CRYPTOCURRENCY & BITCOIN – HERE’S WHAT YOU NEED TO KNOW
Hold up - first understand blockchain technology
First we must understand the blockchain technology. Basically, it’s a peer-to-peer system which uses extremely complex algorithms which are virtually hack proof. It replaces traditional third-party organisations which act as a clearing house. I.e. If you want to send your friend $100 to their bank account, you need to use a bank to transfer this money… and you also need a bank to hold this money. The following clip explains this well.
In the future, you will be able to send a once off code to your friend who can use it to unlock your house when you are not there – to let them in. Lot’s of cool stuff in the blockchain space. Remember this is the technologies that carries crypto currencies – but can be used for much more.
OK – so you know how you put money in a savings account and you might get a 2% return per year, if you’re lucky? That’s because cash in the bank is SAFE and therefore not volatile.
Volatile: liable to change rapidly and unpredictably, especially for the worse
Your retirement savings which is invested primarily in shares in a mutual fund is somewhat volatile, well usually up to 90% of the investment and may return a nice 11% return for the year. Which is nice. Really nice. Some years it may get up to 17%. How sexy... who wouldn’t love a return in the teens.
Bitcoin in the last twelve months has returned approx. 1200% or in the last month has returned like 68%. It also can swing 20% in one day! It's nuts!
There is an old saying – the higher the risk, the higher the reward. Gotta risk it to get the biscuit!
It’s new to pop culture – but not new
Bitcoin has been around for a while – it’s the main one, in fact do yourself a favour and watch the documentary on Netflix (Banking on Bitcoin). It’s great. Usually by the time my next-door neighbour who is a builder starts to tell me about how he has “invested” in something – it’s too late. I mean, I’m sorry how come this builder is suddenly a professional on currency markets and trading. Weird right. While cryptocurrency has been around for a while, once every Tom, Richard and Harry get on board – it basically means it's only for the hype and the get rich quick factor. Most serious economists and futurists say this intense growth is a bubble. The thing is – this type of asset class is so different, it’s hard to know if it should be treated as a currency or commodity. Who knows.
Bitcoin is not the only cryptocurrency
There are thousands of cryptocurrencies available on various coin exchange websites. The main one is Bitcoin, it was essentially the first to market and also the one everyone talks about. Two other popular crypto currencies are Ethereum and Litecoin. Each currency has a slight variant in the way it’s used and mined (yes you have to have a very powerful computer to “mine” coins!). One of the main differences between Bitcoin and Litecoin concerns the total number of coins which each cryptocurrency can produce. The Bitcoin network can never exceed 21 million coins, whereas Litecoin can accommodate up to 84 million coins*. This could be interesting with supply and demand you say; however, you can split coins!
How much cryptocurrency should I purchase?
Firstly, remember the .com boom? People were paying millions of dollars for shares in internet companies where there was simply no intrinsic value. Just because it was a new .com website and company – it had to make me money, right!!!! Just park that thought on your side table for now. In my opinion you should not buy alternate assets such as gold, silver, coins, art, collectibles blah blah with over 10% of your net worth (excluding your home).
This is because we need to limit how much is in assets that are not easily sold, could not be sold if there was not a buyer or assets that are extremely volatile. Further to my humble opinion, I probably wouldn’t suggest you allocate more than 1% of your net worth (excluding your home) into cryptocurrencies.
Also – be careful a lot of these online coin exchanges charge a high broker fee and in some instances once you transfer on to them – you can’t transfer back to your currency without moving to another possible exchange and incur more fees.
Should I buy some cryptocurrency?
I’m not going to sit here (lay here, as I’m on the lounge) and tell you if you should buy crypto currency or not. You’re an adult or at least have an adult body! I would say that perhaps if you have credit card debt or one of your kids are needing orthodontics – you might get a better return with your money before you transfer this over to crypto. But again… be an adult!
Where & what should I purchase?
Full disclosure. I personally own cryptocurrency and use coinspot. I also purchased well before this current hype. coinspot allows you to buy Bitcoin, Ethereum, Litecoin and many others. I personally do not have more than USD$10,000 in cryptocurrency. It’s not an investment for me. I know my wealth will not come from cryptocurrency.
I think I’m more self-medicating for fun with dopamine! So just chill out and don’t use cryptocurrencies as an excuse to solve all your financial problems when you think you'll quadruple your money overnight. Because the chances are by the time you get around to buying some coins – you’ve probably purchased at the wrong time!
I am not recommending you use this product or service. You do so at your own risk.
With all this talk about bitcoins and cryptocurrency – it’s still a far way off being a traded currency. Like, I can’t go to the local shop and buy a coffee with 0.0003 bitcoin. A recent article** quoted Mark Cuban saying, as long as people treat bitcoin as a collectable the price will keep increasing!
P.s. If you want to discuss this more, why not join my private facebook group, "Sort Your Money Out"!
Glen James is a financial professional with many years experience helping people like you.
He is conservative and somewhat a contrarian in the way he delivers his practical financial help. Glen has a particular interest in personal finance and small business.
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