A Beginner’s Guide to Cryptocurrency

Whether you're a seasoned investor or you're looking to begin your first long-term investment portfolio, conversations about cryptocurrency are probably getting hard to avoid. Here's some crypto basics to reference if you're weighing your options.
Advertising Disclosure.

Advertiser Disclosure: Opinions, reviews, analyses & recommendations are the author’s alone. This article may contain links from our advertisers. For more information, please see our Advertising Policy.

The Military Wallet has partnered with CardRatings for our coverage of credit card products. The Military Wallet and CardRatings may receive a commission from card issuers. Some or all of the card offers that appear on The Military Wallet are from advertisers. Compensation may impact how and where card products appear, but does not affect our editors’ opinions or evaluations. The Military Wallet does not include all card companies or all available card offers.

What is cryptocurrency?

Put simply, cryptocurrency is digital money.

Think of it like a type of software. Like software, cryptocurrency only works on computers. But unlike software, cryptocurrency does not have a backend that allows its creators to change or manipulate it.

Instead, it is decentralized. This means unrelated and often anonymous individuals around the world control cryptocurrencies by running software on their computers.

These computers are called nodes.

Since cryptocurrency assets are decentralized, no one is protecting or carrying out crypto transactions. Instead, every cryptocurrency exists on a blockchain, which is like an accounting ledger that records every transaction that has ever happened.

Is cryptocurrency secure?

When you use a credit card backed by standard currency to buy something online, it works because multiple corporate entities have agreed to accept that payment. The transaction is secured by the trust between banks, corporations and payment technologies like Visa or Mastercard.

Unlike government-maintained currencies, which run on trust between governments and financial institutions, cryptocurrencies are maintained by cryptography – the science of maintaining and sending information that has been secured against outside third parties.

Because of this, cryptocurrencies can’t be counterfeited.

How do digital wallets work?

Cryptocurrency users hold crypto in password-protected digital wallets, like MetaMask or Trust Wallet. But because it’s decentralized, if you lose your password, no bank representative can help you retrieve your cryptocurrency. That’s why you may have heard about would-be Bitcoin billionaires who can’t access their investments.

Digital wallets are also anonymous, which means no person or government can necessarily discover that you own this wallet or the assets inside.

This makes cryptocurrency permissionless, which means that no one can stop you from using it in a transaction.

This is why governments and institutions like the International Monetary Fund have warned against widespread cryptocurrency adoption.

Governments can regulate cryptocurrency with things like taxes, but can’t control it like national banking and currency systems. So, bad actors – including terrorists, criminal syndicates and anyone trying to hide their personal assets – can exploit that lack of oversight to move money around surreptitiously.

What is crypto mining?

Additionally, certain proof-of-work cryptocurrencies are minable. This means that powerful computers can be set up to solve cryptography puzzles, which involve verifying actual transactions on the blockchain.

Whoever solves the puzzle first mines a certain allotment of new coins.

The enormous computing power and electricity consumption required for crypto mining provide a work value to the underlying cryptocurrencies.

What is crypto staking?

Proof-of-stake cryptocurrencies work by giving users the ability to deposit their crypto in specified wallets where their tokens will be used to verify other transactions on the blockchain.

By depositing, or staking, the coins, instead of selling them, users can collect interest on their savings through verified transaction fees.

How does cryptocurrency gain value?

Just because cryptocurrencies aren’t issued by a government doesn’t mean they are imaginary. Their value is based on supply and demand – what a token is worth depends on how much crypto users think it’s worth.

Strict limits on the amount of a cryptocurrency in circulation maintain a token’s value. Governments can’t create more Bitcoins, for example, and increase spending while decreasing value.

So as interest in cryptocurrency grows but the crypto supply remains constant, the token’s value shoots up. This is a primary draw for cryptocurrency investors. It’s also what makes crypto a high-risk investment.

Governments and central banks try to keep national currencies stable. They don’t want them to gain or lose too much value relative to other currencies.

Cryptocurrencies, on the other hand, tend to gain and lose value rapidly with users’ interest. Their volatility makes them extremely risky investments, but also capable of offering high returns.

