DBR – Cryptocurrency – What You Need to Know to be Crypto-Smart

Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides.

What exactly is cryptocurrency?
Crypto is digital money. At its core, cryptocurrency is typically decentralized digital money designed to be used over the internet. In other words, Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. The easiest way to think of tokens is to compare them to casino chips or arcade game tokens—you will need to exchange real currency for the cryptocurrency to access the good or service.

​Bitcoin, which launched in 2008, was the first cryptocurrency, and it remains by far the biggest, most influential, and best-known. In the decade since, Bitcoin and other cryptocurrencies like Ethereum have grown as digital alternatives to money issued by governments. Right now, the leaders trading cryptocurrencies by market capitalization are Bitcoin, Ethereum, Binance Coin, Solana and Tether.

Cryptocurrencies are usually not issued or controlled by any government or other central authority. They’re managed by peer-to-peer networks of computers running free, open-source software. Generally, anyone who wants to participate is able to. Even though a bank or government is not involved, crypto is considered secure because all transactions are vetted by a technology called a “blockchain.”  Regardless of lack of government/central authority control, Blockchain is and remains cryptocurrency’s “security blanket.” Blockchain is a decentralized technology spread across many computers that manages and records transactions.

Part of the appeal of this technology is its security. A cryptocurrency blockchain is similar to a bank’s balance sheet or ledger. Each currency has its own blockchain, which is an ongoing, constantly reverified record of every single transaction ever made using that currency. Unlike a bank’s ledger, a crypto blockchain is distributed across participants of the digital currency’s entire network. No company, country, or third party is in control of it; and anyone can participate. A blockchain is a breakthrough technology only recently made possible through decades of computer science and mathematical innovations.

Currencies have developed and transformed since their inception. To what do you attribute this rise of a new currency in our day and age?
In a nutshell, cryptocurrencies offer an important benefit for any investor: a price that moves independently of the economy, rather than changing with it like so many other investments. More high-minded fans say digital assets are simply the future of finance, allowing transactions to sidestep middlemen, with fees tied to a currency that’s not beholden to any government. That is, the rise of a new currency is considered attributable to:

A. The desire to take complete control over his/her own assets. Cryptocurrency blockchains allow individuals to take complete control over their assets.

B. Crypto’s ability to transfer value online without the need for a middleman like a bank or payment processor, allowing value to transfer globally, near instantly, 24/7, for low fees.

C. Crypto emerging as the new “safe haven” against market volatility and inflation. Cryptocurrencies, especially Bitcoin, are now being considered as a safe-haven asset against market volatility and inflation. The current societal and economic climate also brings about a situation for people to hold less cash and stay hedged against market swings. Recently, there has been a trend where public companies (such as Square, Microstrategy) are converting their cash treasuries into cryptocurrency, considering it to be a better store of value … Many companies have since followed this trend. The confidence of corporate giants on cryptocurrencies has added more merit to it as a currency and value store. There is an increase in the desire to convert one’s cash into crypto because of its deflationary nature; crypto is perceived to be a better store of value and a hedge against inflation.

D. Easier access to the public. By redistributing power away from the government and Wall Street and to the people, cryptocurrency will democratize finance … As a digital currency that can be used as both—a store of value and a mode of exchange, cryptocurrency has not only gained attention as a legitimate payment method, it has established its footprint as a new asset class.

Are cryptocurrencies here to stay? If so, to what extent? Will they be used for groceries or will cryptocurrencies be exclusive to larger or more selected transactions?
Whether you love them or hate the idea of them, Cryptocurrencies are here to stay… Cryptocurrencies have surged so much that their total value has reached nearly $2.5 trillion (rivaling the world’s most valuable company, Apple…), and have amassed more than 200 million users. At this size, it’s simply too big for the financial establishment to ignore.

Cryptocurrency is more than just a financial news talking point. For example, it has “normal life” applications that are now being implemented in the food industry. Restaurants such as Bubba Gump Shrimp Company and Morton’s The Steakhouse, will start to accept Bitcoin and other cryptocurrencies as a form of payment for meals. Similarly, major U.S. companies and retailers such as BMW, Microsoft and AT&T have pitched their hat into the crypto ring…. Even major credit card companies are now trending towards enabling cryptocurrency payment options. What is clear is that digital currencies are gaining traction with consumers (especially millennials).

Despite many of the arguments in cryptocurrency’s favor, is it wise to tread carefully considering its instability?
Bottom line is that Cryptocurrency is still unregulated and for that reason alone, it is definitely wise to tread carefully …Given its lack of regulation and exposure to cyberattacks, treading carefully is smart. If you are new to the Cryptocurrency space, an option is to take ‘baby steps’ when entering the Crypto ring. For example, a safer (but potentially less lucrative) alternative is to first buy the stocks of companies with exposure to cryptocurrency. When asking “Is cryptocurrency safe?” the more comprehensive answer is “it depends….” Several factors make cryptocurrency not entirely safe, at least currently, while other signs are emerging that cryptocurrency is here to stay. Even Venmo is now marketing to its users that it can “put to good use” the money sitting in their Venmo account by buying Bitcoin, Ethereum, and more … in just a few taps.

Cryptocurrency risk is very real; at a minimum, one must be aware of the four fundamental risks:

Cryptocurrency exchanges are vulnerable to cyberattacks.
Cryptocurrency exchanges, more so than stock exchanges, are vulnerable to being hacked and becoming targets of other criminal activity. These security breaches have led to sizable losses for investors who have had their digital currencies stolen. Safely storing cryptocurrencies is also more difficult than owning stocks or bonds.

Competition remains fierce among thousands of blockchain projects.
There’s also no guarantee that a crypto project you invest in will succeed. Competition is fierce among thousands of blockchain projects, and projects that are no more than scams are also prevalent in the crypto industry. Only a small number of cryptocurrency projects will ultimately flourish.

Regulations might be against the crypto industry in the future.
Regulators may also crack down on the entire crypto industry, especially if governments continue to view cryptocurrencies as a threat rather than just an innovative technology. The United States Securities and Exchange Commission is of the position that investors simply do not yet have enough regulatory protection from the swarms jumping into crypto finance, issuance, trading, and lending.

Products based on cutting-edge technologies have intrinsic volatilities.
With cryptocurrencies being based on cutting-edge technology, that also increases the risks for investors. Much of the tech is still being developed and is not yet extensively proven in real-world scenarios.

Suzanne DeWitt is the founder and managing partner of DEWITT PLLC. Her work includes the structuring, formation, and operation, on a cross-border basis, of a variety of alternative investment products, including U.S. and non-U.S. hedge funds, private equity funds, hybrid funds, and funds of-funds, as well as private banking and international tax and trust planning for high-net-worth clients and financial institutions. She can be reached at 305-563-7000.