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Wednesday, August 11, 2021

What About Cryptocurrencies?

Bitcoin, Ethereum, Coinbase, crypto mining: a quick guide to what it is and what it may become. 

You’ve been hearing a lot about digital currencies lately. A tweet by Elon Musk can make the price of Dogecoin skyrocket, or send Bitcoin plummeting. You feel like you should know more about it, but the results are confusing. Let’s shed a little light on cryptocurrency.

What is Ethereum?

According to Wikipedia, Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (sometimes also referred to as Ethereum) is the native cryptocurrency of the platform. After Bitcoin, it is the second-largest cryptocurrency by market capitalization. Ethereum is the most actively used blockchain, while Bitcoin is the most popular cryptocurrency.

Does Crypto Belong in Your 401(k)?

Crypto may be coming soon to your retirement account. In July, one small provider covering 70,000 employees began offering the option to invest up to 5% of each account in cryptocurrencies. A plus for long-term holders is the opportunity to invest pretax money. Another positive may the 5% limit, so workers cannot go all-in and potentially lose the lot. It’s expected to be particularly attractive to millennials.

“It’s almost a better option for the at-home investor who’s not going to be watching the market every day,” says Leanna Haakons, founder of Black Hawk Financial. “Give them the exposure, give them the opportunity to have some of those potentially incredible gains, but give them guide rails they can’t go outside of.”

Blockgeeks is a good place to start. Here are a few basics from the site, along with some additional explanation: 
What is cryptocurrency? Cryptocurrency is an internet-based medium of exchange that uses cryptographic functions (written codes) to conduct financial transactions. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency and immutability (transactions cannot be changed over time). At its simplest, it is digital money created from code.

How is cryptocurrency sent and received? It can be sent directly between two parties via the use of private and public keys. These transfers require minimal processing, potentially avoiding the fees charged by traditional financial institutions. 

What is cryptocurrency mining? When a computer is used to solve cryptographic puzzles in order to build blocks, miners are rewarded with cryptocurrency. Blocks are generated about every 10 minutes by the user who guesses closest to a very large, random number. Rewards trend toward zero, ensuring there is a limit on the amount of currency. For example. The maximum amount of Bitcoin is 21 million. 

Will Crypto Replace Cash?

Cryptocurrency was created to buy goods and services, and many companies now take the most popular cryptocurrency, Bitcoin, in payment. Electric vehicle maker Tesla famously accepted payment in Bitcoin, then didn’t, then did again. Other cryptos in the news are Dogecoin and Ethereum. Here’s a complete list and prices of cryptocurrencies

One of crypto’s advantages is that it grants users anonymity. But that can be a disadvantage when it comes to criminal activity. A 2019 study found that about 46% of all Bitcoin transactions involved illegal actions such as money laundering, buying drugs, and blackmail and extortion schemes. Recently, the Justice Department was able to recover $2.3 million of a ransom paid by Colonial Pipeline Co. in Bitcoin. A special agent tracked the money on a publicly visible ledger to a virtual address, where the FBI was able to gain access to the crypto. Whether this bodes ill for criminals in the future is a closely guarded secret of the new Ransomware and Digital Extortion Task Force. 

Regardless, the argument over whether crypto will replace cash is a complicated one involving the three roles currency plays: a medium of exchange, a store of value, and a unit of account. Opinions differ on this complicated theoretical projection. For a detailed analysis, look here

Trading Crypto

Many (if not most) people are not interested in these unregulated, volatile currencies as payment. They want to speculate by buying a currency and hoping that the price will go higher. But what can go up can also go down. For example, Bitcoin reached a new high of almost $65,000 in April, but then lost almost half that value by May. 

For those who want to trade Bitcoin, the easiest method is through an online exchange such as Binance, Coinbase, Gemini or Kraken. You can even use a credit card for the purchase! There is usually a fee for each transaction, and the price will fluctuate over time and vary between companies, much like when you had to pay to exchange money while traveling between countries with different currencies back in the days when everyone used travelers checks and cash. 

These exchange platforms create a digital wallet for you. Your digital wallet is where you keep your public and private keys for your crypto. The public key can be shared with others so they can send you currency (think Venmo). But your private key should be guarded with care; it’s what allows you to send crypto out to others. Secure it on a thumb drive or write it down somewhere only you can find it. 

Coinbase and other companies that accept crypto (such as, ticker symbol OSTK) are publicly traded. Buying stock in one of these entities is a way to bet on crypto indirectly. Robinhood Crypto is an exchange platform where you buy and sell a number of cryptocurrencies 24/7. 

Should You Buy Crypto?

More important than if you can or how you should buy cryptocurrencies is IF you should. Investments carry inherent risk, and cryptocurrencies have more than their share. As an example, China has recently and suddenly cracked down on crypto in an effort to keep control of the country’s financial engines, causing the price to drop worldwide. The price of crypto is incredibly volatile. It is not money. It has no value, unlike gold. You should not invest more in crypto than you can afford to lose. For a deeper look at the risks, read this Forbes article on crypto.