Cryptocurrency. It’s the hot buzzword of the investing world these days. But what is cryptocurrency really? Ever heard of Bitcoin, Dogecoin, Litecoin, XRP or Ethereum? Nope—they aren’t embarrassing rock band names from the ’90s. They’re actually types of cryptocurrencies (aka digital money). And they’re trending everywhere you look.
But here’s the million-dollar (or million-bitcoin?) question: Should you invest in cryptocurrency? Despite what every loudmouth on the internet yells at you from their digital soapbox, buying cryptocurrency isn’t a safe bet for your investing future.
But we’ll get more into that in a minute. Let’s unpack what in the world crypto is first.
What Is Cryptocurrency?
Cryptocurrencies are digital assets people use as investments and for online purchases. You exchange real currency, like dollars, to buy “coins” or “tokens” of a certain kind of cryptocurrency.
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Think of it this way: Cryptocurrency is kind of like swapping out your money in a new country. A Benjamin can buy you a nice dinner in the States, but if you want to enjoy fine dining in Italy, you’ll need some euros. We value dollars and euros because we know we can purchase goods or services with them. The same goes for cryptocurrency. You exchange your money for crypto and use it just like real money (at places that accept it as a type of payment).
So where the heck do we get the word cryptocurrency from, anyway? We’re glad you asked. It comes from the word cryptography—meaning the art of writing or solving codes. Sounds like the setup of an Indiana Jones movie, right? Each coin of cryptocurrency is a unique line of code. And cryptocurrencies can’t be copied, which makes them easy to track and identify as they’re traded.
You’ve probably heard of people making (or losing!) hundreds of thousands of dollars by investing in cryptocurrency. It feels like a modern-day gold rush all of a sudden.
How Does Cryptocurrency Work?
Cryptocurrency is exchanged person-to-person on the Web without a middleman, like a bank or government. It’s like the Wild West of the digital world—but there’s no marshal to uphold the law.
Here’s what we mean: Have you ever hired a kid in your neighborhood to mow your lawn or watch your dog while you were out of town? Chances are, you paid them in cash. You didn’t need to go to the bank to make an official transaction.
That’s what it’s like to exchange cryptocurrencies. They’re decentralized—which means no government or bank controls how they’re made, what their value is, or how they’re exchanged. Because of that, cryptocurrencies are worth whatever people are willing to pay or exchange for them. Yep, it’s pretty wild.
With us so far? Okay, good. Because we’re about to get into the tech weeds even more.
How Does Someone Earn Cryptocurrency?
There are basically two ways someone can get their hands on cryptocurrency: They can buy it, or they can “mine” for it. Wait, what does that even mean? (Don’t worry, you won’t need to raid your garage for a shovel or pickaxe.)
Cryptocurrencies are based on something called blockchain technology. A blockchain is like a really long receipt that keeps growing with each exchange of crypto. It’s a public record of all the transactions that have ever happened with a given type of cryptocurrency. Yes, it sounds like it’s straight out of The Matrix. Just think of it like a ledger that shows the history of that piece of currency.
In the crypto world, mining happens when people use their computers to solve super complicated math problems that make sure new crypto transactions are correct. Then, those transactions get added to the blockchain (aka the receipt). As a reward for making sure a purchase made with crypto is legit, these people mining are then paid in cryptocurrency.
How Do You Store Your Cryptocurrency?
You store your cryptocurrency in something called a digital wallet—usually in an app or through the vendor where you purchase your coins. Your wallet gives you a private key—a unique code that you enter in order to digitally sign off on purchases. It’s mathematical proof that the exchange was legit.
What Types of Cryptocurrencies Are There?
Bitcoin is the top dog that everyone knows about, but it’s not the only kind of cryptocurrency out there. There’s Litecoin, Polkadot, Chainlink, Mooncoin . . . and, oh, just about 10,000 other kinds of weirdly named coins coming up the ranks. Let’s hit on the top contenders:
Yeah, it’s the household name that most people think of when you talk about cryptocurrency. That’s because it was the first cryptocurrency, and it’s been around for a while now. Bitcoin was created in 2009 by an unknown person who goes by the alias Satoshi Nakamoto—whoever that is.1 And that big secret is part of its underground feel that people like. But there’s no denying the fact that everything anonymous is super shady.
Even though cryptocurrency is rocky, crypto investors seem to like Bitcoin because they think it has a little more strength and stability than the rest. It’s also valued much higher than its competitors (for now).
This one is the next most popular cryptocurrency after Bitcoin. And even though Ethereum is like Bitcoin with its crypto coins (called Ether), it’s a little different too. While Bitcoin was created to become an alternative option to traditional currencies like the dollar, Ethereum has evolved into a network that can be used to do old things (like buying art) in new ways.
For example, NFTs sparked a cryptocurrency digital art craze where you buy digital art with digital money—NFT stands for non-fungible token . . . seriously, who comes up with these names? NFTs are supported by Ethereum’s blockchain technology, creating a brand-new way for folks to get into (digital) fine art collecting.
Dogecoin (pronounced “dohj-coin”) started as a joke back in 2013 and is now the hottest thing to invest in. At the time, there was a meme going around of a Shiba Inu (that’s a kind of dog) who was given the nickname “Doge.” The creators of Dogecoin named their cryptocurrency after the Doge meme, it became their mascot, and the rest is internet history. Oh, we’re serious. You can’t make this stuff up.
