Cryptocurrencies like Bitcoin and Ethereum receive vast amounts of attention from the media, with most headlines touting the incredible price swings in these "investments". As useful as these may eventually become as a means of exchange, they are not investments ; they are merely "speculations". Retirees who don't understand the difference are putting their retirement portfolios in jeopardy.
What Is Cryptocurrency?
According to Forbes, cryptocurrency:
- is decentralized digital money, based on blockchain technology.
- is a medium of exchange that is digital, encrypted and decentralized. Unlike the U.S. Dollar or the Euro, there is no central authority that manages and maintains the value of a cryptocurrency.
- can be used to make purchases, but it’s not a form of payment with mainstream acceptance quite yet. Tesla famously began accepting Bitcoin recently.
- can be purchased on peer-to-peer networks and cryptocurrency exchanges, such as Coinbase, but transaction fees can exceed half a percent of the purchase price.
Investing vs. Speculating
Click the video below to learn more about the inherent risks of cryptocurrency and why it is a speculation, not an investment.
What Does the Future Hold for Cryptocurrency
As a medium of exchange, and maybe as a store of value, cryptocurrency may play a valuable economic role in the future. Any system that can get around the value manipulation and inflationary risks inherent in our current government-run currency systems would be a welcome relief.
The problem is predicting which one or ones will be the winner. Leading sources estimate there are more than 5,000 different cryptocurrencies out there today. Look at what happened in the early mania days of the US automotive industry. The number of active automobile manufacturers dropped from 253 in 1908 to only 44 in 1929, with about 80 percent of the industry's output accounted for by Ford, General Motors, and Chrysler, formed from Maxwell in 1925 by Walter P. Chrysler. There were plenty of investors out there looking to capitalize on the hot automobile stocks, but some lost everything. While Bitcoin gets the most headlines today, there is no guarantee it will be around in 5 years. Do you really want to count on Bitcoin being around to pay your mortgage?
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