Cryptocurrency and Bitcoin: A Quick Primer for Curious Investors

    In early April 2018, The Street, a finance and investing website, ran an article headlined, “Why Cryptocurrency Could Be the Next Frontier in Retirement Investing.” A few days later, an article headlined, “The Scary Truth About Bitcoin and How It Could Ruin Your Retirement,” appeared on The Cheat Sheet, a lifestyle website.

    With dozens of conflicting headlines like these floating around, it’s little wonder the subject of cryptocurrency — at its most basic, it’s a form of digital currency, of which Bitcoin is one, enabled by a distributed, peer-to-peer technology known as blockchain — is not only piquing the public’s (and the media’s) curiosity, it’s raising a lot of questions and causing considerable confusion about whether it’s worth paying attention to, not just as the latest “shiny object” to hit financial markets, but as a viable investment option for the masses.

    “When people start hearing about investors earning these huge returns [on cryptocurrency investments], they’re going to ask questions about it and they’re going to wonder if they should be getting involved,” says FPA member Amy Hubble, CFA, CFP®, principal at Radix Financial in Oklahoma City, OK.

    For early adopters who already are involved in the fledgling cryptocurrency market, extreme volatility comes with the territory. Along with huge gains in the value of a Bitcoin — from less than $1,000 at the start of 2017 to more than $19,000 at one point in December 2017 — there have been drops of 30 percent in a single day.

    If you’re one of the many people who have heard about cryptocurrency and Bitcoin but aren’t clear what they are, how they work and whether they’re worth your time and money, read on for answers to some of the common questions financial professionals are fielding about a concept that appears poised for a breakthrough into the investing mainstream.

    What is cryptocurrency? Cryptocurrency is a digital-only currency that is bought, sold and traded in a decentralized, peer-to-peer marketplace or exchange that no single entity controls or regulates. Cryptocurrencies have no government backing, nor do they have a physical representation (bills or coins).

    First introduced as “Bitcoin” in a 2008 white paper by an anonymous computer hacker writing under the pseudonym Satoshi Nakamoto, digital currencies trade within a secure public database called a blockchain. Each unit of cryptocurrency carries a store of value that fluctuates according to supply of, and demand for, that specific cryptocurrency. These units are bought and sold in the peer-to-peer marketplace. By purchasing a unit of a certain cryptocurrency, a person essentially takes the position that there will be a liquid market for that unit of cryptocurrency in the future — that they eventually will be able to sell that unit to a purchaser.

    The blockchain includes cryptographic data records of all user balances associated with a specific cryptocurrency, along with a complete, time-stamped history of all transactions included in each “block” in the blockchain. “The best way I can think of to explain this is to imagine there is one single shared spreadsheet on a cloud drive where everyone in the world has editing privileges,” Hubble writes in a recent blog post about cryptocurrency.  “Blocks made up of hundreds of transactions are reconciled and irreversibly published on the public…blockchain continuously.”

    While all transactions are publicly viewable by those who have access to the blockchain, the participants in these transactions remain anonymous. Executing and verifying the transactions, and the data attached to them, requires massive computing power. That power is supplied by computers linked to a particular cryptocurrency. These high-powered computers are known as “miners.”

    While Bitcoin, the first cryptocurrency, is still the movement’s standard-bearer, today there are more than 1,500 cryptocurrencies, according to COBINHOOD, a cryptocurrency trading platform. They go by names like Ethereum, Litecoin, Monero, Dash and Ripple.

    How is cryptocurrency used? Also known as protocol tokens, cryptocurrencies are bought and sold by people connected to the blockchain network of a particular cryptocurrency. They can be used to purchase digital assets or services within that network. “Many protocol utility tokens, such as Ethereum, can be used to trade for digital assets, storage, or work from other network participants; be held and speculatively traded as a store of monetary value; and perhaps will soon be used within a new technology platform owned and capitalized by a ‘real’ investable technology company,” Hubble explains in her blog post.

    Ultimately, however, most of today’s investments in cryptocurrency tend to be speculative, where the goal is to make money, she writes. “These are assets generally purchased primarily because you believe there is an opportunity within the current or future market to resell them at a higher price and make a profit.”

