It remains my position that investing in cryptocurrencies is a big risk/a speculation, and you should only do so if you are willing to take a huge loss.
With that being said, my staff has written this article to look at the positives and negatives associates with such investments.
Nothing written here should be considered as legal, financial, tax, or any other kind of advice.
For any questions, or if you are looking to invest as an expat, you can contact me using this form, or via the WhatsApp function below.
Table of Contents
These days, every single person is familiar with cryptocurrencies and whenever they hear the term, they usually want to get involved and earn profits from them.
For example, when a person named ‘a’ heard that person named ‘b’ earned huge profits by investing in a cryptocurrency called ‘Bitcoin’, then ‘a’ would also want to earn such profits.
Then ‘a’ would invest $10,000 the very next day and watches the price movements. A week later, when the price starts to decrease a little bit, ‘a’ becomes panicked and cashes out at a 10% loss, which means he gets $9,000 only.
Well, this is a scenario that happens in most cases and people are losing a lot of money. So, in this article, we will cover the most important information regarding cryptocurrencies and determine whether cryptocurrencies are a good investment.
Cryptocurrency – Let’s begin with the definition of cryptocurrency for having a better understanding of the topic. The term Cryptocurrency is made up of two words namely, ‘Crypto’ and ‘Currency’.
Almost every single person reading this article is familiar that currency is nothing but money, but what is crypto? ‘Crypto’ refers to something hidden or simply a secret.
The term crypto is derived from cryptography, which defines the process of hiding something so that it can be kept a secret. This is a technical process and done by creating some programmable codes.
Why does somebody want to hide a currency? If it is invisible, then how can a person make use of it?
Well, here the process is not used to hide the money, instead, it is used to secure the process of making monetary transactions. Cryptocurrency does not exist in the physical world and only exists in the virtual realm.
Therefore, cryptography is necessary for keeping them safe from any sort of potential threats such as cybersecurity threats from hackers. All the cryptocurrency transactions are done with the help of a network, which is called a ‘Blockchain’.
This blockchain stores all the transactional data regarding cryptocurrencies in the world, whenever and wherever a transaction takes place. All the information is stored in bundles that are called blocks and hence the term Blockchain.
All the data stored with the help of a blockchain is stored on a public ledger, which is accessible to any person on the network. Yet, all the data is permanent and no person has the ability to modify or alter the existing information.
This data is added to a blockchain by some individuals who are called ‘Miners’. Because the process involves a lot of time and effort, the people who mine cryptocurrencies would be rewarded with some tokens (units) of that cryptocurrency.
Cryptocurrencies are decentralized, which means no country’s government or monetary authority has control over their operational procedure.
Cryptocurrency transactions can be done in a secure and anonymous way and therefore there are some advantages as there are some disadvantages.
A few examples of some of the major cryptocurrencies in the world are mentioned below:
- Bitcoin (BTC)
- Ethereum (ETH)
- Litecoin (LTC)
- Stellar (XLM)
- Ripple (XRP)
- Tether (USDT)
- Dogecoin (DOGE)
- Cardano (ADA)
- Bitcoin Cash (BCH)
- Chainlink (LINK)
- Binance Coin (BNB)
- Polkadot (DOT)
- EOS (EOS)
Including these, it was estimated that there were around 4,000 cryptocurrencies in existence as of January 2021.
Investing in cryptocurrencies:
People can either buy and hold on to their purchased crypto tokens in a digital wallet called a ‘crypto wallet’, or they could trade with cryptocurrencies. We’ll get to the buying process in a few moments, meanwhile let’s talk about crypto trading.
Trading – Just like forex trading, people who want to trade with cryptocurrencies can buy them with the help of their country’s currency such as USD, JPY, CAD, GBP, AUD, SGD, etc.
People can trade with cryptocurrencies and make money from that process by Futures contracts, Options contracts, Call Options, Put Options, and Binary options.
They can even speculate the price movement and earn profits with the help of a CFD trading account. The CFD trading in cryptocurrencies is like that of actual CFD trading where the person won’t be required to own the underlying asset.
Both the long and short positions are leveraged products, which means a person can put a little amount of money into it, and yet, they can get broad exposure.
Holding – People who want to buy and hold crypto assets can do so with the help of a cryptocurrency exchange and a crypto wallet, and this process is called ‘Hodling’ in crypto terminology.
They must create an account with the cryptocurrency exchange, make the deposit, buy tokens of the specific cryptocurrency, store it in a crypto wallet, and finally sell it when there has been an increase in the price.
Before we can understand a crypto wallet’s definition, we must know about the meaning of a bitcoin address. For suppose let us imagine that you are required to send an email to one of your friends.
When you are sending that email, you are not sending the email to his name, instead, you are sending the email to a specific location called an email address.
