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Introduction to cryptocurrency
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INTRODUCTION TO CRYPTOCURRENCY

E*TRADE Securities

12/01/21

Summary: Cryptocurrency began as a decentralized digital money used to make
payments online, although its use has evolved. While it’s still a very nascent
asset class, it’s recently made big strides toward maturity in financial
markets. We break down the history and types of cryptocurrencies—and some of the
investing risks to consider.

The swift and sudden rise of cryptocurrencies is hard to ignore.

This new asset class has ushered in a range of opportunities, piquing many
investors’ interest as a way to enhance and diversify portfolios. It’s also
presented significant risks that market watchers should take the time to fully
understand.


WHAT IS CRYPTOCURRENCY?

While it can serve other purposes, cryptocurrency, commonly called “crypto”, is
decentralized digital money that uses blockchain technology to make peer-to-peer
payments. Cryptocurrencies like Bitcoin are created through a process called
mining, which uses computer power to solve complicated math problems that
ultimately produce a fixed supply of virtual coins. While many cryptocurrencies
are created in the same way, some others may be created through different
methods.

The first cryptocurrency, Bitcoin, launched in 2009 and it continues to be the
most well-known digital currency. While Bitcoin claims about two-thirds of the
cryptocurrency market, there are roughly 10,000 alternatives such as Ethereum,
Tether, Binance Coin, and Dogecoin, to name a few.

Today, some cryptocurrencies could be classified more as currencies, others more
as securities, and still others somewhere in between.


TOP 10 CRYPTOCURRENCIES BY MARKET CAP OR TOTAL NETWORK VALUE

Source: Coinmarketcap.com, as of 9/30/21

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A DECENTRALIZED PAYMENT SYSTEM

Unlike the US dollar, cryptocurrencies have no physical form, aren’t stored in a
central place, and aren’t governed by a central authority such as the Federal
Reserve.

The blockchain is vital to crypto’s decentralized nature. Every crypto
transaction is recorded in the blockchain—a public ledger available to other
users—and a new “block” is added to the chain with the most recent transactions.
In Bitcoin, blocks occur every 10 minutes, but it varies from cryptocurrency to
cryptocurrency. There are thousands of copies of the blockchain file on
computers around the world, making it extremely hard to alter.

While traditional currencies use a trusted third party such as a credit card
company or bank to verify that the funds are available to complete a
transaction, cryptocurrencies rely on a network of computers to confirm the
spender’s coins and the transaction. The method by which a particular
cryptocurrency network ensures validity of transactions on that network is known
as a consensus mechanism.


EVOLUTION

Cryptocurrency has evolved significantly since Bitcoin hit the mainstream media
in 2013. It has seen several setbacks, from hacks to regulatory challenges, as
well as successes such as increased adoption by institutions.

In 2014, Mt. Gox, which was once the largest Bitcoin exchange in the world, was
hacked, widely exposing security vulnerabilities in the industry. Over the next
two years, however, blockchain became increasingly recognized as an important
technology, with startups in the industry drawing major investment from venture
capital firms.

In 2017, investors were reminded that cryptocurrency could be affected by
government action, when China rattled the market by shutting down Bitcoin
exchanges. Meanwhile, in the US, two major exchanges began offering Bitcoin
futures.

Cryptocurrency made further strides in gaining mainstream approval in 2020. A
leading payments company started allowing users to buy Bitcoin and a mid-cap
technology company reported it had added $250 million in Bitcoin to its balance
sheet.


CRYPTO HAS EVOLVED SINCE HITTING THE MAINSTREAM MEDIA IN 2013

Source: Bitcoin to USD chart, Coinmarketcap.com, as of 8/31/21

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INVESTING RISKS

Like with any asset, investing in cryptocurrencies involves risks. For one, they
are notoriously volatile, so while some investors have seen significant gains,
investing in cryptocurrencies may lead to significant losses.

Some risks unique to cryptocurrencies include, but are not limited to:

 * Laws regarding cryptocurrency can change. If a change in the law restricts or
   impairs holding cryptocurrency, its price may decline.
 * Since cryptocurrency is not issued or controlled by a particular person or
   group, there may not be any recourse if it’s lost or stolen.
 * Since the value of a particular cryptocurrency may be based solely on supply
   and demand, investors may face the total loss of their investment if the
   market for a cryptocurrency disappears.
 * New technologies like cryptocurrency are often used to perpetrate fraudulent
   investment schemes. Investors should do their due diligence before investing
   in a cryptocurrency they aren’t familiar with.
 * Cryptocurrency exchanges or wallet services may stop operating or permanently
   shut down due to fraud, hackers, or malware.

Additionally, because cryptocurrencies are relatively new, there may be
unforeseen risks in the future that are not evident now.


KEY CONSIDERATIONS

Investors who want to pursue opportunities in cryptocurrencies should proceed
with caution. Before getting started, investors should get educated and consider
how and whether cryptocurrency exposure may fit into their portfolio in a way
that aligns with their risk tolerance and financial goals.


WHAT TO READ NEXT...


THE BASICS OF BITCOIN

Bitcoin is a digital currency that commands the majority of the crypto market.
We explore the history and evolution of Bitcoin, along with investing
considerations for this volatile asset.

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FACTORS THAT AFFECT BITCOIN'S PRICE

The price of cryptocurrencies is impacted by supply and demand. Below we look at
several factors that may affect the price of Bitcoin.

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E*TRADE offers securities and futures products that allow investors to gain
indirect exposure to various underlying cryptocurrencies. Cryptocurrencies are
oftentimes also referred to as virtual currencies, digital currencies or digital
assets. Transacting in these cryptocurrency related products is highly
speculative and may result in the loss of your entire investment. The value of a
particular cryptocurrency may be based solely on market supply and demand, as
opposed to any underlying fundamentals. Since the value of cryptocurrencies may
be derived from the continued willingness of market participants to trade in
these products, customers may face the total loss of their investment in a
cryptocurrency related product should the market for that instrument disappear.
Investors should be aware of the various risks of transacting in cryptocurrency
related products. For more information, see the SEC’s Investor Alert, FINRA’s
Investor Alert, the CFTC’s Customer Advisory, and the NFA’s Investor Advisory.
You may also find more information regarding the risks of cryptocurrency related
products in E*TRADE’s Disclosure Library.





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buy, sell, or hold any security, financial product, or instrument discussed
herein, or to open a particular account or to engage in any specific investment
strategy.





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