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Cryptocurrency explained: what is it and how can you use it?
Cryptocurrency can come in a range of different formats from a variety of providers, making it a diverse and unique market that presents several opportunities for clients. Stablecoins and well-established currencies, such as Bitcoin, Ethereum, and XRP, that have been able to steady themselves in the market are often seen as a less volatile option. In most cases, these coins and currencies are used to trade, whether that’s for other currencies, fiat money, or other digital assets in the attempt to make a profit or secure more promising market positions as a result. In addition to this, we are also now seeing more options that allow cryptocurrency to be used in purchase transactions for goods, services, and items. Famously, Tesla had been accepting Bitcoin as a method of purchase for their vehicles, but this scheme has since been shut down due to Elon Musk’s fears over the impact that mining Bitcoin may be having on the environment. The recent headlines about bitcoin becoming official legal tenderin El Salvador, three months after the Bitcoin Law passed the country’s legislature, where businesses from shops to restaurants and hairdressers must now accept bitcoin alongside the dollar (which has been El Salvador’s official currency since 2001), add to the debate.
Bitcoin was the first and is the largest cryptocurrency by market cap, and the breakthroughs that allowed bitcoin to emerge underlie all other blockchain and crypto projects. As a result, understanding bitcoin—where it came from, how it works, and what new opportunities and challenges it creates—provides a firm foundation on which to consider the entire crypto and blockchain space.
A disruptive capability of blockchain has to do with settlement. Blockchains such as bitcoin provide a massive improvement over existing settlement infrastructure. For example, this transaction: On 12 April 2020, someone transferred 161,500 bitcoin—worth more than $1.1 billion at the time—in a single transaction. The transaction settled in 10 minutes, and the fee for processing the transaction was $0.68.1. Contrast that with an international money wire, which can be sent only during banking hours, takes one to two days to settle, and has fees ranging from 1% to 8%. It’s a startling difference.
Why add crypto to a portfolio?
Ultimately, investors arrive at the question: What role, if any, should cryptoassets play in an institutional portfolio? “Cryptocurrency might be highly volatile, but during its short life, it also has had high average returns. Importantly, it also tends to move independently of other assets. This might explain its appeal to some big investors. Paul Tudor Jones, a hedge-fund manager, has said he aims to hold about 5% of his portfolio in bitcoin.”
Digital assets are the future. The diversity of investable asset types will significantly increase in the coming years. Businesses in the financial sector, but also in industry, should become familiar with the new opportunities to take advantage of this next stage of digitalization.
A recent study on behalf of Fidelity Digital Assets confirmed findings that seven out of 10 institutional investors are expecting to invest in or buy digital assets in the future, although price volatility is the main barrier for new entrants, with more than half of the institutional investors surveyed, said they had digital asset investments. 90% of those interested in investing in future said they expected their company’s or their clients’ portfolios to include digital asset investments within the next five years, the research found. The survey included responses from high net worth investors, family offices, digital and traditional hedge funds, financial advisors and endowments.