Similarly, when you wish to make a transaction involving cryptocurrencies, you cannot send it to the name of a person, if you do so, the whole objective of keeping the transaction anonymous would be compromised.
Therefore, you make a transaction with the help of an address known as a crypto address which is used to represent the wallet of the person, whom you intend to make transactions.
These crypto addresses are available in various formats and range in between 26 to 35 characters and consist of alphanumerical characters.
Now, this address is used to represent a wallet, known as a crypto wallet, which allows an individual to store the crypto tokens. It is nothing but the software/hardware that acts as a storage space and can only be accessed by the owner (who has a key).
There are different types of wallets namely Mobile Wallets, Web Wallets, Desktop Wallets, Hardware Wallets, and Paper Wallets. A person should always be careful about their crypto wallet because even a small mistake could result in the loss of the assets present within the wallet.
Coming to cryptocurrency exchanges, these are nothing but mediators between the people who want to buy cryptos and the people who want to sell them.
Some cryptocurrency exchanges even allow a user to make cryptocurrency transactions without even having to own an actual crypto wallet.
While selecting a cryptocurrency exchange, one should be attentive to various factors such as the exchange’s security, costs involved, funding options, ease of accessibility, etc.
Some of the best available cryptocurrency exchanges, which are said to be the best in their respective fields are as follows.
Cryptocurrencies are taxable in almost all the countries just like any other asset.
Scams involved with cryptocurrencies:
As there is a good scope for people to invest money and earn profits, cryptocurrencies gained a lot of attention from people all over the world.
Especially, when people who have a very minimum level of knowledge regarding cryptocurrencies start investing in them, scammers and hackers primarily target these people to steal money from them.
Let us have a look at some of the most important types of fraudulent activities involved in the cryptocurrency universe that everyone should be aware of.
- Fake Exchanges:
Over the years, there have been many instances of fake exchanges that stole money from people in the name of investment and vanished.
A good example is an exchange named BitKRX, which was exposed by the financial authorities of South Korea to be a fake exchange with the help of the local crypto community (investors and fans).
- Ponzi Scheme:
Almost everyone is familiar with Ponzi schemes, and for those who might not be familiar, this is a scam where an individual or an institution borrows money from one individual or company to pay off the previous lender.
In 2019, three people were arrested for conducting a Ponzi scheme related to cryptocurrencies, which involved a sum of around $722 million.
- Fake Cryptos:
When you want to invest in cryptocurrencies, you should always opt for a cryptocurrency that has been operational for a while. New cryptocurrencies might look attractive as they have a good potential for earning more profits.
When someone or some organization asks you to invest in a new cryptocurrency by showing references of a few cryptocurrencies that have performed very well by starting as a new one, you should pay more attention before you invest.
Not all cryptocurrencies might be operational in the future, and there is no guarantee that they would still exist in the future. You cannot do anything even if a cryptocurrency goes out of business because they are not regulated or monitored by any government.
- Usual Scams:
In general, most of you might have been familiar with the scam where a person would call and tell individuals that they are calling from a monetary authority, and the individuals owe them taxes that are to be paid immediately.
One should be aware of such scams because no monetary authority would approach individuals by phone and ask for money other than the traditional way in which taxes must be paid.
When you receive such phone calls, never make payment by listening to the scammers who try to manipulate you by scaring you.
Malware is the most used cyber-attack to get hold of an individual’s credentials. Cybercriminals use malware for getting access to all of your personal information such as bank details, credit card details, crypto wallet details, etc.
Never click on a suspicious email or a website because this is the only way that cyber-attacks such as malware attacks take place. Always click on websites with URL that starts with ‘HTTPS’ and avoid websites that have an URL starting with ‘HTTP’.
So, we are now familiar with the types of scams, cyber-attacks, etc., which are involved with cryptocurrencies. Now we will have a look at some of the pros and cons of cryptocurrencies.
Advantages and Disadvantages:
Advantages – Like we usually do for any other topic, let’s start with the advantages of cryptocurrencies.
Cryptocurrencies come with greater liquidity compared to many other types of assets. This makes it easy for individuals to convert cryptocurrencies into fiat currencies easily while not having to lose most of their value.
However, this is the case for some of the major cryptocurrencies such as Bitcoin, Ethereum, etc., while most of the smaller cryptocurrencies must be converted to major cryptocurrencies such as bitcoin before they can be cashed out in fiat currencies.
In such a process, the value might be decreased, and therefore, we suggest you opt for major cryptocurrencies rather than smaller or newer ones.
There is also a specific limit on many crypto exchanges regarding how much cryptocurrency can be withdrawn. Regardless of these facts, cryptos such as Bitcoin come with greater liquidity making them similar to regular money.
Over the past few years, cryptocurrencies have stepped into the spotlight and gained a lot of popularity. Because of that, many online websites, stores, and even individuals are starting to accept cryptocurrency as a means of payment.
