Cryptocurrency has skyrocketed in popularity and value over the past year and has quickly grabbed its spot in top financial trends.
And it’s not just your tech-friend in California who invests; big banks and financial institutions have begun taking this new investment opportunity seriously, too. So what is cryptocurrency, and should it have a place in your portfolio?
Let’s dive into the basics of what you need to know.
“Crypto,” The Basics
To best understand what cryptocurrency is, you need to grasp digital currency. Digital currency is pretty much exactly what it sounds like—virtual money instead of paper or coins. Digital currencies are only accessible with electronic devices because, well, that’s the only way they exist.
Cryptocurrency is a digital (or virtual) form of currency that can be exchanged online for goods and services. You may be surprised to learn that you’ve likely used a simple form of cryptocurrency in your everyday life—your credit card.
When you buy something like groceries, clothes, gas, etc., you swipe a plastic card with numbers printed on the card and embedded on the magnetic strip. The card reader processes the numbers, and electrons fly through the network to register the transaction. In this case, you haven’t exchanged physical currency; you exchanged electronic currency. Cryptocurrencies are based on a similar idea.
As a safeguard, cryptocurrency is secured by cryptography, which makes it practically impossible to counterfeit. That’s where the term "crypto" comes from—it refers to the various encryption algorithms and cryptographic techniques that safeguard these entries. Technical experts claim it is more difficult to counterfeit than real currency.
You can use crypto to buy any goods or services, but it’s most commonly used as another form of investing.
Pro tip: All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies (but that’s a topic for another day).
What Is Blockchain? (And Why It’s Such A Powerhouse)
Cryptocurrencies operate differently from nearly every other investment. Their big claim to fame is that they’re a decentralized form of investing, so investors don’t have to contend with a centralized exchange to manage financial transactions.
How does this digital ecosystem run?
Cryptocurrencies work using a technology called blockchain. A blockchain is a digital database that utilizes decentralized technology to manage and record transactions in code. It is one of the main appeals in the cryptocurrency space because it provides high-level security and transparency.
Now it’s time to view the ledger. Blockchain highly secures the data without the need for a third party.
A blockchain collects information together in groups called blocks. Each block can only hold a certain amount of data, and once a block is “full,” it links to the next block in a line, forming a chain of data. It’s a specific (and mathematically complex) process, with each block in the chain given an exact timestamp when it is added.
Another critical point is that the data is irreversible. It can’t be edited—there are no do-overs. So if you lose your password or forget your unique number sequence, it’s lost in the block forever.
Think about it like a playbook. Each page contains a different play or strategy, and within the book itself, there are several entries containing specific information. In this case, the pages are the blocks, and the playbook containing each page is a blockchain.
Here Are The Most Popular Types of Cryptocurrency
There are more than 13,000 cryptocurrencies in existence, and they’ll likely be more before you finish reading this article.
If you combine all 13,000+ cryptocurrencies, the total value is estimated to be $2.48 trillion. With so many options, how do you choose which to invest in?
Here are the three most common cryptocurrencies you should know about:
- Bitcoin: Bitcoin, which launched in January 2009, is perhaps the most well-known cryptocurrency on the market. With Bitcoin, blockchain technology is used in a decentralized way so that control of the data isn’t limited to a single person or group. It was created as an alternative to national currencies.
- Ethereum: Launched in July 2015, Ethereum is an established open-ended decentralized software platform. It allows smart contracts and decentralized apps to be built without downtime or security concerns. It’s used for digital currency and on the Ethereum network to run applications.
- Binance Coin (BNB): Binance Coin is a cryptocurrency issued by Binance Exchange and trades with the BNB symbol. It was originally based on the Ethereum network but is now the currency of Binance’s own blockchain. Many people use it to pay transaction fees on Binance.com, Binance DEX, and Binance Chain, but they can also use it to book travel accommodations, entertainment, and other payments.
Another digital currency that’s gaining momentum is non-fungible tokens (NFTs). NFTs are part of the Ethereum blockchain, and people use them to buy and sell digital art and collectibles. Think about it like the digital version of collecting valuable baseball cards.
Is Investing In Crypto The Right Move For You?
Here’s the thing: crypto is volatile and has seen intense swings in value over the years. Cryptocurrencies are incredibly uncertain and generate no cash flow, so for you to make a profit, someone has to pay more for it than you did.
Whether or not you should invest in crypto depends on your current financial situation and your future financial goals. You need to ask yourself a few different questions:
- Are you maximizing your retirement vehicles?
- Is your high-interest debt paid off?
- Do you have an emergency fund containing 3-6 months of expenses?
- Are you saving for other goals such as higher education or real estate?
- Do you feel in control of your money?
If you answered yes to all of these questions, investing in crypto could be the right move for your situation. If you’re excited and passionate about the crypto space and where it’s heading, then use leftover funds to invest.
If it’s not your cup of tea, that’s fine too. Before you decide, do your research and talk to your advisor. You should only invest what you don’t mind losing, which could translate to about 1% of your portfolio.
How To Invest In Crypto
The world of cryptocurrency is vast, and it’s only expanding, so the ways to access it will also shift. Here are some ways you can invest in this type of asset:
- Open an account with a company like Coinbase or Gemini. There you can purchase coins on an exchange, the same way you might buy a share of Apple stock. A platform like this will look the most similar to traditional investing.
- Invest in companies that are investing in crypto. This is an indirect way to get in on digital currency without taking on the same amount of risk. These days it won’t be hard to find companies who are investing in it—even big financial institutions like Goldman Sachs, Morgan Stanley, BNY Mellon, and more will add cryptocurrencies to their client’s menus.
- Buy full or partial coins. The current price for one Bitcoin is nearly $50,000, so you may not buy a whole coin outright, but you can purchase a fraction of one! You can purchase some cryptocurrencies with U.S. dollars, but others require payment with a specific cryptocurrency.
Remember, investing in cryptocurrency is an extremely volatile market and can be challenging to navigate by yourself, but at Pro Wealth, you’re not on your own. If you have questions or concerns about how investing in cryptocurrency could affect your financial health, get in touch with our team.