What is cryptocurrency?
Cryptocurrency is a sort of digital asset that’s not regulated or controlled by the government or traditional financial institutions. As Investopedia contributor Jake Frankenfield notes, it’s decentralized and supported by what’s known as the blockchain, a network of computers linked over a peer-to-peer network. Crypto gets its name from the method by which it’s secured — cryptography. This prevents it from being counterfeited or double-spent, making each individual coin or token unique.
Andry Rosen, NerdWallet’s lead writer on cryptocurrency and alternative assets, writes that cryptocurrency can be derived from a process called mining. Crypto mining is an especially controversial practice because of its massive energy requirements, but other cryptocurrency generation methods don’t have as significant an impact on the environment.
As for cryptocurrencies themselves, there are thousands upon thousands of options in the marketplace, all with varying degrees of value. Rosen notes the best-known and most valuable is Bitcoin, which also originated the cryptocurrency boom. Other popular and well-valued options include Ethereum, Cardano, Dogecoin, and Shiba Inu.
Is it a good time to get into cryptocurrency?
Cryptocurrency reached incredible heights during the pandemic, topping out around $3 trillion in 2021. While the value of cryptocurrencies like Bitcoin is still significant, it pales in comparison to those past numbers. According to Bankrate principal writer James F. Royal, the values of Bitcoin and Ethereum were down more than 70% from their peaks the following year.
While Royal notes the crypto market has recovered slightly during 2023, it’s hard to predict where it will end up or whether it’s worth investing in. He notes that among the largest detractors of cryptocurrency are some of the world’s top investors, including Warren Buffett, who didn’t mince words when he called Bitcoin, “probably rat poison squared.”
Despite the name, Royal points out cryptocurrency is not a good form of currency due to speculation and market volatility, but may typically be better for traders and investors. However, because it’s a relatively new form of investment, it’s also becoming increasingly subject to government regulation worldwide. China, for example, has already moved to ban crypto outright.
Another major issue pointed out by Royal and many detractors — including Warren Buffett — is the fact that cryptocurrencies have no inherent value because they’re not backed by any actual assets. Unlike stocks, which provide a stake in a company, cryptocurrency isn’t supported by anything other than its market value. This explains in part why the market is so volatile and hard to predict.
Because of its unpredictable nature and uncertain future, it’s almost impossible to recommend putting any significant stock in crypto investments. Rosen suggests following the traditional guideline for high-risk investments and making cryptocurrency no more than 10% of your total portfolio at the absolute most. Ultimately, if you’re well along on your retirement journey, your best option is to consult with your financial advisor, who can point you in the right direction and help you decide if it’s worth it to jump on cryptocurrency now or wait and see if it’s truly a flash in the pan.