Digital currency is the key to a more innovative, inclusive finance industry
Cyptocurrency has been a fixture in the headlines lately. From Bitcoin’s record-breaking value (around $67,000 in October 2021) to El Salvador adopting bitcoins as legal tender to Elon Musk popularizing (and then tanking) dogecoin, crypto has moved from fringe online communities to the cultural zeitgeist. But there’s much more to digital currency than what’s trending.
I see crypto (also called digital currency, software currency, decentralized money, etc.) as the currency of the future. It’s digital cash that’s bought, sold, and tracked entirely online using a distributed ledger technology known as blockchain, enabling individual investors to sidestep traditional financial institutions and get involved on their own terms. It stands to revolutionize not only the way we invest but how we buy goods and services in virtually every scenario.
If you’re unsure about incorporating cryptocurrency into your investment strategy, here are 5 reasons that it deserves your attention.
Unprecedented financial innovation
I’m extremely passionate about fintech (financial technology), an approach to financial services that uses tech to improve the customer experience. You’ve likely used fintech to make mobile payments, trade stocks, or access other financial products like bank accounts, mortgages, and insurance. Cryptocurrency falls under the fintech umbrella, but it offers an unprecedented level of innovation.
Sure, you can use crypto to buy goods and services, which suggests digital coins are nothing more than a new payment method. But the use of blockchain has the potential to reinvent the entire financial ecosystem. Traditionally, every financial transaction requires some kind of middleman. In real estate specifically, you need banks and brokers to facilitate sales. But blockchain eliminates the need for intermediaries.
Essentially, a blockchain is what’s considered a distributed ledger. When a transaction is made, a network of thousands of computers (“nodes”) confirms the legitimacy of the sale. Record of the purchase is logged in a “block” and added to the ledger in chronological order. In the case of real estate, the network of nodes approves the sale of a property, not a mortgage lender or other third party. Everything happens digitally, simplifying the process and cutting down the total transaction time.
Across industries, blockchain technology could remove the pain points for all sorts of complex transactions, upending the way we conduct business.
Furthermore, many people envision a world where Bitcoin is the sole currency of the future, displacing all other currencies around the globe. This may seem far-fetched. But this concept lies in what we think of as money. At its core, “money” is anything we all collectively agree to use for barter or exchange. In the past, various forms of currency or money have been anything from glass beads to livestock. So that dollar bill in your wallet is only worth something because it’s accepted as legal tender. Bitcoin’s rapidly growing adoption means it, too, could stand as money in all parts of the world — so long as enough people and institutions accept it.
Another reason I love cryptocurrency is that its value isn’t backed by any entity or tied to other types of currency. Fiat money, like the U.S. dollar, is controlled by the government, meaning the central banks can control the amount of money that’s printed. And stock value is driven by a mix of market forces, including a company’s performance, the state of the economy and monetary policy. But crypto is decoupled – from the government, the market, and other currencies. There’s the possibility for big returns and outsized yields relative to other investments, as shown by the performance of Bitcoin
Back in 2011, 1 bitcoin was just $5. Today it’s around $67,000.
When the stock market sells off or equities have a bad day, there’s no bearing on crypto’s value. However, this decoupling results in high volatility. Crypto takes wild swings because the market is driven by speculation, and everything from negative headlines to high-profile losses can turn the tide. For this reason, it’s important to do your homework first before investing. Also, be sure to invest with funds that you can afford to lose or keep invested for a longer period of time.
Unlike traditional investments, cryptocurrency has opened up financial possibility for everyday investors and investors of color.
Though the cost of bitcoin – currently about $67,000 as of this writing – seems daunting, you don’t need a great deal of money to get started. You can buy fractional shares of crypto through exchanges like Coinbase. So, instead of fronting the full cost, you can commit a dollar amount that works for you. The barrier to entry is basically nonexistent.
Crypto is also attracting people of color. Black investors largely missed out the big equity market gains that occurred in 2020, with only 33.5% of Black households owning stocks at the end of 2019. But to date, more Black and Hispanic investors own crypto compared to White investors. This is because crypto represents a race-neutral approach to investing. Many people of color hold a deep distrust of the financial industry, because of bias, past mistreatment and a lack of access to services from mainstream institutions. Investing in crypto requires only Wi-Fi and a bit of disposable income – not enduring the judgment of people working at a particular financial institution.
However, as crypto becomes more widespread, financial inclusion will need to stay front and center. The fintech industry will need to reach individuals who don’t have smartphones, large sums of capital, or the digital literacy necessary to get involved. Otherwise, what was meant to be inclusive and democratized could, in some ways, worsen the wealth gap.
Free from government intervention
As I mentioned earlier, crypto isn’t a fiat currency, meaning it isn’t driven by government decision-making and intervention. One big reason crypto bulls advocate for a cryptocurrency like Bitcoin is that it’s complete free of actions by central bankers around the world, including the U.S. Federal Reserve. One byproduct of this is that innovation can happen at a rapid clip, since there aren’t currently any draconian regulations in place. The lack of government involvement is a bit of a double-edge sword in some ways: that’s what makes it so easy for any investor to get involved, but it also accounts for some of crypto’s volatility.
But as other countries follow El Salvador’s lead in officially adopting crypto as legal tender, and as major institutions consider accepting crypto or launching their own coins, it’s likely that government involvement is around the corner. That’s not bad news. Some degree of regulation will likely benefit consumers, to protect them from unethical practices and to further improve security.
For now, however, innovation can continue unchecked, allowing the crypto market to operate as its own force and keep its doors open to all.
Market growth potential
Last but most certainly not least, I love crypto because it’s a nascent market ripe for growth. The total market cap hit $2 trillion in April, with bitcoin accounting for $1.1 trillion of that. It may sound like a lot but the global stock market is valued at $95 trillion. Crypto is just a fraction of all action in financial markets, with lots of room to expand. That makes this a great time to get in on the ground floor and watch your investment blossom.
Just think about what early adopters have made so far. If you’d invested $10,000 in bitcoin in April 2011, you could have sold off your holdings for $650 million in April 2021. That degree of growth is not happening with stocks.
It’s also worth noting that Bitcoin competes with gold too — as a store of value and a hedge against inflation. In fact, bitcoin is better than gold (and other fiat currencies too) in these ways:
* Bitcoin has a finite supply (just 21 million coins will be programmed; scarcity creates value)
* Bitcoin is portable, divisible and easily transferable (whereas you can’t readily break up or lug around gold)
* Bitcoin is ultra secure (with un ‘unhackable’ code and it would be extremely difficult to counterfeit it)
* Bitcoin is digital (and doesn’t have the constraints or hassles associated with any form of physical currency)
All in all, I’m an enthusiastic fan of crypto — especially Bitcoin — because it’s unlike any other advancement in financial services. And with just 1% or 2% adoption rate so far, the total addressable market is enormous. But a note of caution – there’s a learning curve here. Before you jump in, research the best ways to invest, trade, buy and hold. Explore apps like Coinbase, Robinhood, and Kraken, and play around with a simulator account (like the one available via TradeStation) to get a feel for the market. There’s a lot to be gained. However, you still have to do your homework. I’ve also written a short glossary of cryptocurrency terms in this article.