The emergence of cryptocurrencies has completely transformed the finance industry, forever changing traditional approaches to transactions and the functioning of banking institutions with their central regulation while creating a new multi-billion dollar market with a capitalization of $2.4 trillion. Investors use digital currencies for various purposes, such as diversifying their portfolios, benefiting from fluctuations in exchange rates, quickly sending transfers, and mining or ICOs. Statista data indicates the scale of the market, with as many as 861 million users already participating by 2025. Analysts predict a stunning outlook for the crypto market to reach a capitalization of $61.1 billion by 2031 with a growth rate of 8.4%. This new technology has been massively recognized worldwide, and the number of those wishing to benefit is only increasing yearly.
However, understanding the pros and cons of cryptocurrency, its technological aspects, and the regulation processes by institutional players will allow one to take a deeper look at all its features and protect investments from unnecessary risk.
What is Hidden Behind the Name of Digital Active?
Cryptocurrencies are a new type of digital or virtual currencies that use blockchain technology for instant, trusted, and global transactions without any involvement of traditional banking institutions. Virtual currencies are not controlled by central regulators, nor are they issued; the value is determined by the market through supply and demand.
Blockchain, or the chain of blocks where transaction records are stored, provides:
This innovation in the market appeared in 2008 when Bitcoin was publicly introduced to the market. Since then, more than 20,000 different crypto coins have been created, but still, 70% of the market is shared between Bitcoin and Ethereum (which is also used for DeFi NFT).
The market has just started to boom, so there are certain disadvantages of cryptocurrency, such as volatility and the unresolved issue of regulation by many countries. El Salvador is the first of many countries to officially accept Bitcoin as a means of payment. Regulators in the U.S., Japan, and Canada have authorized transactions using digital currencies. In the UK, they equated this type of currency with shares, and in Switzerland, they equated them with foreign currencies. A single decision has not yet been made; each jurisdiction independently decides how it is profitable to work with virtual coins.
Benefits of Using Virtual Asset
Cryptocurrencies, as a decentralized form of money, have become an option for investors to profit. Many have come to believe in this technology and are actively using it. The volume of sales on cryptocurrency exchanges per day reaches $302.51 billion, while the traditional U.S. stock market has figures not much higher – $478.72 billion.
The main advantages of cryptocurrency include:
The Market Regulates the Price and Demand
Cryptocurrency is also a good investment because it serves as a protection against inflation. Fiat currencies are issued by central banks, and the issuance leads to a depreciation in the value of any currency. Digital assets offset this factor by limiting the issuance of coins. After all, crypto coins are not tied to any currency government regulation, the price is determined by market demand. The total number of Bitcoins should be 21 million by 2140, which means that demand will always grow, and therefore the price will increase.
Transactions 24/7
The speed of transferring crypto coins from one wallet to another is almost instantaneous, which cannot be said about the established banking system with verification and going through all KYC procedures within a few days. This is undoubtedly one of the advantages of investing in cryptocurrency. The blockchain system eliminated intermediaries and ensured the reliability and safety of data. Also, transactions in cryptocurrencies are possible 24/7, which cannot be said about transfers in fiat currencies, when you have to wait for the opening of banking institutions to exchange one currency for another and make a shipment to another country.
Cost Minimization
When considering all the pros and cons of Bitcoin investment, it is important to highlight the absence of intermediaries in sending payments. This means cost minimization. When international currency payments take place, in addition to banks, intermediaries, payment systems, and currency conversion fees are involved. All of these combine to add additional fees and increase the overall cost to the consumer.
No System Regulator
Another reason why you should invest in cryptocurrency is the decentralization model. Every transaction is verified on the blockchain by a network of nodes; there is no single governing body. This eliminates monopolization by any regulatory agency, both in terms of the number of coins issued and the rules of circulation.
Several Categories
Variety in choice (more than 20 thousand cryptocurrencies and tokens) has become one of the main benefits of cryptocurrency.
All virtual currencies can be divided into several categories:
Investors can choose on the basis of certain characteristics, price, number of coins issued, and needs (exchange, storage) to form their portfolio both on a short-term and long-term basis.
