But here in this article we will try to respond to an aspect relevant to this topic: after all, is it worth investing in cryptocurrencies? For this, among other points, we will address what they are, what are the risks and benefits of this application and what you need to know to make that decision. Good reading!
What are cryptocurrencies?
To understand what cryptocurrencies are, it is possible to follow several paths. First, we can run through a broader and more generic definition. In this case, cryptocurrencies are a type of currency that exists only digitally and uses encryption systems to ensure the integrity of transactions involving the asset.
In a broader definition, understanding what cryptocurrencies are involves understanding the role of an issuing central bank in the economy. So, think about this: at that very moment, the money you have in your wallet or in your bank accounts has value because everyone believes in it (from the bakery on the corner to the biggest banks) and because it is issued by a monetary authority.
That way, you can go to any establishment that accepts that currency and buy something with the money you have in your pocket, without further questions. It is the authority that issued the coin that guarantees its value and makes pieces of paper and metal exchangeable for other items.
With cryptocurrencies this does not happen. In addition to being created on the internet and only existing there, they do not depend on a central regulatory body to certify their value and guarantee the effectiveness of all transactions. In the opposite sense to what happens with real money, the process is decentralized and it is the users themselves who guarantee this.
But how is this done in practice, to, among other things, prevent the same unit of digital currency from being used more than once at the same time? It is at this point that what for many is the biggest advance in cryptocurrencies comes into play: blockchain networks.
The name (block network, in translation) indicates how this system works. These blocks are nothing more than data packets, which connect to each other carrying the necessary information. Whenever a new block is inserted in the chain, computers process a series of mathematical operations to guarantee the authenticity of the operation, which can be checked at any time, whenever necessary.
In other words, the blockchain network is a ledger, where all transactions involving a virtual currency are registered. As it is necessary to process these mathematical operations to insert a new record, this guarantees that everything that is there has been supervised by all the computers connected to the network.
It is from the blockchain network that the concept of “mining cryptocurrencies” also comes. As a lot of computational power is needed to process each operation, whoever gives up their machines for this task is rewarded as new fragments of a virtual currency. This is what happens with Bitcoin, for example, the most famous of virtual currencies.
In addition to being the most popular cryptocurrency, Bitcoin is the first digital currency created. It emerged at the end of October 2008, in the midst of the height of the economic crisis, which caused distrust to grow around the conventional financial market.
The curiosity is that nobody knows who was really responsible for its development. The creator (or group of creators) never went public and hides under the pseudonym Satoshi Nakamoto, whose identity remains shrouded in mystery to this day.
Over time, other cryptocurrencies gained space in the market and today there are numerous options. In addition to Bitcoin, Ethereum, Litecoin and Ripple draw a lot of attention from enthusiasts of this combination of technology, payment method and investment.
What are the benefits of investing in cryptocurrencies?
In theory, cryptocurrencies can play the role of any other currency, such as the Real or the Dollar. So you could go out there and pay for your lunch, your groceries and your bills using one of these cryptocurrency-based currencies. However, over time, this type of digital asset has come to be seen as a form of store of value and an alternative financial investment.
The logic behind this is simple: you can buy a certain amount of a cryptocurrency and keep it with the expectation that it will appreciate in value in the long term. When that happens, just resell them for that higher value and profit from the difference, ensuring return on investment . In practice, it is not very different from what happens with stocks or even investing in real estate .
Various cryptocurrencies from time to time experience periods of appreciation. Again Bitcoin is perhaps the prime example of this. In a single year, the cryptocurrency has already had a market value registering a 1300% increase . This happened in 2017, which was marked as one of the first years of popularity for this type of asset.
And it is precisely this appreciation that cryptocurrency investors are after, since few investments available on the market manage to offer a return compatible with the gains achieved with the rise and since the price of such assets.
Relatively low cost
Many investments involve paying a series of fees to maintain the application. With most cryptocurrencies, these costs are low or even waived. That is, these discounts at a reduced level end up appearing as an additional advantage over other financial investments, whose high rates can erode the profitability obtained.
Putting available resources into different types of investment helps both in obtaining better returns and in reducing risks. Spreading across multiple applications helps to balance it all in a smarter way.
Therefore, those who already have consolidated investments in other assets can choose a cryptocurrency to take advantage of some of the advantages of this form of investment, such as the potential for high gains, as already mentioned.
Autonomy, anonymity and privacy
Many of the technological resources employed throughout the structure involved in buying and selling most cryptocurrencies add a series of layers that strengthen the autonomy, anonymity and privacy of investors. This can be relevant, especially for those who are concerned about security.
Bitcoin, for example, allows the entire transaction to be carried out without linking the user’s personal information to the movement made. In addition, cryptography prevents any manipulation of the currency register, as it is public and available for verification at any time, guaranteeing the neutrality, predictability and transparency of each transaction.
What are the risks?
Of course, like any other type of investment, opting for cryptocurrencies also carries risks, which may be greater or lesser depending on the circumstance. Therefore, we indicate the main ones for you to know what an investor of these assets needs to deal with.
Very high volatility
Volatility is a common term in the world of finance and refers to the degree and frequency of fluctuations in the price of a given asset. Thus, the more volatile an application, the greater the price variations, both upwards and downwards.
And most cryptocurrencies suffer from prices that go up and down at the pace of a roller coaster. Bitcoin itself demonstrates this: after a record surge in 2017, the following year, the most famous cryptocurrency faced a 70% drop , the worst in its history so far.
Lack of regulation
Most countries still do not have clear rules for buying and selling these digital assets and are still in their infancy about the ways in which they are going to do this. For those who are going to invest, such a scenario can be another source of insecurity and instability.
The lack of a central regulatory body for emissions and the risk to the financial system as a whole make many governments hesitant to set standards for transactions involving cryptocurrencies.
Financial bubble risk
Among the risks for the global financial system is the formation and subsequent collapse of a bubble involving cryptocurrencies. It is not uncommon to find specialists pointing out that the constant appreciation of these assets is artificial and a sign of a bubble that is inflating.
Bubbles form when the value of a certain investment deviates from what would be a real value. When that happens, many people seek this investment at the same time, until something breaks this circle of appreciation, bursts the bubble and causes damage to most of those involved.
Restrictions in some countries
Not least, many countries not only fail to regulate cryptocurrencies but also impose restrictions on their circulation, preventing transactions using digital resources of this type. The Central Bank of China , for example, prohibited the country’s financial institutions from recognizing and authorizing businesses based on this virtual money.
Lack of ballast
Cryptocurrencies have nothing in the real world to guarantee their value. In economic parlance, this means that they have no ballast. It is exactly the opposite of what happens with conventional currencies: when issued by a Central Bank, the money is backed by the country’s monetary policy, its debt capacity or even the economic activity of that nation.