Cryptocurrencies have captured the imagination of the general public, and it’s not hard to see why. After the global financial crisis of 2008, which saw hundreds of billions of dollars worth of wealth evaporate in the blink of an eye, it’s refreshing to see an investment vehicle that is not only innovative but also appears to have a solid fundamental basis. The concept of virtual currencies has been around for nearly as long as computers have been invented, with the first decentralized digital currency – Bitcoin – being introduced in 2009. However, it was during the latter half of the 2010s that this new asset class really took off, with the price of one bitcoin soaring from $2 to more than $20,000 over the course of the past year. Cryptocurrencies: The Future of Money or the Latest Scam?
What Are Cryptocurrencies?
Cryptocurrencies are digital or virtual currencies that are designed to be secure, decentralized, and anonymous. Unlike fiat currencies – which are issued and managed by governments and central banks – cryptocurrencies are decentralized, with no centralized entity controlling them. This means that you can trade or invest in them without needing to trust anyone – something that many people find appealing in an era of heightened financial fraud scandals and countless reports of financial negligence.
How Do Cryptocurrencies Work?
In order to understand how cryptocurrencies work, we need to first examine how conventional money works. For example, if I want to buy a coffee with US dollars, I need to go through a series of steps, including obtaining permission from a bank to withdraw money from my account, before the money even reaches my bank account. In contrast, if I want to buy a coffee with Bitcoin, there is no middleman – i.e., no bank – involved in the transaction. Instead, the money is transferred directly from my Bitcoin wallet to the coffee store’s Bitcoin wallet, without passing through any other bank account.
Pros of Cryptocurrencies
One of the main attractions of cryptocurrencies is the fact that they are decentralized. In contrast to conventional, regulated financial systems where governments and banks can essentially shut down an economy at will, cryptocurrencies are based on distributed ledger technology that is thought to be more resistant to outside influences, making them an appealing choice in volatile economic times. Additionally, many people see cryptocurrencies as a way to avoid the prying eyes of governments and banks, who can frequently be accused of impeding on individual liberties.
Cons of Cryptocurrencies
On the other hand, cryptocurrencies do have some significant shortcomings that place them in the “scam” category. For example, as mentioned above, cryptocurrencies are decentralized and, therefore, not supervised by any central authority. Although decentralization is a desirable trait in many contexts, it can also be a source of significant risk when it comes to cryptocurrencies. Because there is no “in-between” entity to mediate and regulate transactions, there is no way of knowing if and when a cryptocurrency transaction is legitimate. This means that it is possible for people to conduct transactions using a cryptocurrency that is later discovered to be fraudulent.
How to Buy Cryptocurrencies
First, you’ll need to acquire some cryptocurrencies. The easiest way to do this is to simply purchase them on an exchange – most exchanges allow you to purchase a wide range of popular cryptocurrencies, including Bitcoin, Ethereum, Litecoin and many others. If you want to get your hands dirty and go all-in with cryptocurrencies, you can also purchase them directly from an exchange as a “crypto token” – this is what many investors are doing these days.
Is Investing in Cryptocurrencies a Good Idea?
Ultimately, the decision whether or not to invest in or use cryptocurrencies lies with the investor. While cryptocurrencies have a lot of positive aspects, they are also very volatile and risky, and it’s important to put these assets into the proper context. For example, cryptocurrency investments are very unlikely to provide anything close to the growth potential of a traditional investment portfolio, which is likely to provide much higher returns on a consistent basis in the long run. Moreover, cryptocurrencies are even more unlikely to provide any sort of protection against inflation, making them a poor choice as a long-term investment.
In the end, while cryptocurrencies have many benefits, they also have significant shortcomings that make them a risky investment – especially when compared to conventional, regulated financial assets, like stocks. As such, cryptocurrencies fall under the category of investments that are best saved for short-term gains, with perhaps a few exceptions. If you’re interested in learning more about cryptocurrencies, we recommend checking out our comprehensive guide, which covers everything you need to know about investing in this new asset class.