Cryptocurrency: What you need to know

Almost every day in the news, cryptocurrency is discussed amongst investors. But what exactly is cryptocurrency?

Cryptocurrency is a virtual currency or “digital cash” that is backed by cryptography, making it difficult to counterfeit. Think of them as tokens used in arcades that return tickets and therefore prizes from the arcade. Blockchain technologies are key components of cryptocurrencies, ensuring the integrity of a transaction and recording these transactions.

While secure, these specific currencies are outside of the government’s control or centralized authority, making them prone to be utilized to conduct illegal activities and peer-to-peer technologies. Yet, cryptocurrencies are commended for their resistance to inflation, portability, and transparency.

Many companies have issued their own cryptocurrency or “tokens”, traded for goods and services provided. There are multiple cryptocurrencies in circulation today, however, one of the most popular and first cryptocurrencies is Bitcoin.

A Brief History — Beginning in the 1980s, early ideas about cryptocurrencies failed to gain traction but paved the way for future developments. A decade later, in 1995, American cartographer David Chaum conceived Digicash which rose to prominence as an early form of cryptographic electronic payments.

This required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by the issuing bank, the government, or any third party. However, the company went bankrupt shortly thereafter.

Other early attempts at cryptocurrencies or their underlying technology include B-Money, Hashcash, Flooz, and Bit Gold.

In 1998, author Wei Dai offered the first description of modern cryptocurrencies, but not until 2009 did the concept fully emerge with explanations of the foundations of blockchain and bitcoin written by “Satoshi Nakamoto,” a presumable pseudonym for either a person or group of people.

Twelve years later, on April 5th, 2021, the total market cap of cryptocurrency surpassed USD$2 trillion for the first time.

Impact on Stocks — Like many retail investors, my portfolio only consists of stocks, not cryptocurrencies. However, it is possible for cryptocurrencies (i.e., Bitcoin) to have impact on numerous stocks. This article will highlight a handful of individual stocks that can see price changes due to the change in Bitcoin or other cryptocurrencies.

The most obvious stocks/funds that are affected by the cryptocurrency market are ones meant to directly follow the price changes of cryptocurrencies. For instance, Grayscale Bitcoin Trust ($GBTC) is designed to track the change in Bitcoin’s price. It should be noted that the fund is not perfect and is often traded at a premium/discount when compared to Bitcoin’s price change.

Grayscale has other funds that track certain cryptocurrencies such as Ethereum, Ethereum Classic, Litecoin, and Bitcoin Cash. There have also recently been ETFs passed in Canada that track Bitcoin’s movement. The Purpose Bitcoin ETF (BTTC) and Evolve Bitcoin ETF (EBIT) are the top two options right now, both having management fees around 1%.

With cryptocurrency being a new phenomenon, there are also young companies that are publicly traded whose main operations revolve around cryptocurrency. Many of these companies will not have ideal fundamentals since they are aggressive growth companies.

One popular stock is Riot Blockchain Inc. ($RIOT) which focuses on mining cryptocurrency. Riot stated that they hope to have over 22,000 miners by June and their crypto mining revenue has been constantly increasing the past year.

Hive Blockchain Technologies ($HVBTF) is a similar company, as it also focuses on mining crypto for revenue. However, it also mines Ethereum and Ethereum Classic alongside Bitcoin.

Finally, Marathon Patent Group ($MARA) is in the same field but is a little different since it purchases the patents of mining equipment as their main operation.

The previously mentioned stocks all are focused on cryptocurrency, so the fact that they are impacted comes as no surprise.

Now we will be looking at bigger companies who you may not know are affected by cryptocurrencies. Nvidia Corporation ($NVDA) is one of the biggest technology companies there is. It is known for producing graphics cards and some of these computer hardware products have been used for mining digital currencies. This has caused demand for these products to skyrocket and often sell out.

Advanced Micro Devices ($AMD) has seen similar growth due to miners using its chips. Amazon ($AMZN) has also started to become involved with cryptocurrencies. It has been heavily researching blockchain and even started developing its own digital currency this past year.

Digital payment companies such as Visa ($V) and PayPal ($PYPL) are also benefiting from the cryptocurrency trend as they are working to allow customers to use Bitcoin for purchases. Square ($SQ) is another digital payment company that has actually invested $50 million into Bitcoin. This has helped generate more revenue for the company. Finally, even Kroger ($KR) wants in on this new trend. They are now offering an awards program for customers who shop in Bitcoin!

Overall, there are many companies that are impacted by the rise of cryptocurrency. It is important for investors to look into these technological trends when making their own decisions. Before partaking in these investments, it is crucial to do your own due diligence to make sure you are making a smart investment.

The Collegiate Financial Management Association’s mission aims to promote financial literacy and personal finance skills in order to ensure financial stability.