Editor’s Note: Our blog this week is authored by our newest DWM member, Parker Ring. Parker graduated in May, 2021 with honors in finance and accounting from Clemson University, started with DWM in July, and is currently working remotely from Krakow, Poland. Parker received a grant from the Kosciuszko Foundation to attend Jagiellonian University, the second oldest university in Central Europe. He is there for a semester studying Polish language and culture. Parker will be returning to the Lowcountry in January.
We’re sure you have all heard the buzz around cryptocurrency in recent years. Every couple of weeks someone is talking about the new cryptocurrency that is supposed to be the “next best investment.” You can’t bring up the topic without hearing the same story about a friend of a friend who got in early, invested a couple thousand dollars, and is now a millionaire. However, most people don’t really know what cryptocurrency is at its core.
So, what exactly is cryptocurrency? If your answer is an investment tool that might be used to make a quick buck, you’re right, but only partially so. Cryptocurrency, or “crypto” for short, is a digital asset that can be used for trading and the purchase of goods and services. Many cryptos are both encrypted and decentralized, meaning it is a secure transaction that isn’t backed by any central authority like a bank.
Let’s look at the first established cryptocurrency, Bitcoin. Bitcoin was launched in 2009 by a person or group of people under the pseudonym “Satoshi Nakomoto.” He detailed the concept of Bitcoin as a digital currency that was decentralized. In the early months of its release Bitcoin was only obtained by Miners. Bitcoin Miners were those who used their computers to solve complex math problems to “mine” new bitcoins and keep the network running. This cryptocurrency wasn’t used in a transaction until May of 2010. Surprisingly enough, Bitcoin was used to buy a couple of pizzas from Papa John’s. In that transaction, the currency was valued at roughly 4 Bitcoin to 1 penny. Today, 1 Bitcoin is worth more than $60,000.
Below, is a graph from CoinDesk showing Bitcoin’s price history.
At first glance, the meteoric rise in Bitcoin price over the last 5 years shows much possibility for crypto growth. However, it’s really important to pay attention to the deep valleys as well. Cryptocurrency is highly volatile; there is potential for huge loss. Reducing potential losses can be very difficult since the price of crypto can change significantly even within the span of a couple hours. The unpredictability of digital currency should make any investor wary. Unfortunately there are more things to keep in mind besides volatility when deciding to invest in crypto. Due to the nature of cryptocurrency, there is no regulation or oversight. It can be remarkably easy to be the victim of scamming or fraud. If that happens, there is no one you can run to for help. Another thing to keep in mind is scalability. Bitcoin and many other top cryptocurrencies are still being produced. Additionally, more and more cryptos are being launched every day. This presents the risk of the market becoming oversaturated. Many new digital currencies being launched may be completely shut down. The crypto market can seem very exciting, but it’s imperative to do your own research and weigh the pros and cons before you choose to invest.
While the big crypto names like Bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB) tend to get most of the fame, the real magic behind cryptocurrency lies in its core technology, blockchain. A blockchain is essentially a database that documents a ledger of transactions, contracts, or records electronically. This differs from a traditional database in the way the information is structured. Information is stored on different “blocks.” You can think of each block as a digital page of a ledger. When blocks reach storage capacity and are filled, they are closed and linked to the last filled block, creating a chain. When new transaction data is recorded, another block is created, and the chain grows. This system of storage blocks ensures that data is securely stored so it may not be edited or deleted. Instead of all this information being kept in a centralized location like other ledgers, it is spread out through thousands of nodes. This technology successfully attains decentralized security.
Blockchain technology is not only effective in crypto. It has great potential for use in many diverse industries. Some of these include:
- Retail- Retail can be made more secure and cost-effective by using blocks to store contract information.
- Identity Security- The high level of encryption provided by blockchain can prevent identity theft.
- Supply Chain Management- Blockchain can improve distribution due its transparency and security.
- Banking- Banking services can be made much more accessible, faster, and cheaper.
- Government- Corruption and inefficiency can be decreased with blockchain’s encryption technology and transparency.
The capacity for blockchain implementation in businesses everywhere is almost boundless. It’s exciting to think about the next industry this may benefit. With blockchain technology, we are only limited by our creativity.
At DWM, we believe a small allocation to this blockchain space makes sense now. In fact, we just recently established a position in an actively managed globally diversified ETF that focuses on companies involved in developing blockchain technologies and cryptocurrencies. Why now?
- In a sign of legitimacy, just several weeks ago, the SEC commission Chair declared his support in principle for crypto-based ETFs futures. Two have come out since then with many more in the works.
- China recently cracked down on crypto which opens the door to the US becoming the global center for mining and other crypto aspects.
- Big institutions, who just a couple of years ago pooh-poohed crypto, are now moving into this boom with blazing speed.
To be frank, Bitcoin hasn’t achieved safe-haven status and any security related to this space can exhibit extreme volatility. There will be many winners and losers in this space so it’s prudent not too load up in just one cryptocurrency or blockchain industry. Which is why it’s so important to do your homework before investing into anything crypto. Crypto can be a part of your overall portfolio, but it needs to be done in a risk-based manner, something your friendly DWM team can help with. Maybe next time someone brings up cryptocurrency at lunch, you will have more to talk about than Bitcoin’s latest peak.