If you’ve taken the time to look around online for opportunities to invest, chances are you’ve come across Cryptocurrencies like Bitcoin and Ethereum. This certainly piques the interest of the financially savvy person inside us. But just like any other investment, there are pros and cons of investing in crypto as well.
Digital currencies have risen to a place of prominence among the portfolios of many retail and institutional investors. After all, in an age where technology and finance are becoming increasingly more interrelated, it’s no surprise that at some point, someone will find a way to digitize not just the way we transact but our mode of transactions as well.
In this article, we’ll discuss what is crypto and what are the pros and cons of investing in it.
Cryptocurrency or “Crypto” for short, is a digital or virtual currency that is generally not regulated by a centralized system (central banks, governments, etc.) but rather, a decentralized system.
Most crypto is centered around a technology known as Blockchains, which in essence, is a database wherein every transaction is recorded across multiple servers or computers. The term “crypto” refers to the cryptographic techniques and complex encryption algorithms that are used to safeguard payments/transactions.
Bitcoin is just one of many cryptocurrencies currently available in the market today.
These are the main cryptocurrencies based on market cap:
Data is important. And there are many ways hackers can steal consumer data.
However, each crypto transaction is a unique exchange between two parties, which protects users from issues like identity theft. The transaction is secured and confidential due to blockchain technology. It is based on complex mathematical puzzles aimed specifically to make it hard for hackers to steal consumer personal information. Another security measure present is the use of pseudonyms that are not linked to any accounts or users, adding another layer of protection for the user.
Crypto has been debated for months now as a possible hedge against inflation. The argument behind it is that crypto is protected from inflation because it is not regulated by central banks and the government. Unlike cash wherein the central bank can just keep on printing; most crypto (particularly Bitcoin) has only a certain amount of supply released at a time. This limited supply resists inflation and increases their value as more and more people adopt them.
When it comes to cash, the value is determined by the central government or regulating institutions. This isn’t the case when it comes to crypto. For most cryptocurrencies, value is determined by the people who hold the majority of the value of that coin. This decentralized nature ensures that no central groups or institutions that can interfere or manipulate the value.
One of the defining features of crypto is the removal of a middleman. This makes fund transfers easier and cheaper since it removes third parties like a bank or a credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems. Thus, the transaction is completed with lower fees, allowing users to save more money.
Unlike the stock market, there are no market hours with crypto. Thus, you can buy or sell crypto 24/7. That’s why cryptocurrencies are hot for traders as they can trade them anytime during the week.
For beginners, crypto is difficult to understand as it is based on complex blockchain technology. Without proper understanding and doing intensive research, dealing with it proves a lot of risks that can lead to losses. A survey shows that more than 1 out of 3 investors know little about crypto. Cash is much simpler to grasp on especially in third-world countries.
As cryptos become more secure and decentralized, it becomes hard for regulating bodies like government agencies to track individual users by their wallet IDs alone. This makes crypto one of the favored methods to do illegal transactions such as the purchase of illicit items, terrorism funding, and money laundering.
While there is a great potential for gains when investing in crypto, there’s also a great potential for losses. Each day is bound to get sharp increases and losses due to the nature of crypto.
Bad news such as the proposed capital gains tax hike in the United States, can lead to a market downturn in just a day.
Another example was seen in the aftermath of Tesla CEO, Elon Musk’s, announcement in May that Bitcoin will no longer be accepted as a mode of payment due to environmental concerns. What followed was a dramatic fall in price, with as much as USD 365 Billion worth being wiped out in the cryptocurrency market within the same week.
Did you know what happened to Turkey recently? To cut the story short, crypto payments have been banned in Turkey amidst the currency crises. This resulted in exchanges such as Vebitcoin collapsing, causing $2 billion of losses for investors.
In the Philippines, Bangko Sentral ng Pilipinas (BSP) stated risks associated with bitcoin trading and usage. Recently virtual currencies were legalized and cryptocurrency exchanges are now regulated by them under Circular 944. However, Bitcoin and other cryptocurrencies are not recognized by the central bank as a legitimate currency as “it is neither issued nor guaranteed by a central bank nor backed by any commodity”.
Since crypto is decentralized, scam coins can easily pop out of nowhere. And there are no regulatory bodies that can detect it. Developers can create a coin on their own and start a Ponzi scheme. This is true for thousands of altcoins out there.
Crypto’s value is determined by how much of the world adopts it as a legitimate form of currency.
According to Statista, when it comes to adoption, the majority of the leaders come from developing nations with Nigeria, Vietnam, and the Philippines among the top countries where people are most likely to own at least some form of cryptocurrency as of 2020.
Visa, one of the largest multinational financial services, has announced that it would be piloting transaction settlements using crypto, specifically the U.S. Dollar Coin (USDC), a cryptocurrency pegged to the U.S. dollar in a 1:1 ratio, from its global crypto wallet partner Crypto.com over the Ethereum blockchain. This is in part in response to the announcement of Mastercard on February 10 wherein select cryptocurrencies will be facilitated in their network.
Invest only in what you can lose.
As long as you can handle the risks, there is no one stopping you from investing in crypto. It’s easy nowadays to buy and sell crypto with exchanges such as PDAX, Coins.ph, and Binance paving the way for Filipino investors.
But before dive into any kind of investment—whether investing in stocks or crypto, we recommend that you build an emergency fund and determine your risk tolerance first. It’s important to have a financial cushion first and gain knowledge of what you are investing in.