Cryptocurrency, Risk, and Retirement

Just My Story

There are many reasons why people buy cryptocurrency generally, and Cardano specifically. But what I’ll be doing here is just talking about the path I took with crypto as I head towards retirement.

Cardano, for those who don’t know, is a blockchain-based cryptocurrency network that uses the ADA (₳) as its basic unit of account. But let’s not get too far ahead of ourselves here. I’ll be explaining these and many other terms momentarily.

Due disclosure: I ended up creating a Cardano stake pool as part of this process. So I’ll be explaining staking as well.

My target audience here are active, middle-income people like me who have been around the block and are looking to diversify financially as they head into retirement, but who may not trust or “get” crypto, and who may never have heard of Cardano.

This is not meant to be financial advice. It is simply my story.

First: No, Crypto Isn’t Real

When people talk with me about crypto, one of the first knots we need to untangle is whether crypto is “real.” I remind them that little of what we do financially is real, in the sense of being concrete or tangible.

Just think about the money you hold in your bank account. After you deposit it, your bank turns around and lends most of it out to people who, in turn, deposit it into their own bank accounts or buy things with it from other people who do the same. Much of that money is then lent out again, multiplying it, creating more money, basically out of thin air. You probably already know this process as fractional reserve banking.

Relatively little of the money being passed around in such a system exists at any point in time as printed currency or coins, which themselves are just paper or relatively inexpensive metals, with little backing beyond people’s faith in the government that mints them. True, if you are operating from a US bank, FDIC insurance makes it likely you can convert deposits to hard currency. But nothing stops the US government from regularly devaluating that currency, so even if the currency might be, in some way, realizable, its original value may not be.

My point is: No, crypto isn’t “real.” But most of the money you’re used to dealing with isn’t real, either.

It’s Not Just for Criminals

Another issue many people bring up is that crypto can be used to fund illicit activity. I respond to this by acknowledging that, yes, crypto can be abused. But so can a lot of other things that we don’t ban, like kitchen knives and cameras. In 2019, criminal activity is estimated to have represented only 2.1% of all cryptocurrency transaction volume. The vast majority of transactions are legitimate; crypto is legitimate, and potentially very useful.

So What Really Is Crypto?

When people use the term “crypto,” they often mean different things. So let’s start with some basic definitions and work through some common threads and variations. Be prepared to read this section more than once. It’s a bit dense.

First off, note that there are currently thousands of cryptocurrencies. Most, though, are based on what’s called a blockchain, that is, on a series of cryptographically validated and linked blocks of transactions (on which, see this recent article). Blockchains are often compared to an accountant’s ledger, and the blocks inside are often compared to pages of that ledger.

Sometimes the ledger-blockchain is public, sometimes not. Sometimes the network of nodes (think of them as computers) that houses the blockchain is permissionless. That is, anyone can play. But sometimes the blockchain is permissioned, and only certain people or groups can access it. Sometimes control of the network is maintained by just a few entities, or by a single entity, like a government, and sometimes control is spread out across many entities, that is, it is decentralized.

Because adding blocks to a blockchain needs to be an orderly, verifiable process, only one node on a given blockchain network should typically be generating blocks at a time. To decide which node gets to generate a given block two basic methods are used: proof of work and proof of stake. The former method, proof of work, requires nodes to demonstrate their stake in the network by solving a difficult mathematical puzzle. Doing this requires significant computing resources. Block-producing nodes in a proof-of-work chain are called miners. You’ll hear that term a lot. In a proof-of-stake blockchain, on the other hand, block producing nodes are called validators or stake pools. In a proof-of-stake system, block producers are selected by weighted voting systems. The process of participating as a voter in a proof-of-stake election system is typically referred to as staking. Hybrid systems also exist.

