The advent of debit and credit cards and smartphones has made paying for goods and services with cash almost a relic of the past. Let’s face it: there is very little need for paper money anymore. Even your shopping has moved online, so there is even less need for cash payments mailed to sellers.
Even services like bank transfers and paychecks are mostly done digitally, which makes those little green pieces of paper that we call money seem like they aren’t that important anymore.
Over the past few years, cryptocurrency has been making ongoing news headlines, from scandals, blowups, court cases, and price declines in 2022 to more recent price rebounds in 2023 and 2024.
But what impact will cryptocurrencies have on you moving forward? It’s an interesting question that our team of experienced wealth managers in Roseville, CA, will explore in this blog.
What is Cryptocurrency?
Think of cryptocurrency as digital cash. Instead of physical bills and coins, cryptocurrency exists as digital tokens on computers.
You can use it to buy things online, just like the transactions you are used to, but some significant restrictions dictate where and how you can use it. The most significant twist is that banks are not involved.
Unlike your bank account, cryptocurrency isn’t controlled by any one organization. It runs on a ” blockchain system,” like a public ledger that everyone can see. This may potentially make it more secure, transparent, and riskier (more on that later).
There are many types of cryptocurrencies, like Bitcoin and Ethereum, Stablecoins, and even meme-inspired ones like Dogecoin. Some are meant for everyday transactions, while others are more like investments.
How Do Cryptocurrencies Work?
Cryptocurrencies are considered fungible, which means their value stays consistent through buying, selling, or trading. This starkly contrasts Non-Fungible Tokens (NFTs), where values can swing wildly. In crypto terms, a dollar is always a dollar, but in the NFT world, the value of a dollar can vary depending on the digital asset it’s linked to.
Here’s a look at how three different types of cryptocurrencies function for comparison purposes:
Bitcoin
Think of Bitcoin as digital gold. You can send or receive bitcoins using digital wallets. Making new bitcoins, a mining process, requires solving complex math problems. This creates new bitcoins, may potentially keep everything safe, and checks that all transactions are legitimate.
Examples of how Bitcoin is used include long-term investments and purchasing high-value items online (though only accepted sometimes).
Due to the lack of speed and high processing fees, everyday transactions are not ideal.
Ethereum
This form of cryptocurrency operates as a decentralized platform, utilizing blockchain technology to enable users to create and deploy decentralized applications (DApps) without intermediaries, such as a bank.
Think of Ethereum as a vending machine, but instead of using coins, it operates on pre-programmed rules. Ethereum uses smart contracts, where self-executing code written by developers is stored on the blockchain that automatically enforces the terms of the agreement without human intervention.
For example, the code includes specific conditions and actions that must be met, like receiving a payment. Once those terms are met, the code automatically executes the transaction. The beauty of this self-executing process is that it’s publicly viewable and eliminates the need for intermediaries, reducing the cost of processing. In a nutshell, anyone with an internet connection can interact with smart contracts.
Stablecoins
A stablecoin is a type of cryptocurrency designed to maintain a consistent value over time, similar to that of a standard currency or a commodity. This allows for faster transactions and borderless transfers without the high volatility commonly associated with traditional cryptocurrencies like Bitcoin or Ethereum.
This stability particularly appeals to people conducting financial transactions, where value predictability is crucial. It allows users to transact and save using a digital currency without worrying about sudden drops or spikes in value.
Understanding Your Risk Tolerance
Whether cryptocurrency is a suitable investment for your portfolio depends on your risk tolerance, investment goals, and understanding of the digital currency marketplace.
Even though the crypto world operates outside government oversight, the results of these digital assets are still taxable. If you profit or incur a loss, you must still report it to the Internal Revenue Service.
As discussed, cryptocurrencies are known for their high volatility, offering the potential for significant returns but posing a considerable risk of loss. If you’re comfortable with this risk level and understand the process, cryptocurrency might be a good addition to your investment portfolio.
Bulman Tip: A prudent investment principle; if you don’t understand it, don’t invest in it.
However, it’s crucial to remember that investing in cryptocurrencies should be part of a diversified investment strategy to manage risk more effectively. Also, staying informed about regulatory changes and market trends is essential because they can significantly impact the value of cryptocurrencies.
How Bulman Wealth Can Help
At Bulman Wealth Group, we focus on helping individuals create sustainable retirement plans that can last 30 years or more. We think of retirement planning as putting together a complicated puzzle. There are six primary components that we believe should be included in every retirement plan:
- Your income: Do you have a plan for where your “paycheck” will come from once you are in full retirement?
- Your investments: Your investment portfolio should not be based on a one-size-fits-all approach. In particular, as you move through different stages of life: Working years, transition years, retirement years. What works during your primary working years may not be appropriate after you retire.
- Your taxes: What will your tax situation look like once you retire? It may be different than you think.
- Your healthcare expenses: Without proper planning, unexpected healthcare costs can significantly impact your retirement lifestyle.
- Your longevity: You may live 30 or more years in retirement. You may have to take some investment risk to make your assets last this long.
- Your legacy planning: Do you have a plan outlining what happens to your assets when you’re no longer here?
If you’re considering adding cryptocurrency to your investment strategy, connect with us to discuss this in more detail.
