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This is How You Explain Crypto to Your Clients

January 12, 2024

Read Time 6 MIN

Whether your clients are looking to invest, transact, or simply learn, it's crucial they have a grasp of the basics—brought to you here using language and concepts they will quickly understand.

Please note that VanEck has exposure to Bitcoin.

From the gold standard to paper money and now to digital assets, the means by which we transact and invest is constantly changing. Among the latest additions to the financial landscape are cryptocurrencies. While they may have seemed like a futuristic idea just a few years ago, cryptocurrencies are quickly becoming a mainstay in the world of investing. For many, they represent a fresh and potentially lucrative opportunity. However, with new opportunities come new questions and challenges. Where does one start? What are the basics? As a financial advisor, this is your guide to help your clients answer these questions and navigate uncharted waters, providing them with the necessary knowledge and resources.

What is Blockchain?

Imagine a book. Every page of this book records a list of transactions, like a ledger. Now, imagine that thousands of people have this exact book and are always updating it simultaneously. Whenever someone wants to add a new page (or block of transactions), everyone with a copy of the book has to agree that the new page is correct. Once they agree, this new page is added to the book, and everyone updates their copies. This entire book is called a "blockchain," and it's like a shared digital ledger.

The power of blockchain lies in its transparency and security. Because so many people have copies and they always verify new pages together, it's incredibly difficult for someone to cheat or make false entries.

What are Cryptocurrencies?

Cryptocurrencies are a digital means of exchange that use cryptography for security and exist on the blockchain. Blockchain ensures the integrity and transparency of cryptocurrency transactions. Every time someone sends or receives a cryptocurrency, that transaction is recorded on a block. Once enough transactions are recorded on a block, it's added to a chain of previous blocks—hence the term "blockchain." The decentralization of this ledger—meaning it's simultaneously maintained by numerous participants globally—ensures its security. If someone tries to alter transaction data on one block, it would conflict with the information held by others, causing the alteration to be rejected. This feature is what allows cryptocurrencies to operate without a central authority and makes them resistant to fraud.

Bitcoin: The Pioneer

Bitcoin, the first and most well-known cryptocurrency, operates on its own blockchain. People can send or receive Bitcoins (much like money) to make purchases or as an investment.

Bitcoin, introduced in 2009, was the first cryptocurrency and remains the most widely recognized. Think of it as the "gold standard" of crypto. Its decentralized nature – meaning it's not controlled by any government or central bank – has made it especially attractive to a broad audience.

Ethereum and Smart Contracts

While Bitcoin introduced the world to blockchain and cryptocurrencies, Ethereum brought in a revolutionary concept: smart contracts.

Let’s think of a traditional contract, like an agreement to buy a car. Usually, you'd involve third parties like banks or lawyers to ensure everyone keeps their promises. Now, imagine a digital contract that automatically does what it's supposed to when certain conditions are met, without needing a middleman. That's a smart contract!

Ethereum is a platform that allows these smart contracts to operate. It has its own cryptocurrency called Ether, which powers these contracts and ensures they run smoothly.

Applications of Cryptocurrencies and Blockchain Technology in Everyday Life

The world of cryptocurrencies can seem complex, but at its core, it’s about using technology to enhance trust and simplify transactions. With these expanded use cases, the potential and versatility of blockchain and cryptocurrencies become more evident. They're not just tech buzzwords; they're tools with the potential to revolutionize industries and daily life.

The concept of blockchain as a shared digital ledger has opened up a plethora of opportunities:

  • Supply Chain Management: Companies can track products from their origin to the store shelves. This transparency ensures the authenticity of products and reduces the chances of fraud.
  • Voting Systems: Elections can be conducted on blockchains to prevent vote tampering, ensuring transparency and integrity in the voting process.
  • Health Records: Patients' health data can be securely stored on blockchains, giving medical professionals quick access when needed and ensuring data privacy.
  • Real Estate: Property deeds and ownership transfers can be recorded on a blockchain, making processes more efficient and reducing fraud.

The advantage of blockchain is its decentralized nature. When information is stored across multiple nodes, it becomes tamper-resistant. Any malicious activity or inconsistency can be quickly detected and corrected. Ethereum expands the scope of blockchain through its smart contracts:

  • Decentralized Apps (DApps): Developers can build applications on Ethereum that inherit the security and decentralized features of its blockchain.
  • Decentralized Autonomous Organizations (DAOs): These are like digital companies or organizations where decisions are made based on predefined rules in smart contracts, without centralized control.
  • Digital Identity: Individuals can have a digital identity on the Ethereum blockchain, ensuring personal data is secure and giving control back to the user.
  • Licensing and Royalties: Artists and creators can use Ethereum to ensure they get paid their dues every time their work is used or sold.

