Cryptocurrency Basics: Blockchain, Bitcoin, and Betting on the Future
Like many investors, you may be interested in exploring opportunities in cryptocurrency markets such as Bitcoin. However, cryptocurrencies are a relatively new investment alternative, and the concepts behind digital assets can be confusing.
"Cryptocurrency Basics: Blockchain, Bitcoin, and Betting on the Future” is designed to help investors understand how Bitcoin works and its potential role as an investment. The paper is divided into three major segments:
Bitcoin and blockchain basics: Bitcoin refers to both the blockchain network and the cryptocurrency that trades on that network. We describe how the network keeps track of all historical transactions and accurately reflects who currently holds bitcoins. In addition, we discuss how crypto assets perform the basic functions of money as a medium of exchange and a store of value.
Crypto assets in a portfolio: While the cryptocurrency asset class is relatively new and volatile, high risk-adjusted returns are commanding attention. Institutional and private investors are increasingly incorporating cryptocurrency assets into their investible opportunity universe. In this section of the paper we review the characteristics of digital coins in an investment portfolio.
Risk: While the possibilities for digital assets are virtually endless, a fully informed investor should realize that there is equally impressive downside risk. Bitcoin’s annual price volatility is far higher than that of traditional risk assets like equities and commodities, and investors must understand the risks before including bitcoin in a portfolio.