TL;DR
- The internet is flooded with reasons to get into crypto. But you’ll need to know the pros and the cons of the asset class before making a decision.
- The pros include cryptos hedging against inflation, decentralization, security and privacy, low transaction fees, 24x7x365 trading, etc.
- Cryptos have their cons as well. These include irreversible transactions, the need for self-custody, scams, and the lack of regulations surrounding the asset.
- Cryptos like Bitcoin and Ethereum have given astronomical returns on investment over the years. But the volatility of the asset class makes people hesitant about investing in it. Mass adoption of cryptocurrencies would provide a solution for its volatility.
Introduction
Yin and Yang, Sun and Moon, Day and Night. We could go on, but you get the drift. The existence of one trait makes the other one relevant. If there were no dark, would you appreciate the light? Alright, enough of philosophy. You might be wondering what all of this has to do with cryptocurrency. Well, it’s a lot more than you think. In a world full of moon and Lambos (that is what crypto junkies aspire for when they take a position), it is easier to forget the other side of the story.
So, while the internet is flooded with all the reasons to get into cryptocurrency, today we will add some rationale behind it. And while we’re on it, we would also touch upon the downsides of the same. So who’s ready to evaluate cryptocurrency pros and cons? Read on!
Advantages of Cryptocurrency: The Positive Side
Well, we’d start with the positives first. Why? Because they outnumber the negatives by a margin. However, in the end, we all need to build our personal narratives. To kickstart that journey, let’s first dive into some advantages or pros of cryptocurrency.
1. Hedge against inflation
Before you rush out to start investing in all sorts of cryptocurrencies out there, hear us out. This applies to a limited number of coins only. Before we get into that, let us try to decipher inflation. You see, governments worldwide have total control over the supply and demand of their currency. There was a time when this supply was a function of gold reserves, but that arrangement ended decades ago.
Now, a central body like Federal Bank or RBI decides the number of Dollars/Rupees in circulation. They take this call depending on various factors. For example, the government may choose to print money to fund activities like war, debt repayment, etc. While it may seem like a harmless proposition, citizens often feel the brunt of ruthless printing in the form of inflation.
Since the excess money in the market is now competing for the same limited assets, prices shoot up. Mind you; it was never you who wanted a war. Not at the cost of your daily meals, at least. However, you are caught up in the act because of inflation.
In other words, we can say that inflation, in reality, is the measure of the ever-decreasing value of your money.
On the other hand, what if money was fixed in supply and nobody could tweak it at will? That would appreciate over time as the demand goes up. That is exactly how gold behaves in the real world. Because of its fixed supply and difficulty to mine, it is an appreciating asset.
Some cryptocurrencies like Bitcoin also follow a similar suit. Due to the fixed supply cap of 21 million, Bitcoin is independent of supply-related devaluation. You can park certain funds in BTC and set yourself free from fluctuations of the government’s fiat currency.
Invest in Crypto Blue-chip Coin Set of which Bitcoin is a part.
2. Decentralized
Did it ever strike you why governments have no control over the supply of Bitcoin? Seems too good to be true, right? Well, thanks to Satoshi Nakamoto, the anonymous founder of Bitcoin. They designed Bitcoin in a way that no individual can single-handedly exercise control over it. Not even the founders of the project.
Blockchain technology enables fast and smooth governance of all transactions without an intermediary. No one is managing the supply and demand of your money. In fact, it is hardcoded in an immutable format.
Secondly, this also enables faster interchange of value because there are no third-party validations that create friction. This also reduces the overall cost of transactions as the system takes care of all the nitty gritty and trust.
3. Secure and private
Cryptocurrencies offer the best in class security to your transactions by using cryptography. Apart from that, you are not forced to do KYC before hopping onto a platform. All you need to have is an internet connection and a smartphone to start interacting with any blockchain-based application.
This gives the user an option to maintain their privacy without compromising the security of the funds. To put more context into it, web2 might also offer these traits. However, they are often mutually exclusive. You can either choose privacy (where you would have to trust an anonymous intermediary with your funds) or security (where a known, reputed intermediary would move your funds safely but at the cost of privacy).
Blockchains offer both these functionalities hand in hand.
4. Cost-effective mode of transaction
Your beloved banks would often charge you a percentage of the transaction amount as the fee. They need to do this to fund the intermediaries that have helped to process these transactions. For cryptocurrency, especially Bitcoin, it is different.
The average Bitcoin transaction fee is currently hovering at $1.5 per transaction. It has seen some highs during periods of network congestion, but on average, it is a decent sum to pay if you are transacting a moderate to low amount of Bitcoin. Given that it is transferring your funds with the least resistance, fast and privately acts as the cherry on top.
5. 24x7x365 trading
Because you don’t need a massive infrastructure powered by multiple employees to run a blockchain, it enables unstoppable trading. Stock markets across the globe often operate for about 240 days a year (including weekends and official holidays) for about 6 to 8 hours a day.
Cryptocurrency trading, on the other hand, is active whenever you are. The infamous crypto greeting ‘GM’ has its roots in this trait. GM or good morning signifies that no matter the time of the day, someone is trading crypto globally.
6. Partial ownership: tokenisation
Cryptocurrency offers a fantastic solution to partial ownership in the form of tokenization.
Imagine a piece of real estate. It can be quite difficult for most of us to purchase land up front. However, with cryptocurrency and blockchain, we can divide it into multiple pieces (tokens) and invest in them for future appreciation.
