Understanding Risks In Cryptocurrency
Cryptocurrencies (or digital currencies) have attracted the attention of the media and many investors. However, the risks and technology behind these virtual dollars should be understood before investing. Listen here as we discuss more.
About The Speakers
Diane Rose, CRPC®
Client Relationship Manager
Diane Rose: I'm doing great Neil, excited to be here.
Neil Craft: Excellent, well thank you. We really appreciate your time. So, Diane, we're going to talk today about cryptocurrencies and specifically maybe understand some of the risks associated with them. We've all been hearing a great deal about them and in recent years I think especially Bitcoin has made a lot of headlines. So what is all the hype about?
Diane Rose: You’re right Neil. Cryptocurrencies or digital currencies as they're often referred to certainly have attracted the attention of the media and many investors, some even very famous investors. Bitcoin, for example, and its surge in price in recent years has a lot of people talk about and wondering if they should own some, so as not to miss out on a big profit opportunity.
Neil Craft: Yeah, that's for sure. So what exactly are crypto currencies?
Diane Rose: Cryptocurrencies have been around since 2008, Neil. They're basically a digital or a virtual means of facilitating or paying for an online financial transaction.
Neil Craft: Okay, I see. It definitely seems like nowadays almost everybody's at least heard of Bitcoin since it’s made a lot of headlines, but I understand there are several more types of currencies being traded today, is that correct?
Diane Rose: That's correct. Neil. In fact, there are now more than 6,700 currencies being traded as of the beginning of this year, and I suspect the number is likely to keep growing in the future. If the demand continues as strong, some of the larger and more popular cryptocurrencies that you may recognize along with Bitcoin are Ethereum, XRP, Tether, and Light coins.
Neil Craft: Okay. Yes, I've definitely heard of those, and I know Doge coin comes to mind, especially with some of the younger listeners out there. How are these currencies primarily being used?
Diane Rose: Well, these currencies are not commodities, so they're not physical raw materials like gold or silver. And they're also not considered to be an asset class like stocks or bonds. However, they do share some characteristics with them. Individuals can use them to buy goods and services over the internet, but they are not yet widely accepted as a medium of payment. That is to say that currently no party is required to accept payments in virtual currency.
Neil Craft: Interesting. So what is the technology I guess, behind these virtual currencies?
Diane Rose: That's a good question, Neil, the technology that drives these currencies is called the block chain to put it in very simple terms. Just think of the block chain as a huge database or ledger distributed across a peer-to-peer network that supports all types of online financial trends.
Neil Craft: Okay. Okay. That's definitely helpful. So if I decide to go buy some cryptocurrency, where would I keep it? Or where would I hold those assets?
Diane Rose: Right. Cryptos are stored in what's called a digital wallet. And that would be kept on your personal computer. Or on your cell phone, in the cloud, just think of your digital wallet as your virtual bank account.
Neil Craft: Okay, I get it. Let's back up for a minute. And for our listeners out there who want to try to get started, how would they buy and or sell these cryptocurrencies?
Diane Rose: You can buy and sell these currencies directly on crypto exchange, on crypto brokerage platforms and even at crypto kiosk.
Neil Craft: Okay, so there's lots of accessibility. It sounds like lots of choices.
Diane Rose: Yes, indeed, but before you jump in and start buying these virtual dollars, it's important to understand how they compare to the paper dollars in your back pocket.
Neil Craft: Sure, so what are the major differences that we have between digital currency and regular currency as it stands?
Diane Rose: The first big difference, Neil is that digital currency is not a universally accepted medium of exchange. Not yet anyway. Unlike the dollars in your back pocket, they tend to be very volatile in terms of their price, and this is because cryptocurrency prices depend mostly on investor speculation about their future adoption and how, and to what extent they will be used in the future, and that speculation in and of itself, Neal creates price volatility.
Neil Craft: Okay, Right. So I think, if our listeners out there have been following Bitcoin through the last several years or even months for that matter there's been a tremendous amount of price, volatility. Is that correct?
Diane Rose: It sure has. We're all familiar with the rollercoaster ride that has been Bitcoin's price. It's exactly these wild price point swings that make these cryptocurrencies often impractical for many transactions, but perhaps the biggest difference between virtual currencies and the dollars in your back pocket is the fact that unlike our paper bills, they have no central authority or regulation to manage them.
In other words, they're not overseen by any government or central bank. You know, the role of our central bank is to preserve the value of our currency by keeping inflation in check. That's why prices are more predictable under the Federal Reserve’s management authority.
Neil Craft: Okay. Well, that's very, eye-opening. When you back up and think about it, are there any other maybe what we haven't mentioned already, other potential risks that our listeners should be aware of before they start buying crypto card?
Diane Rose: Yes, Neil, you should also be aware of some potential liquidity risks, meaning that it may be difficult to sell your virtual currency quickly at a reasonable price. If you would find yourself in need of your funds, say in a hurry, in the case of an emergency. Lastly, the online exchanges and platforms where these currencies are traded are often highly subject to cybersecurity risks.
Neil Craft: Of course. I mean, those are certainly some very valid concerns. I think it's obvious to see now that advanced investors should be careful, and be sure to really do their homework before they jump right into something like a cryptocurrency.
Diane Rose: That's right and I would agree cryptocurrencies, although they are very popular today and certainly are exciting, they're not for everyone. At some point, the government may seek to regulate or restrict them and even may issue their own version of a digital currency. Investors need to tread with lots of caution in the crypto world. For now, the exchanges and platforms where these currencies trade do not offer them the regulations, controls, and investor protections that are available in more traditional markets.
Neil Craft: Okay. So it sounds like we should all proceed with caution, right? Well, this has been very informative, Diane, thank you so much for the information and more importantly, your time today. If you have any questions about Bitcoin, other cryptocurrencies and their associated risks, or our Market Clarity podcast, please be sure to visit us at www.jamesinvestment.com for more information.
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