Cryptocurrency has fully arrived. When Bitcoin was first described in a 2008 white paper, it started a revolution in the world of investment and finance. What this innovation has led to is the first new asset class to be realized in a long time.
Traditionally, asset classes have included:
- Equities (stocks)
- Fixed income (bonds)
- Cash or money market instruments
- Real Estate
Most investment professionals would also point to commodities, futures, and financial derivatives as well.
Unlike previous asset classes, cryptocurrency as a whole has become a powerful force of decentralization and we’re only at the beginning.
What is decentralization?
In a nutshell Bitcoin does not have a central authority. Bitcoin is a peer-to-peer network and has no central servers. The network also has no central storage; the bitcoin ledger is distributed publicly and anybody can store the ledger on a computer.
There is no single administrator, rather the ledger is maintained by a network of equally privileged miners. Miners are individuals who use a combination of specialized hardware and software to ‘mint’ new bitcoins into the blockchain.
While anyone can purchase bitcoin, they can also become a miner. The additions that are added to the ledger are then maintained via the blockchain. Until the new block is added to the ledger, it is not known who will create the block. The issuance of bitcoins is decentralized and they are distributed as a reward for the creation of a new block.
Any individual can create a new bitcoin address (the bitcoin counterpart of a bank account) without prior approval from any entity. Transactions can be sent via the network without approval; the network merely confirms the transaction and keeps a record of it.
The blockchain provides the infrastructure to replace the middleman with a web of users. It is a decentralized, democratizing force. It allows people who are not aligned or connected, to work collaboratively to authenticate and record their transactions.
While there is much to be excited about when it comes to bitcoin, or any other cryptocurrency, NFT, or DeFi - related entity, there is much to be wary about. As a new asset class, it can be a key part of a diversified approach to investing, but it is also full of risk.
Diversify your portfolio
Combining more traditional avenues into your portfolio for investment or speculation serves to spread out the uncertainty and, ultimately, the risk of loss. As anyone who has watched the overall crypto market ebb and flow through the years can tell you, you don’t want to put all your eggs into this one basket.
Arguably you should view crypto as a long play. Based on value retention, the leaders in the crypto investment space like Bitcoin and Ethereum have shown the ability to act as a hedge against other, more traditional types of investment. There are many more opportunities to research, but these two are the leaders for very good reasons.
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While many speculators have seen huge gains, many have seen losses. As an asset class unto itself, crypto can be a part of a multi-faceted approach to investment, but it should not be the only class you invest in. Spread out the risk and never put in more than you can afford to lose.