Cryptocurrency. We’ve all heard stories of the Bitcoin booms and uncapped profit potential for the smallest of investments. We've heard of rubbish tips around the world playing host to hard drives which are potentially worth in the high tens of millions. But what is it? Should you be adding some kind of crypto to your portfolio? There are many different varieties, so which one might be right for you? With the current uncertainty going on in the markets is now a good time to be investing in something considered to be the highest of high risk?
What is cryptocurrency?
In layman's terms, cryptocurrencies are a form of digital currency. At the moment, cryptocurrency is seen mainly as an investment vehicle. Still, in the future, you may be using it to pay for everything from the weekly shop to your next summer holiday. Then what sets cryptocurrencies apart from other more traditional currencies?
- Cryptocurrency transactions are all recorded and made possible by blockchain technology. All of the purchases and sales made using crypto are recorded on the blockchain and validated by the network itself. A blockchain consists of transactions or ‘blocks’ which are then chained together one after the other. A Blockchain is a permanent ledger which contains all cryptocurrency transactions.
- Unlike the Pound and the Dollar, for example, cryptocurrency is decentralised. This means that there are no banks necessary for holding or transferring monies. With crypto, you don’t need middlemen or bankers, which means transactions are less expensive. The downside (or upside depending on your point of view) is that the currency is not regulated by any governmental authority or central bank. Cryptocurrency is going to be worth the same to you no matter where you are on the planet, making international payments free of exchange rates.
- Owners of cryptocurrency usually hold their funds in digital wallets. These wallets are located in certain apps or provided by the vendor where the value was purchased. Like any digital account, the wallet is secured by a code that only the owner knows. The owner can then access the funds at any time using this code.
- It isn’t easy to calculate how many different cryptocurrencies there are out there. Some sources claim that there are close to 7000 varieties that share a market cap of $231.7 billion globally. The three big ones that you might have heard of represent a good chunk of that value. Those market leaders are Bitcoin ($128 bn), Ethereum ($19.4 bn) and Ripple ($8.2 bn).
How has cryptocurrency performed historically?
If we use the most popular cryptocurrency Bitcoin (BTC) as an example, saying that crypto has had a volatile history feels like an understatement.
- On the 22nd May 2010, the first recorded real-world transaction for Bitcoin took place. Two pizzas for the sum of 10,000 BTC - a sum which would be worth close to $132 million at the time of writing.
- In July of the same year BTC the price per coin shot up 900% in less than a week from $0.008 to $0.8.
- It took only till February 2011 for Bitcoin to be on parity with the US Dollar.
Bitcoin's trading history has been marred with multiple instances of meteoric rises and falls. In more recent years you may remember the massive spike of 2017. Here, Bitcoin reached an all-time high of $19,665.39 in December, completing a rise of 1,824% on the year. By December 2018, the price of Bitcoin was below $3,300. Bitcoin has however made another resurgence this year on the back of worldwide uncertainty in national currencies and surging gold prices. According to Bloomberg, it has spurned the notion further that “cryptocurrencies will emerge as a viable alternative to traditional monetary systems”.
Whereas market sentiment has played a large part in driving the price fluctuations of cryptocurrency through its outrageous spikes, there are several influencing factors involved in crypto pricing. When there is varying confidence in national structures, investors commit more assets to cryptocurrency, much like gold. The perception of how widely used crypto will be as a vehicle to transfer funds in the future also drives value.
What are the pros and cons of cryptocurrency?
Despite the inherent risk involved with cryptocurrency investments, there are several pros as well as cons to adding crypto to your portfolio.
- Potentially massive returns.
- As discussed before, the potential for unparalleled returns is evident throughout crypto’s trading history.
- Relatively high levels of liquidity.
- Compared to its foundling years, popular cryptocurrencies are now easy to buy and sell at a moment's notice, which makes all the difference when it comes to the extremely fast-paced crypto market.
- Potentially rapid ROI.
- Even though it can be viewed as a long term investment due to the way in which cryptocurrency is still developing, it can also provide excellent returns in extremely short time windows.
- Cryptocurrency is immune to inflation.
- Unlike traditional currencies, crypto is immune to inflation, meaning that your investment won’t become diluted.
- Volatility could mean immediate losses.
- The volatility of cryptocurrency doesn’t only go one way. Massive losses in the period of a few hours are possible and even likely.
- Cryptocurrency is not well regulated.
- A large part of the crypto market operates in an unregulated state. This could mean that you are open to fraud or mismanagement.
- Crypto markets are targets for hackers. With a large number of funds being moved around in an unregulated digital landscape, cryptocurrency wallets are prime targets for hackers, and wallets can be compromised.
Should you invest in cryptocurrency?
If you’re ok with high volatility and risk in your portfolio cryptocurrency may be the investment for you. A few of the most popular crypto markets where you can start your cryptocurrency journey include; eToro, who boast that they are the world’s leading social trading platform. Coinjar, who cater to everyday investors, traders and institutions. And Coinbase who offer secure storage, insurance protections and industry best practices.
From very humble beginnings and after a rocky trading history currencies like Bitcoin may still have room to grow. A lot of analysts believe that the record highs that have been seen previously are but a fraction of potential future gains. This does, however, all depend on a lot of moving parts. These parts include how crypto develops as a tool and worldwide governmental acceptance. Without increased adoption and utilisation across the globe, cryptocurrencies may not be adopted effectively, and therefore see a dip in inherent value.