Cryptocurrency, more commonly known as crypto, is a digital asset that can circulate globally without a central monetary authority, such as governments or financial institutions. While it’s true that cryptocurrencies operate without a central authority, there has been increasing regulatory scrutiny worldwide.
Without governmental regulation, cryptocurrencies like Bitcoin, Ethereum, Tether, and thousands more, are purchased, sold, and traded securely through blockchain technology. Blockchains provide a secure, tamper-resistant record of transactions and tracks the type and amount of cryptocurrencies people own so they cannot be copied or spent twice.
Purchasing Cryptocurrency
When you purchase cryptocurrency, you’ll hear the terms “coin” and “token” interchangeably. This is simply how crypto is referred to and measured. The coins and/or tokens you have can be used for the exchange of goods and services, while others are designed for computer networks and financial tracking. Merchants like PayPal and Square have integrated crypto services, however widespread adoption for everyday transactions is still limited.
Cryptocurrencies are created though mining, a process that involves computers solving complex puzzles in order to verify the authenticity of transactions across the network. People and companies alike use their computers to assist with running the blockchains and mining process around the world. In return, they are rewarded with cryptocurrencies, like Bitcoin. The process of mining has evolved significantly. Many cryptocurrencies, including Ethereum, have moved from proof-of-work (PoW) to proof-of-stake (PoS) mechanisms to reduce energy consumption.
As the world of cryptocurrency investing continues to grow, you may be wondering if you should participate. Read on to learn why investing in cryptocurrency is a great option for additional retirement savings, as well as how buy it and the potential risk involved.
Should I Invest in Cryptocurrency?
Outside of regular investment strategies, such as contributing to retirement accounts, like a 401(k) and IRA, cryptocurrency can be an additional way to add to your investment portfolio.
Unlike investments managed by financial institutions, cryptocurrency is decentralized, meaning there is no overarching financial, governmental, or political control. Because of the way they’re structured, cryptocurrencies are relatively safe from inflation and taxation, making investing in crypto a great way to avoid hyperinflationary events, bank failures, and other disastrous financial scenarios. It also ensures that centralized systems cannot decrease the value of the cryptocurrency over time.
But buyer beware: Cryptocurrencies are subject to capital gains taxes in many countries, and their value can be highly volatile.
How to Buy Cryptocurrency
If you choose to invest in cryptocurrencies, there are a few ways you can get started, including:
- Cryptocurrency Brokers: A broker can provide historical trends and digestible information that helps you make appropriate decisions for your investments. They also provide easy-to-use interfaces that interact with crypto exchanges for you minimizing your management, while maximizing your return. View Robinhood and SoFi to learn more about brokerage opportunities.
- Cryptocurrency Exchange: This is where buyers and sellers can trade crypto online. Exchanges typically have low fees, but can be more complex to navigate due to the complex interface. This includes multiple trade types and performance charts.
- DIY: You also have the option to invest without the assist of a brokerage or exchange. Doing it yourself involves navigating digital wallets and doing thorough research before investing in a type of crypto.
Managing Cryptocurrency Risk
Where there is reward, there is always risk, and crypto specifically is considered a high-risk investment. Because of this, many financial advisors recommend using crypto as a secondary investment strategy versus the primary. You wouldn’t want to put your entire life’s savings into crypto with hopes of maintaining a solid nest egg for your future retirement. Instead, high-risk investments should only take up a small portion of your overall investment portfolio.
If you choose to invest in cryptocurrency, there are a few things you can do to manage your overall risk, including:
- Diversify your crypto portfolio with a range of cryptocurrencies to reduce the financial burden as they rise and fall on the market.
- Do your homework to ensure that the cryptocurrencies you are investing in come from reliable sources. The development of cryptocurrency has opened the door to new digital and financial scams, crime organizations, and money laundering worldwide. It’s important to know who you’re investing in.
- Cryptocurrency is extremely volatile, meaning that their worth fluctuates easily. Because of this, financial advisors typically only recommend investing 10% of your overall retirement portfolio in high-risk investments like crypto. Something as simple as a tweet from an influential figure can send the value in a downward spiral overnight.
Cryptocurrency can be a great way to make additional money for your retirement fund, but doing your research is key. While there are risks associated with every type of investment, the world is still navigating cryptocurrency as a whole. It’s best to approach conservatively. If you’re concerned about your risk factor, speak with a financial advisor with a cryptocurrency background.
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