Overview
This article aims to look at the benefits and limitations of investing into cryptocurrency. A cryptocurrency is a decentralized digital currency, one not owned by a centralized authority (for example a government), used as an alternative form of payment created using encryption algorithms. The most common trading platforms of cryptocurrency are Binance and Coinbase, where USD and other generic currencies can be directly exchanged for cryptocurrencies such as Bitcoin and Ethereum and then stored in virtual wallets. Cryptocurrency has a similar risk and volatility in terms of investment as stocks and shares, the key differences include the fees and regulations, with cryptocurrency exchanges almost free from regulation and stock exchanges highly regulated. Another key difference is that stock exchanges represent equity in a company, whereas a cryptocurrencies' value is subjective to the investors buying or selling said cryptocurrency.
History
The first cryptocurrency was Bitcoin and was created in 2009 by a person or group of people using the pseudonym Satoshi Nakamoto and the first transaction of Bitcoin was in 20210 when a man paid 10,000 BTC for two pizzas, resulting in the value of a BTC to be a fourth of a cent. One Bitcoin is now worth £18,136, of course fluctuating daily due to the volatility of the market. Originally Bitcoin was mined, it still is today however it is much harder to mine. Mining is done through a decentralized computer network that tracks transactions in the cryptocurrency, when computers on the network verify said transaction, new Bitcoins are mined. Not all cryptocurrency is mined this way, for example some use computing power from graphics cards and CPU's from miners to do research and in exchange for this research miners are rewarded with the coin or token, the more computing power offered and research done, the more currency will be rewarded. This way of mining tends to occur when a new currency is distributed.
Benefits of cryptocurrency
Cryptocurrencies have a multitude of benefits to invest into. Possible benefits include easy transactions to a world that is becoming more and more reliant on technology and digitalisation. The digital currency goes against the centralized ownership of currency and is protected from inflation, which has caused many currencies to decline in value over time. In time as more users purchase cryptocurrency and investment into it grows exponentially, possible ways in which it could be used is through online and in person purchases. Since the technology of near field communication (NFC) already exists - the technology that Apple pay uses - this could be applied to cryptocurrency wallets if it is widely used and could mean in person purchases are possible.
A potential benefit to cryptocurrency is portfolio diversification. This could be in two different scenarios, the first one: a stock trader could diversify trading into cryptocurrency trading. The other scenario is that the person is in a country with an unstable currency. Investing into a cryptocurrency could help with security of assets in the event of inflation.
Limitations of cryptocurrency
Lots of cryptocurrency and NFT scams are one of the main social problems involved in cryptocurrency. Scammers claim that money can be made quickly through investment into cryptocurrency and ask for investment into the currency. Other limitations of cryptocurrencies are the scaling problems, an advantage previously stated was the application of cryptocurrency to NFC, however this may not be feasible on a large scale since the market is extremely volatile and the value of a certain currency could potentially fall to almost nothing meaning a large investment could be lost by many potential investors. The complexity of learning how it works also may be a deterrent for it to be used on a large global scale as it is not as simple as using cash such as GBP or USD to pay for goods.
Conclusion
Overall cryptocurrencies are a positive way to use money, due to the increased digitalisation of society. However, it has it's negatives and potential investors should not view it as a get quick rich scheme as this is not what it is. Investing is also extremely risky and any money invested into a coin could lead to a potential complete loss of investment. Therefore, before investing, significant research should be done into the way it works and how to trade with it.