Money Talks: everything you need to know about cryptocurrency

31 May 2022
By Victoria Harris

Should we be investing in cryptocurrency? We ask our resident financial expert, Victoria Harris.

Image: Shutterstock.

What do Trump, Whopper burgers and pot have in common? No, it’s not that they’re all bad for society! Each relates to a different type of cryptocurrency: Trumpcoin, Whoppercoin and Potcoin. They’re just some of the 10,000 kinds of cryptocurrencies in the market today.

But what is cryptocurrency exactly? If we break it down, ‘crypto’ means ‘secret’ or ‘concealed’. So cryptocurrency is just a secret currency, a currency that’s anonymous — or almost anonymous. It’s a form of money that isn’t issued by a central authority, like a government or bank. Bitcoin is the best-known cryptocurrency, but it’s definitely not the only one. 

You may also have heard the word ‘blockchain’. In the context of cryptocurrency, this is a public record of past transactions. How it works is that every time someone completes a transaction, it gets recorded in a ‘block’ and added to the ‘chain’ of transactions. This record is then widely dispersed so it can’t be hacked, and the algorithms make sure the record can’t be altered. 

Think of blockchain like a Google Doc. When you create a document and share it with a group of people, it’s distributed instead of copied or transferred. This creates a decentralised distribution chain that gives everyone access to the document at the same time, and therefore makes it extremely difficult to hack.

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Crypto and blockchain often go together, but they’re not the same. One is a currency and the other is technology that supports the currency system. Instead of relying on regulatory bodies such as banks and governments, cryptocurrencies use a blockchain. The full blockchain from the beginning is publicly recorded and unchangeable, which means everybody’s computer agrees on every single transaction that ever happened. All of that makes fraud pretty damn difficult.

Investing in cryptocurrency is similar to investing in any foreign currency — you exchange your New Zealand dollars for that currency, hoping that the exchange rate moves favourably and, if it does, you exchange that currency back into New Zealand dollars so you (hopefully) have more money than you started with.

The difference is that, unlike foreign currency, cryptocurrency isn’t tied to any country’s economy. It’s completely independent from any central authority, and its value can move wildly up and down. Its value fluctuates so much because it’s dependent on supply and demand. As more people jump on the bandwagon and accept its legitimacy, demand will increase, which will drive up its price. 

An example of this occurred recently when Tesla founder Elon Musk publicly stated that his company would now accept cryptocurrency as payment for its vehicles. This led to the value (or price) of bitcoin to jump significantly due to increase in demand. Meanwhile, the media also began to wonder whether big cities and other corporations could follow suit. In our opinion, widespread adoption isn’t likely yet because it’s too volatile to be used in everyday situations. Imagine buying a coffee only to discover it’s 50% more expensive the next day!

Victoria Harris.

Crypto’s biggest risk is also its biggest attraction — that it’s unregulated. Many countries and governments are introducing regulatory actions against cryptocurrencies due to their ability to facilitate illicit transactions. If you’re drawn to the thrill of the cryptocurrencies and have money set aside for a high-risk investment on which you could lose 100%, then by all means, have fun. 

Investing in cryptocurrency is speculating, not investing. In our opinion, investing in a diversified investment portfolio has a greater chance of success in the long term. You don’t want the outcome of your financial goals, and your future, to be influenced by pure speculation.

Victoria Harris is the founder of The Curve — an investing platform for women. 

Read more Money Talks: here are Harris’ tips for navigating market volatility and fear.  

Disclaimer: This article is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice.

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