What Boomers Need to Know About Cryptocurrency

Cryptocurrency, often shortened to “crypto,” is a speculative asset especially popular with millennials and Gen Z. Fans will talk all day about the potential in the technology and the potential for striking it rich, while critics (rightfully) focus on its huge fluctuations in value and potential for scams. As two-thirds of the investment’s value evaporated this summer from its peak, a Federal Reserve exec called it an invitation to “theft, hacks and ransom attacks” often used for “money laundering and financing of terrorism.” North Korea specializes in crypto scams and El Salvador’s idea of making bitcoin its national currency has gone over about as well as Prohibition. Here is what baby boomers should know about cryptocurrency.

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Bitcoin was invented in 2009 by a person or group of people going by the name Satoshi Nakamoto. The bitcoin whitepaper calls it “A purely peer-to-peer version of electronic cash [that allows] online payments to be sent directly from one party to another without going through a financial institution.”

Related: Things You Wanted to Know About Cryptocurrencies but Were Afraid to Ask

Fans of bitcoin often compare it to gold. Like gold, there is a limited supply (only 21 million bitcoins will ever exist) and it is difficult to forge. The cryptographic system in the bitcoin network (called “the blockchain”) makes it easy to verify the authenticity of each bitcoin using a series of randomly generated numbers and letters called “keys.” Keys allow bitcoins to be transferred from one holder to another.

Related: Why Pennies Still Exist and Other Money Trivia

As of July, one bitcoin is worth approximately $20,000. Bitcoin reached its all-time high in 2021 at around $68,991. This value is entirely determined by the market — there is no inherent value to bitcoin. Crypto fans like to point out that the same could be said of the U.S. dollar.

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Bitcoin’s value has skyrocketed since its inception. If you’d bought $100 worth of bitcoin in 2010 and not sold, you would have around $20 million in bitcoin. It’s estimated that one bitcoin will be worth anywhere from $115,000 to $400,000 by 2030.

Though bitcoin’s biggest gains are likely behind it, there is passive income potential from bitcoin if you were to buy during a bear market and sell during a bull market. Like many other assets, owning bitcoin for a year or more would make earnings subject to long-gains taxes, rather than short-term gains taxes.

Most years, the stock market makes a fairly reliable 10% gain. It’s not uncommon for bitcoin and the general crypto market to gain or lose 10% value in a day, and bear markets can be especially brutal, with losses up to 90%. While this can be exciting for young investors, it makes investing in bitcoin on a fixed income potentially perilous.

To lock in gains, some choose to trade bitcoin and crypto like stocks. It’s possible to long or short most cryptocurrencies on various exchanges. Of course, any earnings on that front are subject to short-term gains tax.

Any cryptocurrency that’s not bitcoin is called an “altcoin.” The second-largest project in the crypto sphere and the strongest altcoin is called ethereum. Whereas bitcoin is strictly a store of value, ETH is a blockchain network on which many crypto projects are built, with similar cryptographic elements as bitcoin. Its primary founder is programmer Vitalik Buterin, who built it with Charles Hoskinson, Gavin Wood, Anthony Di Iorio, and Joseph Lubin.

Some anticipate that ETH will one day overtake bitcoin by market cap — this is called the “flippening.” ETH’s value as of July is around $1,100 down from its all-time high of $4,800 in November.

Other crypto projects of note include:

• Chainlink: a network by which blockchains can access outside data
• Cardano: another blockchain network founded by Charles Hoskinson, a co-founder of Ethereum
• Solana: another blockchain network, which is known for its speed and lower fees

Software engineers Billy Markus and Jackson Palmer created dogecoin in 2013 as a sort of jokey commentary on crypto’s speculative nature. Dogecoin (doge) is now a top 10 cryptocurrency by market cap. It is known for its Shiba Inu mascot. There are now many similar meme coins — even one called Shiba Inu. Like the rest of the crypto market, these are highly volatile assets. Though there are certainly “doge millionaires” who made huge gains, the number of doge millionaires went down by 43% in 2022.

Though a diversified portfolio is never a bad idea when investing, crypto investments are a little different. Generally, crypto bear markets mean that almost every asset goes down at least 50%. A diversified portfolio will help ensure stronger gains, as different cryptocurrencies peak at different times during a bull market, but a diversified portfolio will unfortunately not protect you from the brutal losses of a crypto bear market.

The safest way to buy crypto is on centralized exchanges such as Coinbase or Binance, though critics like to point out that crypto was created to avoid centralized entities. Theoretically, your crypto could be “stored” on a piece of paper — you could just write the keys down and store that piece of paper in a safe (though you would have to request your keys from the exchange where you bought the crypto). Some choose to keep their crypto on exchanges. Some prefer “wallets,” which are classified as “hot” or “cold”: The “hot” wallets are generally apps that remain connected to the internet; the “cold” wallets are essentially just flash drives on which keys are stored. The convenience of “hot” wallets or keeping coins on exchanges makes your crypto more susceptible to hacks and theft.

Crypto critics like to point out that the crypto sphere is rife with potential for scams and hacks. Though some exchanges such as Coinbase will reimburse crypto owners who lose coins due to a weakness in the Coinbase system, there are many other ways to be taken advantage of in the crypto sphere. Sometimes, hackers will reach out seemingly from an exchange asking you to verify your login and will steal your crypto. Some projects are meant to be a “pump and dump,” where there’s a lot of hype around the project that leads to people investing; when the coin is at a high, the investors sell their coins, crashing the project to zero. There is no recourse for these scenarios.

Bitcoin has never seen a global recession; some wonder how it would fare. Many analysts say it will take some heavy hits but ultimately survive. No one really knows.

For those on a fixed income, crypto is a risky investment. The potential for the biggest gains are with altcoins, but most altcoins — of which there are currently 19,000 — fail during a bear market, to say nothing of a recession. Even cryptocurrencies such as bitcoin and ethereum that will likely stick around will be subject to huge losses. If you choose to invest in crypto, make sure you’re investing only money that you’re willing to lose. Be extra vigilant about cyber security so your coins are not stolen.  You may see huge gains, you may see major losses. It’s all part of the crypto experience.