Cryptocurrency in simple terms.
As stock markets tumbled this past few weeks, cryptocurrencies followed. That was a surprise to some investors who had believed that crypto was the new gold. It was supposed to hedge against inflation and the stock markets.
The cryptocurrency market is a new space and many investors are still trying to sort out what it is and how it works. The high volatility makes this market susceptible to fake news and speculation. We see an example every time Elon tweets.
Fear, Uncertainty, and Doubt. They call it the FUD factor.
With any kind of investing, it’s best when you don’t let emotions affect your decisions.
Having a plan is the best approach. Then you’ll know what to do when things go south and your investments are in the weeds.
That said, there’s a lot of misinformation out there.
Here are some truths.
The big players affect the market more than the media.
Individuals use social media to try and move the crypto market in the direction they want it to go. That doesn’t work very well and it fills social media with false information.
The market is impacted by professional traders. Don’t listen to the little guys. Do your own research and ignore the FUD.
Cryptocurrency is a store of value.
Some people think that an asset that is volatile isn’t going to hold its value. Volatility isn’t a good enough reason to rule them out. It’s a new technology, so it’s really volatile, but a lot of people and businesses are holding it for the long term. Scarcity is a better indicator of an asset that will hold value. Assets that are scarce actually increase in value over time.
“By design, Bitcoin is a scarce resource with a predictable supply of new issuance. And it is this scarcity and predictable supply that makes it so attractive as an underlying asset to bind to economic activity and trade.”
Jeremy Allaire
Intangible assets do have value.
We know that gold is a real asset and understand that it has value. Cryptos value is based on its limited supply in some cases (Bitcoin). Many cryptocurrencies are used to support decentralized financial technologies (DeFi). That gives them an intrinsic value that increases as these technologies are adopted.
Many DeFi technologies give people more secure transactions at a cheaper cost than traditional technologies. They’re more accessible, you can earn higher interest rates and you aren’t relying on a centralized system.
Crypto and NFTs earnings are taxable in most countries.
They’re treated as a commodity and any gains are taxable. If you’re paid in crypto, that’s generally considered income. Check with the taxman where you live.
Diversification is important.
Some investors only believe that Bitcoin is a good investment in the crypto space because it was the first currency and because it has the highest value. Growth is another factor to consider.
We don’t know which cryptocurrency is going to increase in value so it's a good idea to diversify by investing in a variety of different crypto. It’s never a good idea to put all your investments in a single place.
Look at crypto that has a built-in maximum, like Bitcoin, or one that serves a functional purpose.
Tokens and Coins aren’t the same.
Coins are usually used in the same way as money. They are the currency used in a transaction. Coins lie on their own blockchain.
Tokens use existing blockchain technology to store data or information. A token represents digital assets that are secured with a smart contract.
The contract can’t be changed, is stored securely and anyone can view it.
Smart contracts are like a computer program that runs when a specific condition is met. An example of a smart contract is one where payment is released when the goods are recorded as received.
Fungible
When something isn’t fungible (non-fungible) it can’t be interchanged with another thing that is exactly the same. Dollar bills are fungible. A plot of land is non-fungible.
An NFT is proof of ownership and can’t be duplicated.
A digital piece of art that is secured with a smart contract can be bought or sold, but it can’t be copied. An image of the art can be copied but the actual ownership of the original NFT is registered on the blockchain.
Crypto transactions aren’t traceable.
There is a higher level of privacy with a crypto transaction but you’re not invisible. Each transaction is publicly and permanently recorded on a blockchain so it can be tracked. It’s not completely anonymous.
Governments are starting to adopt crypto.
There are different regulations in each country and some have tried to block the use of crypto. People use VPNs to access crypto networks when governments have tried to control them. Some countries are incorporating crypto into their economies.
“Courage taught me no matter how bad a crisis gets …
any sound investment will eventually pay off.”
Carlos Slim Helu
Now that you understand some basic truths about cryptocurrency and the market space, it might be easier to ignore some of the FUD in the media.
Things are changing all the time in the crypto space, so it’s good to keep up to date and always do your own research.
This article is not investment advice. It is up to each individual to honor their own risk tolerance, do their own research, and make their own informed decisions.
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