Access to Bitcoin, Ether, and all other coins is becoming increasingly easy. Even for people who know little about the technology behind it. What are the pros and cons of investing in cryptos?
At the end of 2021, almost 300 million people owned cryptocurrencies. This was calculated by the crypto.com platform. And the number of investors is expected to grow even more.
Crypto investors no longer have to be technology nerds who guard their private keys like the apple of their eye. It is becoming easier and easier to get started via custodial wallets managed by third parties and software like a crypto trading bot to get started on the exchange market.
Many online brokers have long offered individual currencies for sale. Even some savings banks want to enable their customers to do so via their checking accounts soon. Many are afraid of missing out. That’s why they’re getting on board.
In 2020, Bitcoin was worth about $8,000 at times. At the end of March 2022, the price stands at just over $42,000. So, anyone who held the first of all cryptocurrencies for two years, or hodle as crypto fans say, raked in a fat profit.
Such returns attract many people to the crypto market. However, Bitcoin and its well-known and lesser-known emulators such as Ethereum, Solana, or Dogecoin are all very volatile. High potential returns come with a high risk of loss.
So, what are the arguments for and against investing in cryptocurrencies? We have taken a closer look at some of the arguments.
Pro: Potential of Blockchain Technology
Cryptocurrencies are a new asset class with potential, especially when it comes to the use of this technology in other areas. If you look at the past, you can see the price opportunities that exist there.
In fact, blockchain technology is not only suitable for payments and as a means of storing value, as we know it from state currencies. The technology behind digital currencies manages and processes data. Many usage scenarios already in use today derive from this simple definition.
These include digital identities, patient records, or insurance services. An electronic way to vote, smart contracts, intellectual property protection, business process automation or transparent and fast supply chain management.
In addition, we already see the trend to tokenize real assets such as real estate or luxury goods, i.e., to map them on a blockchain.
Which of these possible applications will ultimately prevail and which new ones will be added is still unclear. While the technology is versatile, it is not necessary or efficient in every case.
Cons: Inexperience of the Market and of Some Investors
The cryptocurrency market is new and disruptive. However, the market is also still very young and far from mass adaptation.
This is aimed at the wrong target groups. Experience with the asset class is still thin and those who want to invest are ignoring the fact that many coins have long since been discontinued.
Therefore, many investors ignore the dangers of a purchase. Nobody can really assess the risks, especially not small investors. Even the basic features of the technology behind the currencies are difficult to understand.
Yet when it comes to investing, one principle applies: you should only buy investment products that you understand. Only then does an investor know where his money is.
Since there are no real values behind digital currencies, they can disappear from the market at any time or be replaced by other currencies. In such a case, the money invested would be lost. Investors should keep this in mind.
Pro: Growth Market for Long-term Investors
Even a single tweet from Tesla founder Elon Musk can be enough to set Bitcoin prices in motion.
For example, when the entrepreneur announced in 2021 that customers would be able to pay for his e-cars with cryptocurrency in the future. But then revised this again shortly afterwards.
Volatility is a natural part of the still very young market. We crypto investors are already familiar with such short-term price drops. Like many other investors, we use price drops as an entry opportunity and add to our positions at favorable prices.
Experts interpret the on-chain signals as very positive toward cryptocurrencies in the long term. For example, the number of wallets and the sum of cryptoassets held on them is continuously increasing.
Cryptocurrencies represent a large growth market from which especially investors with a long investment horizon can profit.
Cons: Bitcoin is Not a Safe Haven
In times of crisis, many stock portfolios slip into the red. Investors long for a safe haven for their assets. But is Bitcoin really a crisis currency?
Proponents would argue that cryptocurrencies are not controlled by any central bank and are, therefore, not directly under the influence of government monetary policy.
But these same market analysts refrain from using cryptocurrencies as a safe haven simply because of their high volatility. At least in the short term, Bitcoin is not a suitable store of value.
Cryptocurrencies offer no protection in market phases characterized by uncertainty, as they function as a high-risk asset class and are usually abandoned in a hurry when uncertainty arises. The ‘safe haven’ narrative remains a myth.”
Pro: Natural Scarcity of Bitcoin and Other Cryptocurrencies
Bitcoin as digital gold? This comparison is often made when talking about cryptocurrencies in times of crisis. However, the oldest of all cryptocurrencies is compared to the precious metal also because of its limited availability.
Analogous to precious metals, which are not endlessly available in the earth, Bitcoin is also finite. 21 million Bitcoin can be mined, then it is over.
State central banks, on the other hand, can fire up their printing presses at will, which can fuel inflation, but is a popular tool especially in crises and high debt.
Cons: Cryptocurrencies Consume a lot of Power
Not only each individual transaction, but especially the mining of some cryptocurrencies consumes a lot of electricity.
Whether or not this energy use is detrimental to the environment depends on the countries in which it occurs and how sustainably the energy is generated there.
In an ideal world, the electricity that miners use would come from surplus energy and renewable sources. However, we don’t even begin to live in that world yet.
For example, the Ethereum network has recognized this and is planning to switch to a proof-of-stake mechanism that is significantly less energy-hungry with a comprehensive upgrade soon.
The reason for the high energy expenditure of the two largest cryptocurrencies, Bitcoin and Ether, is their consensus mechanism: Proof-of-Work.