With help of some positive statements from influential people such as Elon Musk, more and more people are becoming aware of cryptocurrencies and their advantages.
If this keeps on continuing, cryptocurrencies would be accepted in many corners of the world in the nearby future.
3. Easy to use:
The process of making transactions with cryptocurrencies or investing in them is very easy than most people would assume. In some regions, it is even easier than the digital transaction process using fiat currency.
A person can make international payments without having to pay any additional fees. Moreover, there is no limit to the amount that can be sent to others with the help of cryptos.
Additionally, most cryptocurrencies have a very low transaction fee, which does not even exceed $2, which is a huge benefit for making international transactions. On average, card transfers cost 3% and money transfers cost around 5% to 15%.
Another great advantage of making payments using cryptocurrencies is that the transaction would take time as low as few minutes, while people opting for other methods might have to wait for a few hours, if not days.
The process of trading is also made very simple with the help of crypto exchanges and crypto-wallets.
Transactions made with the help of cryptocurrencies are private and anonymous. While making payments with the help of bank transfers, the bank is responsible for the handling of your transaction.
This means the banks have all the necessary information regarding your transaction details and know about the important details such as the amount, the person you are sending it to, etc.
As cryptocurrencies are not safeguarded by any monetary authority, these details remain anonymous. It is, however, possible to track the amount that has been transferred to a specific individual.
Nevertheless, nobody can find the details regarding who owns the address.
Like mentioned before, these are not controlled by any monetary authority and therefore, no political authority, government, or organization can have control over a person’s funds.
Even if there is a criminal investigation or a political fraud, nobody could freeze the funds in a person’s wallet.
6. Inflation resistant:
Unlike fiat currencies that are subject to inflation, cryptocurrencies are free from inflation. Even though the prices are highly volatile, the prices would increase over the long term.
Cryptocurrencies such as Bitcoin come with a built-in scarcity, which means there is a specific limit for the number of tokens that can be created. After reaching this limit, the production of crypto tokens would be stopped and would result in a price hike because of the lowered supply leading to increased demand.
Disadvantages – Having said this about the beneficial features of cryptocurrencies, we will now discuss the drawbacks of getting involved with cryptocurrencies.
1. Fraudulent activities:
We have already discussed that there are a lot of fraudulent activities such as scams, hacks, cyber-attacks, etc., which endanger the security of an investor’s money.
Some cryptocurrencies do not have many users and are susceptible to cyber-attacks compared to those having many users.
Usually, when there is a fraudulent activity related to fiat money, the monetary authorities act and clear all the mess related to it. Whereas cryptocurrencies have no such controlling authority to take care of such a mess.
2. Highly used in black-market transactions:
Because of anonymity and privacy, cryptocurrencies such as Bitcoin are being used in black market platforms such as the dark web and deep web for illegal activities such as drug deals, weapon sales, etc.
Because of this situation, cryptocurrencies have acquired a bad reputation and if this keeps on continuing, cryptocurrencies will gain a lot of ill-fame and the general public wouldn’t wish to get involved.
The volatility of cryptocurrencies is very high and the price swings since their existence is a proven example of that. People who trade with cryptocurrencies using futures, options, etc., (short-term traders) would be able to benefit from these fluctuations.
However, people who are in it for capital appreciation might become scared of the huge fluctuation and withdraw at a loss.
For example, the price of one Bitcoin was around $65,000 in the month of April, which was considered as the record-level high in its price history. However, the price is around $35,000 by the time of writing this article.
Most investors panicked because of this crash and have withdrawn their funds at a huge loss. This makes it clear that the people who invested in cryptocurrencies are never safe.
4. No refund policy:
Imagine if you are sending money with the help of a bank, and something went wrong. For example, you sent the wrong amount or sent the amount to the wrong person, then you can contact the bank for dealing with these problems.
Imagine the same while you are making a transaction with the help of cryptocurrencies. When you send the wrong amount or send money to the wrong address, you cannot approach anyone as there is no controlling authority.
In simple words, if you make a mistake while making a transaction using cryptos, then you can kiss your money ‘Goodbye’. Yes, as harsh as it might sound, it is true in the case of cryptocurrencies.
5. Possibility of replacement:
Bitcoin has been the most popular cryptocurrency in the world and many investors were able to profit from this asset. However, there is no guarantee that it would remain the same.
However, there is a possibility for other currencies to take their place in the nearby future. For example, if we take Ether (ETH), which is the crypto toke used on the Ethereum network, it does not have a specific limit for the number of units that can be created.
So, if people conclude using it instead of cryptos like Bitcoin, which are limited, the price of Bitcoin and other cryptos having a built-in scarcity might face difficulties while experiencing a decrease in the price.
Therefore, crypto assets have a probability of being replaced by other cryptos that are considered beneficial compared to those.
