The phenomenon of cryptocurrency has taken the world by storm. Whether it be well known names like Bitcoin or fads based on memes like Dogecoin, the popularity of crypto has surged within the digital landscape in recent years. This is due to the role celebrities and top executives such as Elon Musk have played in ensuring that Crypto is a trending topic within social media and the stock market world.
You may, however, ask the following question: What are cryptocurrencies, and what are their implications to the investor? Why, in other words, should investors pay any attention to the cryptocurrency trend that has enamored the world in recent years?
We will observe the potential answers to the following questions in this article and attempt to explain why wealth firms such as RVW Wealth have no opinion on crypto owing to the difficulty in calibrating their real value.
Definition of Cryptocurrency
When we think about cryptocurrency, concepts such as security, decentralization, cryptography, and digital currency may come into our heads. However, how exactly can we define what a cryptocurrency is supposed to be? Cryptocurrencies are digital currencies that allow for online transactions through blockchain technology, which ensures that the transaction takes place securely and is recorded through a ledger distributed across a disparate network of computers that run the crypto model.
The transaction and currency in themselves is protected by cryptography, which helps to avoid counterfeiting or double-counting. Another key feature of crypto is that all transactions are recorded on the ledger to create unprecedented levels of online security.
Why is Cryptocurrency so popular?
We have looked at the conceptual definition of the definitive features of a cryptocurrency. However, it is normal to get overwhelmed and ask yourself why such a revolutionary means of monetary transactions is necessary? Additionally, why is it that such a technology has become so popular? Here are the possible reasons why this is the case:
Philosophical Appeal
Most supporters of crypto-currency believe that the decentralized nature of blockchain technology ensures that cryptocurrencies are free from unwanted government intervention. This allows them to isolate themselves from the political and ideological biases of the government monetary policymakers and allows currencies to be exchanged on a free and secure basis.
Supporters of this idea believe that government intervention may lead to unwanted inflation since the government may only use monetary policies that are beneficial in the short run. This is, for some, a harbinger of a society that allows for free individual enterprise and markets.
Security
Indeed, some investors and large-scale companies believe that cryptocurrencies’ ability to carry out safe and secure transactions through their decentralized process is quite valuable. This would overcome the traditional issues of hacking and blackmailing that may occur through financial robberies and scams. Crypto avoids this by providing top-notch security through blockchain, which is free from human intervention.
Speculation
The biggest appeal of crypto as of right now is its potential for speculators. Investors have seen cryptocurrencies such as Bitcoin jump to $70,000 in value, only to plummet to one-third this value in days. This volatility makes the crypto trend quite valuable to some investors. This is because they may look towards this entire innovation as simply a way to make more money rather than having a long-term goal.
Disadvantages of Cryptocurrency
To be sure, the above arguments for why crypto may be beneficial towards different types of individuals depending on their needs do hold validity. It is, for instance, a good argument that crypto can help create a monetary system that is immune to inflationary pressures. However, there are also a number of shortcomings of crypto which must be mentioned as well:
No Real Value
The first and most apparent disadvantage of cryptocurrency is that it isn’t rooted in the material economy. It isn’t tied to anything of value, and so it is prone to be used as a tool of speculation and investing more than as a currency. It is also for this reason that many wealth firms such as RVW Wealth do not have an established opinion on Cryptocurrencies.
Since the design of cryptocurrency ensures a significant degree of scarcity, the fact that it runs on the principles of supply and demand ensures that the price of the cryptocurrency varies widely. This would mean that a stable currency cannot be created within such conditions, and stable currencies are pivotal to the formation of sustainable currencies. They are essential for the general acceptance of a currency by the public and civil society.
To counter this criticism, some have argued that there is potential within cryptocurrencies to have real value, which is derived from the massive amounts of energy required to mine these currencies. However, this further raised the criticism of the environmental degradation created by such inventions.
Security
Despite being one of the selling points of crypto-currency, the usage of crypto can actually be counterproductive to security and general welfare. Exchanges and digital wallets have been subject to hacking and theft on numerous occasions since those aspects of the crypto ecosystem can still be susceptible to cyber-security threats. In addition to this, the system can also be exploited for the purposes of tax evasion and illicit transactions, and trafficking. However, there is still security within the general crypto server, and this is beneficial for activists and whistleblowers who may be operating within oppressive regimes.
Is Cryptocurrency worth it for investors
We observed the fact that cryptocurrencies don’t necessarily have an established opinion within the investing world. This is mainly due to the fact that it does not have any real basis for determining its material value. There are, therefore, competing views on whether cryptocurrency should constitute a viable part of one’s investment portfolio, and these views need to be observed separately.
