Cryptocurrency 101: An Empowering Financial Journey for Women into the Digital Currency Space
According to BlockFi’s Real Talk survey conducted in March 2022, nearly 1 in 3 women in America planned to buy crypto in that year. Indeed, a notable 24% of women reported owning cryptocurrency, with the majority (70%) embracing the ‘HODL’ strategy — holding onto their crypto without selling, a figure significantly higher than the market average of 55%. The leading cryptocurrencies among women are Bitcoin (71%), Dogecoin (42%), and Ethereum (18%).
Yet, despite this growing interest and participation, there is still a considerable knowledge gap to be addressed. Among those who already own crypto, a striking 75% have only traded, missing out on opportunities such as earning interest & rewards or engaging in mining or staking. Moreover, 80% of women find crypto confusing and 72% perceive it as too risky to invest in.
This guide aims to demystify the complex world of cryptocurrencies for women, helping to convert confusion into confidence and perceived risk into informed decision-making. Whether you’re among the growing number of women already investing in crypto or looking to take the plunge, this comprehensive guide is for you.”
Introduction to Cryptocurrencies: Cryptocurrencies are digital or virtual currencies that use cryptography for security, making them almost impossible to counterfeit or double-spend. Unlike traditional currencies, they are not issued or regulated by any central authority, such as a government or financial institution. This makes them theoretically immune to government interference or manipulation.
Understanding Blockchain Technology: Blockchain is the underlying technology of most cryptocurrencies. It is a type of Distributed Ledger Technology (DLT) where transaction data is stored across a network of computers globally, making the system decentralized. This technology ensures the integrity and security of the data — once a transaction is recorded on the blockchain, it cannot be altered, which creates trust in the system.
Value and Volatility: The value of cryptocurrencies is highly volatile, and it is not uncommon to see significant price swings in short periods. This volatility is often driven by investor sentiment, market speculation, regulatory news, technological advancements, and macroeconomic trends. The potential for high returns exists, but so does the risk of substantial losses.
How to Buy Cryptocurrencies: Purchasing cryptocurrencies typically involves several steps. Firstly, one must set up a digital wallet to store the cryptocurrencies. Then, an account needs to be created on a cryptocurrency exchange platform. These exchanges allow users to purchase cryptocurrencies using traditional money or trade one cryptocurrency for another.
Types of Cryptocurrencies: There are several types of cryptocurrencies available in the market. Bitcoin, the first and the largest cryptocurrency by market cap, was created to function as a peer-to-peer electronic cash system. Ethereum, the second-largest, was designed to facilitate smart contracts and distributed applications without downtime, fraud, or interference from a third party. Each cryptocurrency has its own use cases, technologies, and ecosystems.
Bitcoin (BTC): Bitcoin, invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto, is the first decentralized cryptocurrency and remains the most valuable and popular. It was created as a response to the financial crisis and the perceived failure of traditional banking. Bitcoin transactions are recorded on a public ledger known as the blockchain.
Ethereum (ETH): Ethereum is an open-source, blockchain-based platform invented by Vitalik Buterin in 2015. Ethereum has its own cryptocurrency called Ether, but it’s best known for enabling ‘smart contracts’ — self-executing contracts with the terms of the agreement directly written into lines of code. This allows the creation of decentralized applications (dApps) and tokens on its platform.
Litecoin (LTC): Launched in 2011 by Charlie Lee, a former Google engineer, Litecoin is a peer-to-peer cryptocurrency often referred to as the silver to Bitcoin’s gold. It offers quicker confirmation times for transactions and a different hashing algorithm.
Ripple (XRP): Ripple is both a digital payment protocol and a cryptocurrency (XRP). Developed by Ripple Labs Inc., the Ripple network is designed to enable fast, low-cost international money transfers between financial institutions, aiming to disrupt the traditional cross-border transfer systems like SWIFT.
Dogecoin (DOGE): Dogecoin, featuring a Shiba Inu dog from the “Doge” Internet meme as its logo, was introduced in December 2013 by Billy Markus and Jackson Palmer. It started as a joke but has gained a cult following and become a well-known “meme” cryptocurrency. Despite its whimsical origins, Dogecoin has been used for serious crowdfunding efforts, including funding a team of athletes to go to the Sochi Winter Olympics in 2014.
Meme Coins: Meme coins are a type of cryptocurrency that have often originated as jokes or memes on the internet. Despite their humorous or non-serious origins, some meme coins, like Dogecoin or Shiba Inu coin, have garnered significant attention and have even achieved substantial market capitalization. While they can present potential opportunities for speculative profit due to their viral nature and community backing, they also carry significant risk given their often volatile price movements and lack of underlying utility or value proposition compared to other cryptocurrencies.
Importance of Research: Prior to investing, it’s crucial to research the cryptocurrencies’ fundamentals. This includes understanding the purpose of the coin/token, its use cases, the technology it’s built on, the team behind it, and its roadmap for future development. Thorough research can provide a better understanding of the investment’s potential risks and rewards.
Risks Involved: Investing in cryptocurrencies comes with risks. The market’s extreme volatility can lead to significant losses. Cryptocurrencies are also susceptible to cybersecurity threats. Exchanges or digital wallets that are not stored offline can be hacked, leading to a loss of investment. Furthermore, the regulatory environment is still developing and can change rapidly, affecting the value or even legality of certain cryptocurrencies.
Diversification: Diversification is a key strategy in mitigating investment risk. By spreading investments across a variety of cryptocurrencies, investors can potentially offset a poor performance by one cryptocurrency with a better performance by another. However, it’s also important to diversify investments across different asset classes, not just within cryptocurrencies.
