Hope everyone is finding ways to stay in high spirits in spite of lockdown 3.0 and the demoralising news about the spread of the virus.
Goal Setting: House Cleaning
Thought I would share something I did different when setting my 2021 financial goals (courtesy of Peter Komolafe’s The Conversation of Money podcast). My financial plans have in the past been based on the figures in the current month’s budget figures, but off the back of Pete’s suggestion, I did an analysis of my 2020 expenses. I literally went through all my 2020 bank statements and analysed the expenses into different categories (while along the way identifying standing orders that will be cancelled and unnecessary cost I plan to either completely cut out or cut down on, in 2021). How useful that turned out to be; I will save about £320 of unnecessary standing orders. This is a similar, but more thorough process than just looking at your monthly budget; we could call this “house cleaning”, don’t you think 😊 I now have a more realistic figure of what my average living expenses are; so I have taken a look at my emergency pot and will be adjusting as necessary during this year. I think it is a good idea and encourage you to take the time to carry out the exercise.
Today: Cryptocurrency
In a previous post, I had alluded to my investment in crypto and promised to write about it. With Bitcoin currently in the headlines, there is no better time than now to deliver on that promise!
What is Cryptocurrency
“A cryptocurrency (or crypto currency or crypto for short) is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.” (Source: https://en.wikipedia.org/wiki/Cryptocurrency)
https://www.investopedia.com/terms/c/cryptocurrency.asp) goes further to say “… A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.”
To put all that into nonprofessional speak; crypto currency is a virtual (not physical, like bank notes and coins) asset which can be used as a medium of exchange, just like money. The difference is that it is not issued by the government nor is it stored in the bank, rather it is mined and its ownership records are stored in computerised databases; and it is transferred across a network of computers.
The word ‘crypto’ derives from encryption which is how the network through which it is transferred, is secured.
Since the advent of Bitcoin in 2009, several alternatives to Bitcoin (known as altcoins) have emerged e.g. Bitcoin Cash, Ethereum, LItecoin, Ripple, Peercoin, EOS, Cardano, etc. Bitcoin however, according to Investopedia represents more than 68% of the total value of the cryptocurrencies in existence.
Where and how to buy/Store crypto
To invest in cryptocurrency, you need to register with a crypto exchange like Coinbase, Binance, etc. These exchanges charge a fee for purchases and sales made.
To store crypto, you would do so using either a software wallet (which Coinbase provides automatically when you register) or a hardware wallet which looks like a USB. For those who actively trade crypto, a software wallet is better as it makes for easier access to your crypto.
Why is Crypto Volatile
This is a question that has held back my crypto investment decisions, and not until now have I taken the time to find the answer. Some of the answers I found in writing this post are:
Emerging Market: Because the crypto market is still a small market in comparison to gold and fiat currencies, if a small group decide to sell crypto with a substantial total value. (especially if such people are renowned investors), the prices would be affected (unlike if that were the case with gold).
Digital Currency/Demand and Supply: crypto are purely digital and not backed by anything physical (like a currency or commodity) so their price is dependent on demand and supply. The supply is however fixed (as there is a known maximum number that would ever be mined), so the price will always be dependent on how many people want to buy crypto/how much of it they buy. The more the demand, the higher the prices will be and vice versa.
The above are the main influences on the price of crypto, however the below also play a part;
Barriers to entry/Investor profile: There are no barriers to investing in crypto, so it is easy for inexperienced traders to get involved in trading crypto, while institutional investors have until recently been very cautious and sceptical about investing in crypto because of its volatility. This therefore means that until recently, most investors in crypto have been inexperienced traders whose investment decisions are influenced by fear and doubts resulting in them wanting to cash in their investments while the going is good, rather than ride any waves like experienced traders might do.
Media: Given the size of the cryptocurrency market (relatively small) speculators and investors look to the headlines when making buy or sell decisions, so media stories have an impact on crypto prices.
With continued global uncertainties, increased interest in crypto and claims that cryptocurrency could soon become a mainstream method of payment, all eyes have been on cryptocurrencies as their values began to climb. in the last quarter of 2020. This article https://www.theguardian.com/technology/2021/jan/03/bitcoin-hits-record-high-on-12th-anniversary-of-its-creation says Bitcoin quadrupled in value in 2020 and surpassed its previous all-time high last week (on its 12th anniversary). The value of altcoins are mostly, directly correlated (some more closely than others) to Bitcoin’s so as the value of Bitcoin rises, so do the altcoins’.
My experience with Crypto in pic
I started out in August with a £250 investment and its value, at some point fell below £200. I invested a further £20 in December bringing my total investment to £270. The value of the investment has gradually crept up (and down as well, as depicted in the picture), but this morning the value of that investment stands at £602 (133% increase).
As with all investments, irrespective of what the charts say, the profit does not actually crystallise until you take the money out. I guess I therefore have a decision to make; with what I now know about it’s volatility do I want to increase my investment in crypto and if so, how much more do I put in and what would be my investment strategy – buy and hold (long term investment) or sell as the profit materialises (and even if selling, I would need to set parameters e.g. at what my profit target i.e. at what percentage gain do I take profit).
The research put into writing this has helped me further understand cryptocurrency and its volatility; and would help with my decision on what percentage of my investments (if any more than already invested) I would put into crypto. I hope the post helps someone else out there with some basic understanding of cryptocurrency and springboards them into further research, if crypto is an investment consideration for them.
As usual, don’t base any investment decisions solely on the contents of this post, rather take the time to do your own research.
Share, like and comment in the box below. Let me know if you found this useful and what other topic might be of interest.
📝 Originally shared under my first blog, bitalks; part of the journey that shaped Life’s Riches.