Cryptocurrency, and moreover investing in cryptocurrency, has grown exponentially over the past couple of years, you can read all what Bitcoin is and where it is going here. However, the following article is focussed on the reasons behind this growth and also the barriers to investing in cryptocurrency that these ‘new digital currencies’ are already facing, or set to face in the future.
The main growth drivers cryptocurrencies are as follows:
- Decentralization: Decentralised protocols and proof of stake protocol of cryptocurrency solve the problem of inflation (in this type of consensus algorithm, instead of investing in expensive computer equipment in a race to mine blocks, a ‘validator’ invests in the coins of the system). Inflation is almost non-existent in the crypto world and even the slightest existence is known and the numbers are not hidden unlike centralised banks where rate of inflation is not known and banks print the fiat without public approval.
- Universal: There are no limits on the amount and the areas where you can send virtual currencies, thereby mitigating one of the major drawbacks of fiat currency.
- Fees & Time: There is less transaction time and limited to no fees as compared to SWIFT (Society for Worldwide Interbank Financial Telecommunication)/SEPA (Single Euro Payments Area).
- Transparency: The model is transparent as the network is aware if someone attempts to cheat or scam another person, as the ledger is fully auditable and open.
- Anti-Fraud: No one has the authority to block or freeze a cryptocurrency wallet.
On the other side:
As always, there are two sides to every coin, and cryptocurrencies do not come without drawbacks:
- Scalability: Scalability of cryptocurrency is a concern, as many regions in the world do not have sufficiently fast networks and servers to support the currencies. There is still a large number of unknowns with cryptocurrency and it takes time to adapt to the change.
- Regulation: Regulation of cryptocurrency is happening, notably in China where cryptocurrency trading and raising funds through Initial Coin Offerings (ICOs) has been banned. However, the rate at which this regulation is occurring still falls behind the rapid rate at which the cryptocurrency market is growing.
- Protocol Amendment: Changing a protocol in a cryptocurrency is another drawback as it is a very long process, but can be improved with community efforts.
- Volatility: As in any new asset class, there will always be a risk of price volatility. With the price of bitcoin fluctuating from $904 to $14,612 just in the past 12 months, reaching a high of $19,343 in December 2017.
- Hackability: The most concerning drawback to cryptocurrencies is the prevalence of hacks, particularly to exchanges, creating a risk that you could lose everything with no right to compensation. One such hack was the Dao Hack in 2016.
You can compare and view different cryptocurrencies and their market value and trends on:
However, there are other new investment approaches outside of the overly-hyped, hot and volatile Cryptocurrencies for those looking for other options. It is worth taking the time to compare these different investment types, such as Robo-Advisors, Stocks and Shares ISAs and Equity Crowdfunding, to see what could be the right choice for you as an individual.