You can’t watch the news or surf the internet without someone eventually talking about the newest financial buzzword – cryptocurrency.  You’ve probably heard of some of the bigger names (Bitcoin, Etherium, Dogecoin, etc.), but what exactly are they?  How do they work?  Most importantly – should you invest in them?

First, let’s take a look at what cryptocurrency actually is.  Well, to put it in the simplest of terms, it’s a form of digital currency (usually tokens) that can be used to buy goods and services.  These currencies are traded on the open market or can be “mined”, using computers that execute programs that solve puzzles or complex equations to actually “create” a token in the specific currency (i.e. Bitcoins are extensively “mined” all over the world).

So what is the attraction? 

Well, for one thing, cryptocurrencies use high-level technology like ‘Blockchain’, a decentralized security protocol that allows secure and fast digital transactions for any purchase[1].  Basically, transactions can be done from point to point anywhere in the world without the use of a bank – and most importantly, both parties involved in a transaction can remain anonymous.  This is why hackers love using cryptocurrency for ransomware attacks, as the transaction’s source cannot be easily traced.

Secondly, there are over 6,700 cryptocurrencies currently being publicly traded on the market – many of them for mere pennies.  If a savvy investor gets involved with one of these at the right moment, their investment can potentially skyrocket to massive gains, creating millionaires overnight.  Conversely, catching one of these companies going in the wrong direction could potentially eliminate all of one’s initial investment – and that’s real money. 

Think about the previous fads we’ve seen in retail over the past fifty years.  Remember pet rocks? ‘Cabbage-Patch Kids”?  They used to be all the rage, and it cost top dollar to get one.  But once speculation and interest ended, the prices bottomed out quickly.  People who invested lots of money and time into using ‘Beanie Babies’ as an investment were left with boxes and boxes of worthless stuffed animals.

So, are cryptocurrencies a good investment?  Well, one of the issues with them is that they create no cashflow, so they only “make money” if someone else is willing to “buy” them at a higher value than what was originally paid for them.  Unlike government-backed securities (like the dollar, euro, or the yen), the market is totally built on every investor agreeing that the cryptocurrency is worth something tangible. 

This “worth” of a cryptocurrency can swing wildly.  All it takes is for one celebrity or popular internet post to mention one and the value can go up or down simply on word of mouth (see Elon Musk’s latest comments on Bitcoin and its subsequent market moves as an example). 

Lastly, one of the most important things about a currency is its stability.  A dollar today is worth a dollar tomorrow or a dollar ten years from now (not factoring in inflation, of course); whereas an Etherium token today could be worth ten times its current price next week – or perhaps nothing.  These extreme swings also discourage the use of the currency in an everyday sense.  Why should I pay for something in Dogecoin now if I can simply hold it and it be worth double the price next month?  This type of speculation discourages circulation of the currency, which then turns it into another fad or the next Pokemon card collection.  That uncertainty makes it a risky investment.

So, is cryptocurrency right for you?  Hard to say, but you should understand what you’re getting into (as with any investment).  A little research goes a long way, so do your due diligence and be sure before you take the plunge.

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[1] “What is Cryptocurrency? – Here’s What You Should Know”, Nerdwallet.com, 4/22/21, accessed 5/20/21,  https://www.nerdwallet.com/article/investing/cryptocurrency-7-things-to-know