What Are Cryptocurrencies And What Can They Do For You?
By Maura C. Schauss, CFP®
Since bitcoin was launched in 2009, cryptocurrencies have gone from being a relatively obscure and niche area of finance to more mainstream. In 2017, this new form of currency started trading at nearly $20,000 before plummeting to nearly a fraction of that price a few months later.
Investing in cryptocurrencies carries inherent risk, and that’s probably why we, at Washington Wealth Advisors, have received a lot of questions about them. We want to ensure you have a firm grasp of the cryptocurrency market before deciding whether investing in cryptocurrency is the right move for your portfolio.
Cryptocurrencies are digital assets that are stored in a computerized database ledger that uses strong cryptography to secure transaction records. Cryptocurrencies, such as bitcoin, use a collection of computers that run the cryptocurrency code and store transactions in blockchains.
Unlike typical currencies, such as the U.S. dollar or the British pound, cryptocurrencies are not backed by any country or centralized bank and are under decentralized control. They are also designed to be free from government manipulation and control, and in general remain entirely digital, and therefore intangible.
Bitcoin was the first decentralized cryptocurrency to be released in 2009, and it was relatively unknown and obscure until the currency attracted speculative investors and appreciated rapidly in May 2011 and November 2013. In 2017, it shot up to nearly $20,000 per coin but was trading for less than half that a year later.
In the 12 years since bitcoin was released, thousands of cryptocurrencies followed suit to varying degrees of success. So, what other cryptocurrencies should you be aware of? While we can’t offer you a comprehensive list here, we want you to be aware of some of the more popular cryptocurrencies, such as ether and litecoin.
Ether was launched in 2015 and is the second largest digital currency by market cap after bitcoin. Ethereum is ether’s decentralized software platform that allows users to create a suite of financial products that anyone can access. As of January 2021, ether had a market cap of $160 billion and $1,400 per-token value.
Litecoin was launched in 2011 by Charlie Lee, an MIT graduate and former Google engineer. Litecoin is very similar to bitcoin but boasts faster block generation rate and offers faster confirmation time. Like bitcoin, there are more and more merchants who are accepting litecoin as a form of payment. As of January 2021, litecoin had a market cap of $8.724 billion and a value of $134.20 per coin.
The interesting thing about this investment is that instead of acting as a medium of exchange, investors began to purchase bitcoin and other cryptocurrencies for their investment value. But what value does cryptocurrency actually hold, and is it a sound investment?
As it lacks guaranteed value, purchasing bitcoin or any other cryptocurrency carries inherent risks. Several investment alerts have been issued by American regulators, including the SEC and FINRA, among others. And it is still a new investment with a very short and rather volatile history that does very little to ensure stability.
However, it is growing in popularity and becoming more and more mainstream every day. If there is room in your portfolio for more high-risk, high-reward investments, cryptocurrencies may be the right choice for you.
How To Invest
Investors can purchase cryptocurrencies on exchanges like Coinbase, Kraken, Gemini, and Binance U.S., all of which offer a growing number of cryptocurrencies. Cryptocurrencies, like Bitcoin, can also be purchased through capital markets using Greyscale’s Bitcoin Investment Trust. And there are ETFs available that are made up of Bitcoin related companies. As always, remember to be extra secure in setting up your account: choose complicated passwords and opt for two-factor authentication.
If you are wondering if this investment makes sense for your financial plan, we at Washington Wealth Advisors can help. Call our office at 703.584.2700, email firstname.lastname@example.org, or you can also schedule a meeting with us.
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