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A guide to cryptocurrencies in 2021
Crypto might be here to stay. What should you know?
People are spending small fortunes on Non-fungible tokens or NFTs (which, until recently, you would be forgiven for thinking is your cool cousin’s new favorite band). You can buy a car (or tickets to the game) with Bitcoin. Elon Musk (and his mom) cracked wise about crypto on Saturday Night Live. Even if cryptocurrency still feels new and complicated, one thing is becoming clear: Understanding what it is, and what it might mean for your bottom line, is important.
In this article:
Why is cryptocurrency so popular right now?
If cryptocurrency is more than a fad, there are two big reasons for that. The first has to do with its built-in security and potential for anonymity, especially during financial transactions.
“Cryptocurrencies make it easier to transfer funds between two parties without the need for a trusted third party,” says Courtney Zaharia, consultant for Pelicoin, a Bitcoin ATM service located in the Gulf South. “These transfers are secured by the use of public and private keys. Only the owner knows the private key, and this allows transfers to be completed with minimal processing fees.”
The second reason people are interested in cryptocurrency trends has to do with its potential investment value. Will buying Bitcoin now lead to higher-than-average returns later? Is there any value in investing in non-Bitcoin cryptocurrencies, like Ethereum or the infamous Dogecoin? What about non-fungible tokens (NFTs), which allow people to own an original digital asset such as the Nyan Cat gif, which — as The New York Times reports — just sold for nearly $600,000? Or are the risks too great?
We asked the experts whether cryptocurrency might be a good investment — and they didn’t necessarily agree on an answer.
“Many people can benefit from these assets, but they should be smart about investing in them,” says Nate Tsang, founder and CEO of WallStreetZen.
“It’s still uncharted territory,” explains Michael Hammelburger, CEO at The Bottom Line Group. “It’s too early to tell whether it’s a bubble or not.”
“Investing in NFTs might sound attractive, but a year or two from now, you never know how people will view the value in something that they can easily make a copy of,” argues Ben Reynolds, founder and CEO of Sure Dividend.
Still interested in getting started with cryptocurrency? We’ve got a guide to help you understand the latest cryptocurrency trends.
“It’s still uncharted territory. It’s too early to tell whether it’s a bubble or not.”—Michael Hammelburger, CEO at The Bottom Line Group
What is cryptocurrency?
“At its most basic, cryptocurrencies are digital or virtual currencies secured by cryptography, making it nearly impossible to counterfeit or double-spend,” explains Zaharia. “Most cryptocurrencies are based on blockchain technology, which is essentially a distributed ledger enforced by a disparate network of computers. Because a central authority does not distribute these currencies, they are theoretically immune to government interference.” In a strange way, it harkens back to the days of bartering, but with virtual crypto coins taking the place of goats and pelts.
Cryptocurrencies are distributed directly from one owner to another, without the need for a bank or credit card issuer to keep track of the transaction. You can consider it a type of crypto trading that doesn’t require the involvement of traditional financial institutions. The opportunity to privately transfer digital currency that is disconnected from the larger financial system has — as you can probably imagine — both its advantages and its downsides.
“Because cryptocurrency transactions are semi-anonymous, it makes them well-suited for many illegal activities like money laundering or tax evasion,” says Zaharia. “However, this anonymity is also a positive, as it grants privacy to whistleblowers or activists under repressive governments.”
What are some of the most popular cryptocurrencies?
Even if you don’t know much about cryptocurrency, you’ve probably heard of Bitcoin. “It’s the most common cryptocurrency,” explains Zaharia. “Bitcoin accounts for more than 60% of all cryptocurrency value in existence.”
Of course, Bitcoin isn’t the only digital currency option within the cryptocurrency market. “Some of the competing cryptocurrencies include Litecoin, Peercoin, Namecoin, Ethereum, Cardano, and EOS,” says Zaharia.
