A cryptocurrency is a digital or virtual currency. Cryptocurrency is backed by cryptography which makes it nearly impossible to counterfeit or double-spend. The original cryptocurrency is said to be Bitcoin which originated in 2009. Since 2009 Bitcoin has risen to recent highs of $70,000 CAD. With the recent stimulus packages released by the government as well as the collapse of the economy due to the pandemic many people have been prompted to turn towards cryptocurrency as an investment. Many cryptocurrencies are decentralized networks based on blockchain technology. Blockchain is a distributed ledger enforced by a disparate network of computers. Blockchain has many applications and cryptocurrency although the primary use at the moment is not the only application. Check out this article for more information on blockchain technology and its many uses (https://www.businessinsider.com/blockchain-technology-applications-use-cases). Cryptocurrencies are not distributed by a central figure. Unlike fiat currencies (USD, CAD, etc.) transfer can be done between two individuals without an intermediate such as a bank. This is beneficial but also slightly problematic as with no intermediary cryptocurrency is non-refundable. The transfer of currency is “anonymous”, it can be tracked very well but the transfer is done from one wallet to another. Cryptocurrency was once said to only be used for black market activity and drug dealers, now gaining attention from major news outlets and accepted in transactions by PayPal, Square and Tesla it has gained recognition as a currency of the future. In this blog I will be discussing the pros and cons of cryptocurrency as well as talking about cryptocurrency as an investment.
Cryptocurrency Cons and Investment
Cryptocurrency as an investment is said to be speculative in a highly volatile market. I will be speaking about cryptocurrency from the perspective of a Financial Advisor or Financial Analysts in regards to the speculation surrounding cryptocurrency. Many Financial experts believe the market is purely speculative and not a good investment for multiple reasons.
One of the reasons is the lack of foundation to back up the price of the currencies. In the stock market advisors use company outlooks, debt to earnings ratios, P/E ratios, and many other metrics to determine the value of stocks. The majority of cryptocurrencies are not backed up by companies and are purely driven off of the “hype” from investors. In relation to the evaluation of companies and crypto in the money market, the price is driven by the willingness for people to continue to buy the currency. Without the want from investors to purchase the currency there is no market. In the stock market past success does not guarantee future success but it is a very good indicator. A company with a long term reputation of success, an increasing dividend payout and a good company outlook is typically a good investment. The past trends in the stock market are typically analyzed for a 10 year period. Bitcoin has only been around for 12 years, meaning that there is not much of a market to analyze.
Another reason Financial Advisors are speculative is the lack of security around transactions. For many currency exchanges there have been security breaches that steal cryptocurrencies. Holding currency on exchanges can be very risky and therefore it is important to hold currency in secure wallets. The saying goes “not your keys not your coins” when buying, selling and trading cryptocurrency. Whoever has access to the private key can access the funds. Once the currency has left your wallet it is virtually impossible to get it back. Regular stocks face similar issues for many brokerages. If accounts whose money has been compromised inform the brokers immediately the transfer can typically be reversed. There are small issues though. Unlike a bank account where a lack of authorization will restore funds a brokerage account does not have that same legal protection. Although many brokerages are willing to offer a 100% guarantee of the restoration of funds it can still pose a challenge to get your money back.
The final two reasons many Financial Advisors are against cryptocurrency is they prefer to trade long term as well as they worry about regulation from government and banks. Stocks already face regulation from both banks and the government. The central bank has an effect on the stock market indirectly through the quantity of money, interest rate, etc. The trouble is that there is potential for these same controls to affect cryptocurrency. We have also seen “whales” controlling the value of coins that are more centralized such as Dogecoin. This centralization defeats one of the main purposes of cryptocurrency.
Bitcoin although reaching all-time highs recently has faced crashes in the past. Due to cryptocurrencies high volatility you should only invest money that you are willing to lose as the market is very unpredictable. The majority of cryptocurrencies are not centralized therefore if people stop buying/trading Bitcoin its price begins to drop. Understandably financial advisors prefer to trade long term investment. This is for good reason because they stand to make a consistent profit and have many of the characteristics to support a sustainable growth in money for years to come. Whether you are a cryptocurrency enthusiast or against the idea entirely it is important to identify its benefits and downfalls.
There are negatives attached to cryptocurrency but that isn’t to say there aren’t positives. I will quickly list the benefits as well as a short description of each. Cryptocurrency provides user autonomy. Digital currencies allow the user to control how, where, and when they spend without dealing with an intermediary such as a bank or a government. Privacy is another benefit, unless someone makes their transactions public, transactions are never associated with a personal identity and cannot easily be traced. They still remain traceable but much less associated with individuals than transactions that use an intermediary. Another benefit is the peer-to-peer focus of cryptocurrency. Funds are able to be sent without the approval of any authority. Other benefits include, but are not limited too: Little to no transaction fees, easier international trading, no third party holds or seizures, and the decentralization of funds.
With the IPO of Coinbase and the introduction of other cryptocurrency trading platforms. The question isn’t whether or not cryptocurrency is here to stay but rather how quickly will it be globally excepted? Regardless of whether the market goes belly up and fails the technology of blockchain and the uses of cryptocurrency have massive potential and uses within today’s world. Ignoring the possibility of a future with cryptocurrency as our main means of buying, selling, transferring funds, etc. would be foolish.
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