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If you're crypto-curious, read this cryptocurrency guide that explains what is cryptocurrency, how it works, and how you can invest in cryptocurrencies.

You’ve probably heard the hype on Bitcoin, Ethereum, and alt coins, but what the heck is cryptocurrency? From the headlines, you know that it’s a digital currency — one that’s unregulated and highly volatile. Also, you’ve likely heard stories about people going broke or getting rich from crypto-investments.

But the headlines don’t give a complete picture. If you’re crypto-curious, you’re not alone and this guide is for you. Keep reading to learn what cryptocurrency is, how the system works, and how to buy cryptocurrency in Canada.

What is Cryptocurrency? 

In a nutshell, cryptocurrency — or “crypto” — is a digital currency that’s currently unregulated by governments and conventional banks. You can exchange cryptocurrency into fiat (i.e., “real” money such as Canadian dollars) and use it to buy stuff or sock away into savings. Cryptocurrency started with Bitcoin but spiralled into almost 7,000 variations called alt (“alternative”) coins.

Essentially, the digital funds can be sent, received, or traded across one decentralized online platform — known as the “blockchain” — that stretches across scores of computers. Participants of this blockchain platform track transactions in real-time, confirming their authenticity. This system makes crypto faster, cheaper, and more transparent than traditional systems of sending and receiving money.

Crypto has a bit of a rogue reputation. On the one hand, it’s on the verge of being adopted by banks as of 2021; on the flip side, it’s often rejected by retailers for its volatility. Governments toy with policies on how to legislate it, while environmentalists condemn its threat to the environment. Meanwhile, the 1.7 billion unbanked people say crypto’s their boon since it reaches them where no banks can.

How Does Cryptocurrency Work?

When spending traditional fiat money, the transaction — the amount you spend, what you purchase, and the seller you buy from — is recorded by the retailer or your bank.

But with cryptocurrency, all this information is stored directly in the coin. Transactions are included in an encrypted ledger within the blockchain of a coin, and every time a coin is exchanged, that transaction adds a block to the blockchain.

The information stored in a blockchain cannot be forged or changed, making it more secure than an external record. And because it’s encrypted, it’s anonymous and impermeable to hackers. Your cryptocurrency cannot be easily stolen because your ownership is written in the information of the crypto coin itself!

Every cryptocurrency coin carries its entire transaction history: from the time it was mined to its current owner. While the ownership of the coins is anonymized, the ledger is actually public. The blockchain shared and stored across many peer-to-peer nodes to confirm its authenticity and make it impermeable to tampering.

Leading Cryptocurrencies on the Market

With thousands of cryptocurrencies in existence, it can be hard to keep track of what’s what. Here’s your cheat sheet for all the top cryptocurrencies on the market.

Bitcoin (BTC)

Bitcoin (BTC), first out of the gate in 2009, is the most famous, most sought after and most controversial digital coin. Its shortfalls include that it is slow and said to guzzle more energy than the entire country of Sweden, since it works on a proof of work (PoW) concept where miners need huge amounts of computer power to unravel Bitcoin algorithms. Bitcoin gets its value from its scarceness. Only 21 million BTC can be produced – with the final coins minted around 2140.

Litecoin (LTC)

Litecoin (LTC), produced in 2011, is often called the “silver” to Bitcoin’s gold since it tried to correct for Bitcoin slowness by pushing digital coins four times faster than Bitcoin. In all other respects, Litecoin is mostly identical to Bitcoin, with some slight changes in its hashing algorithm.

Ethereum (ETH)

Ethereum (ETH), 2013, not only exceeds Bitcoin’s pace by five times per second but also introduced the first smart contracts, or self-executing contracts for crypto trading. ETH and BTC are actually your two top famous digital coins, ubiquitous across crypto marketplaces and with any merchants that accept crypto. After Bitcoin, Ethereum’s asset (called Ether) is the second-largest cryptocurrency by market capitalization, while Ethereum is the most actively used blockchain.

Neo (NEO)

Neo (NEO) belongs to a group of crypto that soldered its appeal on a more environmentally-friendly way of mining its crypto. NEO works on a technology called proof of stake (PoS) where the crypto of that platform is generated by members with the most “stake” or relevant crypto.

Dash (DASH)

Pioneering anonymity-giving coin Dash (DASH) gives you two privacy options: An InstantSend feature for transparent transactions and a private feature called PrivateSend. Dash confirms transactions in just 2.5 minutes, is easy to use and famously well-managed. On the other hand, Dash has been criticized for its bugs and security.

ZCash (ZEC) 

Anonymous coin ZCash (ZEC) comes with two options: T-addresses for transparent transactions and Z-addresses for anonymous transactions. The coin functions through a theoretical code called ¨zero knowledge proof¨, which assures the recipient that the amount is correct without revealing details of the sender or recipient nor the transaction amount. ZCash is fast, secure — and secretive.  For example, its operators demand a 20% tax on all coins mined, with proceeds going to an undisclosed location.

Monero (XMR) 

Monero (XMR) hides your wallet address, transaction history and spending details through its own unique strategies. It takes about two minutes to verify a transaction, is thoroughly private and has no block size limit. On the other hand, Monero absorbs a lot of memory – about eight times as much as a Bitcoin transaction. But on the other, it’s a crypto that’s notoriously used by criminals.

