Student’s Guide to Cryptocurrency
The fear of missing out is a powerful force.
Everyone wants to get on board with the next big thing as quickly as possible. Nothing is worse than being the one who missed it, right? A candidate for the next big thing is cryptocurrency, but what exactly is cryptocurrency?
“Cryptocurrency is a blockchain-backed currency with nothing behind that people choose to trust,” said Britton McKay, Ph.D., associate dean for students and external affairs and professor of accounting.
Let’s break this down a bit. A blockchain is a unique form of database that stores data in a chain based on when it is entered. It can be used in a number of ways, but when it comes to cryptocurrency, it is mainly used to keep track of transactions. The blockchains used in most cryptocurrencies, like Bitcoin, are decentralized.
No one has control of it. No one can modify or delete data and every transaction is permanently recorded once processed. This creates a rigid transparency system, as the blockchain is always available to the public.
So, does this mean that cryptocurrency is actually safe and low risk? Not exactly.
Full decentralization has its advantages and disadvantages. “The reason people love cryptocurrencies is that there is no federal oversight. There is no monitoring period, ”McKay says. She also mentions how volatile cryptocurrency is, with fluctuations ranging from a few hundred to thousands to zero, all in unpredictable ways.
The notable cryptocurrency that started out as a joke, Dogecoin, lives and breathes at the whim of Elon Musk. A malicious tweet could triple your investment or sink it into the mud. Overall, the emphasis is on the fact that crypto investments are often almost stable.
Let’s go back to the decomposition of this previous statement. What does McKay mean when she says that a cryptocurrency is “with nothing behind it?”
The US dollar was originally backed by federal gold reserves. Each dollar reflected the value of a certain amount of our gold reserves.
However, we have long left this idea behind. In modern times, the only thing that sustains the US dollar is confidence in the US government and its ability to uphold its value. Cryptocurrencies are in a similar position, where they have no element of value to back them up, but they also lack the backing of a global superpower.
The only support they have is people’s belief that he is valuable. This is why people who own cryptocurrency are eager to publicize and promote the cryptocurrency of their choice. The more people believe in their currency, the more value it generates for them.
This particular facet of cryptocurrency has shown its face through recent high profile cryptocurrency scams. McKay shared a simple suggestion on how to avoid scams: “Anyone who will guarantee a return is someone you should stay away from. While some cryptocurrency options are safer than others, returns are never guaranteed.
An important detail for student investors to note is how interacting with cryptocurrency directly affects you. On the one hand, when it comes to the federal government, cryptocurrency is taxable good. Just trying to capitalize on your investments could hurt your FAFSA status due to income tax incurred.
Ultimately, the world of cryptocurrency is a very volatile environment that a lot of people don’t understand. Even those who have studied it for years admit that it is extraordinarily complex and doesn’t always make sense.
While the fear of missing out may force you to dive straight in, it’s important to be wary and think about where you’re investing your money.