Pre-Retirement

Get the latest information and tips on financial planning.

Cryptocurrencies - What Are They? 

Wondering what the heck Bitcoin is? Here's an overview. 

I attended a friend's wedding this past weekend in Asheville, and as part of the usual chit chat, people at events like this often start asking me financial questions. One question I'm getting a lot lately is "What is Bitcoin?"

Bitcoin is one of about 700 cryptocurrencies, with Ethereum and Monero being the other two most popular. Essentially, these are digital currencies you can convert your money into, as you would the Euro, or Chuck E. Cheese tokens, which you then use in exchange for goods or services (skee ball anyone?) Retailers such as Overstock.com are already starting to accept Bitcoin for purchases.

The transactions are secure, and are automatically recorded on networks called blockchains, which act like a ledger. This removes the middleman in a sense, and makes transactions much cheaper, since a bank or other institution isn't having to verify the transactions and funds. Instead of your individual bank or credit card company verifying your purchasing power, it's all done in one place. This in turn reduces a lot of human error and costs for verification of all transactions.

Now you're probably wondering, what's driving the price? These digital currencies are similar in function to current currency and trading - cash, checks, credit cards, etc. Bitcoin initially achieved underground popularity via the Silk Road trading website, as people saw it as a way to trade value in a more anonymous and secure way than traditional payment methods. However, the technology and the commodity itself is becoming more known, which is pushing it to new heights as more and more people start using it. People believe it has value, just as they believe their "regular" money has real value.

So, will it continue to go up, or is it a bubble? Is this THE new currency or a simply a fad? Will another cryptocurrency take over Bitcoin? The short answer is I don't know - these are the million dollar questions that no one can answer. Bitcoin has gone up and down in very short periods of time in its relatively short existence, and some people have made some large profits. But, one does have to be wary of letting the excitement around reports of large recent profits drive their decisions, especially when it comes to something we know so little about.

I also get questions about the security of Bitcoin. Seems everyone is hacking everyone these days. This gets a little complicated, as the actual systems many of these currencies are built on are secure, but the exchange markets they're traded through or the "wallets" they're stored in can be less secure.

Think of it like this: No one can steal your money just by holding your credit card. However, if that card gets swiped through a reader that has been compromised, then it's potentially exposed to scammers. The bottom line is, just as with any investment, you do need to have a solid understanding of what you're doing before getting involved.

I know this all sounds pretty newfangled and confusing if you're just trying to learn about Bitcoin. I'm still learning too! But I'm happy to answer any questions you have about Bitcoin or other cyrptocurrencies. At the very least, it should be interesting to watch the story unfold.

Loading Conversation