Retirement Planning, Elder Law, and Senior Finance

6/3/2021 | By Seniors Guide Staff

In case you didn’t know, Warren Buffett is probably our country’s leading investing guru. And his behind-the-scenes business partner, Charlie Munger, is equally astute. Munger has famously argued that any investor, regardless of age, should stick with investments they fully understand and avoid anything so complex it causes confusion.

That sage advice is the perfect lead-in to the subject of cryptocurrency, a type of digital payment that shares some of the characteristics of traditional currencies. By now, practically everyone has heard of cryptocurrency, yet few can honestly say they understand it. Though relatively new, is cryptocurrency safe? Here is what you need to know to decide for yourself.

What is cryptocurrency?

Cryptocurrency is a decentralized electronic cash system that confirms transactions using blockchain technology, a publicly distributed ledger that enables direct transactions. Proponents of crypto, its more popular shortened name, use it to purchase goods and services. Others invest in it as they would with any other asset class such as common stocks.

Some people assume that Bitcoin and cryptocurrency are synonymous terms. The truth is that Bitcoin is merely one type of crypto, albeit the oldest and largest, among thousands of others. And even though the total market value of all cryptocurrencies topped the $2 trillion mark at one point, they still only account for 0.7% of the world’s money.

How does cryptocurrency work?

These are the basics:

Every confirmed crypto transaction is in a public ledger (blockchain) and secured by cryptography. Peer-to-peer transactions are completed using cryptocurrency wallets. These transactions are encrypted and added to the public ledgers using a process called “mining.” The transaction amounts are public, but the identity of the person who sent them is encrypted.

How does blockchain work?

Think of the blockchain as a decentralized bank ledger, recording transactions and balances. After a transaction, the details are sent to all users hosting a copy of the blockchain. Certain users, known as miners, then attempt to solve a cryptographic puzzle (using software) that lets them add a “block” of transactions to the ledger. The miner solving the puzzle first gets a few “newly mined” coins as a reward plus transaction fees paid by those who created the transaction.

Each new block is connected to the data in the last block with cryptographic codes (hashes) designed to make tampering with the blockchain all but impossible. Offering new coins as rewards, solving the cryptographic puzzles, and the difficulty of adding false data to the blockchain adds insurance against those with bad intentions.

When you wonder, is cryptocurrency safe? This type of blockchain technology helps make it more so.

What is cryptocurrency mining?

Those who are running the software and hardware to confirm transactions to the blockchain are cryptocurrency miners. Solving cryptographic puzzles using software to add transactions to the blockchain with hopes of getting coins as a reward is cryptocurrency mining.

Beware: Cryptocurrency Scams

Is cryptocurrency safe for investment?

Now that you know the basics of crypto, you can probably come up with a few adjectives to describe it. However, it’s doubtful that “safe” is among them. Trading crypto is speculative, at best. It is a highly volatile market that is decentralized and unregulated.

While cryptocurrency is a new and exciting asset class, with the possibility of substantial gains, keep in mind that you will be entering an unstable market in which 25% drops are followed by equal gains or one in which a bear market can last for years.

Warren Buffett believes that cryptocurrencies like Bitcoin have no underlying value. They are much too complex to understand sufficiently. Even if you could comprehend them, they are nothing more than a speculative bubble that could crash to zero. “I don’t have any cryptocurrency,” he proclaimed recently, “and I never will.” Enough said?

Seniors Guide Staff

Seniors Guide has been addressing traditional topics and upcoming trends in the senior living industry since 1999. We strive to educate seniors and their loved ones in an approachable manner, and aim to provide them with the right information to make the best decisions possible.

Seniors Guide Staff