Cryptocurrencies have turned everyday investors into millionaires and billionaires. They have changed the way we conduct transactions and invest. And the ever-present fear of missing out on potential gains has more and more investors turning their attention to digital assets.
But for many, volatile cryptocurrencies are a mysterious, high-risk investment best suited for millennials and Silicon Valley type investors. While the inner workings of how decentralized digital currencies like bitcoin are created can be daunting, the fact is, they are designed to perform specific functions and have a wide range of practical uses.
What Exactly Are Cryptocurrencies?
A cryptocurrency is a digital coin that transacts on the internet. It is created, or mined, through complex, online mathematical transactions via a blockchain, or similarly based distributed ledger. A blockchain is essentially a large database on the internet managed by several computers in a peer-to-peer network. This database stores a public record of all transactions. The blockchain consists of chains of blocks each of which record the movement of coins among users. For new coins to enter circulation these blocks need to be mined.
Distributed ledgers and blockchain are a cornerstone of cryptocurrencies. Because they are accessible to everyone on the network, there is no need for intermediaries or monetary authorities, like governments or central banks. Because its decentralized, it cannot be tampered with by a government or central bank either.
Through distributed ledgers and cryptographic techniques, people are able to buy, sell, or trade cryptocurrencies securely.
What Are Some of the Most Popular Cryptocurrencies?
Bitcoin is the most popular cryptocurrency in the world mostly because it was the first cryptocurrency to be introduced and widely adopted. It was created in 2009 as a reaction against the traditional fiat money system where governments borrow money by issuing bonds and forcing central banks to buy those bonds. Flooding the market with fiat currency that is created out of thin air, devalues the underlying currency.
There is a finite amount of bitcoin that can be mined: 21 million. Approximately 19 million bitcoin have been mined. The last bitcoin will be mined in 2140.
The benefit of having a limited supply of bitcoin safeguards it against inflation.
Some of the biggest benefits of bitcoin include its usage as a store of value, its wide network and proven security. Moreover, because bitcoin has first mover advantage, it is more accessible and accepted by a growing number of merchants and exchanges, making it far more liquid than other altcoins.
In September 2021, El Salvador became the first nation to make Bitcoin a legal tender. While the U.S. dollar remains El Salvador’s primary currency, people now have the option to use Bitcoin to purchase goods, such as a cup of coffee or even pay their taxes using Bitcoin.
Bitcoin may be the world’s most popular cryptocurrency, but it’s not the only one. In fact, there are around 18,650 types of cryptocurrencies in existence.
Ethereum was created in 2015 by University of Waterloo drop-out Vitalik Buterin and is now the second largest digital currency after Bitcoin. Ethereum is a global, decentralized blockchain that runs smart contracts and powers decentralized digital apps (DApps). Through the Ethereum platform, users mine Ether and can buy, sell, and invest without the need of a centralized authority.
Ethereum might sound like bitcoin, but there are some big differences. Bitcoin was created as an alternative to fiat currencies, but Ethereum is programmable, which means it can be used for a lot of digital assets, including bitcoin.
Unlike Bitcoin, however, the total number of Ether tokens is not capped, rather is adjusts based on demand. In August 2021, the London upgrade (EIP 1559) added fee burning with every transaction. This was an exciting development for Ether because it changed the way the Ethereum blockchain hands out new tokens. With this upgrade, some of the charge that users pay to utilize the Ethereum blockchain is burned or deleted. This offsets the new Ether that is paid to miners as the block reward. The amount of Ether can therefore reach a stable point, or potentially decrease creating a deflationary coin.
Thanks to its large, existing network, Ether has been tested through billions of transactions. And like Bitcoin, has a large and committed global community of users and is home to the largest ecosystem in both blockchain and cryptocurrency.
Besides being used as a digital asset, Ethereum can also be used to process a wide range of financial transactions, execute smart contracts, and store data for third-party applications.
And because there is an infinite number of Ether tokens, it promotes spending and lowers the cost of entry for new investors.
Bitcoin and ether are decentralized cryptocurrencies that are not backed by a government or tied to the value of silver or gold. But there is a class of cryptocurrencies, Stablecoins, whose value is tied to physical assets such as the U.S. dollar and precious metals.
Stablecoins were developed to combat the daily price volatility that traditional cryptocurrencies like bitcoin and ether can experience, which can significantly impact their purchasing power. Stablecoins are a type of cryptocurrency that are more ‘stable’ than other cryptocurrencies. They achieve this by being backed by a reserve of the asset they represent. As a result, Stablecoins do not fluctuate as much in value.
Altcoins are what every single cryptocurrency, except bitcoin, is referred to. Bitcoin was the first cryptocurrency, which makes every crypto that came after that an “alternative” coin.
Bitcoin makes up 41% of the total market cap for cryptocurrencies. Ether is the most popular altcoin with a market share of nearly 20%. All of the other altcoins combined make up the rest of the crypto market (40%).
The global acceptance of bitcoin and other cryptocurrencies by retail and institutional investors, banks, businesses, including established companies like PayPal shows that it has evolved into a widely accepted asset class.
As an asset class, cryptocurrencies are even being embraced on a national level. In September 2021, El Salvador became the first country to adopt bitcoin as its national currency. Many other countries are considering following suit, including Panama, Cuba, Ukraine, and Paraguay. Where does the U.S. stand? According to a recent survey more than a quarter (27%) of Americans support the idea of making bitcoin legal tender.
Cryptocurrency is without a doubt, a widely accepted asset class, and is increasingly gaining acceptance and participation in every corner of the global economy.
Investing in Cryptocurrency with Evolve ETFs
Deciding which cryptocurrency to own and how much to allocate can be overwhelming for many investors. The Evolve Cryptocurrencies ETF (TSX: ETC) is Canada’s first multi-cryptocurrency ETF. ETC is designed to be a one ticket solution to cryptocurrency exposure. It is market cap weighted and rebalanced monthly. It currently holds Bitcoin (TSX: EBIT) and Ether (TSX: ETHR) but as regulators approve other crypto ETFs, they may be added as well. For more information on ETC, visit https://evolveetfs.com/etc/.
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