Before You Invest in Crypto: A Beginner’s Guide
The centralized position of fiat currencies operates on the principle of trust. However, the response of federal governments around the world to the pandemic has put forward a strong reason that digital assets should make up part of an asset allocation.
Is it possible to ignore the increasing adoption of digital technology and payment structure? Why are we reluctant to trust it? Why does it remain a challenge to date?
Most of us don’t know enough about cryptocurrencies. The following article presents both sides without bias, allowing you to decide for yourself whether digital currencies are a passing fad or the future of commerce.
The Case for Cryptocurrency
PayPal has recently opened up a cryptocurrency platform for all U.S. users. Not only the company is offering initial support for Bitcoin, Bitcoin Cash, Ethereum, and Litecoin, but also intends to let people use their cryptocurrency holdings in the app for online purchases starting in the year 2021.
Such experiments with digital currency and the utility of digital wallets are attempts to introduce cryptocurrency in day-to-day commerce. To bridge the conventional financial system, crypto giant Coinbase has announced a debit card that can be used at ordinary merchants. MasterCard too has announced a service to let central banks test out digital currencies. Such steps could indeed help launch cryptos to the mainstream. The massive adoption of digital platforms and remote transactions amidst the pandemic has led the ventures beginning to warm up to cryptocurrencies and e-wallets for a swifter and cheaper option. The rise of the crypto during unprecedented times is being considered seriously by investors. According to FORBES, when the Bloomberg Commodity Index was down by 25% the Bitcoin was up by 22%. The fact that Bitcoin being a “digital gold” is relevant as they are easy to acquire, transfer, and store than the gold itself. The support of the high-profile investors and Wall Street giants amid the financial crisis sparked by the pandemic has furthered Bitcoin’s reputation as “digital gold.”
Bitcoin (BTC- USD) bottomed out near $5,000 in mid-March, only to rebound to over $9,400 in October. That’s nearly a 100% profit during the pandemic. The crypto market is in the midst of a major bull run. On Nov. 12 it surpassed a $16000 threshold for the first time! Now that it’s approaching its all-time highs the crypto community is anticipating more records in the near future. Investment in cryptocurrency seems profitable. The Bitcoin community is looking forward with high hopes. Even after political discords, pandemic outbreaks, and numerous lockdowns, many investors continue seeking out non-traditional assets.
While the cryptocurrency market continues to gain traction in business and financial activities, there’s no denying the fact that it comes with a host of risks. We cannot ignore the cryptos shrinking trust gap.
The Case Against Cryptocurrency
Bitcoin lacks the back of a legal institution. Thus, trust is the true hurdle. The cryptocurrency exchanges are prone to security breaches like money laundering, illegal trading activities, cyberattacks, and incidences of scam projects. The promise of dazzling returns and failure of the lofty promises discourage people from experimenting with the available opportunities. The conversation of trust in cryptocurrency resurfaces from time to time.
It’s easy to store stocks or bonds, but not easy for cryptocurrencies. Coinbase makes it fairly easy to buy and sell crypto assets, still many don’t like to keep their digital assets on exchanges. While some prefer “cold storage” options which are again risky due to the fear of losing private keys and making it impossible to access cryptocurrency.
Cryptocurrencies and blockchain are cutting edge technologies which are still being developed. Buying crypto is an early-stage investment and the vast majority of the projects fail and become worthless. Only a small number succeed and that too is unclear if these wins will be enough to offset the many losses. Since the spread of blockchain technology, several thousand cryptocurrencies launched out of which only a few are currently of any investment interest. Let’s take a look at a few projects which started with a promise but failed drastically:
· TON or Telegram Open Network- Telegram planned to launch its blockchain platform and native cryptocurrency. The developers presented this future coin as a potential standard cryptocurrency in the project white paper. Launched in 2018, the Telegram initial coin offering was a huge success but it didn’t end well. The company’s lack of legal resources, technical difficulties, and strong competition led to its official termination in the year 2020.
· Petchains- It was presented as the future information management system which would allow its users to maintain data of the animals living in shelters and homes. The system was intended to be developed using blockchain technology. Despite marketing efforts, no serious funding was attracted. As a result, their official website now stands inactive.
· Wiki token- Wiki token was designed to be used as a means of payment at the so-called Crypto University. The future platform of the project was described as a decentralized, totally independent, censorship-free educational system. Without any collaboration with institutions or educators and a lack of well-thought-out concept, the project failed.
The hasty launch of such projects on the wave of blockchain popularity, with nor market or audience research is unable to offer any meaningful value to a potential customer.
The widescale adoption of cryptocurrencies can only determine whether crypto assets pay off. Fiat currencies like the Japanese yen and U.S. dollars are printed at the will of politicians while Bitcoin has a supply of just 21 million coins. It is viewed as a scarce asset. Ethereum serves as a launching pad for “dapps” or decentralized applications that have their terms written in code and executed automatically. Such technologies could disrupt massive industries and potentially create entirely new markets.
The Bottom Line
Cryptocurrency and its underlying blockchain technology have potential. To see its overwhelming adoption, there is a need for the inclusion of trusted governing bodies in the crypto space. Financial giants such as PayPal and Square are already making it easy to buy and sell cryptocurrency on their popular platforms. MicroStrategy and Square have collectively invested in digital assets.
Surprisingly, countries in Southeast Asia (SEA) are improving their regulatory bodies to reap the benefits of crypto technology and blockchain-powered solutions thus acting as a catalyst in mainstream adoption. In Singapore, the initiatives to front blockchain projects and progressive guidelines for crypto companies can be seen as a new shift in financial structure. The involvement of local authorities boosts the public’s confidence and encourages them to kick- start their crypto journey. Acknowledgment of the trust gap is indeed the first step along with a supportive regulatory environment that will lay the foundation for future innovation and mass acceptance of cryptocurrency.