Cryptocurrency gained major media notoriety in the Bitcoin Boom of 2017. In recent months it has dominated the discussion in financial circles. At Cowen Tax, we’re here to help you understand the basics of a digital marketplace that changes by the day.
What Is Cryptocurrency?
Cryptocurrency is a form of digital currency that is encrypted which renders them impossible to counterfeit or duplicate. Crypto tokens are how cryptocurrencies are denominated. Crypto token holders get involved with cryptocurrency for a variety of reasons. Many buy and hold, hoping the value goes up, similar to other securities. They also sell, trade for different tokens which have different functions, make purchases, buy gift cards and even donate to charity.
What Is Blockchain?
According to PWC, blockchain can be defined as, “a decentralized ledger of all transactions across a peer-to-peer network”. In other words, a decentralized market allows for two people to trade crypto tokens with each other in a recorded transaction without the involvement of a bank, government or other institution. No one person is in control of the blockchain and anyone can become part of the blockchain network. It can be said that tokens reside on a blockchain. Think of a blockchain as a database, which anyone can see holding irrevocable transactions which fill up in chronological order and when full, another block is added to create a chain It is important to note that once a chain is added to the block, it is unalterable and impossible to duplicate which adds a lucrative security measure for crypto holders.
Popular Coins?
It is impossible to mention cryptocurrency without discussing Bitcoin. As recently as May 10, 2021, the crypto market reached a peak market cap of 2.5 trillion dollars. Bitcoin is the original cryptocurrency and is currently valued at upwards of $37,000 a coin at the time of writing. Bitcoin is accompanied by thousands of “alt coins” (what other popular coins are referred to on the crypto market). Some popular alt coins are Ethereum, Litecoin, Bitcoin Cash, Stellar Lumen, XRP, and Dogecoin. Dogecoin gained notoriety in the retail trading craze which the brick and mortar retail chain Gamestop and Dogecoin ignited in late January, 2021 and is often critiqued for its lack of enterprise and purpose. Dogecoin is an interesting crypto case study as the coin has no intrinsic value or purpose leading it to be dubbed a “meme cryptocurrency”. Despite this label, the coin has surged to reach highs of $.71 in recent weeks.
Opportunities?
The extreme volatility of cryptocurrency is a lucrative opportunity for day traders to make life changing money, fast. Bitcoin’s fluctuation has ranged from $15,000 to $60,000 in the span of a year. Dogecoin was not even $.01 and has skyrocketed to the aforementioned heights of recent weeks. While these are opportunities to make a quick buck, they aren’t sound retirement investing strategies. Bitcoin is slowly becoming widely accepted in the retail market with large companies like PayPal and Xbox (a subsidiary of Microsoft) accepting Bitcoin as a valid form of payment. As this acceptance grows, the price of Bitcoin and popular altcoins may surge in response.
Risks?
In the wake of the recent ransomware attack on Colonial Pipeline, it would be remiss not to discuss the incredible risk cryptocurrency brings with it. Every single day, hackers work tirelessly to breach crypto wallets to gain access to digital assets. Wallets are password protected accounts which house your tokens. If you were to forget the password, those assets could be lost forever. On top of cybersecurity risks, the volatility of crypto is a tremendous barrier for risk-averse investors. Additionally, the lack of backing by government or central authorities provides little stability and protection in the event of an economic crisis.
Closing Thoughts.
Cryptocurrency isn’t going away anytime soon. The highly contested digital economy will likely continue its turbulent ascent to financial and governmental recognition. Cryptocurrency and blockchain capability of instant, secure transfers directly from peer to peer has a promising future in this country. However, if peace-of-mind or guaranteed income are your needs in retirement, we do not recommend cryptocurrency as part of your assets. For computer savvy, risk tolerant and seasoned players with a few extra bucks, there may be potential for gains. Play wisely.
Connor Rosenberger
connorctag@gmail.com
As Cowen Tax Advisory Group’s Digital Content Marketing Specialist, Connor provides in-house copywriting and manages the company’s electronic records system, email marketing, and blog.