Long-term vs Short-term: Long-term investment strategies often involve buying and holding a cryptocurrency for years with the expectation that the price will significantly increase. Short-term trading, on the other hand, involves taking advantage of the market’s volatility by buying and selling cryptocurrencies over shorter time frames. Each approach has its own set of risks and potential rewards, and an investor should choose a strategy based on their individual risk tolerance and investment goals.
Legal and Regulatory Environment: Given the relative infancy of the cryptocurrency market, the legal and regulatory environment can be unpredictable and vary greatly by country. Governments around the world are grappling with how to regulate this new asset class, and any changes can significantly impact the value and viability of certain cryptocurrencies.
Crypto as Part of a Balanced Portfolio: While cryptocurrencies can offer high returns, they should only represent a portion of a balanced investment portfolio. Their volatility and risk mean that they are not suitable as the sole investment for most investors. Traditional investments, such as stocks, bonds, and real estate, still play a vital role in a diversified portfolio. As with all investments, only money that one is prepared to lose should be invested in cryptocurrencies.
Canada
Canadian investors do have the option to invest in Bitcoin ETFs (Exchange-Traded Funds). These financial products can be a good way for investors to gain exposure to Bitcoin without having to directly buy, store, and secure the cryptocurrency themselves.
Here are some pros and cons of investing in a Bitcoin ETF:
Pros:
Ease of Use: ETFs trade on traditional stock exchanges, meaning you can buy and sell shares in a Bitcoin ETF using any brokerage account. You don’t need a digital wallet or have to engage with a cryptocurrency exchange.
Regulation: ETFs are subject to regulatory oversight, providing a layer of protection that direct Bitcoin investments do not offer.
Diversification: Some ETFs invest in a diversified portfolio of cryptocurrencies, not just Bitcoin, which can help spread risk.
Security: With a Bitcoin ETF, you don’t need to worry about securing a digital wallet or dealing with potential hacks, as the ETF manager handles the security.
Cons:
Fees: ETFs come with management fees, which you wouldn’t incur if you bought Bitcoin directly.
Price Discrepancies: The price of a Bitcoin ETF might not precisely track the price of Bitcoin itself due to the fund’s expenses, supply and demand for the ETF’s shares, or other market factors.
Lack of Control: With an ETF, you don’t own the underlying Bitcoins directly. This means you can’t use them for transactions or in DeFi (Decentralized Finance) protocols.
What is DeFi?
Decentralized Finance, or DeFi, is a rapidly growing sector within the cryptocurrency industry that leverages blockchain technology to recreate and improve upon traditional financial systems.
Here are some key points about DeFi to understand:
Decentralized Nature: DeFi applications operate on blockchain networks and are not controlled by any single entity, such as a bank or government. Instead, they are governed by code and the community of users.
Smart Contracts: DeFi applications are built using smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. The Ethereum blockchain is currently the primary platform for DeFi due to its robust smart contract capabilities, although other blockchains are also developing DeFi ecosystems.
Financial Services: DeFi platforms offer a range of financial services similar to those in traditional finance, such as lending and borrowing, interest-bearing accounts, insurance, asset trading, and more.
Permissionless and Open-Source: DeFi applications are typically open to anyone with an internet connection. You don’t need to go through a lengthy approval process to use these services, which can increase financial inclusivity. Many DeFi projects are also open-source, meaning their code is publicly accessible, promoting transparency and community-led growth.
Risks: While DeFi has significant potential, it also comes with substantial risks. Smart contract bugs or exploits can lead to hacks, resulting in the loss of user funds. Also, many DeFi platforms involve highly complex economic models and high volatility, which can result in significant financial loss.
Importance of Education: Due to the inherent complexity and risks, it’s crucial for individuals to thoroughly understand how each DeFi platform works before getting involved. This includes understanding the platform’s smart contract functions, the specific risks involved, and the steps needed to secure their investments.
There are several ways that investors can potentially earn returns in the DeFi space:
Lending Platforms: Lending platforms allow users to earn interest by supplying digital assets. The interest is paid by borrowers who provide collateral to secure their loans.
Yield Farming: This involves lending or staking crypto assets in a DeFi protocol to earn rewards. Yield farmers often move their assets around to chase the highest yields, but the complexity and risk are high.
Liquidity Providing: On decentralized exchanges, users can supply assets to liquidity pools and earn transaction fees in return. The risk is ‘impermanent loss,’ which can occur if the prices of the pooled assets change relative to each other.
Staking: Some DeFi projects have their own tokens and offer rewards for users who stake their tokens in the network. Staking helps secure the network and participate in governance decisions, and in return, stakers earn rewards.
Arbitrage: Taking advantage of price differences between different exchanges or pools. Traders can buy low on one platform and sell high on another.
Participating in Initial DEX Offerings (IDOs): IDOs are the DeFi version of Initial Coin Offerings (ICOs), where new projects sell tokens before they’re released to the public. If the project does well, these tokens can increase in value.
Token Farming: Some projects incentivize certain actions (like providing liquidity or borrowing) by distributing their native tokens as rewards. This is often how new DeFi tokens are initially distributed to the community.
Income from Insurance: Some DeFi platforms offer insurance-like products to protect against smart contract failures or other risks. Users can earn money by providing coverage.
Remember, while there are numerous ways to earn money in DeFi, they all come with significant risks, including smart contract bugs, platform failures, regulatory changes, extreme price volatility, and more. Thorough research and due diligence are essential before engaging with DeFi platforms.
DeFi is an innovative but high-risk sector of the cryptocurrency market. As with all investments, it’s crucial to do thorough research and consider seeking advice from a financial advisor before diving in.
Audrey Nesbitt
