What is cryptocurrency?

[y_so_blu]

I started hearing about it several years ago. Didn't make any sense to me then, still doesn't now. Someone help?

It's in the news again because that FTX company went under, and people lost a lot of money, and the 20-something CEO is babbling about it in interviews.

[Jolly Blue Giant]

It's "virtual money" that exists in a complex system of algorithms (somewhere in a "virtual world") and when someone tries to explain it, it will never make sense.

As an investment, "just say no"...LOL

IMO, it's sorta like musical chairs and the smart person sits down in a chair while the music is still playing...in short, bail while the bailing is good. 

[DaveBrown74]

It's "virtual money" that exists in a complex system of algorithms (somewhere in a "virtual world") and when someone tries to explain it, it will never make sense.

As an investment, "just say no"...LOL

IMO, it's sorta like musical chairs and the smart person sits down in a chair while the music is still playing...in short, bail while the bailing is good. 

Apt description.

[MightyGiants]

Cryptocurrency is a complex topic.  First, you need to appreciate the concept of currency.  Prior to Crypto, money was issued by and regulated by governments, usually via a central bank.  Of course, currency can be anything that a group of people designates to have value; it could be coconuts, for example. 

Now there is a technology called blockchain.  The simplest explanation is that it's a networked decentralized (not sitting in any given computer) database.  This database encrypts (basically scrambles the files stored on the network and requires a key to unscramble.  There are a variety of cryptocurrencies out there, with bitcoin being the most popular.  The new currency is created via a process called "mining," which has specialty computers solving complex mathematical problems (with the first one to get the answer getting the new coins).  This mining serves a functional purpose as the calculations are done also ensure that when files are transferred (especially a bitcoin is spent by giving it to another), it ensures that it's a unique transaction and that a person doesn't spend their bitcoin file more than once.  You don't have to mine cryptocurrency it's available for sale (for "real" money) via brokers.

As a side note, fungible tokens are like one-off cryptocurrencies where the scrambled files are usually pictures of something, and they can be traded for funds as well.

The appealing aspect of this currency is that it's not regulated by any sort of government entity.  It's also easily transferred.  It was the creation of cryptocurrency that allowed hackers around the world to take computers hostage by encrypting all their files and demanding ransom via cryptocurrency.  Of course, there was also a lot of speculation on crypto that helped drive up the price (plus, some felt it might be a safe haven from inflation and fluctuations of stock markets).

Since it's not regulated and it's not a traditional currency, it's essentially an asset class that has zero intrinsic value (like investing in fine art or comic books), and much of the value has been driven by speculation, the currency's values have fluctuated wildly (which sort of negates one of the main purposes of currency which is to have the means to transfer monetary value on a relatively stable platform).  It also turns out that all that financial regulation wasn't just evil government over-reach but was, in reality, hard-earned lessons in terms of keeping a momentary system stable and relatively safe.

So it is that lack of regulation that has led to the bankruptcies and the huge losses we have been witnessing.  On a personal note, I have and will continue to steer well clear of cryptocurrency because it's not really a sound or safe investment.  "Investing" in crypto, at its heart, is like investing in dollar bills.  I prefer investing in companies, bonds, real estate (via REITS), ETFs, and mutual funds.  I have learned that financially I am an investor (invest in something and ride with it) rather than a trader (someone who essentially gambles on the rising and falling of various asset classes) 

[Slugsy-Narrows]

It's a way to own fake money with real money.

You can't see it and touch it, but it's their!

It can be worth a lot but then not!

It's modern fools gold in my opinion!

A way for you to lose money and someone else make money off our foolishness.


Sent from my iPhone using Tapatalk

[Ed Vette]

If you're going to invest in Cryptocurrency my suggestion would be to buy a protective Put option to cover any crash. Especially if it's a volatile market as you can make money on Calls and Puts.

[DaveBrown74]

If you're going to invest in Cryptocurrency my suggestion would be to buy a protective Put option to cover any crash. Especially if it's a volatile market as you can make money on Calls and Puts.