Ethereum is probably the other virtual currency you’ve heard of — most NFTs, for example, are part of the Ethereum blockchain, and Ethereum is doing its best to establish itself as a major Bitcoin competitor.
“In 2021, Ethereum plans to shift from a proof-of-work model to a proof-of-stake model, which will allow it to run on much less energy,” Zaharia told us. “One of the most considerable disadvantages of Bitcoin is the extreme amount of energy needed to mine it.”
If you’re thinking about getting started with cryptocurrency trading, you don’t need to worry about mining — it’s still possible to mine your own cryptocurrency if you’re willing to build the necessary home computer setup, but there are enough Bitcoin and Ethereum in the world by now that you can simply purchase the ones you want without having to do any cryptocurrency mining. Many services like Coinbase even allow you to purchase fractions of Bitcoin or other cryptocurrencies, which might be the most affordable option if you are looking to start cryptocurrency trading.
What are NFTs, anyway?
A NFT is a non-fungible token. “This term more or less means that it’s something unique that cannot be replaced by something else, like a one-of-a-kind trading card,” explains Zaharia.
Some of the first NFTs were one-of-a-kind Bitcoins called “Colored Coins.” Later, sites like CryptoKitties let people collect, breed and trade unique digital cats. Today’s NFTs still include these kinds of original digital icons, but the concept of the NFT has expanded to encompass Nyan Cats, original music — Lindsay Lohan recently auctioned off the NFT version of her original song “Lullaby” for a high bid of $85,484.09, according to EDM.com — and art.
“The current buzz is around selling digital art,” Zaharia told us. “Many people speculate that NFTs will become the new way to collect art, but there is also speculation that this new form of collection will become a playground for the ultra-rich.”
How much does a work of non-fungible art go for, these days? As Verge reports, the digital artist Mike Winkelmann, also known as Beeple, recently sold an NFT of a collage titled Everydays: The First 5000 Days, for $69 million. This transaction took place at a Christie’s art auction, which helped establish NFTs as not only legitimate, but also culturally significant.
Is cryptocurrency really an investment?
“Cryptocurrencies won’t be going anywhere anytime soon,” Zaharia told us. “As these become more generally accepted, you may find that having some crypto under your belt might be useful.”
That said, Zhang suggests learning as much as you can about cryptocurrency if you’re thinking of investing. “Take your time to learn about the market, the different types of coins and tokens, which platforms allow you to trade freely, how much capital you need, etc. Once you have a deeper understanding of the assets, and the risks involved, only then should you consider investing in them.”
Most experts would suggest that you avoid making cryptocurrency a large percentage of your portfolio — especially since it’s still unclear what the value of a cryptocurrency investment might be 30 days or 30 years from now. “Investing in crypto and NFTs for your portfolio can be very risky,” explains Reynolds. “People who decide to invest in it should limit it to a small percentage in the high-risk section of their retirement portfolio.”
Some experts also questioned the value of NFTs compared to cryptocurrencies like Bitcoin and Ethereum. “If you’re the type of person who spends thousands of dollars on art regularly, then, by all means, join in the NFT craze,” advises Zaharia. “But keep in mind that because it’s a digital format, you’re simply paying for the original copy while countless others are downloading it for free.”
However, there is one good reason to consider purchasing an NFT — and that’s to support the person who created it. “If the artist is creating the NFT and then selling it, then it can support the arts community,” says Hammelburger. “For me, this is a good investment.”
Note: This article is intended for informational purposes only. Haven Life Insurance Agency does not offer or recommend purchase of cryptocurrencies.
About Nicole Dieker
Nicole Dieker has been a full-time freelance writer since 2012, with a focus on personal finance and habit formation. In addition to Haven Life, her work regularly appears at Lifehacker, Bankrate, CreditCards.com, and Vox. Dieker spent five years as a writer and editor for The Billfold, a personal finance blog where people had honest conversations about money, and is the author of Frugal and the Beast: And Other Financial Fairy Tales.Read more by Nicole Dieker
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Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
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