Investor’s Business Daily presents
- 1 Maybe a little more than that?
- 2 How does it work?
- 3 How are crypto coins created?
- 4 How do you store it?
- 5 Top 5 Cryptocurrencies by Market Cap
- 6 Risks and Benefits of Cryptocurrency
- 7 Cryptocurrency-related Stocks and ETPs
- 8 How to Trade Cryptocurrency
- 9 Looking for the next big crypto play? Join IBD Digital.
Maybe a little more than that?
Cryptocurrencies are global digital currencies that are becoming widely adopted as an alternative to fiat currency or commodities like gold and silver. They can be used for secure online payments with no middleman like a credit card company to take a cut.
It takes its name from the fact that it’s secured by cryptography, or codes that are deciphered by digital keys. Cryptocurrencies are not backed by any one bank or government, unlike traditional money.
The first cryptocurrency, Bitcoin, was created in 2009 by an anonymous person or group going by the pseudonym “Satoshi Nakamoto.” Since then, crypto has grown to over a trillion dollars in value spread across thousands of individual coins.
How does it work?
Cryptocurrency is based on blockchain technology, which is a decentralized ledger of every transaction ever conducted. When a new transaction is made, it is checked by every computer in the blockchain network and must then be agreed upon as valid, which makes counterfeiting almost impossible.
Think of it like owning an acre of land. You can’t physically hold it in your hand, but your ownership is recorded in a ledger with the local government. If a dispute arises, you can point to the ledger with your name as the recorded owner to prove that you bought and own the land.
With cryptocurrency, it’s money instead of land, and it’s worldwide.
How are crypto coins created?
In crypto mining, a computer solves complex numeric puzzles to verify blocks of cryptocurrency transactions and add them to the worldwide blockchain network.
If the miner is the first to solve this puzzle before all the other computers on the network, the miner is rewarded with a cryptocurrency coin, which then enters into the worldwide supply.
In essence, miners are being offered a reward for doing the job of keeping the blockchain verified and secured, thus preventing fraud.
How do you store it?
Crypto coins are stored in a wallet, which is a software program that holds the balance of your account. As the owner of this virtual wallet, you have a secure private key that allows you to make transactions online. Wallets can be accessed on desktop computers, mobile devices or via secured hardware devices that plug into a computer’s USB port.
Top 5 Cryptocurrencies by Market Cap
- Bitcoin (BTC) – $673B
- Ethereum (ETH) – $295B
- Tether (USDT) – $62B
- Cardano (ADA) – $55B
- Binance Coin (BNB) – $53B
What about Doge?
Dogecoin (pronounced “Dozh”) just misses the top five, checking in at number six by market cap. It may have started as a joke based on an internet meme of a shiba inu dog, but this crypto has serious value at the moment.
Risks and Benefits of Cryptocurrency
Let’s look at 2020, the most recent full year. This was a banner year for the stock market, but crypto gains nonetheless blew away the indexes.
S&P 500: +16.3%
(Data from 12/31/19-12/31/20. Index price data via MarketSmith. Crypto price data via Coindesk.)
Because it’s based on blockchain technology, it’s nearly impossible to create counterfeit cryptocurrency or “double spend” the coins because all transactions are checked and verified simultaneously around the world.
With traditional money, counterfeiting is still a worldwide problem.
Transactions made with cryptocurrency are anonymous in the sense that coins are sent to and from addresses with no personally identifying information.
On the other hand, all transactions are transparent and recorded in a public ledger, so if someone tied you to your crypto address, they could theoretically see your transactions.
Cryptocurrencies are increasingly being accepted as payment by businesses large and small.
Fun fact: The first “real” purchase using crypto occurred in 2010, when a Florida man paid 10,000 bitcoins for two Papa John’s pizzas—worth $41 at the time, now worth over $360 million (the bitcoins, not the pizza).
Cryptos trade 24/7 around the world and are susceptible to large price swings based on news headlines, government regulations, Elon Musk tweets—pretty much any factor you can name.
Cryptocurrency is highly speculative and isn’t considered a reliable investment vehicle by many financial advisors.
That attitude may be changing, but crypto is still not directly tradable in almost any 401(k) or IRA account.
