Cryptocurrencies Basics

Until now, I had never brought-up the matter of cryptocurrencies on this blog. To date, I don’t own any and I find it to be a risky investment. I also wouldn’t have any use for it in my daily life. That being said, cryptocurrencies are gaining ground and I personally believe they may be the money of the future. We’re not there yet though.

In the meantime, what are cryptocurrencies? How do they work? How can you get them? Let’s dig-in!

Definition

Cryptocurrencies are a form of peer-to-peer, digital asset based on a network that is distributed across a large number of computers. It can be used to buy goods and services, provided the merchants accept cryptocurrencies as a form of payment.

It’s also primarily used as an investment, which wasn’t necessarily the main purpose of cryptocurrencies.

Cryptocurrencies have no physical existence. They are secured by cryptography, hence their name. Cryptography has been around for a long time. It’s a field of math that includes encryption, hash functions and digital signatures.

Crypto transfers are encrypted, making the currency itself secure as well as negating the need for an intermediaries such as financial institutions and central banks.

The records of transfers are kept in a “ledger” called blockchain. It’s impossible to duplicate cryptocurrencies and or to use them twice. The blockchain is created and maintained by computer “miners”.

Examples of Cryptocurrencies

At the time of writing, there are about 22 000 cryptocurrencies and counting. Not all of them are active or valuable. It’s estimated only 10 000 are in active use. There are about 300 million users of cryptocurrency worldwide.

The most well-known and the original cryptocurrency is Bitcoin. It first appeared in 2008 and was created by a person or a group of persons using the name Satoshi Nakamoto. Today Bitcoin is legal in 7 of the top ten world economies, including the US and Canada. However, it’s not an official currency, except in El Salvador and the Central African Republic.

Other well-known cryptocurrencies are Ethereum, Ripple or Shiba Inu.

How to Buy Cryptocurrencies in Canada?

In Canada, you can either buy cryptocurrencies or ETFs of cryptocurrencies.

There are several advantages to buying an ETF, rather than the cryptocurrency itself: diversification, simplicity and a bit more protection if things go wrong. There are 5 companies selling crypto ETFs in Canada: Evolve, Purpose, CI Galaxy, Fidelity and 3iQ.

There are 2 ways to buy cryptocurrencies: you either find and use a crypto exchange or you go through a broker. If it’s your first encounter with cryptos, I’d suggest you use a broker like WealthSimple. WealthSimple is the only broker in Canada letting you buy cryptocurrencies. You can only buy ETFs with Questrade.

If you don’t want to go the broker route, you have to find a crypto exchange. You can choose a centralized exchange (CEX) or a decentralized exchange (DEX). A CEX tends to operate much like a broker. It’s run by a single organization and offers many features like 24/7 customer service, storage and a proper platform to trade on. with a CEX, you can also use Canadian dollars to buy crypto. A DEX is run by a group of individuals and is for the most part less user-friendly. You may need to already own cryptos in order to use it. You may also be responsible for your own storage.

You’ll pay trading fees on both types of exchanges.

Pros and Cons of Cryptocurrencies

I find that when it comes to cryptocurrencies, the pros and cons are the same.

Unregulated and decentralized

• Pros: no middle men like financial institutions or central banks. Not prone to inflation/deflation, interest rates and other economic considerations. This isn’t a guarantee cryptos will always perform well.
• Cons: lack of protection if things go wrong…and they occasionally do. Since cryptos are unregulated, your crypto isn’t protected by CDIC, unless purchased as an ETF. You can loose everything and will have no recourse. Same if fraud happens.

Higher level of privacy

• Pros: because cryptos are unregulated, you don’t have to provide much personal information when buying/selling. It makes for very fast transactions. Your crypto is available right away, no questions asked. In contrast, a wire transfer can take days, if international. A stock-exchange trade settles in 2 business days. You also need to provide personal data, courtesy of anti money-laundering legislation.
• Cons: cryptos give a field day to con artists and criminals. As a reminder, CRA will never ask you to pay for your taxes in crypto.

Cost effective

• Pros: trading cryptos is cheaper than trading stocks, bonds, ETFs and mutual funds. It’s also cheaper to transfer cryptos than wiring money overseas. There is also a potential for huge capital gains in short periods of time.
• Cons: there is also the potential for loosing everything. Cryptos are a highly speculative investment.

Final Word

Just like with any other investment, you need to do your research before buying cryptocurrencies. Each cryptocurrency has its own rules. You also need to be very honest with your risk tolerance.

If you decide cryptocurrencies are the right investment for you, you may want to consider buying ETFs first, to see how things go.