Read this before you invest in Cryptocurrency.
The past year has been one of its kind — a global pandemic, market uncertainty, countrywide lockdowns, travel restrictions, etc. Yet, we witnessed one financial asset on the rise- cryptocurrency. While the financial market was suffering, a huge number of people were interested in investing their money in cryptocurrency. With emerging startups like Binance, Wazirx, Coinbase Pro the process of investing in cryptocurrency has become easy. With the newly emerging cryptocurrencies, the important question is “Whether investing in cryptocurrency the right thing to do.”
Before answering that question, there are few things we have to learn about cryptocurrency.
What is cryptocurrency?
A cryptocurrency is a digital form of payment that is used to buy goods and services. To simplify this cryptocurrency is like coins and tokens which you buy at an arcade or casino with actual money. In the same way, we converted the digital money into digital tokens which have their own value.
Why should we buy Cryptocurrency?
In simple words, as the year passes the value of actual money decreases but in the case of cryptocurrency, there is uncertainty regarding the value just like the stock exchange. Another important factor is easy and fast returns.
How does cryptocurrency work?
Cryptocurrency uses a technology called blockchain. Blockchain is a decentralized technology which manages transaction across many systems. The major advantages are
- Security.
- Untraceable and unreturnable.
- Not owned by entity/company/bank.
- Only person-to-person transfer.
Types of cryptocurrencies
There are around 4000 different cryptocurrencies around the world. But they can be divided into 4 types
1. Stable Coins
The major purpose of stable coins, as the name suggests, the stable value of coins. These coins are for the people who are skeptical about the cryptocurrency but still want to try. The stable coin's values are linked to real-world assets like gold and currency which provide reliable value storage. There are around 37 stable coins. Tether, USD coin, Binance USD, Dai being major competitors.
2. Tokens
Tokens are not intended to be used as general-purpose currency. They’re also created on top of existing blockchains, such as Ethereum, and do not exist as stand-alone systems. The simplest way to understand the concept is to think about the chips we use to place bets in a casino. While they represent cash or other assets of value, but they can be only used in the specific casino that issued them.
BAT, UniSwap, ChainLink, Polygon being the best tokens
3. Proof of Work (POW)
Bitcoin, which relies on blockchain technology that uses a concept known as proof of work (PoW) to process transactions.
Blockchain is a distributed ledger system. On a blockchain network, every participating computer (called nodes) maintains a complete copy of the system’s ledger. It’s a bit like sharing a copy of a check register with multiple people — except that no individual member can add something to that register alone.
To add a transaction, nodes compete to solve a complex cryptographic problem that represents the data to be added. The first to solve the problem then broadcasts the answer to the rest of the network for verification.
Bitcoin and Ethereum are the leading crypto in this category
4.Proof of Stake (POS)
The major problem with PoW systems is the fact that they don’t scale well. To overcome that problem, a different consensus model for blockchain was developed that allows smaller pools of nodes to validate transactions. It’s known as proof of stake (POS), and it ensures security in a fundamentally different way than POW.
The most notable cryptocurrency in this category are Eos, Dash, and Tron. And majority of the upcoming cryptocurrency belong to this category.
Myths about cryptocurrency investment
There are many myths around cryptocurrency, which makes people uncomfortable and uncertain about investing in cryptocurrency.
Few of them are-
1. Illegal to own/buy cryptocurrency
Although some countries like Bolivia, Russia, Algeria, Ecuador, and Trinidad have banned the purchase and use of cryptocurrencies, EU nations, G7 nations, USA, India have ruled out the possibility of a ban, and also classified them as legal tender.
2. Cryptocurrencies Are Easy To Hack
Cryptocurrencies are the most secure mode of a transaction as the transactions are stored at different systems which are encrypted using SHA-256 algorithm, To run all the iterations could take 10⁶⁵ seconds which is equal to one quindecillion times the age of the earth.
3. Cryptocurrency Is Not Taxed
There are no banks involved, this does not rule out that the digital currency evades being taxed. It is just any other transaction, and you are taxed whenever you sell it or whenever someone pays you in cryptocurrency.
