Important Facts to Know Before Investing in Cryptocurrency

A short list of must-know things involved with the Blockchain industry that will guide you through the messy crypto world

by Viko
28 December • 5 min
In News

Cryptocurrencies are getting increasingly popular, especially after Bitcoin skyrocketed to a recent all-time high of nearly USD 20 000. The most popular cryptocurrency has lost some of the gains, but other digital coins attract investors’ attention. Here is some essential data that could help you take a decision to invest in the highly speculative and risky virtual currencies market.

1.      Huge volatility

Digital currencies are highly volatile, which can be partially explained by the fact that they are traded on various exchanges, not on a single, centralized one. Recent moves show sharp increases, in the range of thousands percent, as well as sharp drops.

2.      Difficult to evaluate

Unlike fiat money, cryptocurrencies doesn’t have the support of central banks and governments. The also represent no security like stocks or bonds, which are backed by company assets. That’s why it is quite difficult to make a proper valuation of a digital coin and all existing valuations are controversial.

3.      A myriad of coins

Many crypto beginners have heard about Bitcoin and probably a few other cryptocurrencies like Ethereum or Litecoin. Bitcoin is the most popular and most widely accepted coin, but there are more than 1500 other digital coins that will fight for your attention, using various methods.

4.      Blockchain is the key

Bitcoin was created on the back of the Blockchain technology, which represents a decentralized ledger that keeps a track record of all payment transactions and makes them irreversible. The technology has proved revolutionary and can be used for many other purposes in addition to virtual coins.

5.      Miners

The mining process is associated with the use of specific software that solves mathematical problems and thus verifies cryptocurrency payment transactions. The miners are rewarded for their job, usually with crypto coins. Before deciding to start mining, you should calculate whether the expected reward will be enough to cover your electricity costs, as mining is much energy-intensive.

6.      Decentralization

There is no central institution in the crypto world. Various pieces of data are stored in computers across the world, making it hardly possible for hackers to conduct a successful cyber attack and steal information and/or money.

7.      Low-cost, real-time transactions

The Blockchain technology allows transferring money from one account to another very fast, sometimes even instantaneously, compared to several days when using the traditional money transfer channels. Moreover, by avoiding the middlemen, it makes transactions much cheaper than using a bank or a money transfer business. The technology provides also high transparency and control.

8.      Drawbacks

The Blockchain technology is relatively new and its applications are still to be tested and further developed. So, problems emerge, presently related to scalability issues, the speed of verifications and transactions, among others.

9.      Real economy partnerships

Blockchain technology is being tested by, and even already implemented by renowned companies around the world. Ethereum’s Blockchain, for example, has been tested for various projects by more than 200 companies, including JPMorgan Chase, Microsoft and MasterCard. Ripple and IOTA have also attracted customers from the real economy, mainly from the financial industry and the auto sector.

10.  Low entry barrier

It is virtually possible for every entrepreneur with some money and time and the help of a small team of programmers to set up relatively quickly a profitable new cryptocurrency. That’s why the number of ICOs (Initial Coin Offerings), through which companies raise funds for their crypto projects, has been growing exponentially, providing also opportunities for scams.

11.  Big investors likely to join crypto market

While institutional investors have been staying aside from cryptocurrencies, given their volatile and highly speculative nature, some of them are now expected to join the crypto market after CBOE Global Markets and CME Group launching trading in Bitcoin futures earlier in December.

12.  Pessimistic approach

Some of the most prominent investment moguls, like Berkshire Hathaway’s CEO Warren Buffet, and JP Morgan Chase CEO Jamie Dimon have voiced strong doubts about the future of the cryptocurrencies. It remains to be seen whether the digital coins will prove “fraud”, “mirage”, “bubble”, or the basis of the economy of the future.

13.  Crypto bans and taxes

It is illegal to trade in cryptocurrencies and buy goods and services using digital coins in some countries like China, Bolivia, Bangladesh, Nepal, Morocco, Kyrgyzstan and Ecuador. Other countries could follow suit, fearing from the unregulated and anonymous nature of the cryptocurrencies that might be facilitating money laundering and other illegal activities. At the same time, many other governments are trying to create regulations for the industry in order to be able collect taxes from the profits of investors.

14.  Knowledge

Anyway, the largest part of the world population is unaware of cryptocurrencies. While many people have heard of Bitcoin, few know about Ethereum or other digital coins, and even few know how to use them. Much more people need to learn about the practical use of cryptocurrencies before digital payments become a widespread form of shopping.