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The Downside of Investing In Cryptos

Downside of Investing In Cryptos

June 3, 2021 | 

502 Views | 

JOHN K MWANIKI | 

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Some people would swear by cryptocurrencies. If you ask them, they are the currency of the future set to take over fiat currencies. On the other hand, there are skeptics who believe that it is a bubble that will eventually burst. Many online articles are talking about the advantages of trading cryptocurrencies. In this article, we will highlight the downside of investing in cryptos. 

Here are eight reasons you should be cautious about investing in cryptocurrencies

1.    High volatility

Many people invest in stocks or bonds because they typically face low volatility. When someone says that they want to invest in cryptocurrencies, they usually need a high-risk tolerance. This is because the prices of cryptocurrencies can swing wildly in any direction. It is possible to double your money in one day and then lose it the next day. 

For example, in February 2021, Bitcoin exceeded $50,000 but plunged to $30,000 at some point in May. This means that those who invest in cryptocurrencies should be ready to make huge profits or losses depending on the market direction. This volatility makes cryptocurrencies an unstable store of value. If you cannot stand such market swings, it may be better to invest in other ‘safer’ investment vehicles. 

2.    They lack intrinsic value and backing

There are those who argue that cryptocurrencies lack intrinsic value, but fiat currencies do. This is false. Both fiat currency and cryptocurrencies do not have any inherent worth. They have the value either we give them or that the government/banks give them. In the case of fiat currencies, they are typically backed by the government that issues them. Fiat currencies are therefore valuable as long as banks or the government guarantee their value.

Unfortunately, cryptocurrencies are decentralized and therefore do not have any institution guaranteeing their value. They are valuable now because people are finding a use for them and the law of supply and demand. If people decided to stop using them altogether, they would lose their value entirely. This lack of a link to tangible or intangible assets and lack of backing makes some people shy away from cryptocurrencies. 

3.    The scalability issue

Using data from VisaNet, 1,700 transactions are handled every second if 150 million transactions are carried out every day. Paypal carries out 193 transactions per second, while Bitcoin, the largest cryptocurrency by market cap, can carry out 3 - 4 transactions per second to a maximum of 7. Some cryptocurrencies handle more than Bitcoin, but few rival the traditional payment methods transaction rates. 

This information brings into question the capability of cryptocurrencies going global. Another issue with scalability is that some cryptocurrencies are mined through unsustainable energy-intensive proof-of-work consensus algorithms that would be impractical on a worldwide scale.  To become a global currency, cryptocurrencies will need to handle more transactions per second (securely) than they do now in an environmentally sustainable way. 

4.    Interoperability

The interoperability problem refers to how most blockchains are independent and cannot communicate and share information between them. This hinders people’s capabilities of enjoying the full benefits of blockchain technology. 

At the moment, if I want to transact in Bitcoin and I have Ether, I may need to transfer my Ether to fiat then to Bitcoin. Even if you use an intermediary to do the conversion for you, they still need to do that in the background, introducing transaction fees and adding downtime. 

If all the blockchains were connected into one, you would be able to transact with clients from a different blockchain as long as they are compatible. There are blockchains like ChainLink and PolkaDot that are working towards solving this issue. Still, until it is solved, interoperability is a significant hindrance to the mass adoption of cryptocurrencies worldwide. 

5.    Lack of recoverability

If for whatever reason, you get locked out of your bank account, it is possible to recover your details and recover your money. With many cryptocurrencies, if you lose your login credentials to your crypto-wallet, it is near impossible to recover your account. This means that you can lose all the money you invested in a cryptocurrency if you lose your login credentials. This is scary to those who want to invest in crypto but know that they are prone to losing their login credentials as it is not possible to press ‘Forgot Password’ for help. 

6.    Lack of regulation

People can trust fiat currency because it is regulated by their national bank or reserve. However, there is no such regulation with cryptocurrencies. The system is designed to eliminate the intermediaries, but the lack of regulation makes investing in them risky. Cryptocurrencies will no doubt see more adoption if regulatory measures are placed to protect people. 

7.    Cybersecurity issues

Cryptocurrencies are digital assets, and as they are based on digital technology, they are prone to cybersecurity breaches. Most cryptocurrency networks use consensus algorithms that help prevent such hacks, but there are other places where crypto-owners are vulnerable. For example, when crypto-owners transfer their coins from their wallets to a crypto-exchange wallet, their coins are as vulnerable as the exchange. A breach of the exchange exposes them to hackers. 

One way cryptocurrency investors avoid this risk is by trading using decentralized exchanges. In this case, you only use the exchange to change your currencies, but they do not have any of your personal identifying information or access to your wallet. 

8.    The complexity of the blockchain and crypto industry

Many people chose to stay away from cryptocurrencies because it is not easy to understand how everything works. People want to invest in straightforward investment vehicles, and trying to understand blockchain technology, consensus algorithms, decentralization, and other intricacies of cryptocurrency networks makes them opt out altogether.

Conclusion

Cryptocurrencies are a great investment vehicle for people with the patience to understand how they work and the risk appetite. However, the inherent risks and problems in investing in cryptocurrencies like those mentioned in this article are reason enough for some people to choose not to invest in them altogether.

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Total Market Cap The Total Market Capitalization (Market Cap) is an indicator that measures the size of all the cryptocurrencies.It’s the total market value of all the cryptocurrencies' circulating supply: so it’s the total value of all the coins that have been mined.

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Price Cryptocurrency prices are volatile, and the prices change all the time. We are collecting all the data from several exchanges to provide the most accurate price available.

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