- What is crypto and how does it work?
- What are the advantages of owning crypto?
- Advantages of crypto
- Disadvantages of crypto
- Conclusion
Before investors make up their mind to buy crypto, it is important for them to have an answer to the question “What is cryptocurrency?”
During the crypto boom of 2021, investors became fascinated with the trendy crypto and the associated blockchain technologies. Some of them got into the game without even having a clear idea of what cryptocurrency is. As a result, many lost both their life savings and faith in the new technology.
Bitcoin, the world’s largest cryptocurrency, has always been the leader of the crypto market. In November 2021, it reached an all-time high of around $68,000. Over the next year, Bitcoin lost 75% of its value as investors became skeptical about risky assets after the Federal Reserve started raising interest rates to bring down inflation.
All cryptocurrencies, including Bitcoin, were hit particularly hard by the changing investment climate.
What is crypto and how does it work?
Vanguard, one of the most prominent asset management companies, has provided an accurate definition of crypto, “A cryptocurrency is a digital asset stored on blockchain technology that serves as a type of currency or store of value. Unlike traditional currencies, cryptocurrencies aren’t backed by major governments or developed economies.”
Blockchain allows transactions between two parties to be checked and validated through a decentralized network of users known as nodes. Data is verified and recorded by the nodes, rather than by a single centralized authority body or intermediary.
For example, the bitcoin blockchain contains every bitcoin transaction that has ever taken place, divided into blocks. Each block is built upon a body of previous blocks, forming a chain.
Bitcoin miners add new blocks by solving complex math problems. Every time a new block appears, or about once every 10 minutes, the first miner to find the solution is rewarded with a certain amount in Bitcoin. Bitcoin miners support the network’s security and are rewarded for doing so. The system ensures that all transactions are valid and protects the network from fraud.
What are the advantages of owning crypto?
Investors have been asking themselves “What are the advantages of owning crypto?” ever since Bitcoin emerged in 2009. Proponents of digital assets believe that DeFi can democratize the global financial system by gradually taking the power to issue money away from central banks and bankers.
Crypto is particularly effective for quick and efficient cross-border payments to people living in countries with unstable currencies or cross-border transaction restrictions.
Another reason to buy crypto is for investment purposes. Cryptocurrencies are believed to be a hedge against inflation. However, to be inflation-proof, cryptocurrencies must be a store of value in the future, which means that their value must remain the same or increase. What is more, their supply should increase over time but only to a limited extent.
For example, Bitcoin has a maximum supply of 21 million coins. There are currently about 20 million coins in circulation. About 6.25 bitcoins are mined and put into circulation every 10 minutes. The limit is not expected to be reached until 2140. This shortage could drive the price of the first cryptocurrency up as the limit approaches, but this is all purely hypothetical.
Advantages of crypto
The three main advantages of crypto are accessibility, transaction speed, and transparency. Cryptocurrency markets operate 24/7. Regardless of the location, a user can buy and sell digital assets without worrying about the exchange being closed. It is always open.
The benefits of such accessibility for beginners are debatable. However, crypto has always been aimed at democratizing finance. Anyone can conduct a transaction anywhere and anytime. This is what makes crypto appealing to investors.
Market participants have always been interested in faster and cheaper transactions. In the case of crypto, high transaction speed is critical because it affects the overall adoption of crypto.
The second benefit is transparency. The open-source code allows transactions to be validated in real time. From a regulatory perspective, this is important so that regulators can confiscate digital assets used in criminal activity.
Disadvantages of crypto
With the growth of the crypto market, most influential countries have attempted to establish crypto regulation. This is sometimes manifested in attempts to interfere with crypto exchanges, affecting their customers. For example, in early June 2023, the U.S. Securities and Exchange Commission (SEC) sued Binance and Coinbase Global (COIN), two of the world’s largest crypto exchanges.
It is crucial for prospective cryptocurrency investors to realize that the industry is still in its transitional stage. There are many regulatory issues with agencies such as the SEC. This makes any investment, including diversified crypto ETFs, potentially volatile with above-average risks.
Conclusion
Crypto is a relatively new phenomenon, but it’s already hard to imagine the financial market without it. The speed and accessibility of transactions is making digital assets a strong competitor to fiat money. However, due to the failure of the world’s managers and financiers to embrace this phenomenon, crypto is still volatile and dependent on too many factors. Nevertheless, crypto is already one of the most promising assets for investors.
