Understanding Digital Currencies: Should You Byte on Bitcoin?
Quick Take
Digital currencies, including cryptocurrencies like Bitcoin and Ethereum, are decentralized digital assets that operate on blockchain technology and are used for various purposes such as payments, smart contracts, and digital collectibles.
While digital currencies offer high growth potential and technological innovation, they are highly volatile, lack traditional valuation metrics, and face regulatory uncertainty—making them speculative assets rather than recommended long-term investments.
Digital currencies, also known as cryptocurrencies or virtual currencies, have gained significant attention in the financial world due to their decentralized nature and technological advancements. Donald Trump’s promise to make the U.S. the “crypto capital of the world” has driven prices of digital currencies since the election. We explore what digital currencies are, the different types available, how they are used, and whether they should be part of a diversified long-term investment portfolio.
What Are Digital Currencies?
Digital currencies are a form of money that exists purely in electronic or digital form. Unlike traditional fiat currencies (such as the U.S. dollar or euro), digital currencies are not issued by a central authority like a government or central bank. Instead, they operate on decentralized networks using blockchain technology, cryptographic security, and peer-to-peer transactions.
Bitcoin, created in 2009 by an anonymous person or group known as Satoshi Nakamoto, was the first widely recognized cryptocurrency and remains the most valuable digital asset. Since then, thousands of cryptocurrencies have emerged, each with unique features and use cases.
Types of Digital Currencies
Digital currencies can be categorized into several groups based on their underlying technology and purpose:
Cryptocurrencies. These are decentralized digital assets that use blockchain technology to facilitate transactions. Examples include:
Bitcoin (BTC) – The first and most well-known cryptocurrency, often referred to as "digital gold."
Ethereum (ETH) – A blockchain platform that enables smart contracts and decentralized applications (DApps).
Ripple (XRP) – A cryptocurrency designed for fast, low-cost cross-border transactions.
Litecoin (LTC) – A digital currency similar to Bitcoin but with faster transaction speeds and lower fees.
Fartcoin (FRTC) – FRTC is part of a broader category of blockchain-based digital currencies known as meme coins. It recently surpassed Dogecoin in value and has a feature called “Gas Fees” that produce a digital sound with every transaction (Really.)
2. Stablecoins. Stablecoins are cryptocurrencies designed to maintain a stable value by being pegged to a fiat currency (such as the U.S. dollar) or other assets. They are often used for reducing volatility in crypto trading. Examples include:
Tether (USDT) – Pegged to the U.S. dollar and widely used for trading.
USD Coin (USDC) – A stablecoin backed by cash reserves and issued by regulated financial institutions.
DAI – A decentralized stablecoin that maintains its peg using algorithmic mechanisms and collateralized assets.
3. Central Bank Digital Currencies. CBDCs are digital versions of national fiat currencies issued and regulated by central banks. Governments are exploring CBDCs as a way to modernize financial systems and improve transaction efficiency. Examples include:
China’s Digital Yuan (e-CNY) – A state-backed digital currency issued by the People’s Bank of China.
The U.S. Digital Dollar (Under Development) – The Federal Reserve is researching a digital dollar for potential use.
European Central Bank’s Digital Euro (Under Development) – The EU is evaluating the potential of a digital euro.
4. Utility Tokens. These digital assets provide access to specific services within blockchain ecosystems. They are not primarily used as currency but rather for functionalities like paying transaction fees or participating in governance. Examples include:
Binance Coin (BNB) – Used within the Binance Exchange for trading fee discounts and other platform services.
Chainlink (LINK) – Powers smart contract functionalities by enabling real-world data integration.
5. Non-Fungible Tokens (NFTs). NFTs are unique digital assets that represent ownership of specific items such as art, music, virtual real estate, or collectibles. Unlike cryptocurrencies, NFTs are non-interchangeable, meaning each token holds unique value. Examples include:
CryptoPunks – One of the first and most famous NFT collections.
Bored Ape Yacht Club (BAYC) – A popular NFT project featuring digital artwork with exclusive club membership benefits.
How Are Digital Currencies Used?
Digital currencies have a wide range of applications, including:
Payments & Transactions – Cryptocurrencies like Bitcoin and stablecoins are used for digital payments, remittances, and e-commerce transactions.
Decentralized Finance (DeFi) – Platforms such as Aave and Uniswap offer decentralized lending, borrowing, and trading services without intermediaries.
Smart Contracts – Ethereum enables self-executing contracts that automate agreements without the need for intermediaries.
Supply Chain Management – Blockchain technology is used to enhance transparency and traceability in global supply chains.
Investment & Speculation – Many investors buy and hold digital currencies as speculative assets in the hopes of capital appreciation.
Gaming & Metaverse – Digital currencies power in-game economies, virtual real estate, and decentralized metaverse platforms like Decentraland.
Should Digital Currencies Be Part of a Diversified Long-Term Investment Portfolio?
The inclusion of digital currencies in an investment portfolio is a topic of ongoing debate among financial experts. Here are key factors to consider:
Potential Benefits
High Growth Potential – Many cryptocurrencies have experienced exponential growth, over the past decade.
Portfolio Diversification – In theory, digital assets should have a low correlation with traditional investments like stocks and bonds, potentially improving risk-adjusted returns. In reality, digital assets have recently traded as risk assets highly correlated with the stock market, reducing their value as a financial hedge.
Hedge Against Inflation – Some investors view Bitcoin as "digital gold" and a hedge against currency devaluation and inflation. Currently, there is little to no history supporting this use.
Financial Innovation – Exposure to blockchain and DeFi projects allows investors to participate in the future of finance and technology. At the end of the day, the real benefit of digital currencies is likely the underlying technology and its impact in an increasingly digital world.
Risks and Challenges
High Volatility – Cryptocurrencies are known for large price swings, which can lead to substantial gains or losses in short periods. Twelve months ago, Bitcoin sold at $69,702 per coin, dropped to $53,973 in September 2024, peaked at $106,183 in January 2025. It traded on March 31, 2025 at $82,514.
Regulatory Uncertainty – Governments worldwide are still formulating policies on digital currencies, which could impact adoption and legal frameworks. Central bank digital currencies, if widely adopted, could negatively impact values of existing digital currencies.
Security Risks – While blockchain itself is secure, hacks and fraud in the crypto space remain a concern for investors.
Lack of Fundamental Valuation Metrics – Unlike stocks, cryptocurrencies do not generate cash flows, making valuation complex.
What It All Means
Digital currencies have the potential to revolutionize the financial landscape, offering new opportunities and challenges. While their potential for long-term growth and adoption cannot be ignored, they should currently be viewed as speculative assets. We do not recommend them as long-term investments. Investors considering adding digital assets to their portfolios should do so with appropriate caution. We will, of course, continue to monitor regulatory developments, market trends, and technological advancements as the digital currency ecosystem evolves.
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