This, or simply don't invest in crypto with an amount of money that you can't afford to lose 100% of. I don't own any crypto and don't plan on buying any in the foreseeable future, but if I did, it would be a very small percentage of my overall portfolio. Such that if it all went to zero it would be no more than an annoyance to me but life would go on as normal and no budgetary adjustments would need to be made. Obviously, you're not likely to make tons of money in crypto if that's your commitment level, but there are more than enough opportunities in stocks and other investments, even for the risk-hungriest and most aggressive of investors. Investing in crypto purely for FOMO reasons is kind of silly in my opinion. Plus the time for that has probably passed.

[Jolly Blue Giant]

This, or simply don't invest in crypto with an amount of money that you can't afford to lose 100% of. I don't own any crypto and don't plan on buying any in the foreseeable future, but if I did, it would be a very small percentage of my overall portfolio. Such that if it all went to zero it would be no more than an annoyance to me but life would go on as normal and no budgetary adjustments would need to be made. Obviously, you're not likely to make tons of money in crypto if that's your commitment level, but there are more than enough opportunities in stocks and other investments, even for the risk-hungriest and most aggressive of investors. Investing in crypto purely for FOMO reasons is kind of silly in my opinion. Plus the time for that has probably passed.

Yup - it redefines risky business. I never owned crypto, but held stock in a couple of companies that mine crypto a couple of years or more ago. Made some money, but man...talk about volatility. It's off the charts. It will be interesting to see where crypto goes from here. I suspect it's a fading fad, but who the hell knows. I know I am staying far away from it 

[MightyGiants]

This, or simply don't invest in crypto with an amount of money that you can't afford to lose 100% of. I don't own any crypto and don't plan on buying any in the foreseeable future, but if I did, it would be a very small percentage of my overall portfolio. Such that if it all went to zero it would be no more than an annoyance to me but life would go on as normal and no budgetary adjustments would need to be made. Obviously, you're not likely to make tons of money in crypto if that's your commitment level, but there are more than enough opportunities in stocks and other investments, even for the risk-hungriest and most aggressive of investors. Investing in crypto purely for FOMO reasons is kind of silly in my opinion. Plus the time for that has probably passed.

I frequently have heard the story that when the man on the street starts talking about an investment it's a good time to get out (as the peak has come and may even be going).  They usual tell that story about the stock market, but I think it applies to crypto as well

[DaveBrown74]

I frequently have heard the story that when the man on the street starts talking about an investment it's a good time to get out (as the peak has come and may even be going).  They usual tell that story about the stock market, but I think it applies to crypto as well

Maybe, although the good time to "get out" of crypto was one year ago. If you didn't, and just now thinking about getting out today, you kind of missed it.

[y_so_blu]

Thanks, everyone, for the very informative replies! I got everything from common-sense explanations to a textbook-style description.

Any mention of the word "trading" is enough to make me distrust FTX and crypto in general. Also the fact that the whole company was run from the Bahamas. I'll stick with businesses that sell a real product and follow a real set of rules.

[MightyGiants]

Crypto currency needs miners to provide the needed computing power for their crypto networks.   So I found this article about a major Bit Coin minor on the verge of bankruptcy rather interesting (they provide Bit Coin with 10% of the needed processing power)


https://www.bnnbloomberg.ca/bitcoin-miner-core-scientific-has-lost-1-7-billion-this-year-1.1849853

[GordonGekko80]

Personally, I am no fan of Cryptos. I work in Market Conduct and since it's not regulated it has a massive potential of a) money laundring and b) market manipulation (less so for Insider Dealing in my view).

But it's part of the modern financial system and as such, there are facts which are undeniable.

1. Crypto is not correlating with anything. Wrong. When the market crashes, Crypto crashes with it.
2. Crypto cannot be used to diversify a portfolio. Wrong. If used in the right measure, there are possibilities to increase an RoA ratio, more specifically

Portfolio Allocation excl BTC
40% Bonds
35% Stocks
25% Real Estate

Performance since 2016
Return: 5.4%
Std. Deviation: 7.4%
Sharpe Ratio: 0.73

Portfolio Allocation incl BTC
39% Bonds
34% Stocks
24% Real Estate
3% Bitcoin

Performance since 2016
Return: 12.1%
Std. Deviation: 9.1
Sharpe Ratio: 1.33

If you play it conservative enough and use it appropriately there are ways on how to make money, as long as you're patient and don't overload (can't Blitz all the time, can you?!  ).

[MightyGiants]

I thought this was spot on

[Jolly Blue Giant]