Whether proof of state, proof of work, or a hybrid, a blockchain network requires computer software to run, and that software may be open-source or closed-source. In other words, the source “code” for the software running the blockchain network may be published for anyone to check and rework, or kept private and maintained by a closed group, like most commercial software. The software in question may be written mainly, or solely, to facilitate exchanges of tokens or coins. But often it is designed for additional services, like validating and executing basic legal contracts (smart contracts); for issuing new kinds of tokens (e.g., fungible and non-fungible tokens); or for attaching extra data (metadata) to transactions that give them context—data like, “John gives Jane 10 tokens, and…here is a digital summary of the actual document John purchased from Jane.” And the software always enforces various rules, such as who (if anyone) can expand the money supply.

Further diversifying the landscape are the organizations that create and support cryptocurrencies, which may be nonprofit, for-profit, or a mix of both. Some such organizations base their work on their own blockchain protocols and infrastructures (these are known as layer-one networks). Other organizations or groups piggyback their infrastructure and protocols on another blockchain network and its infrastructure and add new functions and services (these are called layer-two networks).

The variations are many. My point is that crypto is no one thing. It’s more a collection of related things: currencies, blockchains, smart contracts, metadata storage, layered networks, and so on, all working under various governance arrangements, with varying levels of openness and various degrees of centralization.

People who hold crypto also do so for different reasons. Some are just looking for price appreciation. Others want a hedge against inflation. Many see it as a way to replace money and to upgrade current payment networks. Others see crypto (particularly Bitcoin) as a store of value, akin to gold, albeit easier to divide, hold, and transport. Still others see it as a way to disintermediate banks, to bring finance to un- or under-banked masses, or to facilitate transfers across borders. To try to meet these needs and fill a particular niche, cryptocurrency designers accept different trade-offs with respect to speed, security, stability, and centralization. And all designers operate under various legal and regulatory constraints that affect what they can and can’t do and how. This is particularly true of central bank digital currencies (CBDCs), like the Chinese digital yuan.

Clear as mud?

Navigating the Maze

In the end, there are just too many cryptocurrencies and too many details and variations for a non-professional to fully analyze out. I don’t pretend to be a professional, and you probably aren’t one, either. But here’s how I personally thought things through.

I am in my 60s, and I’m not rich. I keep about 5% of my overall net worth in crypto, and I don’t trade. I simply buy and hold, partly to avoid short-term capital gains taxes, and partly just because it suits me. (There are ways to work crypto into a 401k, but this involves extra expenses and yielding coin custody, so I haven’t, yet, gone that route.) At times I’ve wished I’d purchased more crypto than I have. But I am, by nature, conservative. So 5% feels right.

So why did I select Cardano as my primary cryptocurrency network and decide to hold ADA tokens? (Cardano refers to the overall network; ADA [₳] refers to the basic unit of account on that network, i.e., the basic unit in which Cardano transactions are recorded and their input/output values stated.)

What brought me to Cardano was that, after doing a modest amount of research, I found I was feeling most comfortable with cryptocurrencies backed by decentralized, permissionless blockchains maintained by nonprofit organizations that incorporated a community-based governance system. I am by trade a coder, data engineer, and systems analyst. I like open systems.

If my terminology here seems a bit tortured or overly dense (“decentralized,” “permissionless,” etc.), just reread the previous section. It may take a few passes for it all to make sense.

But back to my decision making process: I also found, while evaluating cryptocurrencies, that I preferred ones backed by blockchains that offered complete and intrinsic smart-contract support and metadata storage. I also preferred cryptocurrencies with significant market capitalizations, at least a few billion, simply because this makes them harder to launch brute-force financial attacks against.

On the social front, I also found myself gravitating towards blockchains surrounded by large, open, active, committed communities that appeared capable of adapting to changes in technological and regulatory environments without losing their sense of rigor and care. I found myself less comfortable with blockchains dominated by for-profit or government interests, as well as with ones surrounded by cult-like communities, or with communities that depended heavily on a central figure whose demise could trigger the demise of the community, and probably of the associated blockchain network as well (more on this in a moment).

Finally, I disliked proof-of-work blockchains. The question of just how much power proof-of-work blockchains like Bitcoin use is, of course, complicated. But I had no history or vested interest in them, so, all things being equal, I figured I’d focus on the chains that were designed to use a lot less power and were less subject to the whims of the energy industry and its regulators (cf. what is happening currently in China).