4. Cryptocurrencies Are Used For Criminal And Illicit Purposes
Yes it is true that cryptocurrencies are used for illegal activities like drug & human trafficking across the world. To tackle this issue all the wallets are required to verify the person's identity by providing government documents like Aadhar, PAN card in India, and SSN in USA.
5. Cryptocurrencies can be counterfeit
Cryptocurrencies cannot be counterfeited. Each virtual currency operates with its own codes, allowing them to not be counterfeited. Because of the blockchain technology used by cryptocurrencies, it is not possible to record the transactions that a person performs, nor the order in which they do so.
6. Only people with technical knowledge should invest
False, anyone who have an idea about the working principle of crypto can invest. It is like the stock exchange, the right way to invest in a crypto is analyzing the market, having basic knowledge about the stock you want to buy, and the factor that can influence the market.
Factors that influence Cryptocurrency
There are 3 major influencing factors that are responsible for the value
1. Usability/Utility
The major reason for cryptocurrency is to replace the traditional money exchange with digital means. The more the people that execute transactions, the greater the demand for coins will be and will, therefore, push prices up.
2. Scarcity
The limited supply of the coins also drives the price up. Example: The total number of bitcoins is 21million. Similarly, the coins like Litecoin, Cardano, Stellar, and Chainlink are few coins with limited supply.
3. Major Companies & Celebrity Influence
Celebrities like Elon Musk, Bill Gates, Lionel Messi, Ashton Kutcher who responded to support cryptocurrency and also own a piece show their support by occasional tweets which increased the value 15% on average. For example, Dogecoin price increased by 20% after tweets from Elon Musk & Mark Cuban.
Other Ways of Obtaining Cryptocurrency
There are other ways of obtaining cryptocurrency without buying. They are
- Staking
- Mining
- DeFi Yield Farming
- Airdrops
- Microtasks
- Freelancing
- Crypto payments
- Become a publisher
- Cashback on spendings
- Bonus gambling
- Faucets
Advantages
1. High returns
The return on the investment is the major aspect the buyer looks into before investing. Cryptocurrency is a new field and with more options the return rate is high in low time-spam. People looking for fast returns investing in crypto is a good choice.
2. Simple to invest
The investment in crypto does not require any special license and other requirements. The only things required are the personal identity documents. There are many wallets that are easy to create and start investing right away.
3. Control
Cryptocurrency users have complete control over their funds and transactions, keeping everything safe and anonymous. Every transaction that is executed will be independent of the individuals’ or parties’ identities. No private information is made public and this prevents fraud and identity theft from happening. Similarly, as these cryptocurrencies are decentralized users do not have to rely on a bank or any other financial institution in order to make transactions.
4. Fewer Competitions
As investing in cryptocurrency is one of the newer field, most investors are concentrated in the stock market. Due to low competition, buyers will be able to find their desired coin at desired price.
5. Low investment
The initial investment is low when compared to other markets. There are few promising cryptocurrencies which are stated at low price like-Verge, Nem, Wink, Tron which are available for less than 1$(74 rupees).
6. Favorable forecasts
The future of cryptocurrencies is looking good, and some companies already started investing in their own cryptocurrencies. And there is no sign of market collapse.
7. Can invest bites in Cryptocurrency
Right now the two popular cryptos are Bitcoin and Ethereum. The advantage of investing in cryptocurrency is if you cannot afford the coin you can buy some portion of the coin with low investment.
Disadvantages
1. No Regulations
The crypto world is not run by any entity/institute there are no governing bodies that can regulate the use of cryptocurrency.
2. Unpredictability in market
In the last 6 months, the value of bitcoin increased by 260% which makes the market unpredictable. Celebrities like Warren Buffett, Carl Icahn, Sam Zell were against crypto.
3. Potential for large losses
Every investment comes with its own risk factor. But with crypto, the risk factor is high when compared to others. As coins do not have physical assets and unpredictable markets there is a high potential for loss.
4. No refund or cancellation policy
Once the investment is done there is no possibility of refund, which is similar to the stock market.
Conclusion
Finally, to answer the question, you can start with a low investment of 10dollars or 200 rupees and start investing in your favorite coin. The immediate future of cryptocurrency is an upward trend. The most important rule of investing is knowing when to sell. Investing in cryptocurrency is perfect for the people who are interested in fast returns and not for the people who are interested in long-time investments.