Why the world needs cryptocurrencies. Part 2

Criticism of Bitcoin has always been directed at the unpredictability of exchange rates, the still young age of new currencies, cases of fraud and use in the “dark web”. In fact, Bitcoin has been used and is being used for criminal purposes. But the same can be said about cash. In general, public opinion about Bitcoin & The Co was bad.

On the other hand, there was a community of Bitcoin enthusiasts that has grown over the years, advocating a revolution in financial markets, and a move away from government-backed “paper” money such as the dollar and euro. On the one hand, coins look unreliable and poorly transparent investment. On the other hand, if you have a developed financial sense, the investment promises a high profit.

This “High Risk, High Reward” situation has led to the fact that until now the crypto community is mostly overflowing with risk lovers. Many less idealistic investors are now wondering (not least because of this rapid growth) whether it makes sense to invest a small part of their own portfolio in this new asset class? After institutions such as MicroStrategy, Bank of America, Tesla and a number of others have invested billions of dollars in BTC, this does not seem such a bad idea. And if you look at Coinmarketrate.com, and look at the current cost of the Cue Ball, then there is only a question of where to get money for it.

Comparison of cryptocurrencies with classic financial products

As with any investment, a separate financial product should be considered in a broader context. Understanding how investments in cryptocurrencies work and comparing them with other products can help you discover another side of crypto assets.

Unlike the “classic” investment formats, such as stocks, funds and savings deposits, investments in cryptocurrency are practically not regulated. Simply put, this means that legislators and tax authorities have not yet established uniform rules of the game. It is also clear that no one can say how this asset class will work in the future.

While the demand for gold has existed, for example, for thousands of years, which is likely to exist for as long, it is difficult to look into the future with cryptocurrencies, even if Bitcoin is positioned as digital gold. This uncertainty is fraught with both risks and opportunities. With the advent of central bank currencies (CBDC), this generally becomes unrealistic. But, let’s follow the bright path of development of events.

To compare with other asset classes, we used the following criteria:

Bitcoin and the Eternal Bubble

Bitcoin can now look back on more than 11 years of history. During this time, the exchange rate has grown from a few cents to 63 thousand US dollars. This suggests that the BTC is in a speculative bubble. Are cryptocurrencies just a fascinating trend that makes some rich and leaves the masses with big losses?

The fact is that Bitcoin and Co is still an experiment that has never been done before. No one can say how it will end. So far, there have actually been several speculative bubbles with strong price increases, followed by a strong drop. This last bubble burst at the end of 2017. In the following months, the price dropped by more than 50 percent.

But it is also a fact that after each bubble, the price remains at a higher level than before. Until now, there has been no one who has kept their Bitcoins for more than two years and ended up in the red.

Interest in cryptocurrencies and blockchain applications has been steadily growing for many years, and the rhetoric in the media has completely changed. While in the early days reports about Bitcoin were almost exclusively skeptical or bad, now more and more people understand why it can be an alternative to government money. The public is gradually starting to take Bitcoin seriously, and in El Salvador it is accepted at the legal level. Cryptocurrencies won’t disappear from the scene anytime soon. The risk decreases, but with it comes the possibility of return.

Personal risk assessment

Endurance is necessary for cryptocurrencies. Anyone who invests in stocks or funds plans a strategy for at least five years. Experts even recommend an investment horizon of up to 15 years. Transactions aimed at obtaining short-term profits are classified as speculation. The same is true with cryptocurrencies.

Frequent trading in cryptocurrencies can be as profitable as day trading on the stock market, but this is not what ordinary investors need. Most investors keep their cool and prove that patience is the key to success. Acquiring and storing coins, even in supposedly bad times, is a strategy in the crypto market (HODL). A long investment horizon is also recommended for tax reasons. In many countries, profits from the sale and exchange of cryptocurrencies are not taxed if the buyer holds the coins for more than a year. By the way, this also applies to trading cryptocurrencies with each other!

