Cryptocurrency and Bitcoin have become increasingly popular over the past several years. More and more people are investing in cryptocurrency or considering it. Still, there is a lot of misinformation of what cryptocurrency is and whether it makes sense to include in your retirement and financial planning. There are both risks and benefits to investing in cryptocurrency and this article will explore both sides to help you make a sound decision on whether investing in cryptocurrency is right for you.
What is Cryptocurrency?
At its most basic, a cryptocurrency is a form of digital currency that is backed by some form of cryptography. Many cryptocurrencies are backed by something called a blockchain. With regard to cryptocurrency, blockchain is a detailed ledger of all of the different transactions of the cryptocurrency in question. The blockchain is distributed and duplicated throughout the entire network. This means that there is not one central bank or government entity that controls the cryptocurrency.
This makes cryptocurrency popular with people who prefer not to have traditional bank accounts or who distrust government or banking. While there are many legal reasons to have or invest in bitcoin or other cryptocurrencies, people also use it for either illegal or other questionable activities.
What is Bitcoin?
Many times you might hear the words cryptocurrency and Bitcoin referred to interchangeably, but these are actually different things. Bitcoin is one of the oldest and most popular cryptocurrencies, but it is still just one of many different types of cryptocurrencies. There are many other cryptocurrencies that are out there.
What are popular cryptocurrencies?
Besides Bitcoin, which is one of the earliest and most popular cryptocurrencies, here are some of the other popular cryptocurrencies:
What is Cryptocurrency mining?
Unlike most traditional currencies, where a government or other financial institution controls the currency and has the ability to mint or print new currency, there is no central organization for most cryptocurrencies. Instead, cryptocurrency mining is the process of generating new cryptocurrency “coins.”
Cryptocurrency mining is a fairly complicated process and a detailed explanation is outside the scope of this article. When people mine cryptocurrency, they first validate a part of the blockchain, ensuring the full ledger of different transactions. Once a miner has validated a certain number of transactions, they also are performing a complex calculation to generate a 64 digit hexadecimal number less than a specified target. If they are able to do so, a miner may be granted one coin.
Most cryptocurrencies limit the total number of coins available. This means that as more and more coins enter circulation, it becomes harder and harder to mine new coins. This is a feature of most cryptocurrencies. In theory, anyone with any computer could mine cryptocurrency, but with its increasing popularity, most new cryptocurrencies are now mined by specialized operations with high-end computers.
Risks and Benefits of investing in cryptocurrency
There are many different ways to invest in cryptocurrency, each with various risks and benefits. You can try to mine your own cryptocurrency, or buy existing cryptocurrency or invest in an index fund that specializes in cryptocurrencies. Currently, the value of most cryptocurrencies is extremely volatile. While you can see huge returns on investment, you’re also likely to see extreme drops in value as well.
This volatility means that most investors should proceed cautiously when thinking of investing in cryptocurrency. While it can be a good idea to diversify your portfolio, you want to be careful that your investments match your individual risk tolerance. For most investors, you’ll want to make sure that your investment in cryptocurrency is quite small in comparison to the overall size of your portfolio. That will help keep your portfolio insulated from wild swings in the value of cryptocurrencies.
Current Cryptocurrency supported in Mint
If investing in crypto is part of your financial strategy you can connect your account in Mint to see your full financial portfolio. Here are the supported platforms:
- Coinbase Pro
The Bottom Line
Cryptocurrencies are an alternate form of currency and aren’t under the control of a government or any central institution. Bitcoin is one of the most popular cryptocurrencies, but there are many other forms of cryptocurrency. Individuals mine new cryptocurrency tokens as there isn’t a central authority to mint currency,. This process involves complicated computer calculations which theoretically, anyone with a computer can do.
There can be some great rewards for investing in cryptocurrency, but presently, the risks are likely too high for people. You’ll want to make sure you keep the amount of your portfolio allocated to cryptocurrency relatively small, compared to the overall size of your portfolio.