The same has been applied to stocks as well. You can now own a part of some expensive stocks using crypto-based versions of the same.
7. Currency exchange
Have you ever traveled overseas just to find yourself in a situation where the exchange rates burn a hole in your pocket? Apart from that, being stranded without the native currency is even worse. Your local banks don’t work abroad because you forgot to seek their ‘permission’ for such transactions.
Guess what? Cryptocurrency, specially stablecoins like USDC and USDT, solves this problem easily. Since borders do not limit cryptocurrencies, you can transact in a jiffy without worrying about converting your currency.
Through stablecoins, you can also get exposure to the digital version of key currencies like USD, EUR, Yuan, Yen, and INR.
Disadvantages of Cryptocurrency: The Negative Side
And then there was a dark side as well.
Well, let us call it certain shortcomings which will get resolved as the technological and legal landscape evolves. For now, it is extremely important to be wary of these cons of cryptocurrency before investing in them. Let us explore.
1. Irreversible transactions
Welcome to the world of decentralization. While decentralization offers immense benefits, it often comes at the cost of losing an intermediary cushion in case of errors. While in traditional finance, you could reach out to a bank in case of a wrong transaction, cryptos offer NO such fallback mechanisms. There aren’t any intermediaries to bank on (see what we did there?).
So if you are a victim of a wrong transaction on the blockchain, the best you can do is feel sorry and learn from it. There is no way to reverse a transaction.
2. Self-custody
Cryptocurrency enables true ownership of your assets. No banks or governments can seize/freeze your crypto wallet. But as you can imagine, this comes with an added responsibility. You need to manage your funds much more carefully.
There is no ‘forgot password’ option in case you lose your private keys (a password counterpart in web 3.0). As a result, one needs to exercise extra caution while transacting on blockchains.
3. Scams
The cryptocurrency space is plagued with a lot of scams.
Unwitting investors become a victim of various treacherous techniques deployed by these fraudsters resulting in wealth loss. For example, after the roaring success of Squid Games, a Korean show on Netflix, many people aped into a token called $SQUID Coin.
Token rallied like there was no tomorrow. And guess what? There wasn’t any. After surging to a price of $2861 within a couple of days, it went to zero within moments. The founders (or scammers) raked in a sweet $3.8M in the process.
4. Government stance
While purchasing and selling cryptocurrency is completely legal, the entire industry is awaiting a full-fledged regulation to end the uncertainty around the space. Until that happens, every government statement on crypto ends up in a speculative mode fluctuating the prices and doing more harm than good to the retail investors.
Is Cryptocurrency a Good Investment?
Well, there are two ways to answer this question. A short answer is yes. A longer answer has a few rationale backing that claim.
In the past new technology-based businesses have been trending. Technology has tried to transform every sphere. When technology met finance, fintech was born. And it has become one of the hottest areas when it comes to exponential returns. Our beloved cryptocurrency is at the pinnacle of this innovation. Best of both worlds.
In the past decade, Bitcoin has given returns to the tune of 8500%, and Ethereum was even better at some 18,000%. If analysts were to believe there is a lot more juice left in these cryptocurrencies to grow and expand further.
Despite so much noise, only a handful of citizens understand and invest in them. Therefore, mass adoption would pave the way for the next wave of gargantuan returns.
However, optimism must be checked at regular intervals. Cryptocurrency is a volatile asset. There have been moments in history when cryptocurrency prices tumbled over 80% in a week’s time.
Therefore, a good approach is to allocate certain funds to cryptocurrency from your entire portfolio regularly and not go all in. This percentage could vary from person to person, depending on their risk appetite.
And if you are someone who finds it hard to analyze individual cryptos, try to invest in broader themes through Coin Sets.
Conclusion
With the appropriate knowledge of the pros and cons of cryptocurrency, the time is ripe for you to explore further and get into this space. As they always say, web 3.0 is extremely rewarding for those who follow it diligently. We may not be sure of the moon and Lambo, but a lifelong passion with some life-changing wealth awaits you. See you on the other side.
FAQ
1. Is cryptocurrency a good investment?
The short answer is, Yes. It is advised to invest a portion of your portfolio in cryptocurrency. However, be sure to manage your risk and don’t invest a large portion in cryptos since while they are rewarding, they could be volatile at times.
2. What cryptocurrency is best for small businesses to invest in?
Small businesses can start by investing in Bitcoin, which can serve a dual purpose. Firstly, they can reap the long-term benefits of appreciation. And secondly, investing in crypto gets you instant PR due to the market euphoria.
3. What taxes do I pay on crypto gains?
Every country has a different tax regime when it comes to cryptocurrency. In India, this is set at 30% on all gains. However, there are a few nitty gritties to it; you can read about crypto taxation in India in detail here.
4. Can Bitcoin be destroyed?
Since Bitcoin is distributed and decentralized in nature, it is almost impossible to destroy Bitcoin. The effort-to-reward ratio for attacking Bitcoin is not favorable. Therefore, Bitcoin is the most robust form of money ever created.
5. Why cryptocurrency is better than cash?
Cryptocurrency is better than cash as it is deflationary (due to fixed supply), fast, decentralized, and cheaper mode of transaction. It is an elevated form of money that supersedes cash on all levels.
6. Is crypto safer than a bank?
When it comes to trust, cryptocurrencies are trustless by design. This means you need not trust a third party to transact. Rather, you trust the code on which a crypto is based. However, in the case of banks, you need to trust them with your funds. If a bank goes down, so do your funds.
