Deciphering the risks and opportunities of trading crypto-currencies

0

Cryptocurrencies are fast becoming a mainstream form of investment, attracting a generation of young investors to this intriguing concept. Initially dubbed the currency of the illegal world, cryptocurrencies have gradually gained the trust of investors, with their popularity increasing exponentially.

However, cryptocurrency markets have time and again made investors subject to highly volatile conditions, which has drawn criticism for these digital assets. Cryptocurrencies saw steep declines over a short period of time, causing many investors to avoid the market altogether. The obviously polarizing approach to cryptocurrencies has led to the development of two large segments – crypto enthusiasts and crypto critics.

Good reading: 5 cryptos under a dime to watch in 2022

It should be noted that investing in cryptocurrencies is neither a one-stop gateway to lucrative returns nor a surefire way to lose money. As investors slowly converge on a mutual decision regarding cryptocurrency regulation, it is crucial to examine why these digital assets are at the center of intense scrutiny.

Here are some of the risks and opportunities that cryptocurrencies present for investors.

Financial universality

  • Opportunity: Imagine buying your in-game characters and tokens while playing your favorite game with universal currency without having to check conversion rates. Cryptocurrencies can be used anywhere by anyone in the world without the need for cross-country conversions. This universality only adds to the diverse possibilities attached to the use case of cryptocurrencies.
  • Risk: Cryptocurrencies are highly volatile, which is why many businesses are still hesitant to accept Bitcoin, Ethereum, or Litecoin payments. It is this volatility that can hamper global activity on a large scale. Suppose cryptocurrencies are adopted globally as a means of payment in all countries. In this case, unforeseen declines and rises in the currency can affect investors around the world instead of being limited to a select group of investors.

Intangibility and illiquidity

  • Opportunity: Cryptocurrencies have developed their presence only through online medium. It is not necessary to physically hold a cryptocurrency to own it. This intangibility allows for greater convenience and a safer environment for cryptocurrencies to thrive. Additionally, each unit of a minted cryptocurrency is unique from the others due to the underlying blockchain technology containing information about all transactions taking place on that coin.
  • Risk: According to some reports, a huge percentage of the circulating supply of cryptocurrencies is currently illiquid. This means that these cryptos were transferred to wallets with no spending history. The intangibility and illiquidity of cryptocurrencies could be an impediment to insurance business. These assets face the problem of convertibility due to which the space has not been able to develop a deposit insurance “floor” that can allow its use in the insurance industry.

Don’t miss: A Beginner’s Guide to Blockchain: Public vs. Private vs. Consortium

Challenging authoritarian systems

  • Opportunity: Cryptocurrencies mark a shift of power from the government to the public. The blockchain ledger erodes the need for any central authoritative figure to oversee all ongoing transactions. The technology was developed to automatically keep a log of all transactions, with the possibility of error. This could mean large-scale privatization of cryptocurrencies and increased reliance on far superior technological methods of financial regulation.
  • Risk: The lack of regulation in the crypto space has also acted as a blight on the asset class, posing serious questions about its viability as a legitimate currency. When the economy goes up and down, no one controls the supply of these cryptocurrencies, which makes the scenario quite precarious.

Interesting reading: Will cryptocurrency regulations come into effect soon?

The coming years could be marked by increasing crypto regulation.

Uncharted territory

  • Opportunity: Cryptocurrencies are largely a new asset class and have seen immense growth in recent years. This has resulted in a growing share of investors in the crypto space, especially those who have quickly caught on to the trend. So, recent years have seen large-scale profitability in the crypto space, despite the volatile nature of these assets.
  • Risk: The relatively new form of investing can be confusing to many and even discourage some investors from participating in the market. Moreover, the continuous long-term gains of cryptocurrencies are essential to establish a solid foundation for them. If cryptocurrencies lose investor interest, the market can become very volatile.

User anonymity

  • Opportunity: Perhaps one of the most important features of cryptocurrencies is that they protect the identity of the user. This property of cryptocurrencies adds an extra layer of security for the user.
  • Risk: During the early days of the emergence of cryptocurrency, the anonymity of transactions was a major factor that allowed many people to run dubious crypto-related scams. Since it is difficult to trace the user behind a specific transaction, cryptocurrencies can be used for illegal activities and scams.

Must read: Crypto Catch: Scam Victims Recover Millions of Ethereum; FTX is planning a gaming unit

Conclusion

Cryptocurrencies come with various advantages and risks, as is the case with most types of investments. Young investors have acquired a taste for this new form of investment and continue to promote it on the financial market. However, some other investors and skeptics continue to argue for regulatory action in the space.

Share.

Comments are closed.