- July 19, 2022
- Posted by General Electric Credit Union
- 5 read
Flash in the Pan or Enduring Investment Option? Your Guide to Cryptocurrency
Cryptocurrency is everywhere. The Staples Center, which is home to the Lakers, was renamed the Crypto.com Arena; El Salvador adopted Bitcoin as legal tender; and Bitcoin’s market value surpassed a trillion dollars in February.1-2 This investment option has attracted a lot of media attention over the years, allowing it to become more mainstream. You may have asked yourself if you should buy and trade it to avoid missing out on something big.
Cryptocurrency is still a relatively new phenomenon. While it’s less obscure today, it’s important to reflect on its history and track record. This, combined with your personal approach to investing and guidance from a financial advisor, will help you determine whether cryptocurrency is an opportunity – or a costly headache.
What to consider before investing in cryptocurrency
Risk and volatility
The funds you keep at a bank or credit union are insured up to a certain amount. Bank deposits fall under the Federal Deposit Insurance Corporation (FDIC) while credit union deposits fall under the National Credit Union Association (NCUA).
There is no safety net for cryptocurrency. Buying and trading it means you’re accepting the risk of it depreciating in value. While this is also true of stocks, cryptocurrency has shown itself to be more volatile – especially when compared to a diverse stock portfolio.3
DeFi is short for decentralized finance. It’s a concept aimed at cutting the middleman (e.g. financial institutions and government agencies) out of financial services. Cryptocurrencies, which are decentralized, are a tool used to help this concept work in the real world. The decentralized nature of these platforms is one thing that attracts people to them and to cryptocurrency in tandem. The platform gives you complete sovereignty and control over your money.
Unfortunately, DeFi platforms with weak security are a target for bad actors. In the first quarter of 2021, hackers stole $154 million in cryptocurrency, compared to $162 million in all of 2020.4 This trajectory of illicit activity is on the rise, too. In the first four months of 2022 alone, hackers scored a whopping $1.2 billion in cryptocurrency.4
Your recourse if you’re impacted by a hack will depend on where your cryptocurrency is stored. Larger exchange platforms may be able to offer more help and freeze your funds. But the decentralized nature of this digital currency and lack of regulations means no one has an obligation to assist you.5
Criminals are also taking advantage of cryptocurrency’s popularity and weaponizing it to illegally solicit money from unsuspecting victims. Never trust a “business” that requires this payment method. If one does, take this as a red flag and move on. Use this resource from the Federal Trade Commission (FTC) to learn more about cryptocurrency scams and where to report suspicious activity.
Some cryptocurrencies use proof-of-work (PoW) to validate blockchain transactions and create new coins. In Bitcoin’s case, that PoW is cryptocurrency mining. While traditional mining is done to source organic materials like gold, crypto mining involves solving complex math problems. The miner is awarded coins for each problem solved.
Because crypto mining comes with a lot of overhead costs, the “miner” isn’t typically one independent person. Instead, groups of people pool together their resources or form a company to take on the task. The sophisticated computer software they use requires a lot of electricity. In fact, it’s estimated that Bitcoin uses more electricity per year than the Netherlands and is responsible for more carbon dioxide output than the Czech Republic.6 Investors who are more environmentally conscious may want to consider this before adding cryptocurrency to their portfolio.
While cryptocurrency has skyrocketed in popularity, it’s wise to look at it holistically and gauge whether the risks outweigh the likelihood of any potential gain. A financial advisor can help you better understand these risks and how they may impact your financial well-being both in the short- and long-term. General Electric Credit Union (GECU) members interested in earning more off their money should turn to Investment Services, available through CUSO Financial Services, L.P. (CFS).7 As a first-time investor, they’ll help you explore your options and build a diverse portfolio tailored to your needs.