So, all of that to say, there’s no shortage of coins to invest in out there in cryptocurrency land. And depending on what’s trending that day (Dogecoin, anyone?), you’ll see the value on these coins go up and down like one of those swinging pirate ship rides at a carnival. If you chase crypto based on what’s hot that day, you’ll probably wind up sick too (just like you would from that dang carnival ride).
What Can You Buy With Cryptocurrency?
At this point, most people still see cryptocurrencies as an investment. But cryptocurrency is quickly gaining speed and becoming more widely accepted as currency. And using crypto in this way could become even more popular as these cryptocurrencies keep gaining trust.
Some major retailers—like Whole Foods, Nordstrom, Etsy, Expedia and PayPal—are now letting people pay using crypto. And of course, any two people who value the tokens can exchange them for goods or services with each other.
You could also buy those NFTs we were just talking about with cryptocurrency, if owning the world’s first digital perfume or digital toilet paper with flowers is your thing. Yes, those are “real”—but that’s a story for another day.
Is Cryptocurrency a Good Investment? 4 Things to Know
Before you say goodbye to your dollars and hello to Bitcoin, Ether or Doge, there are a few things you need to know up front.
1. Cryptocurrency is unstable.
It’s true—crypto is about as hot-tempered as a 2-year-old. Its value swings way up only to come plunging back down, and you never really know what you’re going to get each day.
The value of cryptocurrencies goes through extreme ups and downs. There’s no denying that some are really hot right now—but for how long? Someone sneezes and the price drops! Investing in cryptocurrency is risky, to say the least.
News flash: Cryptocurrency definitely isn’t a sure thing—it carries a huge amount of risk. Let’s be real here, all investing comes with some level of risk. But why jump all the way into the deep end with something this up and down?
2. Cryptocurrency has lots of unknowns.
There’s still a lot that needs to be ironed out with how cryptocurrencies work. Think about it: Nobody even knows who the founder of Bitcoin is! Only a small percentage of people in the world really understand the system and know how to operate it. Ignorance makes you vulnerable. We always tell people that if you can’t explain your investments to a 10-year-old, you have no business investing in them to begin with. You’re setting yourself up for a big mess.
P.S. Even though it might seem like everyone and their grandpa is investing in crypto, most people say they are still hesitant to put any money into it (72%) or don’t trust cryptocurrency at all (68%).2
3. Cryptocurrency makes fraud easier.
All it takes is five minutes on the internet to know not everyone has your best interests at heart. Scammers will stop at nothing to get access to your personal information and passwords—even your bank account.
And guess what? Cryptocurrency makes it that much easier for them to target people like you. In fact, the Federal Trade Commission (FTC) reported that nearly 7,000 people reported losses of more than $80 million on cryptocurrency scams since October 2020.3
Now look, we’re not saying everyone who uses cryptocurrency is a bad guy who’s dodging the government and making shady deals on the black market. But if someone wanted to commit a crime and fly under the radar without being tracked, cryptocurrency is going to call their name.4
4. Cryptocurrencies have an unproven rate of return.
Trading in cryptocurrency is kind of like gambling. Because it’s exchanged person-to-person without any real regulations, there’s no pattern to the rise and fall of its value. You can’t figure out the changes or calculate returns like you can with growth stock mutual funds. There just isn’t enough data, or enough credibility, to create a long-term investing plan based in cryptocurrency. Don’t play poker with your financial future here.
Should I Invest in Cryptocurrency?
Listen, you can try your hand at cryptocurrency if you want to. If you have some money you’re willing to lose, money that you might have thrown away on a roulette wheel in Vegas instead, knock yourself out. We’re not going to be mad at you for that. But we want you guys to win with money and secure your retirement future—and there is just no evidence that cryptocurrency is going to do that for you.
Plain and simple—investing in cryptocurrency is not a good way to build wealth for your future. Now, we’re not saying that cryptocurrency is going to go away. And we’re not saying it's horrible. But we are saying that crypto doesn’t have a proven track record of building wealth.
If you really want to invest in something with a solid track record, here’s the better plan: If you’re out of debt, have an emergency fund that will cover three to six months of expenses, and you’re ready to invest, then focus on investing 15% of your income in growth stock mutual funds—which are way more secure than crypto.
Don’t give in to a craze just because there’s a lot of hype. We’ve talked to people who have taken out a mortgage or cashed out their entire 401(k) early to invest in cryptocurrency—heck no! Don’t put it all on the line and risk your financial future, your retirement dreams and your family’s well-being. If you can’t afford to lose the money, don’t invest it in something as unstable as crypto.
A Better Way to Invest
Bottom line? The road to building wealth is slow and steady, and there are still way too many unknowns when it comes to cryptocurrency. Could crypto become a more legit way to invest later on down the road? Sure. But as things stand today, just say no.
Get-rich-quick schemes are just that—schemes. Don’t risk it and pour all your hopes, dreams and money into them. Instead, sit down with a SmartVestor who knows what they’re doing. Let them walk you through a solid strategy for investing that doesn’t involve trying to build wealth through risky investments like crypto. And don’t knock that 401(k), folks. It’s the number 1 wealth-building tool of millionaires!
This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.