Decoding "Cryptocurrency"

Many of our clients, at K&R Planners, have been enquiring about “Bitcoin” as an investment option. Thanks to the exorbitant returns, this has caught the attention of one and all. Most of them are however unaware about the concept and how it works. Through this write-up, I am attempting to throw some light on the concept of cryptocurrency and my views about the future of cryptocurrency, as a financial planner.

There has been a proliferation of cryptocurrencies in the past few years and there are now more than 1,100 available on the internet. “Bitcoin” remains the most prominent one. May be because, of it being the first cryptocurrency, which was introduced way back in 2009.

Cryptocurrency is a form of digital money that is designed to be secure and anonymous. It is a currency associated with the internet that uses cryptography, the process of converting legible information into an almost un-crackable code, to track purchases and transfers. Cryptocurrencies use decentralised technology to let users make secure payments and store money without the need to use their name or go through a bank. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders. Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated maths problems that generate coins. Users can also buy the currencies from brokers, then store and spend using cryptographic wallets.

Typically, cryptocurrencies follow the peer to peer currency concept. This means that in order for a transaction to occur, no middle men or central authority is needed. You can send any amount of the cryptocurrency to anyone living anywhere in the world, completely eliminating the need for traditional third parties like banks or money transmitters. 

While cryptocurrencies are more used for payment, its use as a means of speculation and a store of value dwarfs the payment aspects. Cryptocurrencies gave birth to an incredibly dynamic, fast-growing market for investors and speculators.

As a new form of cash, the cryptocurrency markets have been known to attract investor’s attention with the impression that a small investment can become a large sum, overnight.

But the same works the other way. People who look to invest in cryptocurrencies should be aware of the volatility of the market and the risks they take when buying. 

Because of the level of anonymity they offer, cryptocurrencies are often associated with illegal actvity, particularly on the dark web. Users should be careful about the connotations when choosing to buy the currencies.

What makes cryptocurrency unique?

• Cryptocurrency has no central authority, unlike other currencies which are backed by the government
• The transaction are registered in the blockchain which acts as a ledger whereas cash transactions may or may not be recorded
• Cryptocurrency transactions are immutable whereas majority of digital records can be duplicated
• Cryptocurrency transaction requires fees to be paid to miners which are quite similar to taxes that we pay to the government. Since the transaction is registered in blockchain, avoiding charges is practically impossible.

What is the future of cryptocurrency?

The market of cryptocurrencies is fast and wild. Nearly every day new cryptocurrencies emerge, old die, early adopters get wealthy and investors lose money. Every cryptocurrency comes with a promise, mostly a big story to turn the world around. Few survive the first months, and most are pumped and dumped by speculators.

But this doesn‘t change the fact that cryptocurrencies are here to stay – and here to change the world. This is already happening. People all over the world buy cryptocurrency to protect themselves against the devaluation of their national currency.

The revolution is already happening. Institutional investors have started to buy cryptocurrencies. Banks and governments realize that this invention has the potential to draw their control away. As an investment horizon, “Caution” is the word for average investors who have limited risk appetite.