Demystifying Crypto: Understanding the Long-Term Impact

Crypto currencies, of which Bitcoin is the best known, allow individuals and businesses to buy goods and services digitally. These currencies can also be traded as an investment vehicle.

Understanding the Recent Crypto Market Trends

Bitcoin has made headlines in recent weeks, and at one point in mid-February the digital currency had gained almost 200% over a trailing three-month period. Three other versions of cryptocurrency recorded even larger gains over this period with Dogecoin leading the way with a gain in excess of 2,300%. The total market value of all investable crypto tokens reached a mid-February level that was almost double the previous market peak level in early 2018.

Also of significance, Bitcoin has increased its level of adoption as a mainstream payment method. Both Tesla Motors and Mastercard have moved to adopt Bitcoin as an acceptable payment method recently.

What is Crypto and What are its Applications?

Cryptocurrency is a digital currency which is not associated with a specific country or state. Crypto works using blockchain technology. Blockchain manages and records crypto transactions, creating an online ledger.

Bitcoin is the most prominent type of cryptocurrency, but there are over 6,700 different cryptocurrencies traded. Currently Bitcoin accounts for 55% – 60% of the total valuation of all cryptocurrencies.

Crypto has a number of applications as a payment option and for other transactions. The blockchain technology aspect of the process can provide a transaction record that has a number of applications. It could be used to track payments or in the case of loan, it could be used as an ongoing record of the loan’s funding and the borrower’s repayments. The potential applications are virtually endless.

Cryptocurrencies are currently used as an alternative investment vehicle by many investors. Bitcoin’s value especially has been volatile in recent weeks.

Note that one aspect of using crypto is the need for secure storage, there have been stories of lost drives resulting in crypto holders losing access to their holdings of the digital currency.

What Uses Will Crypto Have in the Future?

There are many potential future uses of cryptocurrencies in terms of payment for some types of purchases, transferring funds between parties for things such as loans or a major business transaction and a host of others.

In order for cryptocurrencies to become a more mainstream payment method, there are some issues to deal with. One is to ensure that there is sufficient security on the crypto vehicle. Currently there is a risk of fraud or hacking, this would need to be eliminated or greatly reduced for crypto to gain wide acceptance as a mainstream payment method.

The anonymity of cryptocurrencies can also be used to launder money and evade taxes by unscrupulous characters. Beyond the security issues, there would need to be a level of transparency built in to reduce the ability to use this vehicle in that way.

Crypto and Volatility

The price of crypto can be quite volatile, impacting both those who use it as an investment vehicle and those who use it as a payment vehicle.

The volatility inherent in Bitcoin and all cryptocurrencies stems in large part from the fact that there is no underlying physical commodity or currency behind crypto. Its price is strictly a function of the supply and demand of users and investors.

Compared to markets for stocks, bonds, commodities and even hard currencies, the crypto market is a relatively small one. This means price movements based on speculative factors that play a major role in this arena can serve to exacerbate price movements due to the small size of the crypto marketplace.

Other factors driving the volatility in the crypto market include:

  • Lack of regulation
  • Technology that is still developing
  • Lack or an organized exchange like the NYSE
  • The role of the news media in sensationalizing crypto’s price movements

Summary 

Cryptocurrencies such as Bitcoin are in their infancy relative to other investment and payment vehicles. Crypto has been used as an alternative investment for some investors. It also has potential as a new and alternative payment vehicle.

Crypto is still quite volatile and there are security issues to be resolved. The future of crypto will be an interesting one to follow. Connect with a Wedbush Advisor for answers to your questions about cryptocurrency.


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Disclosure

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.

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