What Are The Advantages And Risks Of Investing In Cryptocurrency?
Like any other currency we are used to, cryptocurrency helps people worldwide buy and sell goods and services. Thousands of people today are investing in cryptocurrencies and making huge profits. Many of them have also made significant losses from cryptocurrency trading. It’s always vital to make the best use of options trading to theorize your future direction in investing. Before unearthing whether it is safe investing in cryptocurrencies, a brief introduction would help.
Cryptocurrency only differs from normal currency because of its digital form. Unlike in physical or printed currency, where a centralized authority is mostly in charge, in cryptocurrency, a decentralized system verifies transactions and maintains records using cryptography. That’s why governments do not issue cryptocurrencies. For example, launched in 2009, Bitcoin is currently the most popular cryptocurrency globally.
We compiled this piece to help you keep an ear to the ground regarding everything cryptocurrency. This way, you will be more informed before making any cryptocurrency investment decision.
What are the Gains of Investing in Cryptocurrency?
One thing about cryptocurrencies is that they are relatively recent inventions that are here to stay with all the benefits that they tag along. Undoubtedly, the world of crypto has plenty to offer. But you must learn to tap into it and perfect the skill.
With that said, here is how you may benefit from investing in cryptocurrency;
- The Potential for High Rewards
Like in any other business, the supply-demand dynamics in cryptocurrencies often play a significant role in shaping the returns. The demand for digital coins by purchasers and their supply from miners mainly drives the prices.
All cryptocurrencies today (over 10,000) tend to experience rapid spikes and drops in value. That’s one of the few things these digital currencies have in common. Therefore, getting on board at the right time can result in heavy returns.
- A More Transparent, Faster and Fairer Financial System
Many consider blockchain and cryptocurrency alternatives to the conventional financial system that revolves around third-party intermediaries. While processing transactions, some of these intermediaries can make some investors wonder whether this is the best way of handling huge amounts of money.
Therefore, instead of placing all your trust in one or more third-party intermediaries, you have a better option. You can participate in the financial markets from anywhere and process your transactions without involving any intermediary whatsoever.
- An Inherently Secure Blockchain Technology
Let’s face it! Cryptocurrency cyber threats (like crypto-malware) can let unauthorized users mine cryptocurrencies on your computer or server. But here is the thing! While this may be the case, the blockchain is an infrastructure that supports cryptocurrencies and protects them from hackers.
As a decentralized data and storage ledger, the blockchain tracks each transaction you make. Therefore, it’s impossible to erase an entry made in the blockchain. Storing the blockchain decentrally across numerous computers makes it even more difficult for hackers to access the whole chain simultaneously.
- Cryptocurrencies Could Help You Beat Inflation
Another benefit of investing in cryptocurrency is that this investment approach keeps inflation at bay. It is essential to note that these digital currencies are typically never tied to a specific economy or currency. Therefore, unlike printed currencies, whose prices often reflect national inflation, the prices of cryptocurrencies reflect worldwide demand.
But do cryptocurrencies experience inflation? Although cryptocurrencies also experience inflation, the good news is that investors can have peace of mind knowing that the number of available coins can hardly spiral out of control. That’s primarily because their numbers are usually capped. This phenomenon beats inflation significantly. For example, Bitcoin and multiple other coins have an overall cap.
- The Crypto Markets are Open 24/7
Unlike banks, cryptocurrencies feature crypto trades that operate around the clock. They are always open. Therefore, if you are always on the go, the recommendation is to try cryptocurrency. This investment route might be your best way to generate hefty returns outside the usual working hours that banks are used to.
In other words, you don’t have to wait for any exchange to begin trading. You can mine coins, and your transactions will be recorded any time of the day or night.
What are the Risks of Investing in Cryptocurrency?
Today, the many unknowns that come with cryptocurrency make investing in this digital currency a much bigger risk than other investment forms.
If you aspire to become a cryptocurrency investor, it is essential to be aware of the following risks;
The absence of a central authority in cryptocurrency is an attraction to many. However, it draws its potential investors to high risk. Decentralization means that cryptocurrency has no physical address or central authority. Usually, other financial institutions have an authority that solves any fallouts with the system. In cryptocurrency, there is the absence of a central body to point out to resolve any dispute.
In some instances, governments have tried to step in to assert some regulatory power, but most of them remain decentralized from a system.
From one angle, investors cannot be held accountable to any institution. On the other angle, there stands a chance for legal complications.
The financial health of an asset is measured based on its volatility. Cryptocurrency is highly volatile, with its prices fluctuating unpredictably.
Investment in something speculative introduces the aspect of volatility. The values of the investments are unstable, hence sensitive to slight changes.
Some of the factors that make cryptocurrency susceptible to volatility are;
- Uncertainties in policies and markets
- Market sentiments
- The cryptocurrency environment
- Financial markets
- Macroeconomic factors
Additionally, there is no intrinsic value attached to cryptocurrency. Its value is based on people’s perception of it, like how much investors are willing to trade it.
- Cyber threats and insecurities
Cryptocurrency uses digital currency to trade in a digital environment. This phenomenon automatically makes them susceptible to cybercrimes. Some common cybersecurity concerns associated with cryptocurrencies are;
- Malware that allows unauthorized individuals to access cryptocurrencies on another person’s server.
- Phishing attacks whereby hackers impersonate a legitimate firm and send links to users, asking them to take some action. That way, they gain access to the users’ currencies and can manipulate them.
- Utilizing third-party software which exposes the users to other cybercrimes
- Illegal trading platforms. Numerous upcoming trading platforms need to be more trustworthy.
- Cryptojacking, where hackers access a device and mine cryptocurrency without the owner knowing.
- Fraud and Money Laundering
Cryptocurrency presents itself as one platform attractive to financial criminals. While this may not directly impact the host, it indirectly affects the investors.
Investors caught up in financial crimes may not have a legal option. This also poses a disadvantage to cryptocurrencies’ decentralized status.
As a currency that trades in a digital environment, it faces competition in its market. The competition is because of different currencies or exchanges where these currencies trade.
Using the network effect, you realize that a currency’s usefulness depends on the population adopting it, and the exchange becomes more liquid with an increasing number of buyers and sellers. In such a case, there is the dominant player with more users. So a popular currency attracts more users and vice versa. Also, the popular exchange attracts more users, and the reverse is true. The winner eventually grows in popularity in the market, attracting more users.
Therefore, the existing platforms face competition with the everyday emergence of new trading platforms. Depending on which platform one chooses, one faces a risk of losing their investments. Also, depending on the exchange platform one chooses, they are likely to lose the value of their currency.
Whether you purchase these coins via an exchange or invest in a crypto firm doesn’t really matter. Whichever strategy you prefer, remember to ensure you do your due diligence and purchase wisely.