Bitcoin's decentralized nature has made it attractive for several use cases:

  • Decentralized Finance (DeFi): Bitcoin can be used in lending platforms, interest-bearing accounts, and other financial services without the need for traditional banks.
  • Peer-to-peer Transactions: People can transact directly without the need for intermediaries, leading to quicker and sometimes cheaper transactions.

Bitcoin Education Resources

VanEck is continuing to play a role in educating investors about Bitcoin and how to participate in the Bitcoin investment story. For more resources, visit our Bitcoin education center and catch up on the latest digital assets insights and market analysis from our investment team.

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IMPORTANT DISCLOSURES

Definitions

Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.

Ethereum is a decentralized, open–source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.

Risk Considerations

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Cryptocurrencies and digital assets are not suitable for all investors. Investments in digital assets and Web3 companies are highly speculative and involve a high degree of risk. These risks include, but are not limited to: the technology is new and many of its uses may be untested; intense competition; slow adoption rates and the potential for product obsolescence; volatility and limited liquidity, including but not limited to, inability to liquidate a position; loss or destruction of key(s) to access accounts or the blockchain; reliance on digital wallets; reliance on unregulated markets and exchanges; reliance on the internet; cybersecurity risks; and the lack of regulation and the potential for new laws and regulation that may be difficult to predict. Moreover, the extent to which Web3 companies or digital assets utilize blockchain technology may vary, and it is possible that even widespread adoption of blockchain technology may not result in a material increase in the value of such companies or digital assets.

Digital asset prices are highly volatile, and the value of digital assets, and Web3 companies, can rise or fall dramatically and quickly. If their value goes down, there’s no guarantee that it will rise again. As a result, there is a significant risk of loss of your entire principal investment.

Digital assets are not generally backed or supported by any government or central bank and are not covered by FDIC or SIPC insurance. Accounts at digital asset custodians and exchanges are not protected by SPIC and are not FDIC insured. Furthermore, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing.

Digital assets include, but are not limited to, cryptocurrencies, tokens, NFTs, assets stored or created using blockchain technology, and other Web3 products.

Web3 Companies include but are not limited to, companies that involve the development, innovation, and/or utilization of blockchain, digital assets, or crypto technologies.

The technology relating to digital assets, including blockchain, is new and developing and the risks associated with digital assets may not fully emerge until the technology is widely used. Digital asset technologies are used by companies to optimize their business practices, whether by using the technology within their business or operating business lines involved in the operation of the technology. The cryptographic keys necessary to transact a digital asset may be subject to theft, loss, or destruction, which could adversely affect a company’s business or operations if it were dependent on the digital asset. There may be risks posed by the lack of regulation for digital assets and any future regulatory developments could affect the viability and expansion of the use of digital assets.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

Phone: 800.826.2333

Email: info@vaneck.com

IMPORTANT DISCLOSURES

Definitions

Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.

Ethereum is a decentralized, open–source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.

Risk Considerations

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Cryptocurrencies and digital assets are not suitable for all investors. Investments in digital assets and Web3 companies are highly speculative and involve a high degree of risk. These risks include, but are not limited to: the technology is new and many of its uses may be untested; intense competition; slow adoption rates and the potential for product obsolescence; volatility and limited liquidity, including but not limited to, inability to liquidate a position; loss or destruction of key(s) to access accounts or the blockchain; reliance on digital wallets; reliance on unregulated markets and exchanges; reliance on the internet; cybersecurity risks; and the lack of regulation and the potential for new laws and regulation that may be difficult to predict. Moreover, the extent to which Web3 companies or digital assets utilize blockchain technology may vary, and it is possible that even widespread adoption of blockchain technology may not result in a material increase in the value of such companies or digital assets.

Digital asset prices are highly volatile, and the value of digital assets, and Web3 companies, can rise or fall dramatically and quickly. If their value goes down, there’s no guarantee that it will rise again. As a result, there is a significant risk of loss of your entire principal investment.

Digital assets are not generally backed or supported by any government or central bank and are not covered by FDIC or SIPC insurance. Accounts at digital asset custodians and exchanges are not protected by SPIC and are not FDIC insured. Furthermore, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing.

Digital assets include, but are not limited to, cryptocurrencies, tokens, NFTs, assets stored or created using blockchain technology, and other Web3 products.

Web3 Companies include but are not limited to, companies that involve the development, innovation, and/or utilization of blockchain, digital assets, or crypto technologies.

The technology relating to digital assets, including blockchain, is new and developing and the risks associated with digital assets may not fully emerge until the technology is widely used. Digital asset technologies are used by companies to optimize their business practices, whether by using the technology within their business or operating business lines involved in the operation of the technology. The cryptographic keys necessary to transact a digital asset may be subject to theft, loss, or destruction, which could adversely affect a company’s business or operations if it were dependent on the digital asset. There may be risks posed by the lack of regulation for digital assets and any future regulatory developments could affect the viability and expansion of the use of digital assets.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

Phone: 800.826.2333

Email: info@vaneck.com