What is cryptocurrency?
A cryptocurrency is a digital or virtual currency secured by cryptography, making it nearly impossible to counterfeit or double spend. Many cryptocurrencies are decentralized networks based on blockchain technology - a distributed ledger enforced by a diverse network of computers. A peculiarity of cryptocurrencies is that they are generally not issued by a central authority, which theoretically makes them immune to government interference or manipulation
Cryptocurrencies can be mined or bought on cryptocurrency exchanges. Not all e-commerce sites allow cryptocurrency purchases. In fact, cryptocurrencies, even popular ones like Bitcoin, are rarely used for retail transactions. However, the skyrocketing value of cryptocurrencies has made them popular as trading tools. To a limited extent, they are also used for cross-border transfers.
The role of consensus in crypto
Both Proof of Stake and Proof of Work rely on consensus mechanisms to verify transactions. This means that while each individual user verifies transactions, each verified transaction must be reviewed and approved by the majority of ledger owners.
How to mine cryptocurrency?
Mining is the release of new units of cryptocurrency into the world, generally in exchange for validating transactions. While it's theoretically possible for the average person to mine cryptocurrency, it's becoming increasingly difficult in proof-of-work systems like Bitcoin.
"As the Bitcoin network grows, it will become more complicated and require more computing power," said Spencer Montgomery, founder of Quinta Crypto Consulting. “The average consumer used to be able to do that, but now it's just too expensive. There are too many people who have tweaked their gear and technology to compete.”
Proof-of-work cryptocurrencies also require massive amounts of energy to be mined. For example, bitcoin mining currently consumes 127 terawatt hours of electricity annually, which exceeds Norway's total annual electricity consumption.
While it is impractical for the average person to earn crypto by mining in a proof-of-work system, the proof-of-stake model requires less powerful computers because validators are randomly selected based on the amount which they will use. However, it requires that you already own a cryptocurrency in order to participate. (If you don't have cryptocurrency, you can't bet anything.)
How can you use cryptocurrency?
While there are a number of goods and services you can buy with crypto, most notably Litecoin, Bitcoin or Ethereum, you can also use crypto as an alternative investment opportunity outside of stocks and bonds.
"The most well-known crypto, bitcoin, is a safe, decentralized currency that has become a store of value like gold," said David, a cryptocurrency expert at financial news site Money Morning. "Some people even refer to it as 'digital gold.'
Should You Invest in Cryptocurrency?
Experts have mixed opinions about investing in cryptocurrency. Because crypto is a highly speculative investment with the potential for wild price swings, some financial advisors advise against investing at all.
Pros and cons of cryptocurrency
Peter Palion, a Certified Financial Planner (CFP) in East Norwich, New York, thinks it's safer to stick with a government-backed currency like the US dollar.
If you have the US dollar in your cash reserves, you know you can pay your mortgage, you can pay your electric bills," says Palion. “Basically, if you look at the last 12 months, Bitcoin looks like my last EKG and the US Dollar Index is more or less a flat line. Something that goes down 50% is only good for speculation.”
However, Ian Harvey, a New York-based wealth advisor, helps clients who are specifically interested in cryptocurrencies put some money into it. "The weight in a client's portfolio should be large enough to feel meaningful without derailing their long-term plan if the investment goes to zero," says Harvey.
As for investment size, Harvey talks to investors about what percentage of their portfolio they are willing to lose if the investment goes down. "It could be 1% to 5%, it could be 10%," he says. "It depends on how much they have now and what's really at stake for them from a loss perspective."
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