Investing in Cryptocurrencies
Cryptocurrencies are one of the hottest topics talked about today. People from all walks of life are making millions of dollars investing in these digital monies. However, the potential returns come with enormous risks. So, before you put any money into cryptocurrencies, it would pay to do your research.
Too many people jump in before their feet are wet, inspired by the fear of missing out (FOMO). This dastardly deed pressured you to smoke drugs and skip class in high school, and now it has returned again to ruin your 25s to 30s. Good thing you learned a thing or two, as FOMO is probably the biggest ‘oops' you could make when it comes to your financial future.
Besides FOMO, here are a number of other benefits and cons that you should be aware of when buying these virtual tokens; ranked in no particular order of importance.
1. Positive: Cryptocurrencies Promise Massive Returns
If you can see past the hype and sensationalism, cryptocurrencies do, in fact, offer some great returns. For example, if you laid down just $1,000 USD in Bitcoin at the start of 2013, that money would have ballooned to $500,000 in 2018. And it was not only Bitcoin that has lined the pockets of teenagers and Wall St. investors, either. Despite their dodgy reputations, a number of altcoins have leaped into the top 10 currencies by market cap, and saw gains of 1000% over the last couple of months.
So, provided that you invest with a bit of common sense and get unbelievably lucky, you too could join the pod of crypto whales that are said to be in control of the market.
2. Negative: Inexperienced, Idealistic Teams
The thing about cryptocurrencies is that each coin is trying to solve a particular problem. Some coins just want to make you laugh (Doge Coin), while others attempt to tackle Bitcoin’s most prominent weaknesses of low speeds and high transaction costs (Litecoin). These coins and the teams behind them are like any other startup; they fish for money from investors to become the next Bitcoin, or to at least haul in something close. The problem is that their captains are lost at sea, with no way of knowing which way the winds will take them.
Cryptocurrencies are something new to the investment world. So the crews behind them are often inexperienced. If these startups are not managed correctly, the whole thing can fall apart, or at least fail to live up to its investors’ lofty expectations.
You can avoid these shipwrecks by checking the credentials of the team. Who are they? What experience do they have? And why is the team qualified to launch an ICO in the first place?
3. Positive: Great Liquidity
What annoys startup investors more than anything is when their money gets locked up. Some of these ventures could be a scam, or go broke before they see a cent of their money. On the other hand, grabbing a bank bond for a pithy 5% return may seem like a safer, better choice. But either way, you end up ripping yourself off when things go bad.
What people love about cryptocurrencies is that they are liquid, which means you can exchange all the Doge you want for real world dollars. Cryptocurrency markets operate at all hours of the day, seven days a week. No queue times, bank tellers, or annoying disclosure statements. You get in and out, when you want to. Plus, selling off your cryptocurrencies is usually instant, so you can ride the ups and downs of the market.
4. Negative: Technical Limitations
Unlike the money in your wallet that you can see and feel, the value of cryptocurrencies exists as much in the investor’s imagination as the blockchain it came from. Their illusory nature makes it seem like you are playing with house money, which is the same as gambling when you hit your upswing. Literally any other investment has a presence in the real world, with the exception of cryptocurrencies.
And as the technology behind cryptocurrencies is fresh, you often pay for this via its technical limitations. Many applications and markets slow down to snail’s pace when traders are busy. The problem can get so bad that certain currencies are disabled altogether, meaning you can’t buy or sell your coins.
This problem of exchanges can be mitigated through the various hard forks and improvements we have seen with Bitcoin, such as Bitcoin Cash (BCH) and the Lightning Network. Both promise to reduce network congestion and lower transaction costs, which are both major issues if cryptocurrencies are to be taken seriously by the rest of the world.
5. Good and Bad: Transparency
A defining feature of Bitcoin is that all of its transactions are public. Each transaction is stored on a public ledger that welcomes any nosy person to see what you’ve been buying. Whether this is a good or a bad thing depends on your point of view. If you don’t like it, then you can opt for a more private currency such as Monaro that does not have this feature, or wait until the Lightning Network for Bitcoin supports private transactions.
This level of transparency trickles all the way down to the management of each currency. Before a new token or cryptocurrency is released, the management team will post a whitepaper on its website. This PDF outlines the company’s business case, amount of tokens issued, team details, and a roadmap.
The problem is that dodgy startups can lie about and its intentions, experience, or ability to complete the project. In the past, some ICOs have amounted to nothing more than a crude snatch n grab, taking its investors’ money and confidence in the market along with it.
A legitimate startup will be eager to provide you with the credentials you need for you to hand over your money. Has the company posted its code on Github? Do they have an active Slack or Telegram channel? Are bloggers tweeting and writing about it in the cryptosphere? All of these things matter!
6. Negative: Questionable Security
By design, security is a currency’s weakest point and centre of gravity. If the security of a coin is compromised, then it becomes worthless. In the past, exchanges have been compromised and led to millions of dollars stolen in virtual currencies. People who trusted these platforms with their livelihood almost lost everything. The issue of security for exchanges and hot wallet services has become so poor that people are advised to move them onto a piece of paper instead (paper wallet). The fact that paper offers superior security tells you a lot about how far these coins need to come for them to be as trusted as online banking, or a merchant service such as PayPal.
Another thing that stands in the way of the security for cryptocurrencies is that no one will insure them. Even Coinbase, which is the largest exchanges of virtual tokens, does not provide insurance for its customers. This means that if someone were to hack your Coinbase account, you would be left holding a big empty bag of Bitcoin. To dissuade attacks on its customer’s wallets, Coinbase states that it keeps less than 2% of its funds online, with the rest being held in cold storage. Yet this won’t mean much if someone takes control of your account.
So, unless you are playing around with only a small amount of coins, it would be best to use a cold storage wallet. There are a number of options available that range from USB sticks, audio wallets, to bits of paper that have your private and public key printed on them. But that’s not where your responsibility stops, either. You should also back up your public and private keys in multiple locations around your home, or keep an encrypted file key on your computer that only you have access to.
To summarize everything: investing in cryptocurrencies will always be dangerous. The cryptocurrency markets are all over the place and its origins are new. Yet they can still be a great investment if you have cash lying around. Always be careful with your money and do your research!