Cryptocurrency 101

January 16, 2018

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While not a new thing—Bitcoin just celebrated its ninth birthday!—cryptocurrency is creeping its way into the mainstream. That’s why you may have been reading about it more lately than before. While it’s still a very new thing in terms of mass adoption, it’s an exciting development that has been taking the financial world by storm for some time now and has the potential to fundamentally change a lot of the ways we do business and think about our money.

With all this recent chatter, we wanted to provide a brief overview of what cryptocurrency is, why we’re excited about it, and what it might mean for your personal finances. 

This isn’t meant to be a comprehensive overview—this is a complex subject—it’s more so meant to give you the gist and hopefully pique your interest. That’s why we’ve provided a list of further reading at the end.

First things first. What exactly is cryptocurrency?

Well, it’s complicated. But at its most basic definition, cryptocurrency is essentially a digital ledger. Sure, the word “currency” is right in the name, but what we’re talking about is actually a type of technology called blockchain—a digital ledger or database that cannot be altered (the technical term for this is immutable). 

That ‘cannot be altered’ part is key because it means that cryptocurrency transactions are completely secure. Once a transaction is recorded in the ledger, it cannot be undone, revised, reversed, or changed in any way.

Cryptocurrencies are one example of how the blockchain technology can be used. When it comes to transferring actual funds, cryptocurrency is a way to trade money though pure technology that eliminates the need to check or authenticate the transaction. Think of it like this: Back in the day if you wanted to give somebody $20 you would just give them a $20 bill. Easy as that. 

But with the introduction of online and digital banking, when you give somebody $20, you’re actually giving them a copy of your $20 (which is a copy of another $20, and so on) and there are a lot of steps and paperwork that have to happen in between you sending that $20 and the person receiving the money. Basically, it’s a bit of a process. 

Cryptocurrency simplifies all of that because it’s basically the digital version of you giving somebody the physical $20 bill. The transaction is direct—it’s not a copy. Which means the trail is easy to track.

Right, but what about the currency side of it?

There are many cryptocurrency companies developing blockchain applications for a range of uses across a range of industries—and yes, some of those include currency applications. Some of the most popular names are Bitcoin, Ethereum, and Ripple but there are hundreds more. (We’ve included a link to the top 100 with a helpful four-word definition for each in the further reading section below.) 

In general, cryptocurrencies all work similarly in that companies issue ‘coins’ that you can purchase and that in turn creates a measure of value. In this way, cryptocurrencies are similar to things like stocks and shares. But unlike more traditional currencies, you can’t walk into your local bank or credit union to purchase them. You need to go through a cryptocurrency exchange to do that.

Got it, I think. Why is this so exciting?

Cryptocurrency is really exciting because of the technology associated with it now, and the potential that technology holds for the future. 

As mentioned, when we talk about cryptocurrency, what we’re really talking about is a type of technology called blockchain. And blockchain can be used to share a lot more than just financial transactions and information. It can be used as a secure way to share important documents like contracts, records, and even mortgage documentation. It can even be used to keep track of assets. 

This type of technology has the potential to be really disruptive—and most of the developments that are happening with it are entirely unprecedented. While this is a little uncertain, it’s also extremely exciting. It’s not every day that you get to witness something completely new and unprecedented unfold. The future is now!

Wow! So, should I put everything I have into cryptocurrency?

Heck no! Slow down! Remember the part where we said this is still really new and unprecedented? That also means that investing in cryptocurrency can be extremely volatile. 

Sure, if you invested in Bitcoin back when it first started you might be sitting pretty right now. But with big gains come big risks, too. 

We can’t tell you whether you should or shouldn’t invest in cryptocurrency—that’s ultimately a decision only you can make. What we can tell you is that if you’re interested in investing in cryptocurrency, first you’ll need to ask yourself some questions:

  • How much risk are you comfortable with?
  • How much money are you willing/prepared to lose?
  • How much money are you willing to invest?

It’s important to be honest when you’re answering these questions (and all questions) as they will ultimately help you make some decisions about what to do. 

If you’re thinking long-term investments, traditional stocks, bonds, and mutual funds are a safer bet, so you might want to consider opening an RRSP or TFSA. A financial expert at your local credit union will be able to give you a better breakdown of the right mix of long-term savings for you, if you’re interested.

Now that you have a primer, here are a few links to help you take a deeper dive into this fascinating technology!

Further Reading

What is blockchain?

Will the Canadian dollar become a cryptocurrency?

What is cryptocurrency?

Top 100 cryptocurrencies described in four words or less

Cryptokitties: collect and breed digital cats