I’ll explain.

 

Our First Questions: What Do We Know and What Do We Need to Know?

At Lake Road Advisors, we begin our decisions on any investment by determining a) what we already know about it and b) what do we need to know. With cryptocurrencies, I can tell you that most likely you’re already invested in at least some of the underlying fundamentals of cryptocurrency. Large stocks that are in many mutual funds – names like Anheuser- Busch, Apple, Toyota and Walmart – are leveraging blockchain technology to improve their supply chains and internal operations. More than 90 percent of publicly traded banks are investing and testing blockchain to create efficiencies in their back-office operations.

Clearly, there’s a recognition by the leaders of these large corporations that the technical advantages provided by this relatively new way of using networked computing power shouldn’t be ignored.

 

The Next Questions: What are the Risks and the Rewards?

The next question: What are the risks and rewards of digital currencies? If you look backward, you can see how appealing it would have been to get in on the ground floor. On July 17, 2010, in Bitcoins early days of trading, you could have bought one coin for 5 cents. In the past several months, a single Bitcoin has traded between $30,000 and $49,000. In short, a $10,000 in Bitcoin when it was first available now would be worth more than $6 billion on the low side. Stunning, right?

But hold on. As the well-known warning goes, “Past performance is not indicative of future results.” Here’s another past performance to consider: In its 11 years on the market, Bitcoin has had six bear markets of drops more than 70 percent. A $100,000 purchase of Bitcoin in December 2017 would be worth about $16,000 the following December because the price plummeted 84 percent in that time period.

In short, Bitcoin – the largest and most prominent of all the digital currencies – is extremely volatile. The others tend to be even more so.

Still, there’s another reason for investing in cryptocurrencies besides the extreme rewards, and that is their lack of correlation with the rest of the market. A balanced portfolio is designed to avoid heading all in one direction or another. Bitcoin and the rest don’t tend to go south – or north – along with other investments. They go their own way, so in that sense they add diversity to your holdings.

 

Should You or Shouldn’t You Invest in Digital Currencies?

If what you’ve read so hasn’t scared you away yet (and it would be perfectly understandable if it did), the first consideration would be how this investment would get you closer to your goals. Investing in the digital currency market is one of many options for each goal – buying a new house, sending kids to college, retiring – and has to be compared to alternatives for each scenario.

The second consideration is your risk tolerance. If you’re inclined to follow stocks daily and become anxious when the market declines, you probably don’t want to invest in this group of assets because of their extreme volatility.

The third consideration is risk capacity – that is, regardless of your feeling, can you take on the risk, given your financial capacity? For example, Harvard, Yale and Stanford all have endowments that are investing in digital assets. But these endowments hold billions – Harvard alone has nearly $41 billion, at last report, and also have an infinite time horizon to invest. They can set aside large amounts for cryptocurrencies because they have the risk capacity to handle losses and volatility. Most individual investors have specific time horizons for their goals and potentially taking a large, sudden loss will almost certainly take them off track.

Here’s the short answer to the question raised in the beginning of this article: Only invest what you can afford to lose completely without causing you undue worry or derailing your overall financial plan. We’ll be happy to discuss this issue and how it affects you personally and answer any further questions you have by scheduling a call, using the link below.

Insights from a 13-Hour Training Course on Cryptocurrency, Part 1 – Terms and Background

Written by support@seostats.com on . Posted in Digital Assets, Investing.

In 2017, I wrote about cryptocurrency – the digital rival to our traditional financial instruments – and for the longest time I avoided a deep dive into the topic because it felt like a fad. Four years later, cryptocurrency – Bitcoin, blockchains, digital assets and the rest – are still around. How big a role they all will play in our economy going forward remains to be seen, but I’m convinced they’re all here to stay.

As your advisor, it’s my job to provide insights on a wide array of topics and investments. I don’t need to be the expert in each area, but I do need to know enough to assist you with financial decisions. With that goal in mind, I recently obtained my Certificate in Blockchain and Digital Assets® by taking a 13-hour course given by the Digital Asset Council of Financial Professionals (DACFP). I’ll summarize what I learned in this article and a follow-up one. This first piece introduces some of the rationale for this digital form of currency and the key terminology. The second piece will examine the pros and cons of investing in cryptocurrency and how to decide if it’s right for you.

 

The Shortcomings of Traditional Monetary Exchanges

Digital currency’s initial supporters saw several shortcomings in how financial transactions are typically handled. They allow for fraud (think of a stolen credit card), can take days (a check being credited to an account) and can be costly (international transfers of sizeable amounts). The supporters realized that new technology could address these issues with a method that would be more transparent. This leads us to the first term to understand.

While most transactions require validation from financial or legal authorities, these digital transactions were verified by a series of computers across the world – thousands of them. For efficiency’s sake, all of these transactions are compiled in a block – to be verified at the same time. The information to be verified is stored in a huge database, and the trick is for one of these computers to verify the transaction before any of the others.

That is done by figuring out a complex equation that serves as the code for viewing the block of transactions. Once solved, this solution is required for the next round of transaction verification – in other words, it becomes a chain of blocks, or a blockchain.

The first and most common reward for the owner of the computer first solving the equation code has been to earn a Bitcoin. Bitcoin itself was introduced in 2008, with a promise that only a limited number of bitcoins would ever be created. These coins are created themselves through complex mathematics, requiring intensive computer power – a process called Bitcoin mining. To sustain its long-term value, Bitcoin’s creators are limiting the total number of Bitcoins in circulation to 21 million. To date, roughly 18.5 million have been produced.

