Should you invest in cryptocurrencies?
Should you invest in cryptocurrencies? Let’s find out …
Cryptocurrencies have gradually become an important part of the evolution of money and the global economy is unavoidably moving towards cryptocurrencies. In the past few months, every other person has started investing in cryptocurrencies, and a number of retail investors are at an all-time high. Cryptocurrency exchanges have been experiencing massive volume in trading.
Every other day we hear people investing in cryptocurrencies and becoming millionaires and some even losing all of their life’s savings. From lost passwords of wallets worth $220 million to bankruptcies, let’s take a step back and see where the basic need of a currency started.
What is the need for a currency?
Way back in the days, the barter system used to happen where goods were exchanged for goods. For example, bread exchanged for butter. But, here, if the person didn’t want bread and wanted something else in return he would have to decline the exchange. So, finding the exact match was not possible.
To overcome this problem, gold coins were exchanged for goods that were being bought. But the people faced another limitation, which was if the trade increased, huge quantities of gold were to be carried and transported which was not safe.
Hence, to overcome this issue, governments issued currencies whose value was to depend on the value of gold. People were satisfied trading paper for a long time but then again came a problem. During World War, countries started to print as much money they wanted to pay for the war costs. This is when they decided to cut their ties to the gold standard.
During the mid-twentieth century, currencies were set to the US Dollar, and the US Dollar was tied to gold at a fixed rate.
The concept of Fiat Money:
Did you know that the Chinese were using fiat money since the 11th century?
In 1971, the U.S. government also introduced this; a system used globally with a variable exchange rate between any two currencies. These variable rates denote that a particular currency’s rate may change based on demand and supply.
Here we can see that central banks have greater control of our economy because they can always control the amount of money being printed. Printing more and more money results in hyperinflation and we all know what happens when inflation kicks in.
Introduction of Cryptocurrencies and Bitcoin:
To tackle these problems, came Satoshi Nakamoto and the concept of Bitcoin in 2009. Among the problems of supply and printing more money, Bitcoin’s supply was capped at a total of 21 million BTCs.
In its true essence, cryptocurrencies are – as blockchain-based platforms are meant to be – completely decentralized. It means that it is not controlled by any central bank or monetary authority. Using blockchain, a distributed public ledger, a digital database run by cryptography.
Cryptocurrency, such as Bitcoin, is secure, as it has been digitally confirmed by a process called – “mining”. Mining is a process where all the information entering the blockchain has been mathematically checked using a highly complex digital code set up on the network. That network – maintained by a peer-to-peer community of computer machines or “nodes” – will confirm and verify all new entries into the ledger, as well as any changes to it.
The mathematics and the code behind all of this make it a global public transaction ledger, so every transaction can ultimately be traced by cryptography.
So, we have realized a point that at every single phase of this economic journey there was a problem and to overcome that problem we moved to another phase of money.
Currently, the phase is of the digital assets i.e., crypto. But it doesn’t mean that our existing fiat currency is gone and only the cryptocurrencies will take over the economy. In our opinion, Cryptocurrencies and blockchain technology will be used along with fiat currencies and they will co-exist supporting one another.
But is the whole concept of Bitcoin and other cryptos still a bubble or can it become a part of the economic ecosystem? Let’s check that by evaluating some key attributes of a currency and whether cryptocurrencies satisfy them or not.
Key attributes of a currency:
- Limited supply: Bitcoin and many other cryptocurrencies like Litecoin and Ripple have a limited supply that is capped and helps maintain its scarcity.
- Durability: Our Indian Rupee notes can easily be torn and destroyed. Whereas, these cryptocurrencies cannot be torn or burnt as they are digital.
- Counterfeitability: In the past, we have seen and heard cases of fake notes and people being jailed and fined for using them. Digital currencies cannot be counterfeited as it is incredibly difficult to do so thanks to the complicated decentralized blockchain ledger system.
- Portability: Bitcoin and other cryptos can be easily held in digital wallets and exchanged via crypto exchanges with other people.