Ripple (XRP)

Founded in 2012, Ripple (XRP) is a global payment network that works hand-in-hand with major banks and financial institutions, dropping your cross-border transaction fees to pennies. Ripple is cheaper and faster than Bitcoin, has more coins in the market (about 1B XRP) than Bitcoin – a fact that gives it liquidity, and is used for quick conversion between different currencies.

How to Buy Cryptocurrency in Canada

To get started, all you need is a digital or hardware wallet for storing your crypto. The digital wallet is an online app, whereas the hardware wallet is a physical plug-in device. Canada has its own famous hardware wallets, notably Trezor Model T  and Ledger Nano X.

You sign up on a cryptocurrency exchange and buy any of the crypto listed on that exchange with real money, called “fiat” in crypto lingo, or Bitcoin, if the exchange gives that opinion.

A good (and safe!) place to start is Wealthsimple Crypto — Canada’s leading cryptocurrency trading platform. Using the platform, you can invest in Bitcoin or Ethereum commission-free and with no fees charged for deposits or withdrawals.

Are Cryptocurrencies a Safe Investment?

The answer depends on who you ask. Naysayers point to these three hazards:

  • Too new: We’re uncertain what its future is; therefore, it’s a speculative investment.
  • Volatile: Its fortunes are as volatile as the notorious weather in Rapid City, South Dakota, where blizzards intercept heat waves without warning. Case in point: the Bitcoin price crashed in May 2021 after Elon Musk tweeted about the environmental impact of the coin, and China cracked down on Bitcoin.
  • Lacks mass adoption: You can’t even buy a loaf of bread with cryptocurrency. Only 106 million people use crypto as of 2021. That’s less than the population of Brooklyn, NY.
  • Prone to crypto-jacking: Because crypto is unregulated, some trading platforms are less secure and prone to cybercriminals looking to steal your coins. Hackers have also looted billions of dollars in coins from cryptocurrency exchanges.

Despite the risks, cryptocurrency has had quite the year with recent research showing 40% of millennials say they’re ready to adopt it, banks are signing up for Bitcoin, and a new type of bank account could pay interest in Bitcoin. That’s quite a future that could skivvy up its value.

Moreover, Bitcoin will soon reach its capped amount of 21 million Bitcoins in 2024, making it a scarce and therefore valuable commodity. Bitcoin investors want to get in on the ground floor and hoard while they can.

The lesson here? Reduce your risk and choose your crypto trading platform carefully.  Reduce your risk by buying and selling on a trustworthy platform like Wealthsimple Crypto – Canada’s first regulated crypto trading platform in Canada. Above all, don’t put all your eggs into one crypto basket. Spread out your investments to give yourself a buffer against crypto’s volatility.

Get $50 when you open your first Wealthsimple Crypto account!

Should You Invest in Crypto?

Crypto is a speculative investment. There’s the reason why British MPs dub cryptocurrencies a “Wild West industry”. It occupies the (very) “high-risk” end of the investment spectrum. If you do invest, you’d want to do your due diligence, spread your money across cryptocurrencies to hedge your risks and invest only what you can afford to lose — which some experts claim should be no more than 0.5% of your funds.

Regardless, no one can deny that crypto is a legit investment that’s gaining popularity and credibility. The Toronto Stock Exchange even approved the first Bitcoin ETF in North America, allowing investors to hold Bitcoin into a TFSA or RRSP.

Just like buying stock, your best protection against volatility is to diversify your investments and buy and hold for the long term. Like buying IPOs or any other speculative investment, limit your exposure to 5% of your portfolio and/or only to an amount you’re willing to lose.

FAQs

While not officially considered money, cryptocurrency is legal in Canada. The government taxes you on crypto transactions and regulates these transactions under its under anti–money laundering and counter-terrorist financing laws.

For crypto traders, the National Bank of Canada is likely your best bet. It does not have any systematic crypto blocks in place.

The Royal Bank of Canada, TD Bank, and Scotiabank block credit card crypto purchases. However, Interac e-Transfers and debit card buys are allowed.

BMO blocks everything crypto-related — from crypto purchases on your credit card to Interac e-Transfers and debit card purchases.

The short answer: it can be if you take a balanced approach.

For the facts: cryptocurrency is a highly speculative investment prone to volatility and showing skimpy mass adoption. Although it’s hugely popular right now, it can still plummet in value overnight (thanks a lot, Elon Musk!). If the Bitcoin or Ethereum price goes to zero, your money is gone. Yes, there are Bitcoin millionaires who have capitalized on soaring Bitcoin prices, but also horror stories of crypto investors who lost their entire life savings.

That said, cryptocurrency can be a worthy addition to your overall investment portfolio if you selectively buy and hold for the long term. With Bitcoin ETF, you can even do it in a tax-sheltered registered account. To minimize the risks, your best bet is to take a balanced approach: Add a small amount of cryptocurrency to your portfolio (up to 5%), while funnelling most of your savings into the stock market and into the best investments in Canada.

The Last Word

If you’ve read this far, let’s hope that you have a better understanding of the cryptocurrency world. Maybe you’re feeling confident enough to take the next step and start trading cryptocurrency.

If you recognize the long-term potential of cryptocurrency, don’t be scared off by its short-term volatility today. Instead of freaking over the latest crypto crash, seize the opportunity to buy at a lower price!

The most important thing is to create a risk-appropriate, diversified portfolio that includes other investments such as ETFs, stocks, bonds, GICs, and more. Cryptocurrency can be part of that.

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