Steve Coker, CFP
What is a Cryptocurrency?
In recent years there’s been a lot of hype regarding cryptocurrencies such as Bitcoin, Ethereum, Ripple, and dozens of other variations. While we are in no way experts on the matter, it seemed like a good time to check in with what a cryptocurrency is and why investing in them is a complicated matter.
A cryptocurrency is a digital currency that is secured using cryptography, making it difficult to counterfeit. Bitcoin, arguably the most well-known cryptocurrency, came on the scene in 2009. In April of 2022, there were 19 million bitcoins in circulation of the 21 million available to be mined. 900 new Bitcoins are created each day. As of this writing, one bitcoin was worth $42,536.
Bitcoin is released to the public through a process known as mining by individuals and companies who have the computing power and governing authority to do so. Because the cryptocurrencies are not issued by a governing authority, they have less regulation and are less susceptible to central bank manipulation which has both pros and cons. From an economic standpoint, cryptocurrencies offer a very purist approach to monetary exchange because they can’t be shifted around by central banks or other governing authorities to achieve policy-related goals. On the other hand, because they lack some of the regulation of traditional banking channels, they are also often associated with illegal activities such as money-laundering.
Because of their use in illegal activities, cryptocurrencies are facing increasing regulation going forward. In November of 2021 the Infrastructure and Jobs Act greatly expanded the reporting requirements for cryptocurrency transactions, expanding anti-money-laundering laws to include digital assets. The new rules could require businesses to collect detailed information about parties involved in transactions greater than $10,000. The Ukraine war has also renewed calls for even more regulation, which could dampen their appeal.
The war in Ukraine provides an example of how Cryptocurrencies work as an alternative to traditional banking. Ukrainians are using cryptocurrency to raise funds during the war, and Russians are using it to avoid financial sanctions. Before the war, Ukrainians were strong users of cryptocurrencies, a common theme in countries with less stable currencies. When the war began, the Ukraine government sent a tweet asking for cryptocurrency donations in Bitcoin, Ethereum, and Tether, and the world responded by sending roughly $15 billion worth of the currencies to help fund the war effort. Meanwhile, Russian banks were disconnected from the SWIFT international banking system as a key international sanction. However, Russia and Russian citizens hold 12 million wallets to store cryptocurrencies. Since these wallets operate outside of the international banking system, they could potentially avoid these sanctions. In both cases, the war increased the usage of cryptocurrencies.
Are they a good investment? I genuinely have no idea. Unlike investing in an asset-backed security or a stock or bond backed by a company, bitcoins are difficult to value. If I wanted to invest in Amazon’s stock, I could look up Amazon’s financial statements and see how their revenue streams are doing, what they’re investing in to grow their company in the future, how they’re managing their cash, and a whole load of other data points. A good investment has to do with the link between price and value; am I getting a good deal for what I’m spending? It’s difficult to answer that question when it comes to cryptocurrencies because there is no basis for value. How much should a bitcoin be worth and why? Those questions are really hard to answer without a basis for valuation. Furthermore, when we can’t answer those questions, investing begins to look a lot more like speculation.
How many bitcoins are there? How Many Bitcoins Are There? (Circulating Supply - Live). (n.d.). Retrieved April 8, 2022, from https://www.buybitcoinworldwide.com/how-many-bitcoins-are-there/