What you need to know about crypto

It's hard to check the news these days without seeing something about cryptocurrency. This digital currency is still relatively new, but continuing to gain popularity. In fact, Millennials today are just as likely to be invested in cryptocurrency as they are the stock market, and Generations X and Z aren’t far behind.

As cryptocurrency becomes more mainstream, it could be an investment option in your 401(k) someday — so if you aren’t familiar with crypto, now’s a good time to learn the basics. Let’s take a look at a few questions you may have.

What is cryptocurrency?

A cryptocurrency is a digital asset that enables secure online payments and is based on a network that is distributed across many computers. This dispersed structure lets cryptocurrency exist outside the control of governments and central authorities. Cryptocurrencies are represented by virtual tokens or coins, and can be bought and sold on crypto exchanges or mined through complex computer processing. There are thousands of different cryptocurrencies today — the most popular is Bitcoin, followed by others such as Ethereum, Binance Coin, and Solana.

Did you know?

"Crypto" refers to the encryption algorithms and coding techniques that protect cryptocurrency transactions and make it almost impossible to counterfeit.

What’s the point of cryptocurrency?

Intended to revolutionize money as we know it, cryptocurrencies allow two parties to easily exchange funds directly, without the need for financial institutions like banks and credit card companies. Cryptocurrencies aren’t backed by any public or private entities, and they aim to make existing financial architecture faster and cheaper. A system with cryptocurrencies would make it impossible for a single point of failure (like a large bank) to set off a worldwide financial crisis, like the 2008 crash triggered by the failure of institutions in the US.

How is cryptocurrency being used?

Cryptocurrencies are rarely used for retail transactions, so you probably won’t be buying groceries with Bitcoin anytime soon. But the skyrocketing value of cryptocurrencies has made them popular as trading instruments. Anyone can purchase cryptocurrency through online exchanges such as Coinbase, apps such as Cash App and PayPal, or through brokers. Cryptocurrency investments can generate big profits — crypto markets peaked at almost $2 trillion in the last decade — but they also suffer from extreme price volatility that can lead to big losses. These rapid surges and crashes in value have led some economists to view cryptocurrency as a short-lived trend.

How risky is investing in cryptocurrency?

While there’s no such thing as a risk-free investment, cryptocurrency is a lot riskier than putting your money into stocks, which have a proven history of gaining value over time. Bitcoin, on the other hand, is only a little more than a decade old, so we don’t know how much staying power it or other digital currencies will have. If investing in cryptocurrency appeals to you, proceed with caution. It’s still an emerging area, and largely unregulated. Educate yourself thoroughly so you understand the risks.

Can cryptocurrency help fund my retirement?

When saving for retirement, experts recommend investing in a mix of different asset types (like stocks and bonds) with varying levels of risk and potential reward. Investing in cryptocurrency would further diversify your long-term investments, since different asset types react to market forces in different ways. However, the future of cryptocurrency is uncertain, making it an especially risky investment choice in the long run — namely, there’s a chance it will be worth nothing in 10, 20, or 30 years. When choosing investments, always keep your risk tolerance and investment time horizon in mind.

Investing in cryptocurrencies and other initial coin offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation to invest in cryptocurrencies or other ICOs. All investing involves risk, including the risk of loss. Diversification does not ensure a profit or protect against a loss. It is possible to lose money in a diversified portfolio. Consult a professional financial advisor for more information.

 

Source(s):
“Crypto and Investing Top Financial Literacy Education Gaps Across Generations,” Investopedia (investopedia.com), April 4, 2022
“Cryptocurrency,” Investopedia (investopedia.com), January 11, 2022
“Could Crypto Be Coming to Your 401(k)?”, The Motley Fool (fool.com), June 13, 2021