There have been a number of hacking incidents involving cryptocurrencies.
The most notorious one occurred in 2014 and involved Mt. Gox, the world’s largest crypto exchange at the time. In total, around 650,000 bitcoins were lost or stolen—
Some cryptos have a high concentration of ownership in a small number of accounts (these high rollers are called “whales”).
This increases the danger of extreme volatility and price manipulation, but that varies depending on the specific crypto.
Stocks and ETPs with Direct Exposure
Grayscale Bitcoin Trust (GBTC): GBTC tracks the price of Bitcoin and trades like a stock. Grayscale buys bitcoins and stores them, while investors holding GBTC shares reap the profits/losses as the price of Bitcoin fluctuates.
Grayscale Ethereum Trust (ETHE): Similar to GBTC, this ETP seeks returns pegged to the price of Ethereum.
MicroStrategy (MSTR): This enterprise software and analytics company bills itself as the first publicly traded company to invest significant assets from its treasury in Bitcoin. They have spent a staggering $2+ billion buying bitcoins, meaning their profits are very much tied to crypto prices.
Investing & Banking Stocks
CME Group (CME): CME operates exchanges that offer Ethereum futures, Bitcoin futures and options, and Micro Bitcoin futures for 1/10 the size of one bitcoin.
Goldman Sachs (GS): The head honcho of global investment banks, Goldman Sachs announced the creation of a dedicated cryptocurrency trading desk dealing in crypto derivatives like futures.
Signature Bank (SBNY): This New York-based commercial bank has started offering banking and deposit services to cryptocurrency customers including the largest crypto exchanges. SBNY makes a healthy margin by lending with these low- and no-interest bearing deposits.
Square (SQ): This digital payment provider not only allows users of its popular Cash App product to trade crypto, but Square as a company has also directly purchased over $200 million in bitcoins as a corporate investment.
PayPal (PYPL): A competitor to Square in the digital payment space, they offer users of their PayPal and Venmo services the ability to buy and sell crypto starting at as little as $1.
Coinbase (COIN): Coinbase is the third-largest cryptocurrency exchange by volume, allowing its customers to directly buy and sell crypto and store in their personal digital wallets. They make money by charging commissions and fees for transactions.
Crypto Mining Stocks
Nvidia (NVDA): A manufacturer of GPUs for computer gaming that happen to be excellent at solving the complex equations required to mine coins. Now Nvidia has announced new crypto mining chips that promise increased performance for dedicated miners.
Marathon Digital Holdings (MARA): A U.S.-based company that mines cryptocurrencies at scale. They buy vast amounts of mining hardware, acquire massive amounts of energy at a lower cost and then hold the coins they mine as they appreciate or sell them at a profit.
Riot Blockchain (RIOT): A dedicated bitcoin miner similar to Marathon Digital, Riot Blockchain’s U.S.-based operations include the single largest Bitcoin mining facility in North America.
How to Trade Cryptocurrency
You can buy and sell crypto directly on a cryptocurrency exchange, which works similarly to a stock exchange like the Nasdaq or NYSE. Dedicated crypto exchanges (Binance and Coinbase are two of the largest) allow you to trade the largest variety of crypto coins.
Some traditional equity brokers offer direct cryptocurrency trading and some don’t; check with yours to see. For those brokers that don’t (like TD Ameritrade, Charles Schwab and Interactive Brokers), they may offer alternative exposure with instruments like Bitcoin futures.
Popular payment apps including Venmo, PayPal and Cash App offer crypto trading, though the selection of coins is limited to Bitcoin, Ethereum and a small handful of others.
Looking for the next big crypto play? Join IBD Digital.
Cryptocurrency can be volatile, which is why it’s critically important to make sure you’re invested in the right crypto stocks, ETFs and coins.
IBD Digital gives you instant access to proprietary ratings for over 7,000 stocks and ETFs that tell you if a stock measures up based on fundamental and technical analysis. It’s a great way to check whether the next hot crypto play is a potential winner or all hype.
Join IBD Digital today and unlock all of our cryptocurrency coverage, exclusive ratings, stock lists, market analysis and so much more. For new members, it’s only $8 for your first 8 weeks.
View more information: https://get.investors.com/infographics/what-is-cryptocurrency/