FINANCE

CRYPTOCURRENCIES: A BLESSING OR A THREAT?

December 4, 2021

*Disclaimer: This blog post is not a financial advice, nor connected with a recommendation to buy or sell shares, but an educational article for those who are interested to know about investing in the stock market, written by DisiCouture.com contributor and finance advisor.

In 2008, a programmer or a group under the pseudonym ‘Satoshi Nakamoto’ introduced a new electronic money system named Bitcoin. Bitcoin is a decentralized system that allows users to use the internet to perform transactions without relying on authorities or financial institutions. By doing so, Bitcoin challenges the most sacred of government monopolies. The notion of sovereignty is being pulled away from governments in ‘favor’ of individuals.

Cryptocurrency backers hope to create a world where money is completely disconnected from politics and not constrained by borders. After Bitcoin was introduced slowly other cryptocurrencies were introduced. Bitcoin is mainly used as a form of payment and has ‘limitations’ when it comes to upscaling. Therefore an alternative to Bitcoin was created, namely altcoins which are mostly funded by investors and have an unlimited potential. Besides bitcoin and altcoins there are also stable coins. The name itself suggests that it’s a stable asset whose price is pegged to fiat currency such as the Euro and dollar or to exchange-traded commodities such as silver and gold. Because they are tied to a legal asset they are not volatile.

IS CRYPTOCURRENCY RISKY?

Newspapers regularly publish articles about the volatile price of cryptocurrencies. When the price of Bitcoin goes down, they’ll say the end of Bitcoin is near. And, when the price goes up they’ll be amazed and the FOMO (fear of missing out) starts. Your neighbor and it’s dog will even be investing in cryptocurrencies because they came to know that Bitcoin made an all-time high.

Besides your neighbor there are plenty of people who have been in cryptocurrencies for years. Some will mislead you and some will give you valid insights. Over the past years there are articles circulating where people say that Bitcoin will reach $100K by the end of 2021. Even today, some people will say we have just a few days left for 2021 but we are on track for $100K by 31st of December 2021. Well, in theory everything is possible.

If you invest in cryptocurrencies you should also be aware of the fact that cryptocurrencies are highly volatile and risky assets whose future is uncertain, and whose ownership requires an understanding of complex technologies and tools. What needs to be understood is that currency is tied to power and sovereignty of a country. Bitcoin wants to undermine the financial system as we know it. The question is: is that possible?

China banned cryptocurrencies in September 2021 and even India is set to ban cryptocurrencies. China ensures that tech systems that are not made in China cannot operate in China as this is a threat to sovereignty and the global currency market. If it undermines the market and it threatens sovereignty it could impose serious threats to national security.

If world leaders see that Bitcoin becomes a danger to the world, then they will ensure that Bitcoin and other cryptocurrencies get banned and become something for the black market. Obviously this won’t happen tomorrow or next month but awareness about how our monetary system works is important. The ban China imposed does not have much effect on the price of Bitcoin but if more countries ban and declare trading Bitcoin illegal then the price would decrease and even move close to $0,00.

Another factor to take into consideration is that the European Central Bank is exploring the option of having a digital Euro. It would be an electronic form of money issued by the European Central Bank and national banks. Even the United States is exploring its options to have a digital dollar. Whereas these proposals for a digital asset are backed by a central bank, are stable and are a complementation of cash, cryptocurrencies are not backed by a central bank and are still highly volatile.

WHAT TO DO?

If you want to invest in cryptocurrencies it is important to inform yourself first. Be aware of which projects there are, read white papers and do research. Don’t rely on the hype because you will read many stories of people who made big money or will offer you workshops to reach the moon. So, what to do?

Only put money in crypto that you can afford to lose.
Spread your investments. Depending on how much risk you want to take, you can also choose to spread your investments in the share market or commodities.
Be aware that there may come a day when cryptocurrencies can actually go to $0. It hasn’t happened yet and it is wonderful because many people made money. However, there are also people who lost all.
Only trade cryptocurrencies if you have sufficient knowledge of trading. Don’t speculate. If you don’t know how to trade it is always better to invest.

There are cryptocurrencies who have fundamentally good projects and are worth putting some money in. People like to see an analysis made when Bitcoin hits $100K or $200K or which altcoins to buy to make 500% profit. While investing or trading cryptocurrencies it’s also important to be aware of the risks because many won’t tell you what the risks are in the (long) term.

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