When all factors are taken into account, it becomes clear that Bitcoin is always associated with personal risk. Therefore, investors are guided by this rule: do not invest in cryptocurrencies more than they are willing to lose. The reason is obvious. For cryptocurrencies, basically, there are only two scenarios.

Bitcoin and cryptocurrencies will no longer matter in a few years. At one point, all investments will disappear along with the crypt, as it will fulfill its role – it will teach people how to use the digital format of money. Even if cryptocurrencies remain, there will be several, not 12 thousand.

Cryptocurrencies are revolutionizing the financial world. At least today they bring great advantages in certain areas. The invested capital is multiplied (if the investor bets on the right horse), but the golden mean is not obvious.

The current speculative value of cryptocurrencies at some point must be confirmed by real benefits, otherwise no way.

At the moment, admittedly, this applies to almost any cryptocurrency. However, many supporters like to compare the current status of blockchain technology with the birth of the Internet. Then, too, there were many visions, as many immature technologies and failed companies. However, only in the next few years it will become clear whether the long-term success of the Internet will be confirmed in relation to cryptocurrencies. In any case, despite the 11-year history, this new technology is only at the initial stage.

Crypto assets stand for personal responsibility and independence. For those who invest with solid basic knowledge, a willingness to persevere and a certain willingness to take risks, cryptocurrencies can be a good addition to other asset classes. And, unlike gold, bonds and the like, there is one thing that cannot be obtained in the traditional market: cryptocurrencies are not boring!

No regulation

According to the most conservative estimates, more than 80 million people deal with cryptocurrencies. That’s a lot. Even more surprisingly, 22% of institutional investors in the US have invested some of their assets or are dependent on cryptocurrencies. As we have already said, there are more than 12,000 cryptocurrencies in circulation, and there is practically no regulation.

It is this absence that allows anyone to find the most liked exchange platform or cryptocurrency exchange. These platforms do not enjoy the protection inherent in centralized exchanges subject to supervision: no protection against market manipulation, no prosecution for insider trading and no prevention of defaults by counterparties who are unwilling or unable to fulfill their obligations. According to Coinmarketrate.com there are 419 crypto exchanges, and this number is growing.

They appeared in 2010 because it was not easy to get Bitcoins: you had to mine, or find a BTC seller on the forums, who then had to pay via PayPal, or exchange dollars, euros or yen for BTC in some other way. Then these coins ended up in an electronic wallet on a computer.

The exchange platform contains bitcoin wallets or other cryptocurrency wallets, as well as private/public keys that protect them. They allow the sale/purchase of cryptocurrencies and their immediate transfer between wallets. These platforms, if they are not properly protected, endanger the assets of those who have invested their crypto savings there. Which of the 419 crypto platforms that exist today can say that they are all safe? These platforms are decentralized, and therefore are an easy target for attacks.

3 key advantages

Their large number is justified by three fundamental properties:

• their ability to buy and sell cryptocurrencies of all kinds, not just BTC;
• fixed exchange rate of these cryptocurrencies among themselves, with the currencies of the real world;
• depositing cryptocurrencies in electronic wallets managed by these platforms.

However, the more users the platform has, the more efficient it is. It is more liquid, because we are sure that at any price offered by the buyer, there will really be a seller who allows the exchange of information. There is nothing worse than putting something up for sale and then not selling anything.

An account on the cryptocurrency platform is free: insiders often have a Bitcoin account on several platforms. These platforms offer many different cryptocurrencies. This is another motivation to stay there, even if it is small. Their specialization compensates for a lot.

At the same time, only the 5 largest cryptocurrency platforms account for half of all transactions. The security of the platform is another concern of users. In 2020, $140 million in cryptocurrency was lost or stolen through the platforms. This may encourage not testing another platform, and hinder the consolidation of the industry. Some platforms retain a portion of the revenue generated from transactions as a guarantee to their customers in case of hacking or theft.

Against the background of what is happening, decentralized crypto exchanges do not even think about consolidation and regulation. Think of Binance, and its taglines with regulators all over the world.

So, cryptocurrencies are a good thing, but not safe. But we will talk about security in the next article.