As stock markets tumble across the world and investors get jittery, the lure of alternatives such as cryptocurrencies can have more of an appeal. Cryptocurrencies are currently in fashion. They’re new, shiny and with promises of fantastic returns in a short space of time. Well, why wouldn’t you?
So, we thought we’d better investigate further and share some of our thoughts with you.
Let’s start with a definition of what a cryptocurrency is. It is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.
A cryptocurrency is a tradable digital asset or digital form of money, built on blockchain technology that only exists online. Cryptocurrencies use encryption to authenticate and protect transactions, hence their name.
To keep this simple, we’re not going to explain blockchain technology but experts believe that blockchain and its related technologies will disrupt industries such as finance and law.
Bitcoin is by far the most popular cryptocurrency followed by other cryptocurrencies such as Ethereum, Binance Coin, Solana, and Cardano and lots of others.
A quick bit of history. In 2013, one bitcoin was worth just under $112, and had a total market value of just over $1.2bn. On June 09, 2022, one bitcoin is worth about $30,511 and has a total market value of $1.3trn.
And today as of March 2022, there are 18,465 cryptocurrencies in existence.
However, not all cryptocurrencies are active or valuable. Discounting many “dead” cryptos leaves only around 10,363 active cryptocurrencies.
There are upwards of 300 million cryptocurrency users across the globe. And approximately 18,000 businesses now accept a form of crypto as payment.
Here is the breakdown of Gemini’s 2021 survey on crypto usage:
And as of December 2021, El Salvador was the only country in the world to allow Bitcoin as legal tender for monetary transactions. In the rest of the world, cryptocurrency regulation varies by jurisdiction.
Here are some of the advantages and disadvantages of cryptocurrencies.
Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company. Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers. Removing third parties and speeding up the process, reduces cost makes transactions cheaper.
The returns on some cryptocurrencies can be fantastic as shown above with a Bitcoin investment of $112 in 2013 now valued today (9th June 2022) at $30,511 less than 10 years later.
It appeals to Generation Z – also known as Zoomers – the age group born between the mid-1990s to early-2000s. They grew up online, playing games and meeting friends virtually, so the transition is natural.
Not all cryptocurrencies are successful. Most are very volatile. Extreme volatility is a defining factor of cryptocurrency. While you may make high returns, you could lose everything. And because they operate in a unregulated environment, they can be subject to unforeseen interventions such as comments by individuals like Elon Musk that can further effect volatility.
Unregulated markets also have enormous appeal to criminals and the increase of cryptocurrency scams has soared over the last 3 years. One of the most common types is when a criminal hacks into your computer and freezes you out of your account. You have been warned!
Equally, the promises made by some cryptocurrencies on the levels of return an investor can expect are often overstated. If the returns aren’t delivered and because it’s unregulated there is no recourse for the investor.
So, whether it’s a scam or a poor rate of return, there is no compensation scheme.
Despite the pros and cons of cryptocurrencies, they are here to stay. It is likely that there will be increased regulation around them, making them a safer option in the future. The cost of the technology associated with cryptocurrencies is increasing and the environmental impact of running and maintaining the server farms associated with the technology is likely to reduce the number of new entrants.
There are also exchanges such as Coinbase which specialise in cryptocurrencies allowing an investor to have a portfolio of cryptocurrencies rather than just having to pick one.
In the short term there is a lot of risk associated with cryptocurrency investment, but over time it will become more mainstream and likely to become less volatile. Even then however, the investor shouldn’t expect any quick wins but should look at cryptocurrencies as a medium to long term investment.
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