What is Cryptocurrency and Should I Consider it an Investment?

Michael Gouldin |

When it comes to investment trends, cryptocurrency has started to divide the community, and for a good reason, it could shake the very core of the traditional investing strategy. Thus, many of our clients have been asking a couple of questions, what is cryptocurrency, and should I be considering it for an investment? So, let’s jump into it!

What is cryptocurrency?

Cryptocurrency can be defined as a digital currency, which uses a variety of cryptographic functions to complete transactions through the internet. Unlike traditional digital currency options on the market, such as PayPal or even e-transfers, cryptocurrencies must meet three main criteria.

  1. Decentralized- Cryptocurrencies do not require nor rely on a central bank or government to operate. Instead, there is a peer to peer network for validation, and they have a transparent and public blockchain ledger to show transactions.
  2. Cryptographic- Cryptocurrencies need to have secure communication methods so peers can validate transactions without the need for a central authority.
  3. Consensus- Cryptocurrencies must have a consensus mechanism known as a protocol. Although each cryptocurrency may have a different protocol, some of the more accepted protocols include proof of work (Bitcoin) and proof of stake (Dash).

Some of the more popular cryptocurrencies include Bitcoin, Ethereum and Litecoin, but there are thousands of coins and tokens in various stages of development. As well, much like the traditional stock market, you will need to access crypto exchanges to buy and sell tokens or coins. Once signed up, buying and selling crypto is as easy as a few clicks of a button much like your current bank's investment page.

Should I consider it an investment?

Potentially, but you will have to be comfortable with educating yourself or trusting an established crypto investor and be willing to take on significant risk for that part of your investment portfolio. Generally, if you are looking to get into cryptocurrencies, you should look to invest no more than 5-15% of your investment portfolio into the crypto market. You will need to find and research a crypto exchange that is trustworthy and is listing the coins or tokens you want to buy or sell. Finally, it would help if you looked to diversify your portfolio with some established cryptocurrencies such as Bitcoin or Litecoin and up and coming coins that may bank some significant returns in the long-term.

Final Thoughts

A couple of things to remember, the current crypto market is similar to the dot com bubble era with several coins that will not pan out in the long-term. The investment potential is great, but so are the losses, and only a trained professional financial advisor will be able to provide you and your investments guidance if crypto is worth the risk in the short, medium and long-term.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2020 Advisor Websites.