Investing in cryptocurrency has been a hot button issue since it was first noticed by the investment world. Since then, we’ve seen the price of cryptocurrencies experience massive volatility, the rise of altcoins, asset-backed cryptos, the rise of crypto ETFs and futures, and a continued focus on crypto regulations.
The majority of recognized financial institutions have yet to create investable crypto products, and it’s easy to see why. It’s a new asset class that’s heavily based on speculation.
And yet, some risk-averse and speculative investors have achieved significant gains when volatility works in their favor, especially for those taking on the risk of newer cryptocurrencies.
Is it time for investors and major financial institutions to consider investing in cryptocurrencies?
Today, we’re going to explore the wild world of cryptocurrency, providing you with a deep dive into the basics, benefits, risks, regulatory environment, and more — so you can make an informed decision when it comes to investing in the crypto markets.
What is Cryptocurrency?
The answer to this depends on who you ask. Everyone has their own biases, hopes, and critiques when it comes to cryptocurrencies.
So, what is a cryptocurrency really? At its most basic level, cryptocurrency is digital cash used to facilitate trustless transactions on a decentralized distributed ledger.
Still following? Let’s start with Bitcoin, the original cryptocurrency.
Bitcoin, the first cryptocurrency that launched the asset class, had a specific vision of creating a new way to handle financial transactions that was strictly peer-to-peer and did not require users to trust a centralized authority, such as a bank or government.
Cryptocurrency has evolved way beyond Bitcoin, with each new blockchain having a new vision and method of execution.
Currently, there are 17,337 cryptocurrencies per CoinMarketCap, which is largely why the entire asset class has a bad reputation. Today, anyone can create a cryptocurrency, and many of them are blatant attempts to get rich.
Yet, should this discredit legitimate cryptocurrencies like Bitcoin or Ethereum? And are any of these cryptocurrencies worth exploring? But more importantly, should you invest in the underlying blockchain technology?
A Few Cryptocurrency Terms to Know
Before we proceed, let’s cover some terms everyone earnestly investigating cryptocurrency should know:
- Blockchain: The underlying technology behind cryptocurrency. A blockchain is a distributed ledger that records every single transaction in full public view (with the exception of specialized “privacy coins”). Blockchains are immutable due to being validated by the entire network of miners.
- Cryptocurrency: The coin or token built with blockchain technology. Cryptocurrencies are specifically used for financial transactions.
- Coin: A general term for the native coin of a blockchain, such as Bitcoin or Ethereum.
- Token: A secondary “coin” built on top of a blockchain, such as USDT (a token built on Ethereum that is pegged to the United States Dollar).
- Initial Coin Offering (ICO): The first opportunity for the general public (or a select few) to purchase a new coin or token. ICOs are the crypto version of an IPO. Plenty of issues have arisen with ICOs and some countries have begun regulating ICOs to protect the public.
- Smart Contracts: We won’t be discussing smart contracts in this article, but you need to know about them. Smart contracts are scripts deployed on a blockchain that cannot be changed and automatically execute based on predetermined conditions. Smart contracts were introduced by Ethereum and power most of the newer applications of blockchain technology, such as “play-to-earn” gaming (games that use blockchain technology) and NFT minting (the creation of new NFTs). Smart contracts also power Decentralized Finance (DeFi) which we will not be covering here.
- Mining: One of the most confusing things about blockchain and cryptocurrency is the concept of mining. There are two methods of mining: proof-of-work (Bitcoin) and proof-of-stake (Cardano). Proof-of-work is the mining method that consumes a massive amount of electricity and has raised serious environmental concerns. Both methods are aimed at validating and recording transactions on the blockchain.
Yes, there’s a lot to learn about blockchain and cryptocurrency, but considering it’s an entirely new asset class, it’s sensible that there would be new terms to know.
Are Cryptocurrency and Blockchain the Same Thing?