    Why the buzz around cryptocurrency? Besides a general cultural obsession with the next big tech “shiny object,” like the latest iteration of a particular brand of smart phone, people also tend to be drawn to disruptive concepts that have a potential to improve their lives. Cryptocurrency and blockchain certainly fit that description. The idea of a secure, verifiable, readily available and exchangeable, wholly digital and borderless form of currency appeals to many. And the many reports of people reaping huge gains from their cryptocurrency investments certainly have grabbed the public’s attention.

    Is there a legitimate market for cryptocurrencies? The market for cryptocurrencies is growing fast, driven largely by speculative traders. The overall cryptocurrency market cap— a measure of the value of all circulating cryptocurrencies — fluctuates widely. It stood at about $250 billion in April 2018, down substantially from a high of $820 billion in January of this year, according to Coinmarketcap. That’s still just a fraction of the $30 trillion that the U.S. stock market is estimated to be worth, according to a recent estimate by the Bespoke Investment Group.

    Are cryptocurrencies worth your attention? Cryptocurrencies hold the potential to emerge as a secure, efficient way for consumers to pay for goods and services. What’s more, they may emerge as another tool investors can use to diversify their investment portfolios with an asset that behaves in a non-correlated way relative to the stock market and other asset classes, notes Adam Nickels, a junior portfolio analyst with Capital Advisors Ltd. in Shaker Heights, OH.

    For these reasons, says Hubble, anyone who wants to maximize the value of their assets should keep cryptocurrency on their radar. “I don’t fully understand it all, but what I do understand makes me believe that sticking your head in the sand and ignoring this revolutionary technology is a mistake, if not downright foolish.”Is there a place in a mainstream investor’s portfolio for cryptocurrencies? For the bulk of investors, Hubble suggests a wait-and-see approach: “Unless you have a use for them, or the technical knowledge to know when the demand will be high and when the demand will be low, it’s best to avoid [cryptocurrencies] as an investment for now,” she writes in her blog post. “Much of successful trading is the ability to identify opportunities for value in inefficient or illiquid markets…The ability to identify value and then exploit it by finding a willing buyer is the key to being profitable.” In a still maturing market such as this, it’s difficult to identify those opportunities with any accuracy or consistency, she says.

    That’s not to suggest that cryptocurrencies are only for speculators and should be dismissed by mainstream investors altogether. They may hold appeal to people seeking non-correlated assets with which to diversify their investment portfolio, says Nickels. “When assessed within the context of an asset allocation portfolio, crypto-assets may prove beneficial to investors on a risk-adjusted basis…A small allocation to crypto-assets in a portfolio could provide an opportunity to [mitigate the volatility of a portfolio] through decreased overall risk and potentially outsized returns.”

    Why should people be wary? “Risks to investing in crypto-assets are present everywhere and must be taken into consideration,” cautions Nickels. Those risks include illiquidity, a lack of market oversight/regulation, the potential for market manipulation, theft and fraud.

    Where’s this heading? What does the future hold for cryptocurrencies? “I still think the future is bright for blockchain protocol technology and digital money,” Hubble writes in her blog post. “Even though it’s currently overly technical, inefficient, and expensive to provide the cryptographic computing power necessary to secure the database, it will get better. Like any new innovation, many players are now entering the market, and there seems to be a new ICO (initial coin offering) to raise capital almost every day. Only time will tell whether Bitcoin or another dominant player will emerge the victor, or whether government intervention will eventually redesign its delivery.”

    May 2018 — This column is provided by the Financial Planning Association® (FPA®) of Iowa, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide more than 23,000 members with tools and resources for professional education, business support, advocacy and community, FPA is the indispensable resource for CFP® professionals. Please credit FPA of Iowa if you use this column in whole or in part.

    The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.


    A Baker’s Dozen for the Bottom Line: 13 Financial Hacks to Save Time, Money and Hassle

    People are constantly looking for “hacks”: ways to improve their lives, to do more with less, to find new ways to gain and maintain an edge. It’s called progress, and it’s something human beings seemingly are wired to want and to seek.

    That’s especially true in the context of our financial lives. People are always seeking ways to improve their financial standing, now and in the future. The 13 financial hacks listed below include bypasses, shortcuts and other straightforward money-related maneuvers that can make a lasting positive impact on the financial bottom line, while saving time and hassle in the process.

