By Daniel Korleski, MBA
If we’ve learned anything recently, it’s that we truly do live in a digital world. The number of people working remotely is expected to double over the next 5 years, (1) and the fourth installment of The Matrix was finally released! Beyond that, the conversation around cryptocurrency has become an ongoing talking point for economists, financial advisors, and investors alike as everyone looks for ways to combat inflation in their portfolios.
It shouldn’t be surprising that cryptocurrency is at the forefront of the discussion around hedging inflation. Since the advent of Bitcoin in 2009, cryptocurrencies have gone from being a relatively obscure and niche area of finance to a mainstream alternative investment with huge inflation-busting potential. (2) In 2021, Bitcoin hit an all-time high of $65,000 per token, (3) and as of January 7, 2022, it was trading at $41,695. (4)
While not all the cryptocurrencies out there are priced that steeply, they all experience extreme volatility and risk. For some, the potential inflation protection and promise of “the currency of the future” make the risk worth it. But it’s always best to do your due diligence before diving in headfirst. Here is everything you need to know about crypto before deciding if it’s the right investment for you.
What Is Cryptocurrency?
Cryptocurrency (commonly called “crypto”) is a digital asset that is stored in a computerized database ledger and uses strong cryptography and encryption keys to secure transaction records.
Cryptography, the backbone of cryptocurrency, works to hide the information associated with a transaction so that only the sender and the receiver can decode and understand it (read more on cryptography here).
This makes cryptocurrency transactions almost entirely anonymous and allows individuals to exchange assets without the use of a middle man (e.g., a bank or broker). Cryptocurrencies, such as Bitcoin, use a collection of computers that run the cryptocurrency code and store transactions in blockchains. (5)
Unlike typical currencies, such as the U.S. dollar or the British pound, cryptocurrencies are not backed by any country or centralized bank and are under decentralized control. (6) They are also designed to be free from government manipulation and control, and in general remain entirely digital, and therefore intangible.
Types of Cryptocurrency
There are many types of cryptocurrency in the market today, but the three biggest contenders are Bitcoin, Ethereum, and Binance Coin.
Bitcoin
Bitcoin was the first decentralized cryptocurrency, originally released in 2009. It didn’t gain traction until speculative investors began buying it and driving up its value in May 2011 and November 2013. In the 12 years since Bitcoin was released, thousands of cryptocurrencies followed suit to varying degrees of success. Bitcoin remains the most widely known and most valued cryptocurrency, with about $788 billion market capitalization as of January 7, 2022. (7)
Ethereum
Ethereum was launched in 2015 and it is a decentralized blockchain software platform that powers the cryptocurrency Ether, which is similar to Bitcoin. Ethereum allows users to create decentralized apps that anyone can access, but are highly secure due to the nature of the Ethereum blockchain. It is powered by a worldwide network of computers that require majority consensus before the blockchain can be altered. As of January 7, 2022, Ethereum has a market cap of about $378 billion and $3,186 per-token value. (8)
Binance Coin
Binance Coin was originally powered by the Ethereum blockchain but is now the native cryptocurrency of the Binance Exchange. With 1.4 million transactions per second, Binance Exchange is the largest cryptocurrency exchange in the world. (9) Like Bitcoin and Ethereum, there are more and more merchants who are accepting Binance Coin as a form of payment. As of January 7, 2022, Binance Coin has a market cap of about $75 billion and a value of $450.32 per coin. (10)
How to Invest
If you are interested in investing in cryptocurrency, it’s important to understand that both privacy and security are paramount when beginning this journey. It is highly recommended that you work with a financial professional if you want to add crypto to your investment portfolio. With that being said, here are the basic steps for investing.
Choose an Exchange
The most common exchanges in the U.S. include Coinbase, Binance, Gemini, and Kraken, all of which offer a growing number of cryptocurrencies. Remember to keep security in mind as you set up your account: choose complicated passwords and opt for two-factor authentication.
Exchange Payment and Place Your Order
Certain exchanges will require you to provide identification and your Social Security number. With the aforementioned exchanges, you can connect your bank account, but you may have to check with your banks as to whether they accept crypto-related deposits. Purchasing cryptocurrency is legal in the U.S., so most banks will not have an issue with this. Also, you should be aware that some exchanges do require fees.
Once you have connected your bank account, you are ready to invest. These exchanges have a variety of features, such as stop-loss orders, that can assist you in managing your investment account.
Your Portfolio
The interesting thing about cryptocurrency is that instead of buying it as a medium of exchange, investors have started to purchase Bitcoin and other cryptocurrencies for their investment value. But what value does cryptocurrency actually hold, and is it a sound investment?
As it lacks guaranteed value, purchasing crypto carries inherent risks. Several investment alerts have been issued by American regulators, including the SEC and FINRA, among others. And it is still a new investment with a very short and rather volatile history. (11)
Despite its speculative nature, crypto is growing in popularity and is becoming more mainstream every day. If there is room in your portfolio for more high-risk, high-reward investments, cryptocurrencies may be the right choice for you.
Questions About Cryptocurrencies?
If you’d like more information about investing in cryptocurrency, it’s wise to consult with a financial professional who can take your overall financial plan into consideration. We at Cobalt Private Wealth are here to help answer your questions. Contact our office by calling 719-332-3863 or emailing danielkorleski@cobaltprivatewealth.com to review your plan today.
About Dan
Daniel Korleski is the President & CEO for Cobalt Private Wealth, where he helps his clients grow, manage, and protect their wealth so they can work toward a stronger financial future. With over 30 years of experience in the financial services industry, Dan has served as the managing director for Investment Trust Company, chief investment officer for the Wealth Management Group at American National Bank in Denver, and regional investment manager for the Greater Colorado Region of the Private Bank at Wells Fargo, where he oversaw the management of over $2 billion. In 2008, he was appointed by the mayor of Colorado Springs to the City’s Investment Advisory Committee. Dan holds an MBA in investment management from Midwestern State University in Wichita Falls, Texas, a Bachelor of Science in Finance from Florida State University, and is a member of both the CFA Society Colorado and The Financial Planning Association.
Dan loves to give of his time to his community and has served as Chair of the Board of Trustees of Pikes Peak Hospice Foundation, the Board of Directors of Catholic Charities of Central Colorado, President of the Broadmoor Rotary Club and Vice President of the Board for the Pikes Peak Chapter of Trout Unlimited. Dan was born and raised in Spain and is fluent in Spanish. When he’s not working, you can find him traveling around the world with his wife of 23 years, Montse, fly fishing, golfing, and hiking with his golden retriever, Curro. To learn more about Dan, connect with him on LinkedIn.
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(1) https://smallbiztrends.com/2021/11/remote-work-statistics.html
(2) https://www.fool.com/investing/2021/11/15/is-bitcoin-a-good-inflation-hedge/
(3) https://www.nerdwallet.com/article/investing/cryptocurrency-7-things-to-know
(4) https://coinmarketcap.com/currencies/bitcoin/
(5) https://www.investopedia.com/terms/c/cryptocurrency.asp
(6) https://www.bbva.com/en/what-are-the-differences-between-a-digital-currency-and-a-cryptocurrency/
(9) https://www.investopedia.com/terms/b/binance-coin-bnb.asp