My thinking was, and still is, that blockchains that met all these criteria would tend to be more flexible, more resistant to attack from governments and malicious actors, and of greater utility and social value over the long haul. I also bought into the idea that crypto was a useful tool worth learning about, and only secondarily a (potentially) appreciating asset.

For me, Cardano fit. Algorand, Polkadot, Stellar, and Ethereum 2.0 seemed decent long-haul choices as well. But Cardano, with its track record of peer-reviewed academic publication and its emphasis on formal verification, became my favorite. I also liked the Cardano community’s focus on empowering unbanked, and generally underserved, areas of the world.

Actually, I got excited enough about Cardano to set up a stake pool, as mentioned at the outset. I had the technical skills and believed in the mission. So I figured, why not?

So What Should You Do?

In the end, you need to do the work and decide for yourself what to do. I personally like to follow balanced Bitcoin maximalists like Nic Carter, to get some perspective. I also subscribe to Charles Hoskinson’s YouTube channel. I try to keep up with crypto-related stories in major venues like Bloomberg News and Forbes. CryptoPanic helps me fill in gaps. And while out biking I’ve listened to most of the core crypto literature, such as Yan Pritzker’s Inventing Bitcoin (2020) and Nathaniel Popper’s Digital Gold (2015), which I strongly recommend. If you navigated my jargon-laden “So What Really Is Crypto?” section above, you’re probably also ready to listen to two great Lex Fridman podcasts: #192 and #188.

But more to the point, if you have enough money to merit the attention of a financial advisor, talk with them. Then get a second or third opinion. I have a few friends who work in the financial services sector. Most of them tell me crypto is too volatile to recommend to people nearing (or in) retirement. But for my part, I’m not sure it makes sense to ignore the general asset class that’s yielded the highest return over the last ten years, so I hold some. But I’m me. You do you.

One word of serious advice here, though, that (as a tech) I can offer: If you have trouble securing your computing environment, if you don’t regularly update your computing devices, if you don’t use a password manager, or if you don’t routinely use dual-factor authentication, then avoid engaging in crypto transactions or using crypto wallets directly. Instead, I’d recommend keeping crypto in a simple, custodial wallet like Coinbase Wallet or just steering clear of crypto.

Crypto doesn’t ship with seatbelts. If you have bad IT-security habits, it’s not a safe ride for you.

Drawbacks, Cautions

I’d also just note, in conclusion, that Cardano is not without its own uncertainties. The leader of the Cardano community and founder of the commercial outfit doing most of the implementation work (IOHK) is Charles Hoskinson. Charles is a prominent figure in the crypto community. He has a strong following. It’s not like Vitalik Buterin’s Ethereum following. The Ethereum community is larger and generally more mature than the Cardano community. And they have multiple implementations of their software, created and maintained by separate groups. Ethereum would likely survive an untimely departure by Vitalik Buterin. By way of contrast, I’m not sure the Cardano community would survive, at least not fully intact, if Charles Hoskinson were to disappear, as of mid-2021.

But looking ahead, I anticipate Hoskinson stepping back a bit more once Cardano smart contracts become available (early fall 2021), especially after the Cardano community has shifted towards solving performance and governance issues. Once this work is done, I believe Cardano will have a clearer path to third place in the cryptocurrency market capitalization rankings, and I believe the community will be well-positioned to run itself, with Hoskinson serving more as a cheerleader and for-profit entrepreneur than as its primary publicist, organizer, and thought leader.

There are a lot of smart people working the Cardano blockchain other than Hoskinson. But as of mid 2021, Cardano is not finished baking.

In the end, if you do decide you’re interested in purchasing Cardano (ADA), work with an advisor you feel comfortable with. Get an account on a legitimate exchange like Coinbase or Kraken, if that makes sense. Download a lightweight Cardano wallet like Yoroi, and stake any coins you purchase, so that you earn a steady, no-fuss reward. You can read more about Cardano staking and stake pools on the PAPAW site.

And as always, don’t invest anything you feel you can’t lose.