Cryptocurrency is a specific application of blockchain technology. Blockchain technology can be used for plenty of theorized applications, such as managing supply-chains, creating asset-backed tokens, or even managing distributed computing power.
Currently, most blockchain applications only exist in theory or in niche applications that haven’t been widely adopted. Gambling and gaming are the two main applications of blockchain technology beyond cryptocurrency.
However, large financial institutions have already started heavily investing into blockchain technology. For example, Citibank has invested $279 million across 14 investments, UBS $266 million across 5 investments, Morgan Stanley $234 million across 3 investments, and JP Morgan Chase $206 million across 8 investments — to name a few.
Revelio Labs revealed that the largest banks have added “over 1,000 new cryptocurrency-related roles” since 2018. This alone shows that large financial institutions understand the long-term potential of blockchain technology.
What Is a Cryptocurrency Wallet?
One of the early promises of Bitcoin that captivated early users was that you could “be your own bank” by having your own wallet. Due to the very nature of blockchain technology, nobody can reach into your wallet to garnish wages, reverse transactions, or help you regain access to a lost wallet.
That last point is why other people scoffed at Bitcoin. If you lose the wallet’s mnemonic recovery phrase (traditionally 12 words that restore the wallet), you lose your crypto. At the same time, if you poorly store your keyphrase, anyone else can recover your wallet and steal your coins. Some people loved this, while others saw this as a pretty major downside.
Wallets that meet the above description are now known as non-custodial wallets. Electrum, for example, is a non-custodial Bitcoin wallet focused on security and pseudo-anonymity above all else.
Fortunately, custodial wallets now exist for those of us who don’t want to “be our own bank” and have the risk of losing our funds if 12 words are lost. Coinbase is perhaps the most popular custodial wallet. You can recover a custodial wallet similarly to any other online account, much like if you forgot your bank password.
There are other types of wallets, such “hot” and “cold” wallets, but those only come into play if you decide to significantly invest in crypto.
How Do I Buy Cryptocurrency?
There are countless services out there that allow you to buy cryptocurrency. If you have CAD or USD and wish to buy cryptocurrency, Coinbase or Gemini are both great options that make use of debit cards and bank accounts. Additionally, these services track every transaction so that you are fully tax-compliant when the time comes (we’ll discuss taxes more later on).
Other options exist for people who want to use credit cards, such as Crypto.com and most major exchanges like Binance. You can even use cash to buy crypto via specialized ATMs or by meeting up with peers, if you’re willing to take on that risk.
The options available to you will depend on regulations specific to your country. For example, people in the United States are locked out of many exchanges and peer-to-peer cash-based options. You’ll need to explore options specifically allowed by your country.
Who Controls Cryptocurrency?
Some people would say “nobody,” but that is not entirely accurate. Cryptocurrency and blockchain technology is computer software that is controlled by a team of developers.
Even Bitcoin, which was abandoned by its creator, is still managed by a team of developers.
Nobody controls most cryptos in the same way that the Federal Reserve controls the US Dollar, but a team of developers is in charge of almost every cryptocurrency.
Crypto developers have an extreme amount of power over future decisions, even though some have started using decentralized autonomous organizations (DAOs) to help guide decisions. DAOs represent an early form of governance, risk, and compliance.
For example, Ethereum is currently being moved to a proof-of-stake model, destroying countless mining operations that were built around the proof-of-work model.
What Impacts the Price of Cryptocurrency?
The price of most cryptos is strictly impacted by speculation, buzz, headlines, and celebrity influence. Few cryptocurrencies have real-world usage to support their price, cryptocurrency proponents simply believe that someday crypto will be in widespread usage.
There are even terms within the cryptocurrency community to describe the different ways people impact the price of cryptocurrency:
- Fear, Uncertainty, Doubt (FUD): FUD can be as innocent as someone posting baseless concerns on social media, or it can be a comprehensive and targeted campaign to destroy a blockchain or cryptocurrency. A recent example is the value of a blockchain game’s token being decimated by a campaign that cast doubt on how many tokens were set aside for developers.
