The very real volatility of cryptocurrencies has lately made headlines, as investors have seen their investments in digital assets plunge. 1 The price of Bitcoin (BTC) plummeted to one of its lowest levels since 2020, wiping away more than $300 billion. 2
One element of bitcoin investment that you should inform your customers about is volatility. However, this is not the whole picture.
Some of your customers may just have heard the phrases “cryptocurrency” or “digital assets,” but they may not understand what they imply or how they function. Others may have minimal awareness, while still others may have invested in cryptocurrency and utilized it to purchase products and services. Because of these possibilities, it’s ideal to start by asking your customers what they know about the issue and working your way from there.
- When clients inquire about cryptocurrency, they need to understand both the positive and negative aspects.
- It is crucial to advise your customers that bitcoin may be a very volatile investment.
- Clients should also be aware that bitcoin may be a safe payment method that is accepted by major and small sellers all around the globe.
As a financial planner or adviser, it is your responsibility to offer your customers with a variety of investment possibilities, analyze these options, and explain how they may assist or hinder them in accomplishing their objectives. Although some economists differ on the long-term viability of cryptocurrencies, it is likely to exist for many years to come. Some analysts anticipate that bitcoin will eclipse cash and credit card usage over the next five to ten years.
What Is Cryptocurrency?
A cryptocurrency is a decentralized digital money that is secured by encryption. 3 You may assist your customer realize that cryptocurrency, like conventional fiat currencies like US dollars and euros, can be used as an investment as well as to pay for daily products and activities.
According to CoinMarketCap, there are more than 19,684 digital currencies with a total market valuation of $1.31 trillion as of June 1, 2022. Bitcoin, the biggest by far, was introduced in January 2009 by the pseudonymous Satoshi Nakamoto. 45
Early digital items were simple to copy, which posed a barrier to digital currencies until Bitcoin was developed with safeguards in place. Despite being digital, the use of encryption and blockchain technology assures that cryptocurrencies are almost hard to counterfeit or double spend.
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6 Things That Your Client Needs to Know About Crypto
- This is how it works. Cryptocurrency is similar to fiat or conventional money in that it can be used to purchase goods and services. It differs, though, in that it is only available digitally. Gift cards bought using sites such as Bitrefill are a convenient method to spend bitcoin at stores and suppliers. Starbucks Corp. (SBUX), Nordstrom Inc. (JWN), Best Buy Co. Inc. (BBY), Walmart Inc. (WMT), and Overstock.com Inc. are among the shops that take cryptocurrencies through the third-party app (OSTK).6
- How to Begin Using It You must open a cryptocurrency exchange account. You may buy cryptocurrencies through an exchange like Coinbase. Traditional cash, such as debit cards or bank accounts, may be used to purchase cryptocurrency.
- How to keep it. To safeguard your assets, move them to a noncustodial crypto wallet. A wallet validates your transactions and safeguards your private key information.
- What can you do with it? Because crypto money are not connected to a bank or a government, they are always accessible wherever in the globe.
- How secure is it? Because you do not need to submit personal information to a seller while using cryptocurrency, the risk of identity theft or fraud is reduced.
- How solid is it? Absolutely not. The volatility of cryptocurrency might be positive or detrimental. Assume you have $2,000 in your cryptocurrency account. The value may rise, indicating that you have more money in your account. However, if the value falls below $750, there is little you can do to recoup the lost monies other than wait it out and hope that the value rises. It might not.
With a noncustodial crypto wallet, you have control over your private keys, which govern your currencies and may help you verify ownership. With a custodial wallet, another firm controls your private keys, and if that company fails or is hacked, your cash are lost.
What is a digital wallet?
A digital wallet (also known as an e-wallet) is a software-based system that securely saves users’ payment information as well as passwords for various payment methods and websites. Users may utilize near-field communication technology to accomplish purchases effortlessly and fast by utilizing a digital wallet. 7 They can also generate tougher passwords without having to worry about remembering them afterwards. Mobile payment systems, which enable users to pay for products using their cellphones, may be used in combination with digital wallets. A digital wallet may also be used to store information from loyalty cards and digital coupons.
What is a distributed ledger?
A distributed ledger is a database that is shared and synced by several persons across various locations, organizations, or countries. It enables for public “witnesses” to be present during transactions. Each network member has access to and owns an identical copy of the recordings shared throughout the network. Any modifications or additions made to the ledger are immediately reflected and duplicated to all participants. 8 A distributed ledger differs from a centralized ledger, which is the type of ledger used by the majority of businesses. Because it contains a single point of failure, a centralizedledger is more vulnerable to cyberattacks and fraud.
What is a blockchain?
A blockchain is a distributed database that is shared across computer network nodes. A blockchain, like a database, saves information electronically in digital format. Blockchains are well recognized for playing an important part in cryptocurrency systems such as Bitcoin in preserving a secure and decentralized record of transactions. The blockchain’s novelty is that it ensures the accuracy and security of a data record and produces trust without the requirement for a trusted third party. The way data is organized differs significantly between a traditional database and a blockchain.
A blockchain accumulates information in groupings known as blocks, which include sets of data. When a block’s storage capacity is reached, it is closed and connected to the previous full block, producing a data chain known as the blockchain. All new information that follows that newly added block is assembled into a newly formed block, which is then added to the chain when it is complete. A database typically organizes its data into tables, but a blockchain, as the name indicates, organizes its data into chunks (blocks) that are linked together. When implemented decentralizedly, this data structure creates an irreversible temporal line of data. When a block is filled, it is set in stone and becomes a part of this time line. When a block is added to the chain, it is given a specific time stamp. 8
The Bottom Line
Clients may be hungry for information about cryptocurrencies, whether they plan to use them or not. It is your responsibility as their financial counselor or planner to explain this relatively new type of money, which has both investment potential and an obvious drawback. Be prepared with facts.
Investing in cryptocurrencies, decentralized finance (DeFi), and other initial coin offerings (ICOs) is highly hazardous and speculative, with fluctuating markets. Consult with a trained specialist before making any financial choices. Investopedia or the author make no recommendation to invest in cryptocurrencies, nor can the accuracy or timeliness of the information be guaranteed.
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