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Cryptocurrencies have become extremely popular over the past few years. Investors both young and old have been diving into this digital form of payment. It is also being purchased and sold as an investment. But even though this relatively new form of investing could provide you with a large return, just the opposite is also true.
So, it is recommended that before you commit to using cryptocurrency and/or investing in it, you have a good idea of how it works – including the potential risks, pros and cons of using cryptocurrency. That way, you’ll know more about what to expect.
Cryptocurrency is a form of digital – and virtual – currency. It can be used online for purchasing items and services. Because cryptocurrency is only available digitally, it can make transactions convenient. It also cannot be easily tracked. That’s because it uses an online ledger with strong cryptography to secure online transactions.
This type of currency was created in 2009 – following the 2008 recession in the U.S. – by an individual known as Satoshi Nakamoto, whose identity is still a secret. The intention behind cryptocurrency was to have a method for making payments that could be used internationally, yet without a financial institution like banks or investment firms behind it.
Unlike “traditional” currency, such as American dollars and cents, cryptocurrency is not centralized by banks, governments or any other type of “middleman.” Rather, cryptocurrency uses a technological method called blockchain, a decentralized technology, that spreads across many computers to manage and record transactions.
Ensuring the security of cryptocurrency is paramount because unlike your dollars that are held at a bank – which cannot be copied in order to “create” more money – the same is not true of virtual currency.
For instance, with digital currency, many systems would have to be recreated. Blockchain solved this security issue, though, and when it did, the use of cryptocurrency increased significantly and eventually became mainstream.
This specialized computer code essentially encrypts and secures cryptocurrency-related transactions, so the information regarding where the currency is coming from or going to is difficult to “hack.” It is this type of “tracking” (or rather, the lack of tracking) technique that makes cryptocurrency so appealing to many buyers, sellers and investors around the globe.
In its early days, many believed that cryptocurrency was not a form of “real” money. But today, it is used by many individuals and companies. At year-end 2020, it was estimated that more than 50 million people were using cryptocurrency.
Further, as of early 2021, there were over 10,000 different types of cryptocurrency in use. Some of the more popular cryptocurrencies today include:
Not all cryptocurrency is exactly the same, so it is important to know the different types, as well as where each of these may or may not be used. In general, though, cryptocurrency typically falls into one of two main categories – tokens or coins. These can be further broken down into different forms of coins and a variety of tokens.
Many of the cryptocurrencies use “coins” for buy and sell transactions online. The most popular of these is Bitcoin. This cryptocurrency is produced via computational solutions that use complicated math problems. But there is a long list of others, as well. For instance, “altcoins” refer to any crypto coins that are not Bitcoins.
There is a limited supply of crypto coins. This helps to keep the balance in check, as well as to reinforce the value of these currencies. As of April 2021, the limit on how many Bitcoins can be in supply is 21 million. (Although there are still some Bitcoins that can be “mined.”)
It is important to note that not all crypto coins work with the same “open source” protocol that Bitcoin does. In fact, several of the others use their own separate systems and protocols and may also be self-supporting.
Crypto tokens may be traded for goods or services that a company provides. Cryptocurrency tokens are typically created and then introduced into circulation though an “Initial Coin Offering” (ICO). This is similar to when new shares of stock are introduced into the market though an IPO, or Initial Public Offering.
Like crypto coins, there are different ways in which crypto tokens are represented. For instance, they may be considered as value tokens, security tokens or utility tokens. Tokens are also encrypted with long lines of letters and numbers that represent the crypto used in a transaction. With that in mind, crypto tokens are not necessarily meant to be used as money, but rather to describe a function.
Once you have obtained some cryptocurrency, you’ll need to store it somewhere. There are a couple of different options for doing so. One way is to keep the currency in your online wallet. These wallets can be software-based or online that can be accessed from anywhere.
Mobile wallets allow you to both transfer and spend cryptocurrency directly from your smart phone. There are also “hardware” wallets. These are USB devises that store the cryptocurrency keys electronically.
