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What is cryptocurrency and should I invest in it?

What is cryptocurrency and should I invest in it?

With all the noise about investing in Bitcoin or other cryptocurrencies (crypto), you might feel like if you don’t join the cryptocurrency craze today you’re missing out! Investing in cryptocurrency has become a wildly popular and trendy investment option over the last few years (especially amongst millennials), however trying to get a handle on what and how cryptocurrencies work is a lot more complex. 

Some commentators are heralding cryptocurrency as the new future of money, whereas a number of large financial institutions such as banks and fund managers are saying that cryptocurrencies will eventually become worthless. The truth is there are still a lot of unknowns when it comes to cryptocurrency and even the purported finance experts can’t predict the future. 

Here’s what you need to know if you’re considering investing in cryptocurrency.  

What exactly is cryptocurrency?

Cryptocurrency refers to digital currencies which are created with the help of blockchain technology. Unlike traditional currencies, cryptocurrencies are decentralised and trades are anonymous. A cryptocurrency can be created by anyone and it’s estimated there are over 15,000 cryptocurrencies in the market. This includes currencies such as Bitcoin, Ethereum, Litecoin, and Dogecoin.

Cryptocurrency can be used to purchase goods and services, and can also be traded for profit. Unlike other asset classes such as property where you’re paid rent or shares where you receive dividends when companies make profits, cryptocurrencies don’t generate an income. Investing in cryptocurrency is more like investing in gold which is valued based on demand, scarcity (i.e think Bitcoin with its limited number of coins), and market sentiment. Cryptocurrency investors attempt to build wealth by selling their currencies once they go up in value.

Are cryptocurrencies a good investment?

We’ve all heard the stories of the early investors in Bitcoin who paid a few dollars per coin, only to have values escalate exponentially, making them overnight millionaires. The notion that you can invest in the next big cryptocurrency before its value skyrockets is very attractive, but it seems unlikely every cryptocurrency will follow a similar trajectory to Bitcoin. 

One bitcoin is now worth around $70,000, but the value jumps around a lot. In early September the value of one bitcoin was around $60,000. That had jumped to $90,000 by early November, before falling to $70,000 in early December. Within just a couple days, Bitcoin can increase or decrease in value by as much as $10,000 per coin. That kind of volatility just doesn’t typically occur in other traditional currencies.

Cryptocurrency is currently a high risk investment. While the rewards can seemingly be huge, so can the losses. If your appetite for risk is low, then this isn’t the investment for you. If you’re more comfortable with the risks of cryptocurrency and want to invest in it, we’d suggest only investing what you can afford to lose

Like with any investment, cryptocurrency investors should look to invest for the long-term, taking their time by researching what currencies are likely to become mainstream over the long-term. Investors looking to speculate and ride short-term waves just need to realise they are closely aligned to a form of gambling and have to be prepared for extreme ups and downs.

Which cryptocurrencies should I invest in?

This is the big question – and one that even the so-called experts don’t know the answer to. Just like with the internet when it seemed companies like Yahoo!, Magellan, Lycos, Infoseek and Excite Yahoo were going to be the key players – along came Google to blow them all out of the water. Most people acknowledge that cryptocurrencies and things such as NFT’s (non-fungible tokens) are here to stay, however knowing which ones will rise and which will flop is the difficult question to answer.

Cryptocurrency and the environmental factors

While it’s extremely difficult to predict which cryptocurrencies will become mainstays and which will fade into oblivion, there’s one factor worth keeping in mind. Limited cryptocurrencies like Bitcoin have an intensive mining process which means they use up a lot of electricity and have a significant environmental impact. It’s reasonable to expect that as we strive towards a carbon neutral society,  carbon-efficiency will become a factor when considering the long-term viability of a specific currency.  

The potential impacts of future regulation 

While the cryptocurrency market is currently unregulated, the threat of future regulation is another consideration that could seriously impact the value of cryptocurrency prices. ASIC has urged caution when it comes to cryptocurrencies and they also haven’t ruled out future regulation (something that has just taken place in China), so its buyer beware when it comes to regulation and the potential price impacts. 

So should you invest into the cryptocurrency craze or let this opportunity pass? 

Honestly, we don’t believe anyone truly knows where cryptocurrencies will be in three years time and which ones will be the winners, but what we are confident about is that where there will be winners there will also be losers. If you feel the urge to get into the cryptocurrency market then do your research first, but whatever you do, don’t bet the house!

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