    HACK #1: Use a tax-favored 529 plan to pay for private high school, or even private elementary or middle school. As a result of newly instituted federal tax policy, tax-favored 529 educational savings plans aren’t just for college anymore.In addition to covering college expenses, beginning in 2018, money from 529 plans can be used to pay for up to $10,000 of tuition expenses per year, per student, for enrollment at an elementary or high school, notes Marguerita M. Cheng, CFP® of Blue Ocean Global Wealth in Gaithersburg, MD.

    HACK #2: Use a tuition payment plan to help pay for a college education. As fast as the cost of a college education is escalating — four years at an out-of-state public college now cost an average of about $102,000 — many institutions offer students and their families interest-free payment plans to relieve some of the financial pressure. To find out if an institution offers such a plan, and if so, what the terms and enrollment cost are, contact the school’s financial aid office.

    HACK #3: If you like to travel, get creative to manage your travel costs. Here’s a four-in-one financial hack to make travelling less expensive.

    •          Find ways to accumulate travel points or airline miles. There are ways to strategically and responsibly use a credit card to gain miles or points that defray the cost of air travel, lodging, rental cars and more. The important point here is to be sure to pay down card balances promptly. Otherwise the perks you stand to gain from using miles/points will be offset by higher interest charges on the credit card balances you’re carrying. Websites such as and offer comparisons and ratings of credit card rewards programs. They can also help you evaluate cards based not only on rewards but on the interest rate charged on purchases.
    •          When you rent a car, instead of paying the extra cost for insurance once you reach the counter, take advantage of the insurance protection that’s built into many credit cards. Before renting a car, first confirm that your credit card offers insurance on car rentals, then find out details on the extent of that coverage. If the card you use to rent a car does come with adequate coverage, then consider declining the extra coverage offered by the rental car company.
    •          Clear the cache of your Internet browser — Google Chrome, Firefox, Safari, etc. — when you’re shopping travel websites for a hotel, rental car or airfare. These sites have the ability to sift through the Internet search history stored in your browser’s cache, then adjust their prices higher, knowing you’re looking to make reservations for a certain destination on certain dates. They can’t do that, however, if your cache is empty. If you don’t know how to empty the cache associated with your browser, ask someone who’s tech savvy to show you how.
    •          If you have a specific place you want to visit, or you just want to travel someplace interesting and you’re willing to offer your home in trade to someone who’s interested in traveling to where you live, then consider arranging a home swap through a house-exchange website. Instead of paying for a hotel or a rental property, you stay in someone else’s home while they’re not there. In exchange, they get to use your home while you’re not there. Sometimes, the exchange involves a car, too. The only cost the participants pay is the fee charged by the website brokering the exchange, typically $100 to $150 annually. If you’re intrigued by the concept, check out sites such as and


    HACK #4: Take video of the contents of your home for insurance purposes. Leon C. LaBrecque, CFP® head of LJPR Financial Advisors in Troy, MI, urges homeowners to keep an up-to-date photo or video inventory depicting the contents of their home as a way to accurately document and value the things they own, a necessity for homeowner’s (or renter’s) insurance. Keep images of every room in your home, plus the contents of closets, drawers, etc., along with details on when you bought specific items and how much you paid for them. Also keep images of electronic equipment (computers, televisions, stereo equipment, etc.) and their serial numbers. And be sure to time-date all the images by putting a dated item in the picture — a magazine cover with the issue date clearly visible, for example. Don’t rely only on the date stamp that the photo/video app embeds on the pictures.

    HACK #5: Pay bills automatically via your bank’s online bill-pay service. This saves time, money (postage) and potential aggravation from a missed payment. “As a student of behavioral economics, I like anything that reduces our reliance on, or eliminates, our biases,” says LaBrecque.

    HACK #6:  Use the automatic rebalance feature in your 401(k). This is a mechanism that periodically checks how assets in a 401(k) account are allocated, then adjusts that allocation if necessary, based on allocation parameters established by the account owner. Maintaining an appropriate allocation of assets is key to positioning assets for long-term growth.

