View Firm's Library

Cryptocurrency - A Brief Overview

What is cryptocurrency? How best to say this? You know that feeling when your teenager asks for help on a school assignment and you quickly realize that you might be in over your head? We have to admit up front that even after researching and writing this White Paper, we're still not sure we fully understand all the ins and outs of cryptocurrency. With that encouraging disclosure in place, let's get right to it.

Cryptocurrencies, or virtual currencies, are digital means of exchange created and used by private individuals or corporations. As opposed to traditional "fiat" currencies, cryptocurrencies are generally not regulated by national governments and are considered alternative currencies – mediums of financial exchange that exist outside the bounds of traditional monetary policy. Cryptocurrencies have value not by the backing of gold or a nation, but by the result of supply and demand and what investors (speculators) are willing to pay. Finite supply, ease of use, social adoption, anonymity, security, and lack of confidence in the fiscal responsibility of national governments and central banks are all contributing factors to the value of cryptocurrencies.

Cryptocurrencies are one application of the relatively new technology known as blockchain. Blockchain, in its essence, is simply a type of electronic database. Where traditional databases utilize spreadsheet-type structures to organize data, blockchain works, as the name implies, by storing information in "blocks" and "chaining" them together. The key advantage of blockchain is that the chaining process creates a transaction ledger that is validated by multiple independent sources and is irreversible. Besides cryptocurrency, blockchain technology is being developed in other areas, such as supply chains, healthcare, property records, smart contracts (i.e., contracts established with specific conditions that, once met, will automatically execute), and even voting. (1)

Although there are hundreds of cryptocurrencies in active use today, Bitcoin is the preeminent cryptocurrency and most widely accepted around the globe. It is controlled by a decentralized network of users and many proponents feel it is the closest cryptocurrency equivalent to traditional, state-minted currencies. (2)




Bitcoin and the Modern Cryptocurrency Boom

Bitcoin was first outlined in a 2008 white paper published by "Satoshi Nakamoto". Some of the mystique surrounding Bitcoin is that nobody knows who or what Nakamoto is. Shortly thereafter, in early 2009, Nakamoto released Bitcoin to the public, and a group of enthusiastic supporters began mining and exchanging the currency. By late 2010, the first of what would eventually be dozens of similar cryptocurrencies – including popular alternatives like Litecoin – began appearing in digital wallets. (3)

Finite Supply

Most cryptocurrencies are characterized by finite supply. Their source codes contain instructions outlining the precise number of units that will ever exist. Over time, it becomes more difficult for miners to produce cryptocurrency units, as the upper limit is reached and new currency ceases to be minted altogether.

The finite supply of cryptocurrencies makes them inherently scarce – more akin to finite supplies of gold and other precious metals than national currencies, which can theoretically be produced in unlimited supply by central banks. Bitcoin reduces the rate at which it can be mined by half approximately every four years, as a means to effectively lower the growth rate of the supply.




Miners

The cryptocurrency world adopted the term "miners" to reflect the fact that their digital work literally creates wealth in the form of brand-new cryptocurrency units. (Much like traditional mining produces new precious metals or gems.) From small DIY operations by individuals in their own homes to large scale server farms owned by private mining collectives, miners use vast amounts of computing capacity to solve mathematical functions built into each cryptocurrency's source code to unlock or create new blockchains of cryptocurrency. Each newly mined blockchain copy comes with a two-part monetary reward: a fixed number of newly minted cryptocurrency units and a variable number of existing cryptocurrency units collected from transaction fees charged to buyers.

Using the same highly technical computing power and techniques, miners also verify the completeness, accuracy, and security of a cryptocurrency's blockchain transactions, thus serving as record-keepers for cryptocurrency communities and indirect arbiters of the cryptocurrency's value.




Wallets

Bitcoin units are stored in "wallets" – an industry term that means secure cloud storage locations with special information confirming the individual ownership of the Bitcoin units contained therein. Bitcoin users can then transact (buy and sell) out of their wallets.

