If you’ve been paying attention to finance or technology news lately, you’ve likely heard about cryptocurrencies of one kind or another. You might also be asking yourself what exactly are cryptocurrencies, and what sort of benefits and features do they have. In an effort to help you understand a little more about the space, this article serves as a beginner’s guide.
Learn how they work, pros and cons, and the basic steps of investing or buying cryptocurrency.
Table of contents
- What is cryptocurrency?
- How does cryptocurrency work?
- Is cryptocurrency legal in Canada?
- Are cryptocurrencies a good investment?
- How to invest in cryptocurrency stocks
- How to buy cryptocurrency in Canada
- How to trade cryptocurrency in Canada
What is cryptocurrency?
The answer to “what is cryptocurrency?” can be a difficult one. In simple terms, cryptocurrency is a decentralized type of digital currency. Cryptocurrency doesn’t require a centralized authority (like a bank or government) to circulate. It is sent, traded, bought, sold, and used securely.
Cryptocurrency is secured by cryptography. This ensures these cryptocurrencies cannot be double-spent by accident or counterfeit. You can use cryptocurrency to buy and sell things, but many people use them today as vehicles for investments, instead.
Why were cryptocurrencies created?
Cryptocurrencies were first created well over a decade ago. The primary reason for their creation was to allow people to maintain control of their money. People can buy, spend, trade, and use cryptocurrency all without having to rely on banks and governments, and the various fees and restrictions they implement.
It was envisioned as a peer-to-peer system to easily send and receive digital money from all over the world. Since it’s decentralized, you can exchange it many times over into local currencies — though paying hefty fees to do so.
How big is the cryptocurrency market?
The current crypto total market cap is over $1.6 trillion (as of January 2022). This is a major increase over what it was around two years ago when it was less than $250 billion. However, this current size falls short of the all-time high of nearly $3 trillion in late-2021.
Of course, you’re going to find folks on all sides of the issue. Many believe the market will get back to that amount, and blow past it, while others believe the opposite.
What is a cryptocurrency portfolio?
Just like an investment portfolio, a crypto portfolio is simply a collection of the different cryptocurrencies a person may own. Some people will invest in one asset, while others will have their portfolio full of different cryptocurrencies. In most cases, you can view your portfolio in your chosen app, platform, or exchange. Here, you can see their values, where they are trending, and much more.
Related reading: Questrade vs Wealthsimple — which one is right for you?
How does cryptocurrency work?
Thinking of investing or buying cryptocurrency? It’s wise to learn more about how it works. All cryptocurrencies run on a public ledger called the blockchain. This is a running list of all transactions by those who hold the cryptocurrencies.
New units of any cryptocurrency for circulation are done through mining. This process uses computational power and resources to solve very complex mathematical problems. Solve the problem, and a new coin or unit of cryptocurrency is created.
You can also buy or sell crypto through a variety of exchanges and platforms.
What is the value of cryptocurrency based on?
First of all, the supply and demand of a cryptocurrency can influence value. If there is more supply than demand, prices will often fall — and vice versa. Essentially, the value can fluctuate based on whatever the market feels the value is at a certain time.
Community and support behind a particular currency can also help it become more valuable. Media coverage or a public endorsement by a well-known public figure can lead to a massive increase in both public interest and the value of the coin.
As you could imagine, the potential use cases and goals for a cryptocurrency can also impact its value. If people like the plans that a certain crypto asset has and what it aims to do, this could make it more valuable. The more overall utility a coin has or is expected to have, the higher its value.
Types of cryptocurrency
The most popular and well-known is Bitcoin, the first cryptocurrency, created back in 2009. It has the highest market cap by a large margin — just over $692B as of late-January 2022).
After Bitcoin, the most popular cryptocurrency is Ethereum. Launched in 2015, it’s actually a blockchain network with a corresponding digital currency. Developers use the software platform to create and build applications. Cardano and Solana are both Ethereum competitors. Cardano is actually run by an Ethereum co-founder, while Solana, according to supporters is faster and more efficient than Bitcoin.
Dogecoin started as a joke (remember all those ‘doge’ memes featuring a Shiba Inu?) in 2013. It’s now considered a valuable option, with a market capitalization of $31.9B (2022).
Additional types of cryptocurrency
- Litecoin, developed via a copy of Bitcoin’s source code. It’s essentially an affordable alternative.
- Tether is a blockchain-based cryptocurrency that’s also a stablecoin, which is a class of cryptocurrency backed by a reserve asset. As Investopedia explains, “they attempt to offer the best of both worlds—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.”
- Stellar, which goes in tandem with its native digital currency, the lumen. It’s one of the most successful altcoins (i.e. any crypto that isn’t Bitcoin) in recent years. Lumens can be used on the Stellar network, a blockchain-based system that transfers digital currency to fiat money.
Some of these might even sound familiar to you from following personal finance or investing accounts on social media or through news coverage.
As with so many personal finance and investing decisions, it’s incredibly important to do what’s right for you and your money. Each cryptocurrency is different, so digging deeper into the ones that sound right for you is always a prudent decision. The bottom line: don’t immediately buy into any hype.
Is cryptocurrency taxable in Canada?
When it comes to cryptocurrency, one of the most common questions is whether or not you need to pay taxes on it in Canada. The answer is, of course, yes. You will either pay income tax or capital gains tax, depending on whether it is income for your business or capital gains like a traditional investment.
