A new technology has taken financial news by storm. While most investors have heard of Bitcoin or other forms of cryptocurrency, few fully understand what it is.
Bitcoin is the first and perhaps most well-known cryptocurrency among hundreds of others, including Etherium, Ripple’s XRP token and Litecoin. In the simplest terms, cryptocurrency is a form of money stored and transferred electronically with no actual physical form. What makes this digital currency special is that it is decentralized, which means that it there is no central authority, such as a government or bank that issues the currency or controls its use. Rather, it is supported by a peer-to-peer computer-based system. While this lack of centralized oversight may raise safety concerns, a key benefit to using Bitcoin is to complete transactions and manage records via a technology known as blockchain.
Blockchain enables the movement of digital assets, such as cryptocurrency, from one individual to another over the Internet. It is similar to a ledger that an intermediary, such as a bank or financial services firm, uses to record online transactions, known as blocks. However, unlike a traditional ledger, blockchain is an Open Distributed Ledger (ODL). This means that the online database, or ledger, is public and accessible to view by all users across a shared network. Blockchain does not require an intermediary. Rather, the public is responsible for maintaining trust throughout the entire network where users can see whether transactions are valid. By removing the intermediary, blockchain solves the often costly and time-intensive use of paper currency.
Each transaction or block continues, on and on, down an ever-growing ledger that records all payments between users. Because the ledger is so long, in-depth and intricate, it is not written in plain English. Instead, mathematical algorithms code each transaction and computers on the shared network compete with each other to solve the algorithms in order to validate the transactions and receive a reward. This process of “mining” essentially replaces the current way central banks mint new currency, and its popularity contributed to the extreme rise in Bitcoin prices in late 2017. Though Bitcoin or any of the myriad of cryptocurrencies may never become legitimate currency, blockchain is a viable technology that businesses and governments may use to validate not only monetary transactions but also documents and signatures. While blockchain is still very much in its infancy, we view the longer-term possibilities of its use in the financial services and banking industries to be very positive. In addition, we are already seeing a number of companies in the supply-chain and logistics industries looking at blockchain to streamline and digitize their operations.
About the author: Todd A. Moll, CFP®, CFA, is a director and chief investment officer with Provenance Wealth Advisor, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email email@example.com.
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Todd A. Moll is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.
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Prior to making an investment decision, please consult with your financial advisor about your individual situation. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are very speculative investments and involves a high degree of risk.
Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.