- Fear of Missing Out (FOMO): This is almost the opposite of FUD, where a coin, token, or project is praised and users are confidently saying the price is about to skyrocket. FOMO causes people to buy tokens or coins they probably would have otherwise overlooked. Elon Musk’s support of Dogecoin can be considered FOMO since there’s no tangible reason why Dogecoin is anything unique (it’s actually a slightly modified copy of Bitcoin’s code).
- Pump-n-Dump (PND): This is the most insidious and direct way that people impact the price of a targeted crypto. “Whales” (rich crypto uses) or specific communities will collude to buy up a given crypto and cause the price to spike, resulting in unaware investors and users to notice the spike and want to earn a profit on the way up. At a given point, those involved will quickly sell off their tokens, gaining a massive profit while unaware investors take a loss. Both FUD and FOMO are common tools in pump-n-dump schemes.
The current market capitalization for all cryptocurrency is US$1.8 trillion, making it more susceptible to intentional manipulation than other asset classes, especially when considering it’s a global market with relatively minimal regulations.
For comparison, the entire world of cryptocurrency has a market cap that’s slightly higher than Amazon and less than Saudi Arabian Oil Co.
Non-malicious factors also influence the price of cryptocurrency, such as major news coverage, new government regulations, or the launch of a new cryptocurrency ETF.
Is There an Exchange-Traded Fund for Cryptocurrency?
Multiple cryptocurrency ETFs exist to cater to more traditional investors who want to realize the gains of cryptocurrency without the hassle of wallets and cryptocurrency exchanges. Be warned that these ETFs typically have high management fees and specific thresholds for investments.
The BITO ETF made history last year by becoming the first cryptocurrency ETF that was cleared by the SEC to trade on US exchanges. This approval was one step towards legitimizing cryptocurrencies in many people’s eyes, especially traditional investors that have been cautiously eyeing the asset class. Your access to crypto ETFs will depend on your country and relevant regulations.
How Much of My Portfolio Should I Invest in Cryptocurrency?
If you decide to invest in cryptocurrency, it should still be a relatively small portion of your entire portfolio. Speculative investments shouldn’t total more than 5% of your entire portfolio.
Some “true believers” of cryptocurrency invest more, with some not even taking part in traditional investments. However, those with established portfolios do not need to sell off everything to invest in cryptocurrency to experience potential gains from the asset.
How Do Cryptocurrency Taxes Work as a Canadian Citizen?
Cryptocurrency is taxed under capital gains law for Canadian citizens, and this is true in many countries around the world. Tax laws may change, but currently losses and gains may both be claimed during tax season.
Additionally, cryptocurrency may even be taxed as business income for businesses that accept it, a rule that is currently in effect in Canada. Citizens of other countries will need to investigate the tax implications of investing in cryptocurrencies that pertain to their country.
Final Thoughts on Cryptocurrency
Cryptocurrency should be approached cautiously and carefully for those who do decide that it’s an investment opportunity for them. Investing in ETFs might be the best option for those who want crypto exposure without the need for managing wallets and tokens.
Adventurous investors that want to participate in the wide world of cryptocurrency and its communities should be extremely cautious. These investors should start with custodial wallets to help learn how to use the new currency.
Blockchain technology is currently being explored for countless applications and we may very well see it used throughout society. However, this does not mean that we’re going to abandon the Canadian Dollar and start relying on Bitcoin anytime soon (or probably ever).
If cryptocurrency is exciting to you, explore it. If it seems overly convoluted and not worth your time, skip it. Like any traditional investment, crypto comes with its fair share of risk and potential upside and you should perform proper due diligence before making any decision.
Disclaimer: This article has been written for educational purposes only and isn’t intended to be investment advice. We do not hold any positions or an invested interest in any of the cryptocurrencies discussed in this article.