What is Cryptocurrency? How to Use and Invest in Digital Currencies

This is not intended to be investment advice and is the personal opinion and experience of the author.

WHAT IS CRYPTOCURRENCY?

Cryptocurrency, or crypto, is a digital asset first created in 2009 that, unlike the U.S. dollar, doesn’t have a physical form. Bitcoin, which you may have heard of, was the first of this new kind of currency, but there have been many others created since, and seemingly more every day. Dogecoin is one example of the lesser known but popular cryptocurrencies being created; originally a joke riffing off Bitcoin, it is now among the top ten cryptocurrencies. There are also other altcoins (alternatives to Bitcoin, essentially) and countless start-up cryptos that have yet to gain much traction.

What is a digital asset, though? It is a form of payment that can be exchanged, primarily online, for goods and services. Not everyone uses crypto to make purchases. There is a broad group of people who are interested in cryptocurrency because it can also be traded for profits.

WHERE CAN CRYPTOCURRENCY BE USED?

Not a lot of vendors currently accept cryptocurrency, but that number is growing as crypto gains traction with a wide range of organizations. The NBA’s Dallas Mavericks accept both Bitcoin and Dogecoin as payment for tickets and merchandise, and even nonprofits like the American Cancer Society accept crypto donations.

Early adopters and speculators believe that crypto will be one of the primary methods of transaction in the not-so-distant future, in much the same way that debit cards have (largely) replaced physical checks. Why do some folks believe crypto will continue growing? One reason is that fewer and fewer people are carrying cash, and even using mobile wallets instead of cards.

The main reason cryptocurrency is expected to become more and more prominent is its security. Cryptocurrency is considered secure due to the blockchain technology it uses. Blockchain uses cryptography (hence the name cryptocurrency) to record transactions in “secret code” on a digital ledger. Each new transaction is added to the previous, forming a chain and making it extremely difficult to change that ledger. In simpler terms, crypto blockchains are very difficult to hack, and thus quite secure.

As more businesses accept crypto, it will become more mainstream.

HOW DO YOU ACQUIRE CRYPTOCURRENCY?

There are a few different ways to acquire the wide variety of cryptocurrencies that are available. The most common way to get these is via crypto apps like Coinbase, Robinhood, and Crypto.com. These apps are primarily used to buy, sell, and store cryptocurrency as an investment, similar to buying and selling stocks.

The other option is to mine the coins. Essentially, a computer will do complex calculations as part of a system that keeps track of all crypto transactions with a digital ledger. As the computer accomplishes the task, the miner is rewarded with fractions of cryptocurrency. Technically, this can be done with a simple home computer—I managed to set up mine for crypto-mining in less than an hour. But when I realized it would earn me about 12 cents in crypto every 24 hours, I scrapped the idea.

I abandoned at-home crypto-mining for another reason: the process uses quite a bit of energy. In order to perform the necessary calculations, the computers are constantly running. In fact, it’s often large banks of computers that mine crypto to make the process more profitable. This has led to some controversy and at least one prominent company is no longer accepting Bitcoin until the environmental impacts of crypto-mining are better understood and mitigated.

WHAT ARE THE RISKS?

As I’ve mentioned, crypto is not only a currency. Some people also use it as an investment—which is where risk comes into play. First, cryptocurrency can be extremely volatile, so, as with other investments, don’t put in what you can’t afford to lose. While cryptos do seem to be trending up over time, it can be quite the rollercoaster ride. Bitcoin, for example, peaked earlier this year at nearly $60,000 per token and is currently around $34,000 each. That is still up over 250% from a year ago! Where Bitcoin and other cryptocurrencies will go next is anyone’s guess.

While all investments have some level of risk, as things are currently, cryptocurrency is considered riskier than most other investment options due to the volatility. Crypto is, after all, still relatively new. As cryptocurrency becomes more mainstream, it may become a bit more stable, but if you do decide to delve into the crypto world, be prepared for the unexpected.

WHAT DO I DO NEXT?

Your financial advisor can help you determine if adding cryptocurrency to your investment portfolio is right for you. Before you invest, be aware of the potential volatility, don’t invest more than you can afford, and don’t expect guaranteed returns. Cryptos can have huge spikes up and down, but they can also hover around the same value for long stretches before seeing much movement. There’s no way to be certain, but given the level of investment and interest, cryptocurrency seems likely to be here to stay.