6. Mining problems:
Cryptos such as Bitcoin, which use the Proof of Work consensus algorithm require an individual known as a miner to add blocks of data onto a blockchain. For doing so, they are required to solve highly complex cryptographic hash functions.
In order to solve these complex puzzles, miners require highly sophisticated equipment such as a Graphics Processing Unit (GPU) or an Application-Specific Integrated Circuit (ASIC).
This hardware equipment requires a lot of energy and other resources for being able to run in an efficient manner.
As we know, the energy necessary for running these is obtained from resources such as coal. As a result of this, the smog created from the coal plants would create a lot of harm for the people as well as the environment, while becoming a huge factor of pollution.
This may cause the environmental organizations to focus on the issue and lead to a partial or full ban on such mining projects.
Keeping this issue aside, we also have to focus on the position of miners in the blockchain.
If the consensus algorithm changes from proof of work to proof of stake or any other consensus algorithm for cryptocurrencies, then there would be no use for miners. If that happens, the people who already invested a lot of money in the mining equipment would experience a loss.
Cryptos such as Ethereum are thinking of shifting from proof of work in the nearby future and if that happens, there won’t be a necessity of miners and the transactions would be added on to a blockchain by the people having a substantial amount of money in their wallets.
By doing so, they would get rewarded for their work in the form of transactional costs.
Also, the chance of being rewarded for solving the hash functions becomes complex with every block of data. Therefore, people having average equipment won’t be able to profit from mining as much as those having sophisticated equipment.
7. Usage issues:
The whole objective of creating cryptocurrencies was to make the process of transactions easy. However, people nowadays, are seeing cryptocurrencies as a mode of investment rather than a mode of payment.
The sole purpose of cryptocurrencies is being compromised because of this fact. Adding to that, the number of people who accept cryptocurrencies as a mode of payment is gradually decreasing, especially after the crypto crash.
8. Possibility of a loss:
If the wallets are not kept carefully, people may lose their crypto assets. Not just a hardware wallet is prone to the possibility of experiencing a loss of the underlying crypto assets, but web and software wallets are also susceptible to a loss because of factors such as viruses, system crashes, cyber-attacks, loss of passwords, etc.
One of the major factors for the recent crypto crash is China’s ban on cryptocurrencies. This year, China banned the usage of cryptocurrencies by financial authorities that resulted in the sale of most crypto assets.
The recent crypto crash has resulted in a loss of more than $1 trillion from investors, which is mostly because of the panic because of the recent bans and other regulations.
Recently, the Indian government also stated that even though it is not going to ban cryptos entirely, there would be some possible regulations on the crypto trades and payments.
Countries like Saudi Arabia, Qatar, Algeria, Vietnam, etc., already have an existing ban on cryptocurrencies and impose fines or prison charges on the people who get involved with cryptocurrencies.
Just like China, if any other country comes up with restrictions on cryptocurrencies, there would possibly be another crash, which would impact the prices of cryptocurrencies to a greater extent.
10. Global events impact prices:
Tesla also revealed that it won’t be going to accept Bitcoin as a mode of payment. This was done by keeping the environmental concerns in mind, as stated by Mr. Elon Musk.
As a company that created environment-friendly cars, they didn’t want to support a currency that caused a lot of damage to the environment. This was also an important reason for the recent crypto crash.
From this scenario, we can understand that such global events have a huge impact on the price movements of cryptocurrencies at a greater level.
There are some beneficial conditions of making use of cryptocurrencies, however, the drawbacks outweigh those.
After the recent plunge in prices, most people might be wary of the fact that nobody can predict the price movements or profitability of cryptocurrencies.
Also, as cryptocurrencies are decentralized, countries that consider the possible threat on fiat currencies because of these would usually end up banning them, just like China did.
We have always been telling our clients about the damage that can be caused because of involving with cryptocurrencies, nonetheless, most people invest in them while seeing them as a good mode of investment.
It is okay if you invest a small amount of money into cryptocurrencies while being wary of the scams and frauds involved with them. But it is not a wise idea to invest a lot of money into the crypto market while expecting huge profits within a short time span.
Instead of cryptos, you can opt for a more stable portfolio consisting of worthwhile assets if you plan on acquiring our services.
Whether you are an individual having an ultra-high-net-worth, high net-worth, or medium amount of net worth, we can offer wealth management and financial planning services that have been proven to be advantageous.
Nevertheless, you can also acquire the financial solutions offered by us for investing an amount starting from $200 or more using our android app.
If you want to learn the art of investing so that you can do it by yourself, then you become an expert investor by acquiring the services of Adam Fayed Academy. You can even get all the necessary education with a subscription plan that requires as low as $1 per day.
Having said that, we hope that you were able to find all the necessary information in this article. We wish you all the best with your investments and other business endeavors. Have a great time!!!
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