If you’ve been on the Internet for the past couple of months, it’s more than likely you’ve come across the rage of cryptocurrency. Headlines after headlines and Elon Musk’s involvement in it made everyone think that this technology is going to change the world.
All the news and buzz certainly has to mean something, right?
Well, it’s definitely something worth diving deeper into because to say that digital currency has no chance of being implemented in the future is irrational either. We can’t tell you for certain what will happen, nobody can. So, here are a few critical things about cryptocurrencies that will hopefully help you make more informed decisions.
What is cryptocurrency?
At the very core of it, cryptocurrency is a virtual coin, or digital money. It is also a decentralised asset, in the sense that it has no ties to any traditional financial institutions, banks, or currency system. In a practical sense, it means that when you make a transfer to somebody else; it doesn’t have to go through any intermediaries (e.g. banks) at all.
In 2021, there are multiple companies that accept certain cryptocurrencies as payment methods (e.g. Microsoft, Paypal, Starbucks) or you can buy it as an investment. Just recently, the country El Salvador even adopted Bitcoin as a legal tender.
The demand for this asset has definitely seen some exponential growth over the past few years, especially with more and more wide-scale adoption headlines. But is that enough to warrant an investment decision?
Reasons for buying cryptocurrencies
When blockchain technology was first developed into a cryptocurrency, it was meant to replace physical cash and remove the middlemen. And that’s still true today, but there are other reasons to buy cryptocurrencies too.
1. Hedge on inflation - Although not every financial analyst agrees on this, there are a lot of investors who use Bitcoin to hedge the devaluing of our fiat money. (Bitcoin is limited to 21 million coins, hence nobody can dilute the value of the coin.)
2. Portfolio diversification - If you can achieve the same returns while taking on lower risks, why not?
3. A long-term bet on adoption - Currently, cryptocurrencies still live in the grey area and countries on the fence. But as more and more companies accept cryptocurrencies as a form of payment, countries will follow suit and it will cascade down the economy.
4. Incredible returns - Ethereum is up about 160% at the time of writing this article. And considering the fact that it has declined about 47% from its highs, it boasts a much higher return than the average of 13% in the S&P 500 or the 5% in the Malaysian stock market.
What are the risks of buying cryptocurrencies?
With the possibility of tremendous returns comes the possibility of tremendous losses. Because remember, the markets are a zero-sum game. The volatility that cryptocurrencies have is sometimes more than what the average investor can handle. On top of that, if you’re caught on the wrong side, it will be a slippery and quick ride down the hill.
Not just that, because of its nature of being digital, it is prone to a certain level of hacking, despite the layers upon layers of firewalls and security measures. Just ask Bitcoin, they’ve been hacked over 40 times already.
One more thing, because Bitcoin and Ethereum have been doing so well for the past year, many smaller cryptocurrencies like altcoins and stablecoins have surfaced just to capture this short-term opportunity. And to be brutally honest, most of them might not be around for the long-term because they just aren’t equipped with the tools for that.
In short, only risk what you’re willing to lose in cryptocurrencies. Treat it in accordance with what it is — a speculative bet.
Is it too late to buy cryptocurrencies?
No one truly knows what will happen to a speculative investment. That’s why it’s labelled as speculation. But one thing to add on is that the ceiling for this asset is beyond what we can see. El Salvador was only the first among about 195 countries in the world to adopt cryptocurrencies. And in terms of companies, there have only been a few that have implemented it.
Think about these questions yourself, because no one has the answer to them:
- How long does a country need to adopt cryptocurrencies?
- Are the laws and regulations rigid enough to protect transactors?
- Other than cryptocurrencies, what can replace fiat currency?
- What do you think will be the catalyst for the wide-scale adoption of cryptocurrencies?
The bottom line is that nobody can tell you whether it’s “too late” to invest in it. If somebody does, that’s their speculation. You have to weigh the risk versus reward yourself and if it makes sense to have this asset in your portfolio.
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