    HACK #7: Use the automatic increase feature in your workplace retirement plan and college savings plan. Most plans allow you to activate a mechanism that increases contributions by a specified percentage each year, on a specified date. “This will automatically help you save more for retirement in a way that is not at all painful,” says Kristin C. Sullivan, CFP® of Sullivan Financial Planning in Denver, CO.

    HACK #8: Take advantage of the tax-favored catch-up provisions that Uncle Sam offers retirement savers.The IRS allows people age 50 and over to contribute an additional amount each year — as much as an extra $6,000 in some cases — to a qualified retirement plan [401(k), IRA, etc.] as a way to accelerate their retirement savings.

    HACK #9:  If possible, delay taking Social Security benefits. A person can opt to start drawing Social Security income as early as age 62. Another option is to wait until what the Social Security program calls “full retirement age” (the age at which a person becomes entitled to full or unreduced retirement benefits, usually 66 or 67), or even until age 70. Delaying allows a person to earn valuable “delayed retirement credits” that increase their monthly benefit when they do start taking payments. Those credits are equal to an annual 8% raise in benefits. All it takes is a glance at the numbers to understand the rationale for waiting. For example, a person who would get a benefit of $1,000 a month at age 62 would get at least $1,333 at age 66 and $1,760 at age 70, according to calculations by the Center for Retirement Research at Boston College.

    HACK #10: Turn money in your 401(k) into a guaranteed retirement income stream. An increasing number of 401(k) retirement plan providers offer participants the option to convert a chunk of in-plan assets into a steady, annuity-like stream of income for retirement. This can be a viable option for people seeking an additional source of guaranteed income for a period of time, or for a lifetime, to supplement Social Security and other income streams.

    HACK #11: Consider purchasing a life insurance policy that also covers the cost of long-term care or a critical/chronic illness. There are lots of reasons to like life insurance, for its ability to protect people financially and to transfer wealth tax-efficiently. Another potentially appealing aspect of certain types of permanent life insurance (whole life, universal life) are so-called “living benefits,” an optional feature that, for an extra cost, provides the policy owner with funds to help cover the cost of a long-term care need or the costs associated with a critical or chronic illness.

    HACK #12: Use lower-cost investments. Led by the King of Investors himself, Warren Buffett, more investors are shifting money into index funds and exchange-traded funds (ETFs) because they generally charge lower fees to investors than do actively managed mutual funds, without sacrificing performance. Actively managed funds incur costs for research and trading in the name of outperforming the market, costs they pass on to investors. Passively managed funds like index funds don’t have these costs, mostly because they’re designed to track the market, not outperform it. Lower fees and costs allow a person to hold onto a larger share of the gains from their investments — gains that may compound upon themselves over time. And research by the fund company Vanguard suggests that passive investments may actually perform better than actively managed funds over time. Vanguard compared the 10-year records of the 25% of funds with the lowest expense ratios and the 25% with the highest expense ratios. The low-cost funds outperformed the high-cost funds in every single category.

    For every actively managed mutual fund you own, there’s likely an index fund or ETF with a similar investment profile that you could use instead, whether as a stand-alone investment or inside a retirement account [401(k), IRA, etc.).

    HACK #13: Contribute to a health savings account (HSA). People who have a high-deductible health plan likely also have access to an HSA. Not only can an HSA provide a convenient way to pay for health care expenses, it also can serve as a powerful savings and investment tool. From a tax perspective, HSAs are a win-win-win: HSA contributions are tax-deductible; money saved in an HSA can grow tax-deferred; and, account holders are able to withdraw HSA funds tax-free to cover qualified medical/healthcare costs.

    What’s more, many HSA providers now allow account owners to keep some of their HSA money in  mutual funds, so instead of earning nothing or next to nothing in interest, that money has greater upside to grow (and greater downside risk, since it is invested in the stock market rather than in a fixed-interest account). The fact that money in an HSA can remain in the account from one year to the next makes that investment option extra appealing to some people. The HSA ultimately functions like an IRA for healthcare and medical costs.

    March 2018 — This column is provided by the Financial Planning Association® (FPA®) of Iowa, the principle professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process.  Please credit FPA of Iowa if you use this column in whole or in part.

    The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.