"Wallet Services" are Bitcoin exchanges, online marketplaces, and specialized websites that exist solely to store Bitcoin wallets. Wallet services, such as the well-known Coinbase, theoretically protect against the theft of Bitcoin units from wallets and facilitate buy and sell transaction out of those wallets. However, cybersecurity is a significant issue in the cryptocurrency world. The largest and most notorious Bitcoin hack involved wallets held by a Japanese Bitcoin exchange that shut down after hackers stole hundreds of millions of dollars in Bitcoin from its supposedly secure servers.

Investing in Cryptocurrency

But how does the regular guy invest in the cryptocurrency movement? Cryptocurrencies can be bought and sold through crypto exchanges (Wallets), such as Coinbase, or payment services such as PayPal, which securely store your coins and provide a marketplace to transact with other crypto currency holders, for a fee.

Alternatively, Bitcoin ETFs might soon be available in the U.S. The new chairman of the Securities and Exchange Commission, Gary Gensler, has taught courses on cryptocurrency and many see him as crypto-friendly. The first Bitcoin ETF in North America, the Toronto-listed ETF (BTCC), has amassed roughly $1 billion in assets since its February 2021 launch. Several large, U.S.-based institutions (Fidelity, Van Eck and other ETF sponsors) are seeking regulatory approval for Bitcoin ETFs. (4) Bitcoin ETFs would provide access to investors looking to add cryptocurrency exposure to a diversified investment portfolio.

Final Word

Cryptocurrency is an exciting concept with the power to fundamentally alter global finance forever. Although, cryptocurrencies remain a technological and practical work in progress, dozens of merchants now view Bitcoin as a legitimate payment method. Given the volatility of Bitcoin prices, many merchants that accept Bitcoin payments attempt to manage risk by immediately converting them into US dollars, making the practical use of Bitcoin more akin to exchanging your Chuck E Cheese tokens for a prize before heading home. However, some high-profile companies, such as Tesla, retain Bitcoin payments and have even used excess cash reserves to purchase large investments in it (although Tesla's recent decision to no longer accept Bitcoin payments highlights the uncertainty that still surrounds cryptocurrency as a form of payment).

Cryptocurrency users, and non-users intrigued by cryptocurrency's promise, need to remain ever mindful of the concept's practical limitations. Any claims that a particular cryptocurrency confers total anonymity or immunity from legal accountability are worthy of deep skepticism, as are claims that individual cryptocurrencies represent foolproof investment opportunities or inflation hedges.

The Investment Committee at WT Wealth Management has had numerous discussions on how and when to invest in cryptocurrencies. We, like you, are intrigued by the rapid development of this new market. Our evaluations focus primarily on determining whether crypto is truly a currency (comparable to the U.S. dollar or the Japanese yen), a hard asset hedge against inflation (like Gold) or simply a speculative asset (which can have a place in a diversified portfolio). In short, we are watching and waiting for clearer signs of regulatory approval and protection and the development of more traditional investment mechanisms before proceeding with cryptocurrency holdings in client accounts.


SOURCES:
  1. Blockchain Definition: What You Need to Know
    investopedia.com

  2. Cryptocurrency
    wikipedia.org

  3. A brief history on Bitcoin & Cryptocurrencies
    ledger.com

  4. First Bitcoin ETF in North America Hits $1 Billion in Assets
    bloomberg.com



WARRANTIES & DISCLAIMERS

There are no warranties implied.
Any opinions expressed on this website are the opinions of WT Wealth Management and its associates only. Material listed on this website is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. You should always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETF’s carry certain specific risks and part or all of your account value can be lost.

At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

View Disclosure
WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management (AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV. WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment objectives – thus making the account “separate” and distinct from all others we manage. An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries certain specific risks and part or all of an account's value can be lost. In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies, sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax. Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we strongly suggest having a personal financial plan in place before making any investment decisions including understanding personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon. WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. WT Wealth Management's website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations, business operations, services, and fees is available at the SEC's investment adviser public information website (www. adviserinfo.sec.gov) or from WT Wealth Management directly. WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

Contact Us Today

Contact Us Today

Reach us directly at 800-825-0616
or by using the contact form below.

Your message has been sent. Thank you!
Cancel