Online Transactions Worldwide
Cryptocurrencies have created a separate global economy, allowing anyone to connect online to exchanges and carry out exchange transactions 24/7, transfers from one cryptocurrency wallet to another without going through checks, providing proof of money sources, and submitting documents to the bank.
Adjustments in Transactions are Excluded
Using the properties of blockchain or decentralized registry provides many advantages, among which are the impossibility of changing, deleting, make adjustments in any currency transaction. This infrastructure allows storing information across the entire network, which means that it is impossible to access the entire chain of records.
The user’s cryptocurrency wallet is protected by public and private keys. In case of loss, the private keys cannot be recovered, and the user may permanently lose access to his funds.
Free Access to The Public Registry
Blockchain also provides transparency of payments and access to view records for anyone at any time in this public registry. Any record that enters this decentralized registry remains there forever; it cannot be changed or tampered with, and the trace of any actions remains in the blockchain. This means for users honesty, transparency, absence of corruption, fraud, and full trust in the system.
Data Anonymity.
Any records are registered in the public registry, thus ensuring transparency, but the record of users is presented in the form of encrypted data (identifier, cryptocurrency wallet address). Accordingly, it is impossible to identify user data, name, and place of residence, which ensures data anonymity.
Сurrency Exchange 24/7
Many crypto exchanges allow you to convert fiat currencies (US dollar, euro, pound, etc.) into cryptocurrencies (Bitcoin, Lightcoin, Dogecoin, etc.) and vice versa 24/7. In addition, it happens for minimal commissions from any corner of the world, which is convenient when traveling, the need for instant settlements, and simultaneous access to several types of currencies.
Risks of Using Cryptocurrencies
Cryptocurrencies have many advantages and bring profit to investors. But still, do not forget about the minuses, the probability of losses, and even the minus values.
Volatility is something that any market participant faces when a coin can soar several times, as it happened more than once with Bitcoin, and also fall sharply.
It is difficult for newcomers to cope with the technology to understand how to properly store encrypted keys, in case of cyberattacks/phishing leads to loss of money due to failure to respect data security. In addition, there are known cases of crypto exchanges being hacked with multi-million dollar losses of user funds.
Investor distrust is also caused by the fact that this is a new technology and a new market. It began to form only in 2008, and in comparison with traditional stock markets, which have been around for more than 100 years, it raises certain concerns.
Investing always carries risks, and with cryptocurrencies, the risks are only multiplied.
One should consider drawbacks such as:
Digital Footprint in The Registry.
Pseudonymous transactions, where encrypted data is used to identify the user, still have a digital footprint in the registry. Government agencies conducting financial investigations, like the FBI, can decrypt them by recognizing the identity and data of the person who made the transaction.
Cyber Attacks
Any technology improves over time, and along with the positive effects, there are negative effects. Hackers are always looking for vulnerabilities in the system and trying to hack it, crypto exchanges and wallets can also be hacked, carelessness of the user can lead to loss of secret keys and money.
Rising Energy Costs
Mining or coin mining has raised many concerns from environmentalists. Coin mining requires a lot of computing power and, along with it, electricity consumption. After the emergence of crypto-coins, the level of energy consumption increased significantly, which began to negatively affect the environment. One of the options was the use of recoverable energy sources.
No Uniform Standards
Cryptocurrencies are unregulated, which means there is no government agency that approves uniform regulatory rules and procedures for the entire industry. This creates some uncertainty about how to use cryptocurrencies, questioning the legality of payments and storage as an asset.
Mining Costs
The profitability of mining is very dependent on the constant updating of equipment and its capacity. Miners have to invest in technical upgrades for electricity, which leads to increased costs and minimized profits.
Individual participation in mining is not competitive with the participation of several organizations in their capacities. All this calls into question the principle of decentralization.
Summary
Cryptocurrencies can bring significant growth to an investment portfolio, but there is still a possibility that the balance may be zero. This is a good tool that has initiated fundamental changes in the financial system. Along with the pluses, such as accessibility decentralization, there are also disadvantages, such as volatility and uncertainty of the market. Dynamism and unpredictability are more suitable for risky investors than for traditional investors, who prefer small incomes with low risks.