Even though cryptocurrency was first introduced in the late 1980s, the digital form of payment didn’t really take off until 2008 when people started to think of cryptocurrency as a peer-to-peer cash system. Since then, bitcoin, dogecoin, ethereum, and many others have become more mainstream as well as seen massive gains.
But how valid is this futuristic form of payment and will it stick? Some doubt was cast when China recently banned all cryptocurrency transactions. As a result, bitcoin immediately slumped. So people may now be wondering if bitcoin is still a thing. What’s important to know is that there are more than 13,000 different cryptocurrencies out there and bitcoin is just one—and it’s still often at the top of the list of the most traded.
It’s pretty clear that cryptocurrency isn’t going away anytime soon, so you may want to get up to speed on the topic for your own portfolio. Here are four things to ask about cryptocurrency and what you should know before you begin investing:
1. What is Cryptocurrency?
Cryptocurrency is a digital currency. Although no physical bills or coins are associated with cryptocurrency, it’s a valid payment method that’s available. However, there could be some risks associated with the investment. For one, cryptocurrency is highly volatile, so the value can go up and down quite frequently. Additionally, it’s not like you can use cryptocurrency anywhere you want; only a few merchants currently accept it as a form of payment.
2. How do bitcoin and other cryptocurrencies work?
The technology that supports cryptocurrency is called a blockchain. All of the data containing every transaction is called blocks. These blocks are connected together and include all the relevant information about every transaction, including the date, time, buyer, seller, and value.
“Blockchain is a technology that has existed for some time and is used by major industries such as retail, real estate, and grocery,” says Robb Engen, a fee-only financial planner and blogger at Boomer & Echo. “Since the blockchain is decentralized, it’s not controlled by one organization such as financial institutions or any government.”
Even though all of the information found on the blockchain can be viewed publicly, it’s highly secure, which is why many people think it’s the future of currency. Unique codes are required to access bitcoin and crypto wallets, and they’re nearly impossible to hack.
3. Is bitcoin, itself, still relevant?
With so many emerging cryptocurrencies, many people wonder if bitcoin is still relevant. “Dogecoin has received more attention in recent years due to memes, lower costs, and celebrity endorsements,” says Engen. “However, bitcoin is the most well-known cryptocurrency available; so it likely has staying power.”
Both bitcoin and dogecoin are the two most common cryptocurrencies, but they have a few minor differences. Bitcoin started circulating in 2009 and has a fixed supply of 21 million coins. Whereas dogecoin appeared in 2013 as a joke, making fun of all the wild speculation in cryptocurrencies. The satire seems to have paid off and there are billions of coins added every year to the currency to legitimize it.
Now think of how cryptocurrencies compare to traditional currency. If the government printed more money, inflation would increase. In other words, you’d be paying more money for the same goods. Additionally, the value of your savings would decrease since there would be fewer incentives to deposit your money at your financial institution. Some people like the idea that the value of cryptocurrency isn’t reduced by inflation.
4. Is cryptocurrency a reliable investment?
In a span of just a few months, bitcoin fluctuated between $30,000 and $60,000. Sure, some people have gotten rich off of it, but many people have also lost everything. So it’s best to think of investing in cryptocurrency as, essentially, gambling. “Crypto is a volatile, high-risk investment that is typically only suitable for investors that are comfortable with a huge amount of risk,” says Engen. “If big fluctuations in your portfolio cause you to lose sleep, then investing in cryptocurrency is probably not a good idea.”
But that’s not to say that you shouldn’t invest in cryptocurrency at all. You might just want to dedicate a small percentage of your portfolio towards it with the understanding that you could lose that portion.
If you want to learn more about investing in cryptocurrencies or have any additional questions, contact a financial advisor. They can explain any risk aspects concerning your portfolio.