Doubters of Crypto
Since cryptocurrency has no real value, the only way to profit off of a cryptocurrency is if there is someone willing to buy one’s crypto at a more expensive price than at which the investor bought it. This is known as the ‘greater fool’ theory of investment and stems from the idea that a crypto is simply a speculative tool that has no inherent value. Its growth and plummeting represent no underlying growth or decline in the economy, and its speculative nature makes the entire investment cycle subject to volatility. These lead to a number of different conclusions for the doubters of cryptocurrency.
One is that crypto cannot be a viable means of investment since it simply possesses no inherent value. It is simply a more secure way of online transactions. This view is raised by Warren Buffet, who claims that investing in crypto is similar to investing in a checkbook.
Another contention that arises from this analysis is that crypto can never be seen as a stable currency, and its expected rise in value may prevent people from selling it today. This would further lead to a dip in the value of the crypto, leading to speculative cycles and consequent volatility. These conclusions then are against the view that crypto should constitute a major part of investment portfolios.
Supporters of Crypto
Despite the prevalence of these doubts over crypto in the past, there is now growing acceptance of cryptocurrency as security which investors should have in their portfolios. Even financial advisers who aren’t big fans of crypto would argue that 2%-5% of a portfolio could plausibly consist of cryptocurrencies. There are numerous reasons why there is a growing acceptance of crypto in the investing landscape in the contemporary day and age.
One of the reasons is the obvious high returns that can be garnered from investing in a cryptocurrency such as Bitcoin. To put it in perspective, if you had invested in Bitcoin in April 2017, your returns would be 3700% of your initial investment in the present day. Of course, there are plunges in price, which make many reluctant, and it is for this reason that people prefer having their portfolios not concentrated within crypto investments.
It may be argued that though the nature of Blockchain technology does offer significant advantages in this department, there are few consumer protections provided. It is true that there is a lot of reluctance to make crypto investments due to a lack of consumer protections, unspecified taxation rules, and lack of financial regulations.
With these being put in place, the prices of crypto would further be influenced in different ways. However, they can be overridden through the use of asset managers such as GrayScale, which would provide crypto investors with reliable investing opportunities whilst also giving an accessible interface. This, however, does come at the expense of somewhat greater transaction fees.
Lastly, in addition to the benefits mentioned above, the biggest reason for Bitcoin and general crypto popularity is the potential for growth. Yes, cryptocurrency has a huge potential to grow in the future, and investors recognize this, investing in lesser-known coins in order to appreciate their value. It is generally accepted amongst supporters of crypto investing that the future of the digital landscape of our economy has to be rooted in cryptocurrency as its monetary mode of exchange.
Is Crypto Legal
The answer to this question depends on political and social context. Some countries, such as El Salvador, have declared crypto as a natural currency in addition to the U.S dollar. This means they have made crypto legal tender and are ready to embrace a future where crypto has a significant role to play.
Others, such as China, have begun to crack down on crypto and have made it illegal. The rationale for this is complex and is rooted in their ideological position against the environmental impacts of crypto and the culture they create within society. In countries such as the U.S, however, crypto isn’t officially legal tender, and there are very few businesses that accept it as a valid mode of payment. However, it is still widely used for investment purposes and to hold in asset portfolios.
How do you buy Crypto?
You could either spend real U.S dollars to purchase crypto such as Bitcoin, or you are obligated to exchange certain cryptocurrencies for others that do not accept the dollar. Hence, this process can be complex and multifaceted as well. Generally speaking. However, investors of crypto need to install an app containing a wallet where they can track and keep all their crypto coins, while they can use direct ways or brokerage to invest in the coins themselves.
There are a number of applications, such as Coinbase, which you could use to invest in coins ranging from Bitcoin to Ethereum. On the other hand, a number of brokers and stock exchange facilitators such as Robinhood, Binance, eToro, Gemini, and SoFi Active Investing, also allow you to make investments into popular cryptocurrencies.
Hence, we can see that there are a number of mechanisms that are in place which can help investors decide which cryptocurrency they want to invest in and how. Direct exchanges are inexpensive, transparent, and quite quick but may be prone to a lack of consumer protection in this context where cryptocurrencies are still in their infancy. On the other hand, brokerages can counter the problem of a lack of protection but may have greater transaction fees and limited possibilities due to financial regulations.
Conclusion
Cryptocurrency is an exciting phenomenon with a variety of facets, contentions, supporters, and prospects. It is widely popular for a number of reasons and has the potential to grow by virtue of those reasons. However, its viability as an investment is also contentious and can be as risky as it can be rewarding.
September 27, 2021
RVW Wealth