Welcome to “Sage Advice” our regular advice column about Senior Finances and Retirement. Each week we will try to answer questions from seniors about a variety of topics related to retirement and finance. If you’d like to submit a question please send an email to SageAdvice@sagewellfinancial.com
Question: I’ve been hearing a lot about cryptocurrency as an investment. Unfortunately, I don’t really understand how it works, and I’m not sure how to ask someone about it without sounding out of touch. Is this something that I should consider adding to my retirement portfolio?
Sage Advice:
This is a pretty common question, so please don’t feel embarrassed. Many people don’t understand cryptocurrency, regardless of their age. In the simplest terms, cryptocurrency, or “crypto,” is a digital or virtual currency. Because it is virtual, it isn’t bound by national borders or markets, and because it is secured by cryptography, it is nearly impossible to counterfeit or double-spend.
Most cryptocurrencies utilize what is called blockchain technology to conduct and record transactions. Think of it as a decentralized “ledger” that is contributed to by several different computers. Each one serves as a series of checks and balances to ensure that crypto transactions are complete and accurate.
Initially, cryptocurrency was used for online purchases, but it is increasingly becoming more and more commonplace and is now accepted at places like Wholefoods, Home Depot, Starbucks, and even AT&T.
Cryptocurrency values are significantly more volatile than a real-world currency like the US dollar, the Euro, or the Yen. A thriving currency market exists for investors who are willing to take the risk.
If you have some experience in trading stocks online, the crypto exchange interface may look familiar. Various cryptocurrencies are bought, sold, and exchanged in a number of different marketplaces. However, there are several significant differences between investing in stock markets and investing in Crypto – and here are a few you should know before you start:
- Crypto is Largely Unregulated: Most of these crypto markets and exchanges are unregulated, meaning that the institutions that buy and sell you Crypto may be in bad shape, collapse and take your money, or worse!
For instance, many banks and other financial institutions must have a certain amount of money on hand relative to the money they are holding for their users. In Crypto, a company has no governing body telling it how many assets it needs to hold and, in turn, can have very little money relative to what it is guaranteeing. This happens all the time in Crypto.
Crypto also allows for all sorts of “leveraging” that is illegal in traditional US markets. There are caps about how risky it is to allow regular consumers to behave in the US. If you put 1 dollar into the market, you cannot have it look like more than $50 (a process called leveraging) which is akin to betting more money than you have at a blackjack table. In Crypto, there is no formal cap on leveraging your investments, so you can take a dollar and make it look like $500 or $1000. The danger is, of course, that you can lose more than the dollar you put in – and quickly! - Crypto Can be Insecure: There is a fairly common security flaw that renders technologies susceptible to manipulation called the “Day-0” Flaw (also called the Zero Day flaw). Tons of Day-0 security flaws have enabled criminals to steal billions every year, and the trend is far from stopping.
The Internet has existed for nearly 40 years now, and it still has day-0 security flaws, though they are becoming less common as tech security experts have scrambled to detect and repair them. But Crypto is a technology that is as or more complicated than the Internet and experiences day-0 security flaws nearly weekly! - Crypto is Unprotected: Unlike the US Dollar in the payment ecosystem, fraud and other criminal activity is your risk! Partially because it’s unclear legally how to treat many of these crypto coins and markets. That means no FDIC! It’s even unclear, sometimes, what “stealing” is as the owner of some coins is defined as exactly the person who possesses it. Massive, multi-billion-dollar thefts happen several times a year!
- Crypto is Used by Scammers: Regardless of the type of scheme or scam, seniors need to be on high alert anytime someone asks them to convert their currency to Crypto.
Many of these scams succeed because seniors don’t or won’t ask for help. Don’t be afraid to ask someone you know and trust – like your family or a Sagewell Retirement Advocate – about any investment opportunity that may seem too good to be true or is brought to you by someone you don’t know personally.
If you think you may have been the victim of crypto or online romance scam, you should report the activity immediately to the FBI’s Internet Crimes Complaint Center (IC3) at https://www.ic3.gov/.
Overall, cryptocurrency has the potential to be a valuable asset in a retirement portfolio. But for now, security risks and the lack of regulation make it a very risky play for people who will be dependent on their investments in the future. MIT professor and cryptography expert Ron Rivest argues for any investment that is important to you (such as your retirement) – that you hold off on the blockchain for now!
The Sagewell Blog is for educational purposes only. The Sagewell is not intended as an offer or a solicitation for the sale of any financial product or service, or as a determination that any investment strategy is suitable for a specific investor, or that any strategy or security is recommended or promoted by Sagewell Financial.
The Sagewell Blog is not designed or intended to provide financial, tax, legal, accounting, or other professional advice. For advice on financial, tax, legal or accounting matters, please consult your financial, tax, legal or accounting professional. The Sagewell Blog may not be relied upon in making any investment or financial decisions.
