Cryptocurrency: The Breakdown

If you’ve been following the financial news for the last few months, you’ll undoubtedly have heard of cryptocurrency. Kids are making small fortunes in their mom’s basements off of these digital currencies, while seasoned investors are just beginning to take note — and the only thing separating those wanting to profit from cryptocurrency investments from those who already are is knowledge.

Nevertheless, there has been plenty of bad press surrounding cryptocurrencies due to a marked worldwide increase in cybercrime such as ransomware, which often extorts money in the form of Bitcoin, as well as risk associated with a market as volatile as crypto. So what to make of all this? Is crypto king? A sound investment ripe with promise? Or is it a passing fad, a bubble about to burst?

Here’s the breakdown.

What is Cryptocurrency?

Cryptocurrency essentially broke on to the scene in 2009 when Satoshi Nakamoto invented and released Bitcoin (BTC) as a way to encourage peer-to-peer exchange of electronic cash over fiat. Eventually others began minting their own digital coins and tokens utilizing the same blockchain technology, giving rise to the likes of ethereum (ETH), which then, after a set of controversial events, spawned ethereum classic (ETC). There’s also Litecoin (LTC), Ripple (XRP), and Dogecoin — truth be told, there are over a thousand other altcoins and alt-tokens, and most of them will be worth nothing in the future.

This is because most of them will never be used in any capacity. Cryptos like BTC and ETH were introduced as an alternative to fiat currency, meaning that it’s meant to replace fiat, paper money controlled by banks and centralized institutions. In fact, many companies are beginning to accept crypto as payment, while still other companies are beginning to pay employees in BTC. One small town in Switzerland has actually adopted crypto as a way of life.

However, speculation means that BTC and ETH have exploded in the last couple of months — actually, most cryptocurrencies have, at one point reaching a market cap that surpassed Uber and Arbnb. To put it in perspective, 1 ETH was worth $8.24 on Jan 1, 2017. It rose to become worth approximately $400 at its height in June. The problem is that the currency is so volatile that whether we’re in a “boom” or “bust” can switch in an instant. ETH, at the time of writing this, is worth less than $200 per token. As we’re seeing in July, with skepticism rising and cryptocurrency prices vs fiat falling faster than a blind man pushed onto an ice skating rink. Insensitive jokes aside, the question for many is: should I invest in BTC, or ETH, or LTC? Or is this a worthless commodity in the middle of a bubble?

Is Crypto Worth… Anything?

Despite the recent drops in cryptocurrency valuation, crypto is still worth looking into. Back in March of 2016, personal finance and lending company LendKey mentioned digital currency as one of the new payment methods college students should start paying attention to. “This new frontier is being driven by young consumers, but as time progresses we can expect more common use of digital payment methods,” they write.

This sentiment is held by the staunchest of crypto-supporters, and could be the key to deciding whether or not you want to convert any of your cash into digital assets. You see, many are buying into BTC and alt-coins because they want to make a quick buck — this is exactly why this crypto bubble is occurring. These people have no intention of ever buying goods with BTC the same way they would with cash, and this is why crypto is becoming overvalued. However, someday, people will be selling goods for crypto. It might be BTC, ETH, LTC, or any of the other coins you can think of… the truth is, nobody knows for sure.

What we do know for sure is that governments all over the world are beginning to pay attention to cryptocurrency. There is no way to tax crypto because it is decentralized, even though the US requires you pay capital gains taxes on any digital asset that experiences appreciation. Perhaps as we see tax reform hit the books, we’ll see a more definitive position on cryptocurrency.

Nevertheless, some think the future is die-cast and that crypto is at the heart of it. If you wholeheartedly believe in the benefits of crypto, go ahead and invest. If you’re a ruthless speculator, bent on making money at all costs, go ahead and invest. However, just remember the number one rule in crypto investment: never put down more than you can afford to lose.