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A Novice's Guide to Cryptocurrency

If you’re looking for a new investment vehicle, cryptocurrency may just be right for you.

The virtual medium of digital payments exchange known as cryptocurrency, or just “crypto,” is a hot topic in financial circles these days – as well as an increasingly preferred means of online purchasing and investment

But with values of crypto and related virtual currencies and exchanges having fallen sharply of late, Andrews Federal Credit Union wants you to know that crypto isn’t just a topic for investors; it also is important for the average person to understand in order to become as financially literate as possible.

The emergence of alternative currencies started in 2019 and is significant – with more than a thousand now existing worldwide, led by popular Bitcoin and major rivals Ethereum and Tether.

Like the U.S. dollar, British pound and other government currencies, this virtual cash can pay for goods and services online or at the counter – from a cup coffee at your local coffee bar to a new wardrobe from your favorite online retailer to a hammer and nails from the hardware store.

The latest U.S. inflation spike poses a challenge to cryptocurrencies’ reputation, like gold, as a hedge against rapidly rising prices for goods and services that, if unchecked, many finance, economy and policy observers fear could spawn a global recession.

5 important things to know about cryptocurrency

For the average person, there are a few key things to understand about crypto.

  • It can be used like cash to pay for goods and services
  • Crypto transactions occur and settle faster than traditional currency
  • Encryption secures virtual currencies in “digital wallets’’
  • Cryptocurrency valuations can fluctuate wildly
  • Virtual currency deposits are uninsured, which can make it riskier
  • You should only invest money you can afford to lose should your investment go sour

U.S. has a mounting interest in cryptocurrency

Whether or not you’re weighing investing in crypto, it’s almost certainly here to stay. Early in 2022, the U.S. Federal Reserve Board invited public input about a potential digital currency issued by the nation’s central bank.

A U.S.-sanctioned cryptocurrency could someday make the use of alternative currencies as widespread as hard cash at America’s banks and credit unions and among their household and business customers. Indeed, crypto has been touted as the key to faster financial transactions at lower cost. Until recently, a mounting number of American banks and credit unions were offering crypto-related products and services, or were weighing doing so.

Putting the technical aspects of crypto aside (e.g, the blockchain technology for managing them using virtual ledgers) – it’s important to understand what crypto is, as well as its pluses and shortcomings for facilitating global commerce and how it might affect your own financial future.

Crypto’s popularity has mushroomed globally

Since Bitcoin emerged more than 10 years ago, cryptocurrency’s use and appeal pushed the value of the global crypto market to $1.5 billion in 2020 and is projected to reach $4.94 billion by 2030.

Of the more than 300 million consumers worldwide who use, invest or trade in crypto, the U.S. ranked second after India in 2021, with 27 million users – just over half of whom were age 18 to 49 and mostly male.

Digital-payment networks like PayPal and PayBolt act as online clearinghouses for transactions involving crypto.

Cryptos’ mounting acceptance and scarcity in the global marketplace also makes them appealing options, or supplements, to investing in securities (aka trading in the stock markets), precious metals and real estate.

What are the advantages of Cryptocurrency?

Crypto advocates tout its benefits vs. the traditional banking funds-transfer infrastructure in place for generations. Among them:

  • Faster fund transfers. With blockchain technology, fund transfers between crypto-accounts occur in seconds. That compares to the hours, even days, it can take to clear and post funds from personal or business checks and other transfers using the traditional fund clearinghouse apparatus that most banks and credit unions rely upon. Speedier transaction times and more demand over time translate to lower costs.
  • Consumer accessibility. A computer or smartphone is all the technology needed to access crypto-based saving, borrowing and other financial services. That’s beneficial for consumers who lack access to bank or credit union checking and savings accounts because virtual currencies can be kept in and dispensed from, naturally, in virtual “wallets.”
  • Security. Digital currencies are stored in those wallets that users secure and access using encrypted (where the name partly derives) private digital “keys.’’ Wallets come in two varieties: “Cold wallets’’ are the safest way to store keys offline and makes them less vulnerable to hacking. The other, “hot wallets,’’ are equipped with private and public keys. However, they are less secure because they are always linked to internet and cryptocurrency networks and, thus, to hackers.

Cryptocurrencies have some drawbacks

More recently, crypto has been criticized for not living up to ambitious claims from promoters that it will eventually overtake hard currency as the dominant financial medium of exchange. However, a combination of factors have slowed cryptos’ advance.

Like investing in certain stocks, bonds and new securities issues, investing in crypto isn’t for the faint of heart. Features that make crypto appealing, like its limited volumes of coins and tokens tied to an ethereal asset you can neither see nor touch, add to its risk.

  • Price volatility. Cryptocurrency valuations are prone to wild price swings – soaring one day, plunging the next. Aside from using it as a medium of exchange, investing in cryptocurrency should one leg of your diversified investment portfolio.
  • Energy-thirsty mining activities. Powerful banks of computers, many running round the clock inside remote warehouses, sift mega volumes of digital data in a format called “blockchain.’’ Some states have enacted measures to limit blockchain operators within their borders due to concerns about the potential deleterious impact on their power grids.
  • An unregulated investment medium. Crypto isn’t directly overseen by any government or regulatory body, fine for deregulation mavens but problematic for crypto consumers and investors who could fall prey to unscrupulous crypto exchange gimmicks and outright fraud.
  • No deposit insurance. Perhaps the biggest shortcoming of all is that, unlike U.S. bank, credit union and savings bank deposits that are insured up to legal limits, crypto holdings are not federally insured. Crypto exchanges and networks are upfront with their declarations that such investments can be risky and are uninsured.

Where and how to buy crypto?

Getting started with crypto is fairly straightforward and, with the right moves and advice, needn’t be overly complicated – or costly. Hundreds of cryptocurrency trading exchanges and networks exist, with Coinbase far and away the most popular.

Exchanges, for a fee, provide investors a secure, centralized virtual space to buy, sell and store crypto. First-time crypto purchases typically are exchanged for U.S. dollars, British pounds or Euros, with funds transferred from investors’ checking, savings or investment accounts.

Keeping a tally on crypto holdings

Crypto can be sold back into government currencies, but here’s where recordkeeping is vital. U.S. tax rules require exchanges, networks and investors to report crypto investments, purchases and income to the Internal Revenue Service. Capital gains or losses on the disposal of crypto holdings are subject to federal tax.

If you’re looking for a new investment vehicle, cryptocurrency may just be right for you. Andrews FCU can assist you in exploring ways to supplement your checking, savings and investment portfolio so contact us today.