One of the main advantages of the blockchain/bitcoin system are that there’s a certain amount of transparency as well as decentralization. In addition, Bitcoin can in certain circumstances demonstrate tremendous speed and cost savings advantages. An international exchange of more than $1 billion worth bitcoins in April 2020 took place. If done by traditional methods, transferring $1 billion it would have taken 1 to 2 days to settle and a fee of 1 to 8 percent ($10 million to $80 million). The Bitcoin version took place in 10 minutes for a cost of 68 cents!

 

The Confusing Array of Cryptocurrencies

With an example such as that, you may not be shocked to learn that Bitcoin’s annual volume is roughly the same as PayPal’s – with no employees and no cases of fraud. But Bitcoin is successful in part because it’s extremely limited in its functionality – send, receive or hold. That makes it more impervious to hackers, but also unsuitable for small, daily transactions. Other currencies, such as Ethereum and XRP (the No. 2 and No. 3 currencies respectively in terms of market capitalization), have been created to allow a greater range of transactions and at much faster speeds.

But that’s just the beginning. There are now more than 10,000 cryptocurrencies. A company can issue its own cryptocurrency, good only for products or services it sells – essentially tokens, like poker chips in a casino. There are various cryptocurrency funds, but with the proliferation has come confusion. Coming by solid information about all these options is hard to come by – an ironic result of a movement intended to create transparency.

What’s more, there’s now an expansion of what’s considered a “digital asset” to “any digital material owned by an enterprise or individual including text, graphics, audio, video and animations.” How exactly a market for such assets is created has yet to be determined.

So I’ll leave you on that note for now, because I think it points out the challenges of deciding on investing in digital assets of one form or another. Bitcoin has established the base for a new way of structuring financial systems, but the pillars of this new financial alternative seem, shall we say, unsteady at best. In the next installment, we’ll look at why cryptocurrency can be attractive and frightening at the same time as an addition to your portfolio.

 

Investing in Cryptocurrency – Know the Risks

Written by support@seostats.com on . Posted in Investing.

I have seen plenty of articles, blogs, and news stories recently on cryptocurrency, cryptocurrency mining, and the Bitcoin fork. I even have a personal friend who has hopped on the cryptocurrency bandwagon, if you will, and realized many more investors may be considering cryptocurrency for their own portfolios.

From what you may read and hear, cryptocurrency seems to have some potential. But is it the new currency that can eventually replace or co-exist alongside existing currencies? Or is it a designer currency destined to fail like a passing fad?

I can’t see into the future to predict the longevity and success of cryptocurrency (no one can); however, there are several points to consider before investing in it. Here’s what you should know.

 

Crash Course in Cryptocurrency

Cryptocurrencies are digital currencies that are, for the most part, decentralized, unregulated, and not subject to any government control. In a way, they work like any fiat currency (What is a fiat currency?), as you can exchange dollars for Bitcoin or Bitcoin for pounds sterling or yen.

The biggest difference between cryptocurrency and traditional currencies is that there is no physical representation of the former. A single Bitcoin, the most common and successful cryptocurrency, doesn’t exist in the same way that a single dollar bill or a single Euro does. You can’t pull it from an ATM or withdraw it from a bank and have a physical coin in your pocket. Instead, it only exists in a digital space.

This means that using digital currencies to purchase goods and services can be problematic. Bitcoin, the biggest and most well-respected cryptocoin, is used almost exclusively as currency on only a few e-commerce websites. Using Bitcoin in the real world usually requires exchanging it for fiat currency.

 

Cryptocurrency Investment Opportunities

While cryptocoins are digital currencies, many investors have seen opportunities in using it as a speculative investment for the future. As the relative value of a digital coin fluctuates naturally over time, much in the same way a fiat currency does, there is the potential for a return both in the short and long term.

There are a few ways to trade digital currencies; however, the most straightforward way is to purchase a quantity of cryptocurrency using a fiat currency like USD, with the hope it will increase in value. You can then and then sell the cryptocurrency back into USD or other fiat currency. There are only a handful of online digital currency exchanges that let you do this, and many of these exchanges also offer digital “wallets” that will allow you to store your cryptocoins securely.

 

The Risk of Investing in Cryptocurrency

Be warned, this is a hugely speculative investment. There are a host of cryptocoin vulnerabilities that you need to be aware of. Hackers have gained unauthorized access to digital wallets and cryptocurrency exchanges. As recently as 2016, more than $50 million in Ether was stolen from investors in a fund known as the DAO.

Additionally, cryptocurrency market prices are often highly volatile. The DAO hack previously mentioned caused the price of the cryptocurrency Ethereum to tumble, leading to a violent market correction. Such events can be notoriously hard to predict and following the pulse of the digital currency community can be a daunting task to any investor.

 

The Bottom Line

Trading and investing in cryptocurrency may have the potential for a big payday, but I can tell you from experience when you see such volatility, press coverage, and your neighbors start giving you advice on when to buy and sell, it’s probably a good idea to pump the breaks.

Crypto investing and trading is a very new market. It requires specialized knowledge that may be inscrutable to the uninitiated. Rampant growth has led to volatility, and while it may seem attractive to invest in digital currencies, this brand new field does have some instability to consider before investing. As with any new investment, be sure the weigh the risk versus reward so you can make the right choice for your situation.