You’re not required to pay taxes if you simply hold the cryptocurrency and let it grow in value. Once those gains are realized and you have actually sold or converted the cryptocurrency into Canadian dollars — or given it as a gift or used it to buy a good or service — you will have tax responsibilities to keep in mind.
Because crypto is still in its relative infancy, the tax rules might change in the coming years.
Is cryptocurrency legal in Canada?
Given its major coverage in all forms of media, yes, it’s legal. There are even some physical locations in the country with Bitcoin ATMs and other ways to buy, trade, and sell crypto in person. However, keep in mind: crypto is not legal tender in Canada.
Are cryptocurrencies a good investment?
Now that you know about cryptocurrencies, are they a good investment for you to make? Well, that is a loaded question. It’s also one that can differ from person to person. They can be the best investment a person has ever made, but also the worst.
Before you ever invest in crypto, be sure to perform your own independent research. Take time to decide on the right crypto asset to invest in before diving into the market. In an effort to help you make your decision, let’s explore a few of the many pros and cons of cryptocurrency.
Pros of Cryptocurrency
The decentralized nature of cryptocurrency is one of the biggest advantages of crypto. You have full control over your digital currency. Not to mention it’s easy to transfer funds, and the fees for doing so are generally quite low. It’s available in many places, and few restrictions exist surrounding it. Even more, transfers can also be fast as there is no need for a third party or intermediary to facilitate the transfer.
You can’t mention cryptocurrency without touching on its massive growth in recent years. The market has multiplied drastically over the last few years. A few hundred dollars invested a few years ago could now be worth thousands, or much more.
The security offered by crypto is also incredible. It’s much harder to be fraudulent, though phishing and other scams do still exist.
Cons of Cryptocurrency
One of the biggest drawbacks of cryptocurrency? It’s association with illegal acts and trade. Because the transactions are very secure, instant and largely private, criminals can use cryptocurrency to evade detection and avoid having to use a currency overseen by a particular government.
However, another major con of cryptocurrency is simply how volatile the market is. One day a coin can be doing well, and the next it could lose 25% of its value. That is why it is always important — even with traditional investments — to only invest what you can afford to lose. If you put your life savings into crypto, that is a major risk and you could lose it all. With no governing authority, if you experience an issue, you can’t really file a report or claim against anyone in most cases.
Finally, cryptocurrency is still very confusing to some. It’s certainly a barrier to entry that the industry needs to keep in mind as it grows.
How to invest in cryptocurrency stocks
Investing in crypto is a fairly easy process. Start by registering for a crypto wallet. Then sign up for an account on an exchange, fund your account, and then buy your cryptocurrency of choice. Find a wallet from a reputable provider, and ensure the exchange you choose has fees you are comfortable with and takes security very seriously.
Of course, some people want to invest in the success and/or failure of crypto without actually having any themselves. People can invest in traditional stocks in companies that have a financial stake in certain cryptocurrencies or the industry as a whole. These will generally be less volatile but can allow you to have an interest in the space. In a similar vein, you can also invest in Blockchain ETFs (exchange-traded funds).
How to buy cryptocurrency in Canada
If you want to know how to buy cryptocurrency in Canada, the process is thankfully quite easy. As explained above, all you need is a cryptocurrency wallet and access to an exchange.
Of course, be sure to find the right cryptocurrency exchange. When you get into your exchange, it will generally be quite simple to find the “buy” section of the platform.
Once you have found it, you simply enter the amount you want to spend and choose the cryptocurrency. Make sure to review all of the amounts to ensure they are correct and make sense.
Then, you can simply hold the crypto and hope it increases in value. Alternatively, you can spend it at one of the thousands of retailers that allow purchases in cryptocurrency. Within seconds, your account will have your cryptocurrency in it. You could leave it, but it’s generally recommended you transfer it to a wallet. This is typically a more secure route.
How much does cryptocurrency cost?
As far as how much cryptocurrency costs, that depends on what you intend to buy. For example, if you want to buy 1 bitcoin, it will cost you over $45,000. But if you want to buy 1 Dogecoin, it will only cost you $0.17.
In addition to the exchange rate itself, different platforms and exchanges will have a variety of fees for making an exchange. So the price you pay for crypto in one place can vary wildly from the price you would pay at another. Many will post their exchange and trade fees online. This way, you can have an idea of what you will be responsible for paying before making the purchase.
How to trade cryptocurrency in Canada
Once you have an online cryptocurrency wallet and an account on an exchange, it becomes very easy to trade crypto in Canada. Just like you did when you bought your crypto, you will enter the amount you want to trade, and then choose the type of crypto you want to trade for (or the type of currency if you want to cash out).
However, it’s important to know that not all trading pairs are available on all platforms. While trading pairs like Bitcoin for Ethereum will generally be on most exchanges, smaller and more obscure cryptocurrency trading pairs may not be.
How safe is cryptocurrency trading?
Trading cryptocurrency is generally safe, if you do your research and educate yourself. Always ensure you are using well-known and reputable exchanges, and ensure you keep all of your passwords and personal information private. Hackers and scammers run rampant in the crypto space, so you always need to be careful.
Crypto is decentralized, so there is a chance you might get scammed. Always double-check that you have entered the right amount, the right addresses, and that you are on the right website or platform. These investments have a reputation for being volatile. As we said earlier, only invest what you can afford to lose,
We hope this guide has helped you learn more about cryptocurrency and helped you decide whether it is an industry you want to become involved in or not. If you do, make sure to do your own research, and only invest what you can afford to lose.
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