Bitcoin and Dogecoin. What Is Up With Crypto? And Is It Too Late To Invest?
With the recent headlines about Bitcoin and Dogecoin, many of you may be wondering, what in the world is crypto? And is it too late to get in on the action? We're sharing the basics you need to know before you invest. Bitcoin alone was up more than 100% in 2021 at its peak price of around $64,000 before the recent slide after Elon Musk’s tweet about no longer accepting Bitcoin as a form of payment due to environmental concerns.
Let’s first start with understanding what cryptocurrencies are. Cryptocurrencies, or Crypto for short, are digital currencies in which encryption techniques are used to regulate the generation of its units and verify the transfer of funds.
The underlying technology of blockchain is really what enables cryptocurrencies to work and it involves the keepers the network perpetually maintaining a ledger of activities independent of all others in the network to allow for the verification of any given transaction. This way no one bad actor can dupe the system and allows the validation of truth in the absence of anonymous trust. To get into the technical details of how it all works further than that would probably be too much to cover in this article, but if you are interested in learning more there are a ton of videos online that dive into this exact topic. For this conversation the only thing you really need to know is that they function much in the same way any other form of currency like the Dollar or Yuan would with the key difference being that cryptocurrencies are decentralized, meaning no one entity has complete control or power over that form of currency. Now whether that is a better or worse system than what most countries have today is up for debate but there are definitely cases to be made on both sides.
Crypto bulls, or those who are in favor of a cryptocurrency revolution, often tout a future where anyone can and will be involved in the financial system. No one would be barred from having a bank account simply because they don’t have the right credit score. There would no longer be a portion of society that struggles because they are deemed “unbankable”. That concept simply would not exist. Another benefit would be in the transferring of funds which would not only be safe but also instantaneous. Rather than needing 2-3 days for your bank to clear a payment or cash a check, you could get those validated into your account in a matter of seconds. Moving money across borders would also become much easier and no longer involved 3rd parties or the exorbitant fees banks may charge today. Cryptocurrencies in essence would basically get rid of the need for folks to have banks and truly democratize the financial system to benefit the masses which is why it’s so appealing to those who appreciate this kind of future.
This is not to say though that there are no downsides to this system either. Because cryptocurrencies cannot be controlled by any given entity this also means that the typical financial policies the Fed enacts to try and stabilize the economy would not work in a future that’s completely reliant on crypto. These levers would no longer be there and as such the economy would be much more prone to violent boom and bust cycles that were quite prevalent before the days of effective fiscal policy. Furthermore because there is no bank that can insure your money, all transactions will be complete and final. In the event a bank fails or is robbed, FDIC insured accounts would be guaranteed to save your money up to a certain amount. A world powered by crypto would have no such safeguards and all transactions, even those that are made by mistake, will be considered valid and final. Therefore an unfortunate hack or exposure of your account detail and passwords could result in you losing all your life savings with no recourse. Cryptocurrency transactions are also quite hard to track and can therefore be taken advantage of by criminal organizations to launder their money which is actually something that is really happening today. It’s these concerns that have really prevented the wide-spread adoption and recognition of crypto around the world especially on part of governments.
It’s only recently that governments have started to look at regulating the more popular cryptocurrencies like Bitcoin and Etherium but they are still some ways off from being completely mainstream, and this would be even more true of alternative cryptocurrencies also known as alt-coins. The easiest way to think of alt-coins is to think of any crypto-currency that isn’t Bitcoin or Etherium. There are a ton out there and since all of them have not been widely adopted much of their value is completely speculative meaning it’s only as valuable as what people believe it to be. Many different cryptos promise to deliver new features or power very specific use cases and their value is driven by people’s willingness to believe in that promised future by buying and holding that specific cryptocurrency. Whether this can be a valid and good investment strategy though is going to be up to you and your risk tolerance.
Many traditional finance folks would likely advise you to stray away from cryptocurrencies and stick to the more traditional investment vehicles like stocks and bonds, but when you’re seeing headlines of newly minted crypto millionaires and billionaires it’s quite hard to ignore them altogether. With many alt-coins carrying such small values, often less than a cent, it’s not uncommon to hear of people multiplying their investments by more than 5 or even 10 times the initial amount. Take Dogecoin for example the latest cryptocurrency fad which was actually started as a joke in 2013. It started at less than a penny at the start of 2021 and suddenly skyrocketed to nearly 65 cents before coming back down to around 50 cents at the time of this writing. It’s this “going to the moon” mentality that seems to be drawing everyone’s attention as well as the potential to get rich quick. What needs to be made very apparent though is that these crypto values can drop just as easily and quickly as they go up and in fact if you don’t know what you’re doing it’s actually more likely that as a new investor you’ll likely be on the wrong end of that price swing and be left holding the bag.
Because the space has so little regulation alt-coins in particular are very prone to what are called “pump and dump” schemes where insiders will generate massive interest and hype around a new coin to “pump” up and price and once it hits a sky-high peak those insiders than sell or “dump” what they have for massive profits. Most famously John McAfee, creator of the notorious antivirus software, was indicted and charged for being involved with these types of schemes in the crypto space. Unfortunately unless you’re an insider of these types of schemes and operations you’re more than likely going to be on the losing end of the trend. What makes crypto even harder to deal with when it comes to “pump and dump” schemes is the fact that enthusiasts online will always encourage each other to “HODL” which is basically a popularized misspelling of the world hold that was used to encourage people to not give up and sell their investment in Bitcoin in the early days of its rise. With some coins the “HODL” mentality may work out for folks while it can dramatically crash and burn in others. It all really just boils down to being nothing more than another form of gambling.
So to get back to our main question, crypto should really just be viewed as a speculative investment because that’s really what it is at this point in time. There’s absolutely no guarantee that cryptos will be widely adopted and there’s a lot of wild volatility involved and so it’ll be up to you to decide whether that risk is worth the potential gains. If ultimately you do decide it’s worth the risk, play it safe and invest while also sticking to more traditional investment strategies. Only put money you can lose into the crypto space and this is doubly so if you’re looking to put money into altcoins. Even veteran crypto investors will agree that newcomers in the space should probably start out and stick with the more established coins like Bitcoin and Etherium before considering any others.
All of this information is purely for educational purposes only and should not be viewed as financial advice. The intent of this article is simply to provide you with a good baseline of knowledge to start building upon with your own research. We highly encourage consulting an advisor if you can before making any large and significant changes to your investment strategy with regards to crypto.
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