Cryptocurrency Gained a Breakthrough in 2021, Should You Buy?
From two Papa John’s pizzas worth 10,000 BTC in 2010 to around $40,000 to 1 BTC, bitcoin has come a long way. And not just the father of cryptocurrencies, other tokens, such as Dogecoin - thanks to Elon Musk, are also gaining traction this year.
Bitcoin has been around since 2009 and it never really picked up its phase right away. More than ten years later, the technology that runs it - blockchain, along with other tokens claiming to be “the next generation” of cryptos came in. Its value ballooned as well, from a couple of pizzas to thousands of US dollars. It is no wonder that most people want a piece of that pie.
Now, the question is, should you get on the bandwagon and not miss out? Quick answer: yes and no. In this article, we will help you understand the risks associated with cryptocurrencies and what you’ll need to do.
What is Cryptocurrency and How Does it Work
Cryptocurrency is a digital or virtual currency that serves as a medium of exchange and is designed to work as a store of value. It relies on cryptography to generate and secure its transactions.
With cryptocurrency, the creation and management of money are decentralized, meaning no central authority issues new units, controls the supply and has not agreed upon its distribution.
Why is Cryptocurrency Volatile
Cryptocurrency is a volatile market because of a lack of regulation. The volatility is also a result of the fact that there are just so many tokens out there, and new ones are constantly being created.
It can be highly speculative and risky to trade, which has become even more challenging as governments continue cracking down on crypto exchanges.
The best way to think of cryptocurrency is as a digital store of value, the same way you might view gold. Unlike gold, which has some industrial use cases and can be used as an investment into precious metals companies or funds, cryptocurrency has no real-world applications beyond its use as an alternative currency for transactions online.
While many cryptocurrencies have been created and sold to the public via an initial coin offering (ICO), most are not backed by any tangible asset.
Is it a Good Investment
The short answer is no. But if you’re ready and accept its flaws, then go ahead and do it. But before leaping into cryptos, check out these three reasons why not.
Volatility
This is a term people sometimes use when talking about how cryptocurrency is too risky to be a good investment. Basically, the idea behind this is that the price of a given cryptocurrency can vary significantly enough from day to day. To invest in it is a considerable risk.
No matter if you are looking to invest short-term or long-term, it just doesn't seem like something you would want as an asset as its value can change drastically and unexpectedly at any point.
Controversy
If you have been following the news even just a little bit, you probably know by now that many governments worldwide are cracking down on cryptocurrency because they think it should be banned.
Countries like China and South Korea have already implemented regulations that prevent their citizens from trading in cryptocurrency or using it for everyday purchases. The French minister of finance has said that he wants to introduce regulations so strict on anonymity in cryptocurrencies that they will be forced to take action unilaterally if necessary.
Most recently, Binance, one of the world’s biggest bitcoin exchange and altcoin crypto exchanges, got banned in the UK in June 2021. The reason for this is “Binance Markets Limited is not permitted to undertake any regulated activity in the U.K.,” according to Financial Conduct Authority.
You should know that many governments around the world are hostile towards cryptocurrencies and want to limit or even ban them entirely. If your home country is one of them, taking advantage of this can make cryptocurrency a terrible investment.
Competition
Cryptocurrency is the first of its kind. It was built from scratch to be digital cash that can be sent anywhere in the world almost instantly, without any need for someone to process it or clear it.
While there are other cryptocurrencies out there that have tried tackling this issue, none of them has managed to prove itself superior enough to gain traction and become what Bitcoin already is - THE cryptocurrency.
This could very well lead people to lose faith in all cryptocurrencies if they could not use one as quickly as before, which would only hurt the prices more.
Meanwhile, other emerging coins are designed to work with processing power, bandwidth, or electricity. If one were to become the dominant coin in this sphere, it would mean that cryptocurrencies can't be used for these purposes anymore, leaving them behind in the face of newer, better solutions.
Risks in Investing in Cryptocurrency
Investing in cryptocurrency carries many risks aside from the three listed above. If you're not careful, you might end up losing your money.
Here are other reasons why investing in cryptocurrency is risky:
Scams and Hackers
You run the risk of getting scammed, losing your coins to hackers, or even forgetting your password and never being able to access them again.
It is Like Gambling
Investing in cryptocurrencies is a gamble - you could make money if you know what you're doing and catch the right wave at the right time, but it's just as likely that you'll lose all your money if you don't know what you're doing and get stuck with the wrong coin when its use case drops out.
Drastic Price Changes
Cryptocurrency prices can change drastically overnight because of something like a hacking incident or a government banning them entirely. This makes it difficult for people who trade their money into these assets because they can be left with whatever they traded their fiat currency into, which could be worth nothing or even less than if the price plummets.
No Recovery
A central authority does not issue cryptocurrencies, so they can't be recovered if something happens to them. If you lose your password, it's gone forever, and there is no way for you to change it back. You can't ask anyone for your password either because of this same reason - they don't have access to your money either.
Regulation Issues
Cryptocurrencies have to face regulation issues that differ from one country to another. They can be completely banned in some countries while being allowed only for specific purposes in others (like trading). If your country decides to ban cryptocurrency entirely, you won't be able to take advantage of them either as citizens or investors.
Values Can Drop to Zero
Cryptocurrencies fluctuate in price constantly for no apparent reason, especially if people aren't using them for anything other than trading. If they rise too much and you want to sell them off, there is a chance that they'll crash and never recover again before you get around to selling them (and thus lose money).
There have been cases in which cryptocurrency values drop to absolutely nothing because there wasn't enough interest in them anymore. This means that the coins are no longer being traded, and their value is 0 - this happened with Coinye West after Kanye sued its creator for making it without asking him first.
Should You Buy Crypto in 2021
After learning all the risks involved and still wanting to test out the waters, go and do it. But make sure to do your research and understand exactly what you're buying. There are no guarantees, and the market’s volatility means that any asset’s value can plummet unexpectedly.
The best way to make a wise investment decision with cryptocurrency is to take a longer-term view and believe in what you are investing in. Bitcoin and cryptocurrency is a highly speculative market, and it's unlikely that any investor or trader can predict where things will end up.
There are also many innovative companies working on building new cryptocurrencies, either for purposes of digital cash like Bitcoin or for specific use cases such as decentralized file storage (Storj), data management (Maidsafe), and the Internet of Things (IOTA).
Before making an investment decision with cryptocurrency, make sure you understand your goals and how investing in them helps you accomplish them.
--
Sources: