Wealth Insights

Your intro to cryptocurrencies

Learning about this rapidly evolving and emerging asset class could benefit you in the future.

Cryptocurrency remains a hot topic in the financial sector due to its wild price fluctuations, headlines about cybercrime and fraud, and predictions about how blockchain technology and decentralized finance, or “DeFi,” are changing the ways we do business.

The Biden administration’s announcement in September 2022 of a new framework to begin greater oversight of the crypto markets has also gained attention.

As an emerging asset class, however, crypto remains extremely volatile—as the so-called crypto winter of 2022 proved—and any investment carries significant risk. Despite this, many (but not all) experts believe the crypto market is here to stay, and ultimately presents a great deal of opportunity.

Before considering even a small investment in any type of cryptocurrency, it’s important to understand how digital currency works, trades and fluctuates in value. You should learn about the lack of regulation currently in the space. You also may consider discussing cryptocurrencies with your Regions Private Wealth Advisor before you get started.

“The cryptocurrency market is still pretty chaotic,” says Michael Moorefield, Asset Management Systems and Operations Analyst for Regions Bank based in Birmingham, Alabama. “Of course, chaos does bring some opportunities, and this market is going to continue developing. But due diligence is a necessity if you’re preparing to invest in them. Otherwise, you’re just gambling.”

What Are Cryptocurrencies?

Cryptocurrencies are digital currencies that enable peer-to-peer transactions and are maintained by decentralized blockchain networks. In other words, unlike fiat currencies (e.g., the U.S. dollar, the euro), cryptocurrencies are not issued by or even overseen by a bank or national treasury. Instead, a digital “database,” known as the blockchain, records all crypto transactions and shares them with all participants within the network.

When it comes to crypto, transactions are set in stone and viewable by the public. Each transaction must be validated by other users of the network (who are known as node operators or validators) and then added as a distinct new block to the blockchain.

Cryptocurrency is still in its infancy. Bitcoin, one of the first and best-known cryptocurrencies, dates only to 2009. But crypto’s emergence has been explosive. Bitcoin still accounts for 40% of the cryptocurrency market, but there are now thousands of alternate cryptocurrencies running on distinct blockchains.

Coins and Tokens

Coins, such as Bitcoin and Ethereum, are just one category of cryptocurrency. Some coins are created by a complex computational process known as crypto mining. Crypto mining is used in a proof-of-work system and is the process whereby high-powered computers compete to be selected to produce the next block in the blockchain. These miners, if selected, consolidate recent transactions and package them into this new block, resulting in the expansion and enhanced security of the blockchain. For their efforts, miners are paid for creating new blocks with newly minted coins. In the case of Bitcoin, there are only 21 million coins that will ever be minted, with a depletion date in the year 2140.

Many types of crypto are considered a store of value and a means for exchange similar to traditional currencies. That said, unlike fiat currencies, cryptocurrencies are still largely unregulated. And owing to their volatile nature, they have not yet caught on as a means of exchange in developed regions of the world, though some merchants and even a few national governments now accept them as legal tender.

Tokens are a separate class of cryptocurrencies, which typically have more diverse functionality than coins, though in some cases, they can also be used to make payments or to trade for other assets. Tokens can be used to facilitate transactions (platform or transactional tokens), access services (utility tokens) or act as a digital proof of ownership for an item (nonfungible tokens or NFTs).

These definitions are still somewhat blurry, which is another reflection of the cryptocurrency market’s evolving status. So is the market valuation. By the end of 2022, the market cap for cryptocurrencies was an estimated $798 billion after reaching a peak of $2.9 trillion in November 2021.

“It’s a very broad market,” says Moorefield. “To say ‘I’m an expert in cryptocurrency’ is comparable to saying ‘I’m an expert in stocks.’ That can mean so many things, and in crypto, as in the equity markets, there are new classifications, differentiators and opportunities appearing all the time.”

How Are Cryptocurrencies Bought, Traded and Sold?