There are some outlets that offer paper wallet services. These are somewhat similar to using cash. In this case, though, there is a piece of paper that contains two QR codes. One of these is for receiving cryptocurrency. The other is for spending it.Because cryptocurrency is virtual, it is not possible to carry it around and physically spend it like you would with cash at restaurants and retail stores. You may, however, connect cryptocurrency to a debit card, which in turn, allows you to spend it like cash.
These debit cards are issued by some of the major credit card companies, such as MasterCard and VISA. Therefore, wherever these credit cards are accepted, you can spend your cryptocurrency.
Not all of these debit cards are alike, though. For example, there are some that are specific to storing cryptocurrency, and there are others that focus on marketplace options. Some of these debit cards include:
There is a large – and growing – number of places where you can spend cryptocurrency. Some of these include the following:
Likewise, as cryptocurrency becomes more popular, there are other options for using it, too. Recently, several payment processing systems that are popular with nonprofit organizations, as well as small businesses and some large retailers are now starting to accept this type of currency from their customers.
As an example, Shopify is a processing system that is used by many small and local businesses that allows the companies to accept payment via Bitcoin. Likewise, the payment app Square also has Bitcoin marketplace options that allow consumers to buy various products and services with cryptocurrency.
There are nearly 7,000 cryptocurrencies traded publicly, with a total value that is estimated at more than $2.2 trillion (as of April 13, 2021). Much of the interest in unregulated financial vehicles like cryptocurrency is to trade for profit. At times, speculators could drive the price skyward.
There are a couple of ways you can get cryptocurrency. One is the “old fashioned” way – by buying it. But there are only some currencies – like Bitcoin – that you can purchase with U.S. dollars.
Many of the other cryptocurrencies require you to use Bitcoins and/or another form of cryptocurrency to make a purchase. You could also trade cryptocurrency on an exchange using other cryptocurrency that you already have. For instance, you could use Bitcoin to purchase NEO currency.
The first step is to get an online “wallet.” This is an online app that can hold cryptocurrency. To do so, you must create an account on an exchange. Once you have done that, you can simply transfer “real” money to make your purchase.
There are also several online brokers that offer cryptocurrency, as well as make crypto trades. These individuals or firms act as an intermediary between the cryptocurrency markets to facilitate the buying and selling of cryptocurrency. A few of the more popular crypto currency exchanges include Coinbase, Tradestation, Sofi Active Investing, eToro and Robinhood Crypto.
Tech-savvy investors may also “mine” for cryptocurrency. In this case, they don’t necessarily have to purchase it, but rather they earn it. For example, Bitcoin mining is the process of creating new Bitcoin by solving a computational puzzle.
“Decentralized” cryptocurrency like Bitcoin now provides a way for investors to profit without worry of restriction or confiscation. As an investor, you can purchase cryptocurrency with other forms of crypto coins or cash. You could also purchase the currency through an ICO. Before making a commitment, though, it is recommended that you first read over the company’s prospectus.
Some of the key points to be mindful of in the prospectus for a cryptocurrency ICO include:
Although there can be a lot of “fine print” included in a cryptocurrency prospectus, it is still recommended that you become familiar with all of the information. Otherwise, you may not know what to anticipate with the investment.
Another factor to keep in mind when purchasing already-existing cryptocurrency is the financial strength and stability of the company. So, it can help to review the market capitalization of the company that is offering the currency for sale.
| Cryptocurrency | Market Capitalization |
|---|---|
| CryptocurrencyBitcoin | Market Capitalization$1.2 trillion |
| CryptocurrencyEthereum | Market Capitalization$263.4 billion |
| CryptocurrencyBinance Coin | Market Capitalization$87 billion |
| CryptocurrencyXRP | Market Capitalization$81.8 billion |
| CryptocurrencyTether | Market Capitalization$45.4 billion |
| CryptocurrencyCardano | Market Capitalization$44.7 billion |
| CryptocurrencyPolkadot | Market Capitalization$39.3 billion |
| CryptocurrencyUniswap | Market Capitalization$18.8 billion |
| CryptocurrencyLitecoin | Market Capitalization$18.1 billion |
| CryptocurrencyStellar | Market Capitalization$14.9 billion |
There are several reasons why cryptocurrency is appealing to investors – one being that many people believe that cryptocurrency is the currency of the future. So, buying this currency now could lead to large profits down the road.
