Alright, so cryptocurrencies have had a bit of a time lately. After colossal spikes in value, digital currencies like Bitcoin (in particular) have fallen through the floor. Recent reports state that Bitcoin specifically is down almost 50 per cent from the year’s high.
The news has placed the already popular topic of conversation front of mind, and website, for many with folks all over asking what’s happened and why. We shared a piece on this and Elon Musk’s involvement here.
If you’re feeling confused about the fluctuations in value, the terms associated with crypto, and what it means to invest in digital currencies, we’re here to explore all that with you.
Let’s dig in.
To start, what’s with all the crypto lingo?
One of the more intimidating elements of the finance world, as a whole, is that many people assume it’s all too complicated because the terms being used are unfamiliar to them.
“I know people like to fill these worlds with jargon and it can be off-putting to a person that’s not looped into the finance world,” Gupthan explained over email. But she stressed that there’s no shortage of resources available to you if you’d like to learn.
Dr Angel Zhong, Senior Lecturer in Finance in the School of Economics, Finance and Marketing at RMIT University, shared that services like Money Smart, Coindesk and Coin Market Cap are useful if you’re just starting out.
If you’d like to kick off your crypto basics, Kaur shared some descriptions of the more commonly-used terms that may be throwing you off.
- FIAT: “This just means government-issued currency. So AUD, NZD, USD, Indian Rupees etc are FIAT. When you buy crypto you are exchanging FIAT into cryptocurrency, e.g. USD to Bitcoin.”
- Crypto Wallet: “This is a digital or physical wallet to store all your crypto into. When you buy from a crypto exchange platform, usually they ask where you want the crypto to be deposited into, a bit like a bank account.”
- Blockchain: “In simple words, a blockchain is just a chain that records where the crypto has moved in the world wide web. If it moved from my wallet to yours to Barak Obama’s it would all be recorded.”
What does the recent drop in value mean for you?
Peters explained that while the recent drop is significant, it’s not all that surprising.
“Some kind of correction was inevitable given that the price [of Bitcoin] had been on an upwards trajectory since March last year,” he shared over email.
He said that anyone feeling concerned about their investments off the back of this swing needs “to consider and define their risk appetite, and to make investment decisions carefully”.
Peters went on to explain, however, this recent dip does not necessarily mean your crypto investments are doomed.
“For many crypto assets, the long-term outlook has not changed. This emerging asset class has the potential to revolutionise many aspects of financial services, and while nothing goes up in a straight line, the long-term fundamentals for crypto assets remain as solid as ever,” he said.
Just keep in mind that crypto is still widely considered a high-risk investment and one that you should research thoroughly (seek out dedicated financial advice, even) before committing to.
How to avoid unnecessary risk
I should point out here that the information presented in this piece is general in nature, so whenever it comes to your personal finances it is much more effective to seek out specialist advice (from someone licensed to do so). But it is useful to recognise on a broad level there are always risks involved in crypto investments.
Gupthan shared that if you’re starting out in this kind of investment, it can be tempting to act off the back of stories about people “making millions” with limited knowledge. This isn’t a sustainable practice. “I’m a fan of the age-old advice of ‘if you don’t know what you’re investing in, best not to invest in it,'” she said.
Kaur added that while some currencies are “more well respected in the crypto space than others, based on their practical use in the real world” [such as Bitcoin or ethereum], she wouldn’t describe any options in this space as “steady”. Sure, options like Shiba Inu have been recognised for being particularly volatile, but there are no low-risk options.
“All cryptocurrency, including Bitcoin, is still regarded as a high-risk investment,” she said.
Peters shared this sentiment, stating that folks need to “be cautious, understand what you are investing in and don’t invest in an asset simply because it is going up”.
Want to keep reading about crypto? Check out our write up on how it will impact your tax return here.