The language of cryptocurrency trading and transacting often mirrors traditional investing terminology—up to a point. But investors would do well to remember how new and untested this market is when thinking about their own goals and interests around buying and selling digital currencies.

For example, you can trade cryptocurrencies via an exchange, which allows you to buy, sell or trade cryptocurrencies for conventional currency, such as the U.S. dollar, or other digital currencies. But some exchanges only allow crypto-to-crypto transactions.

Once you have an account, you can buy and trade coins similarly to how you might trade stocks with a traditional online brokerage service. As with any security transaction, it’s important to evaluate any commissions or fees charged by the exchange.

It’s also important to note that these exchanges are not regulated in the same way as other security exchanges, and some authorities, including the New York State attorney general, have raised questions about the risk posed to consumers who use them.

Perhaps because of this, a number of investors prefer to speculate on the price of Bitcoin without actually owning it. They do this via the futures market. Since the Commodity Futures Trading Commission (CFTC) said in late 2017 that it would allow traders to begin buying and selling Bitcoin futures, the cryptocurrency has often been one of the most popular trades on the Chicago Board Options Exchange.

Are Cryptocurrencies Regulated?

One of the most pressing questions in cryptocurrency is the issue of regulation. The short answer is that for the most part, cryptocurrencies, their respective blockchain platforms and the thousands of crypto coins, tokens and other digital products are, generally speaking, not regulated in the United States.

That’s largely because cryptocurrency itself was created as a decentralized medium of exchange, providing participants a financial infrastructure free from the rules and policies of central authorities like banks and governments. Needless to say, the lack of oversight between traditional financial markets and crypto markets has contributed to a number of headline-making cyberattacks, hacks and outright fraud—which in turn have sparked a growing demand in the United States and some other countries for clear-cut protections for investors as well as accountability for those running crypto projects (as these networks are sometimes called).

Case in point: In March 2022, the Biden administration released an executive order to set up a framework for crypto regulation. This was fleshed out in September 2022, with certain investigative powers given to the Securities and Exchange Commission and the CFTC.

What Would or Could Crypto Regulation Look Like?

Before anyone can answer that question, there is a fundamental debate whether cryptocurrency can be considered a legitimate form of currency (i.e., a means of exchange and a store of value)—or is crypto a type of security?

Why Is the Cryptocurrency Market Volatile?

The crypto market’s volatility is connected to a variety of interconnected factors, including its lack of history, current lack of binding regulation and the presence of bad actors. “It’s no surprise that SEC Chair Gary Gensler referred to crypto markets as the Wild West,” says Moorefield.

Cryptocurrency is also not immune to greater forces in the financial market. “The Fed and other central banks have been hiking rates. That’s going to negatively impact any risk on assets, and cryptocurrencies are among the riskiest,” says Moorefield. “Central banks absolutely have an indirect role in how the crypto market performs and interacts with itself.” Volatility also is likely with any market that is still in its infancy.

Yet another factor is the very real risk presented by scams and frauds, the recent FTX exchange scandal being just one of the most high-profile examples. “Long-time players in the crypto space are all too familiar with scams or ‘rug pulls’ as they’re commonly referred to. If you stick around long enough, you’re almost expected to be caught up in one at some point,” says Moorefield. “But what is most disheartening is the level of deception corporate actors such as FTX are capable of. Their blatant lie about the use and security of users’ funds has fundamentally shaken the communities’ trust in centralized exchanges.”

As with any industry, there will be scams, and there will be corporate fraud. Unfortunately, though, no amount of regulation will do much to deter someone who is a criminal at heart. “That’s why, as with any investment, it is imperative to understand what you own and understand who holds it,” says Moorefield.

Three Things to Do

1. Consider whether the cryptocurrency market and its complex landscape are right for your goals and your risk tolerance.
2. Learn about central bank digital currencies or CBDCs.
3. Listen to our podcast about protecting yourself from cryptocurrency scams.