Investing in cryptocurrency

Stories of Bitcoin billionaires may tempt investors to put 100% of their investment cash into cryptocurrency, but certified financial planners and nearly every personal finance book out there argue against such a high-risk move.

If you put all your eggs in one basket – so to speak – one bad investment can cost you everything.

“A military member needs to understand that this investment has risks that other assets don’t have,” said Kirk Kinder, certified financial planner at Picket Fence Financial. “If a military member put 10% of their portfolio in crypto, would they be ok with it going to zero? If not, then pull back the percentage.”

Investment brokerage AJ Bell released a survey of financial planners this year finding that though only 4% of professional investment advisors encourage their clients to invest in cryptocurrencies, about 36% of their clients already own crypto assets.

Of seven financial advisors and planners who spoke with The Military Wallet, four recommended allocating no more than 5% of your total investment portfolio to cryptocurrency. Two recommended staying away from the investment altogether.

Rick Raybin, CEO and founder of Lifetime Capital Group, said he finds cryptocurrency’s investment risk unnecessary for most people. “The hype doesn’t regale you with stories of losses, lost passwords or hacked accounts and other forms of theft,” Raybin said.

“At best, the cryptocurrencies are an extremely volatile, new, currency about which not enough is known to warrant adding it to investment accounts,” said Barry Korb, a certified financial planner at Lighthouse Financial Planning.

Jim Crider, CEO of Intentional Living FP, is more optimistic about cryptocurrency’s investment potential. He said he proactively pursues conversations about cryptocurrency investment with the families he advises, and most of his clients allocate about 10% to 20% of their portfolios to cryptocurrency.

“While there are countless cryptocurrencies out there, we are not allowing ourselves to be sidetracked by altcoins and only focus on Bitcoin,” Crider said, citing they pioneer crypto’s longer track record.

What is the future of cryptocurrency?

Analyst opinions are largely positive on two of the most valuable cryptocurrencies.

Shervin Pishevar, the cofounder of Sherpa Capital, forecasted that Bitcoin will hit $100,000 by the end of 2021. Mark Yusko, the founder of Morgan Creek Capital, estimates that Bitcoin will reach $400,000 in the longer term by comparing it to the value of the gold market.

Likewise, though Ethereum (the second most valuable cryptocurrency) currently hovers near $3,000, a team of analysts at Britain’s Standard Chartered bank recently released a price target for the smart contract coin between $26,000 and $35,000.

However, as more governments begin to regulate cryptocurrencies, their value could decrease. The Internal Revenue Service requires cryptocurrency investors to report their transactions. The IRS taxes your profits just like capital gains from 0 to 37%, depending on how long you held the asset and how much you profited.

About Post Author

Get Instant Access
FREE Weekly Updates! Enter your information to join our mailing list.

Reader Interactions

Leave A Comment:


About the comments on this site:

These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

The Military Wallet is a property of Three Creeks Media. Neither The Military Wallet nor Three Creeks Media are associated with or endorsed by the U.S. Departments of Defense or Veterans Affairs. The content on The Military Wallet is produced by Three Creeks Media, its partners, affiliates and contractors, any opinions or statements on The Military Wallet should not be attributed to the Dept. of Veterans Affairs, the Dept. of Defense or any governmental entity. If you have questions about Veteran programs offered through or by the Dept. of Veterans Affairs, please visit their website at va.gov. The content offered on The Military Wallet is for general informational purposes only and may not be relevant to any consumer’s specific situation, this content should not be construed as legal or financial advice. If you have questions of a specific nature consider consulting a financial professional, accountant or attorney to discuss. References to third-party products, rates and offers may change without notice.

Advertising Notice: The Military Wallet and Three Creeks Media, its parent and affiliate companies, may receive compensation through advertising placements on The Military Wallet; For any rankings or lists on this site, The Military Wallet may receive compensation from the companies being ranked and this compensation may affect how, where and in what order products and companies appear in the rankings and lists. If a ranking or list has a company noted to be a “partner” the indicated company is a corporate affiliate of The Military Wallet. No tables, rankings or lists are fully comprehensive and do not include all companies or available products.

Editorial Disclosure: Editorial content on The Military Wallet may include opinions. Any opinions are those of the author alone, and not those of an advertiser to the site nor of  The Military Wallet.