What are Cryptocurrencies ?

What are Cryptocurrencies?

As investors we can no longer ignore the existence of the new asset class that is taking the world by storm... Bitcoin has shown us it can turn just a few bucks into a fortune, but its dips and rips are more volatile than in any other market in history.

That, combined with the mysterious nature of the cryptocurrency, and we're all a little more confused and a little less comfortable with this phenomenon than we'd like to be... 

Question: Is bitcoin real money?
Answer: The fundamental characteristics an asset must have to be considered money are:
Uniformity: In other words, every "dollar" or bitcoin is the same as the next one. When you're talking about using seashells or cows as currency, uniformity is hard to achieve.
Divisibility: Dollars and bitcoin need to be divisible, broken up into small increments to cover a wide range of value transactions. Cows? Not so much, unless you're hosting a barbecue.
Portability: Your currency must be easy to transfer and store.
Durability: Older, agriculturally-based forms of money had a shelf life. Gold is the ultimate when it comes to durability. Paper notes deteriorate.
Limited Supply: A currency is worthless if there's no scarcity to it. In our office here in Hong Kong we have a 500 million dollar note issued by the Zimbabwean government - it's a simple reminder of what ultimately happens when governments try to endlessly print their way to prosperity.
Acceptability: To be considered money, the asset has to be widely accepted. People all over the world will take U.S. dollars. They won't however take Turkish lira.

Bitcoin holds all of these characteristics with the exception of acceptability - although that is rapidly changing. Japan passed a law earlier this year that made bitcoin acceptable as legal tender.
And the digital element of bitcoin? Well, more than 90 percent of all money that exists today around the world is not even physical... it's purely digital, existing only on computer servers.
Question: Can bitcoin be hacked?
Answer: In certain circles, bitcoin and cryptocurrencies in general are synonymous with hacking - thanks to some high-profile hacks of cryptocurrency exchanges - like Mt. Gox in 2014 or Bithumb in 2017.
In an area so nascent, of course there are hackers looking to exploit individuals' inexperience, or find technological loopholes. Hackers have always and will always be a risk to ANYTHING where value resides on a computer network.
But bitcoin is one of the most secure assets an individual can own - it's just that it's 100 percent up to the individual to secure it themselves.
Cryptocurrency exchanges have been hacked. They are third-party platforms where you have no visibility as to how customers' digital assets are being secured. That's why I've said repeatedly that you shouldn't keep large amounts of bitcoin on an exchange because when it's on an exchange you don't own it, they do.
Likewise people's computers have been hacked, or they've fallen for phishing scams and fake websites. But Bitcoin itself has not been hacked.
And when it comes to hacking, you are far, far more at risk from other cybersecurity vulnerabilities - just look at U.S. credit reporting agency Equifax who announced recently that the Social Security numbers along with other personal information of millions of Americans may have been compromised.
That's a catastrophic breach. And this kind of thing happens all the time. So there's no use worrying about bitcoin "hacking" when you can take full personal control and accountability for securing it yourself (rather than be at the mercy of an incompetent third party).
Question: Will bitcoin be volatile going forward?
Answer: Most people look at bitcoin's daily price changes and write bitcoin off simply because it's more volatile than your typical blue-chip stock. But these swings are growing smaller, as more and more people move money into bitcoin.
According to investment firm ARK Invest, at the beginning of this year, "bitcoin's daily volatility was about one-fifth that of five years ago, and 28 percent less than January 1, 2016."
And this trend should continue, as time goes on... and more money flocks into this space.
That said, even with this level of volatility, bitcoin delivered better risk-adjusted returns than stocks, bonds, gold and real estate over the past five years. In fact, over the past year alone, bitcoin performed twice as well as stocks, on a risk-adjusted basis.
I'm not saying bitcoin won't be volatile. Like any asset, cryptocurrencies will continue to experience rallies and corrections. Don't fall into the trap of thinking "this time is different" and that bitcoin will go up forever. The cryptocurrency could absolutely be in for a short-term price bubble. But over the long term, the upside is far from over. You just need to proceed carefully. And "invest" no more than you can absolutely afford to lose.
Question: With bitcoin's recent price explosion, am I too late to buy?
Answer: There's no "now or never" with bitcoin.
The overall trend I see remains upwards. The upside potential I see is still huge. But that doesn't mean it won't go back down to US$9,000 or US$7,000 on its way to $25,000.
Cryptos are the most volatile asset class on earth, so we need to be ready to ride out the downturns, which WILL come.
Question: Can a few hundred dollars be invested to buy a fraction of bitcoin itself?
Answer: Bitcoin is divisible down to eight decimal places. The term "bitcoin" is just a unit of measurement. This is the same for nearly all crypto assets. So, for example, you can buy 0.1 bitcoin or more... or less.
Question: How should we know when to give up on a trade - what about if we see a 10 percent fall?
Answer: As I said, cryptos are the most volatile asset class on the face of the earth. A 10 percent fall isn't a "high decline", it's noise.
Some cryptos will see hundreds of percent gains... but if you want to be able to participate in hundreds of percent returns, you also need to be prepared to sit on losing positions. It's not unusual to see a position down 80 percent or more in a correction (heck, even bitcoin was down 40 percent in two weeks in early September).
Remember, cryptos are like the wild west, more volatile than anything you've likely invested in before. And it's a genuine rollercoaster, but it's only just beginning.
Make sure you position your portfolio accordingly - and don't invest money you can't afford to lose.
I've said this many times, but I'll say it again: bitcoin and crypto investments should only represent a very modest (low single digit) percentage of your investable asset allocation at most. It's highly speculative and risky.
These are just a few of the top questions I get about cryptos. As I said, it's an entirely new asset class. And it can be confusing.
[ Courtesy: Tama Churchouse]