Cryptocurrencies: Alternative Investment or Digital Scam?

Investment Advisors at Global Asset Management endeavor to protect and grow clients’ wealth. Protecting clients includes making sure they have a general understanding of markets and various investments. While there is an increasing awareness of the realm of cryptocurrencies, there is a great deal of confusion about their role in an investment portfolio. The ICO market is replete with fraud, but there are several established cryptocurrencies that will appreciate in value.

What is a Cryptocurrency?

Cryptocurrencies are internet-based, digital mediums of exchange. They use blockchain technology to conduct financial transactions and store wealth. They are gaining in popularity due to their decentralized, transparent and immutable characteristics. Decentralization is key: neither governments nor central banks control them. Governments are using digitalization to enact greater powers and limit fiscal privacy, driving demand for alternative forms of money. Transferring cryptocurrencies between two parties involves much lower transaction costs than fiat currencies. Banks and payment processors charge relatively steep fees.

Cryptocurrencies get their name from cryptography, the art of writing and solving codes. It is a practice that precedes digitalization and the internet. It includes any technique for transmitting information securely. “Crypt” refers to a vault. The suffix “graphy” refers to writing or an area of study.

What is an ICO?

And ICO is an Initial Coin Offering. It is similar to an IPO (Initial Public Offering). Both are used to raise capital. However, there are several differences. With an IPO, investors buy shares of ownership in a company. ICO projects also raise funds, but do not represent ownership in a company. Rather, investors receive digital tokens that they hope will grow in value as they expand in use.

The plus side is that ICOs, used properly, are an effective new form of venture capital. The costs are lower than an IPO. The reach is broader and more investors have the opportunity to participate. The downside is that this is a new and unregulated market, providing room for fraud. This can mean an outright scam, or a simple matter of the underlying interest being over-valued.

What Defines an Alternative Investment?

Alternative investments are anything other than stocks, bonds and cash. These assets make up the majority of Global Asset Management portfolios. By broad definition, this would include real estate and derivatives, although some would say these are mainstream assets in this day and age. Examples include hedge funds, private equity, and tangible assets like gold bullion, art and even vintage wines. They tend to be illiquid, unregulated and higher risk. They offer benefits of diversification, exoticism, and the potential for higher returns. Diamonds and gold coins have long been valued for their portability as well as their value as a store of wealth.

Many view real estate and gold as protection against inflation. They gain in value when inflation and economic risk rise, and currencies depreciate. Cryptocurrencies are a new form of alternative investment. As with all new markets, they are unregulated. Investors must be vigilant to avoid being scammed.

South Korea’s Importance

Based on the total volume of Bitcoins bought and sold, South Korea is the third largest market after Japan and the United States. This gives a relatively small country enormous influence on cryptocurrency prices. According to the Korea Blockchain Industry Association, the country hosts at least twelve cryptocurrency exchanges.

The government is supportive of the blockchain industry and permits trading on regulated cryptocurrency exchanges. Cindicator reports that South Korea makes up 30% of global trading. Koreans have long been early adopters of new technology. The larger exchanges there are partnering with local platforms in several industries to expand cryptocurrency as a means of payment.

Cryptocurrencies gain in value the more they are used. For this reason, Seoul has become a major influence on Bitcoin and other markets. At 87%, the country has the largest general awareness of this new asset.

Popular Cryptocurrencies

The first unit of Bitcoin was created in 2009, and to this day it remains the most popular. There are thousands of different cryptocurrencies in existence, but they need to be circulated to gain traction. Most won’t. Five dominate the market. Investors should stick with these.

Bitcoin (BTC)

Bitcoin has the largest market capitalization by far. It is also the most expensive. The size and strength of its blockchain make it impervious to scams. For investors wanting exposure to cryptocurrencies, Bitcoin is a popular choice.

Ethereum (ETH)

The Ethereum blockchain structure is similar to Bitcoin’s. It’s unit of currency is the Ether token. Ethereum is a platform that has uses beyond buying and selling Ether. It’s popular for smart contracts. These act as an arms-length third-party in the digital world, much like a lawyer’s trust account in real estate transactions. Smart contracts ensure agreed upon conditions are met before digital payments are released.

Ripple (XRP)

The fastest cryptocurrency platform is Ripple. It processes transactions in mere seconds, compared to Bitcoin which takes minutes. It may one day replace the SWIFT system. This won’t happen overnight – the banking system needs to feel secure and protected against any potential for fraud. The market is still the wild west.

Litecoin (LTC)

Litecoin is similar to Bitcoin. While Bitcoin retains its gold standard status, Litecoin has several benefits. It’s faster, with a transaction time of 2 ½ minutes compared to 10 minutes for BTC, and there are four times as many Litecoins in circulation. Third, the algorithm is less complex, making LTCs less expensive to create.

Bitcoin Cash (BCH)

BCH was created to improve upon Bitcoin’s transaction speed. Bitcoin Cash increased its block size, which allows all details to be verified at once, speeding up transactions. Its purpose is to reduce transaction costs and increase the amount of transactions that can be processed, one day competing with PayPal and Visa.

Bottom Line

The world of cryptocurrencies includes both alternative investments and scams. Stick with those that have large market capitalizations, established transaction histories and that may be useful for other purposes. For all investment questions, contact your Investment Advisor at Global Asset Management.

Global Asset Management blog – Seoul, South Korea

December 10, 2019