A digital or virtual currency that uses cryptography for security, Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service.
As of January 2018, about 1,400 cryptocurrencies were trading hands, and they continue to proliferate, raising money through initial coin offerings. By the first week of December 2017, ICOs had raised $1.38 billion in the fourth quarter, on top of the third quarter’s $1.74 billion, according to research conducted by Token Report. And both dwarf the approximately $100 million ICO haul in 2016.
But this new fundraising doesn’t include the value of longer-lived currencies such as bitcoin and ethereum that have already gone public. As of Jan. 5, 2018, the total value of all bitcoins, the most popular digital currency, was pegged at $283 billion. The second-most popular, called ripple, was valued at $119 billion. The total value of all cryptocurrencies is about $708 billion, according to Coin Market Cap.
Cryptocurrencies appeal to their supporters for a variety of reasons. Here are some of the most popular:
Supporters see cryptocurrencies such as bitcoin as the currency of the future and are racing to buy them now before they become more widespread and presumably more valuable
Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation
Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems
Still others like the anonymity of the blockchain network, which allows for transactions outside government surveillance, including criminal activities
Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance to move money.
To obtain some of this cryptocurrency — there are many issued by many different companies — users often must exchange bitcoin or ethereum. To buy either of these cryptocurrencies, you’ll need a “bitcoin wallet,” an online app that can hold your currency. You register with your identity and bank details, then you can transfer real money to buy cryptocurrencies such as bitcoin or ethereum.
But you don’t have to buy them directly. Some investment companies have created bitcoin exchange-traded funds, and more are being designed, so investors could purchase a fund that holds bitcoin, much the way they would buy and sell stocks or funds. This would be a relatively simple way to access the currency, and you’d likely be able to trade through your existing broker
There’s a new third option, introduced in December 2017. Investors can now buy and sell bitcoin futures, allowing you to buy or sell bitcoin at a specified future date for a predetermined price. If you go this route, you’ll want to read up on futures trading and how to get started.
There’s no question that they’re legal in the United States, though China has outlawed their use, and ultimately whether they’re legal depends on each individual country.
The SEC has been increasing its regulation of coin offerings and cryptocurrencies generally. That’s good news for investors, since this will help to weed out fraud and protect investors.
If you’re looking to buy a cryptocurrency in an ICO, read the fine print in the company’s prospectus for this information:
Who owns the company? An identifiable and well-known owner is a positive sign.
Are there other major investors who are investing in it? It’s a good sign if other well-known investors want a piece of the currency.
Will you own a stake in the company or just currency or tokens? This distinction is important. Owning a stake means you get to participate in its earnings (you’re an owner), while buying tokens simply means you’re entitled to use them, like chips in a casino.
Is the currency already developed, or is the company looking to raise money to develop it? The further along the product, the less risky it is.
If you’re looking to buy a cryptocurrency in an ICO, you should read the fine print in the company’s prospectus.
It can take a lot of work to comb through a prospectus; the more detail it has, the better your chances it’s legitimate. But even legitimacy doesn’t mean the currency will succeed. That’s an entirely separate question, and that requires a lot of market savvy.
It depends on who you ask, but in the U.S. the IRS has ruled that virtual currency does not have legal tender status in any jurisdiction. For tax purposes, the IRS treats virtual currency as property.
Also, keep in mind that one of the functions of a currency is to serve as a store of value so that the currency can be exchanged for goods or services now or in the future. Given the volatility of cryptocurrencies, at this point, it would be difficult to predict just what sort of purchasing power they may or may not have in the future.
Note: this is particularly ironic, given that one of the reasons for the creation of cryptocurrencies is a concern around the future purchasing power of traditional currencies.
One of the defining characteristics of any bubble is that new market participants rush in. And let’s be honest, even the most ardent believer in cryptocurrencies is unlikely to believe that the world needs 1000+ of them. They are also unlikely to believe that a “currency” with a total value of a couple hundred thousand dollars can play a meaningful role in a global economy whose aggregate economic output is measured in the tens of billions of dollars each year.
Maybe. I mean, it worked for Henry Ford, and the whole automobile thing turned out to be a pretty good idea. So yeah, investing in the car industry in the early 1900s would have been great. The only problem was that there were more than one thousand eight hundred car companies started in the United States alone6, and only a handful survived. In other words, even if you were smart enough to see the future of the automobile industry, you still had to pick the right one, against what turned out to be horrendous odds.
Again, there are already 1000+ cryptocurrencies. So even momentarily setting aside the discussion of whether the sector makes sense, you’ll still need to determine which one or two of those 1000+ are going to be the “winners.” And just to be clear, the biggest player in an industry’s infancy doesn’t always win out in the long run. Remember Myspace? How about Commodore Computers?
If you decide to go ahead and strike it rich, I have good news for you. If Bitcoin itself and its almost routine 10% price movements aren’t exciting enough for you, have no fear. Apparently, option trading on Bitcoin is gaining steam, so now you can employ leverage and really ramp up the volatility.