In other cases, investors are drawn to financial vehicles like crypto currency because there is no central bank involved that manages the supply. Still others like the security and the privacy of cryptocurrency’s decentralized processing and recording system.
Cryptocurrency brokers can offer speculative derivative contracts on the price of digital currency. In this case, investors can own the right to buy and/or sell the contracts as the prices move up and down. Similar to stock options, the investors do not actually own the digital currency, but rather the right or obligation to purchase or sell it.
Although there is the possibility that the value of cryptocurrency could rise in value, similar to trading stocks, options, and futures, there is no guarantee of profit – and these financial vehicles can also come with a great deal of risk.
As an example, in December 2017, Bitcoin was trading near $20,000. However, just one year later, Bitcoin’s value had dropped down to approximately $3,200. This isn’t typically the type of chance that retirees want to make with their savings – especially because life expectancy is getting longer, so assets and income must be stretched out for a longer period of time, too.
With that in mind, investing in cryptocurrency would not likely be a good idea for retirees – particularly those who are counting on personal savings and assets for some or all of their retirement income stream.
In addition, while cryptocurrency could increase the overall value of your portfolio, it is not the type of investment that produces cash flow. So, in order to profit from cryptocurrency, you would have to sell it to someone else for a higher price than you purchased it for.
Cryptocurrency is still a relatively new concept – and, while investing in this type of financial vehicle may provide an opportunity to profit, it is also possible to lose money, too. With that in mind, there are several factors to consider before you commit to making an investment in cryptocurrency.
First and foremost, you should consider your objectives for the investment. For instance, if you are using “extra” money to speculate – and you are comfortable taking on risk – then it may be worthwhile to take your chances in order to earn a profit. But if the money you plan to invest is needed for paying your everyday living expenses in retirement, cryptocurrency may not be a good bet.
You should also consider the future of cryptocurrency. As with other types of investments, if it appears that there will be a long-term need for the product or service that a company sells, investing in it may be worthwhile. Otherwise, you may want to put your money elsewhere.
Likewise, consider all of the pros and cons of investing in cryptocurrency before you make any type of commitment to purchasing it – even if the dollars you are using is a seemingly small amount.
| Advantages of Investing in Cryptocurrency | Disadvantages of Investing in Cryptocurrency |
|---|---|
| Advantages of Investing in CryptocurrencyTransparency | Disadvantages of Investing in CryptocurrencyLost Bitcoins cannot be recovered |
| Advantages of Investing in CryptocurrencyAccessible 24/7 | Disadvantages of Investing in CryptocurrencyConfusing to many consumers and investors |
| Advantages of Investing in CryptocurrencyControl over funds and transactions | Disadvantages of Investing in CryptocurrencyMarket fluctuations |
| Advantages of Investing in CryptocurrencyDecentralization | Disadvantages of Investing in CryptocurrencyDoes not offer income / cash flow |
| Advantages of Investing in CryptocurrencyPotential for growth | Disadvantages of Investing in CryptocurrencyNo guarantee that you can sell it for a higher price than you purchased it |
Cryptocurrency provides an alternative method of paying for various products and services. It can also offer a method of investing for profit. But just like many other types of high potential / high risk financial vehicles, it may not be right for all investors – and particular those who are approaching retirement and need to keep their principal safe.
If you would like to learn more about financial tools and strategies that can allow your money to grow yet keep it safe in any type of stock market environment – and provide you with an ongoing retirement income, no matter how long you live – an Alliance America financial professional can help.
Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.