- Divisibility: It means that money can easily be broken down into smaller values. All the cryptocurrencies including BTC, ADA, LTC can be broken down into very smaller parts.
- Fungibility: It means easy exchange of currencies. A 20 Rupee note can be exchanged with another 20 rupee note. Similarly, a Bitcoin can easily be exchanged with another Bitcoin.
Also Read- What is Bitcoin (BTC)?
Greater the risks, the Greater the profits:
So now let’s take a look at the past rise and fall of cryptocurrencies and the possible reasons behind it:
During 2017-2018 the price of 1 BTC went from 900$ to a whopping 20,000$ and then back to 5,000$. The reasons behind this flash and crash were many. It seemed like a trend that everyone wanted to get on and ride to the moon.
People were mostly basing their belief in cryptocurrencies on their emotions and not on intrinsic value. Then came the FOMO (Fear of Missing Out) which only elevated things. Random companies were trying to get in on blockchain and crypto for no apparent reason, just to create more ‘buzz’. FOMO turns into fear of losing which eventually results in a rapid plunge.
During the end of 2017 and the beginning of 2018, many mainstream investors and the finance world experts were paying attention to cryptocurrency trading. A disclosure from the Japanese exchange Coincheck which is used for investing in cryptocurrencies made public a crypto hack worth nearly $500 million. This happened just after BTC slipped from its all-time-high and resulted in its downfall and moreover accelerated its drop.
Many other factors like lack of institutional support, internal battles of government bodies, and the fear of it being a bubble were also a part of its crash. Some people still speculate around the idea that it could’ve been one crypto whale behind this crash but there’s no firm evidence.
“Can investors or individuals take capital and use it to invest in the cryptocurrencies asset class?” The answer is yes.
Cryptocurrency as an Asset Class and investment perspective:
- Investability: Based on 24h Bitcoin trading volume ($62,183,818,308 as of 5/18/2021) and the top crypto-exchange Binance ($48,349,431,916) 24h volume shows that it has the same if not more liquidity than the largest Gold ETF (GLD). Also, BTC currently has a market cap of $851.16 Billion, which is greater than PayPal, Coca-Cola and Nestle combined.
- Politico-Economic profile: The value of cryptocurrency comes from the fact that it can facilitate all kinds of transactions over the world. It does it in a secure, immediate, transparent, and cheaper form. Also, it’s governed by a protocol run by a distributed network of computers.
- Correlation of prices: Studies done by investors and experts prove that it is the most unrelated to other price movements of any traditional asset class out there. That’s really important from a portfolio perspective. The way Bitcoin performs has no connection to how any other asset performs.
- Risk/Reward Ratio: Due to its high volatility, the reward ratio in cryptocurrencies is much higher than any other asset class.
Should you buy invest in Cryptocurrencies like Bitcoin and other coins?
First, let’s take a look at the factors that determine Bitcoin’s cost:
- Market Supply/Demand of Bitcoin
- Cost of producing a bitcoin through the mining process
- Reward issued to bitcoin miners for validating the transactions
- The number of competing cryptocurrencies
- The regulations governing its sale
- The exchange trades on
These factors lead to the price of Bitcoin rising or falling. When compared to stocks, Bitcoin has been more volatile. This means, massive room for dramatic profit/loss. Purchasing stocks gives you ownership in the company, whereas, purchasing crypto gives you ownership of that digital currency.
Well, looking at these factors it is safe to say that cryptocurrencies are here to stay. But should you invest in crypto? – It is possible to get filthy rich by investing in cryptocurrency, but you could also lose all your money. Like most investments cryptocurrencies come with huge risks and even bigger profits so trade safely if you do!
Before You Invest In Cryptocurrencies read below as well!
Do note that we do not promote any kind of crypto buying or selling or we don’t say by any means to invest in cryptocurrencies. Any individual who invests in cryptocurrencies are doing it on their own and are totally responsible for their own investments. We at Thetecheaven doesn’t take any responsibility for your capital being invested in cryptocurrencies. It will be your loss and your profit. So before you invest, do your own research.