The Crypto Conundrum: Navigating The Volatile World Of Digital Currency Investments

Investing in cryptocurrency is risky, but it can be a good investment if you do it properly and as part of a diversified portfolio. Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It's a peer-to-peer system that can enable anyone, anywhere, to send and receive payments.

Cryptocurrency is volatile, and its value can swing up or down in the blink of an eye. It's also susceptible to fraud and hacking. However, some people have made a lot of money by investing in crypto.

If you're thinking of investing in cryptocurrency, it's important to do your research and understand the risks involved.

The pros and cons of investing in cryptocurrency

Pros

• Cryptocurrencies are supported by secure, decentralized blockchain technology, independent of traditional banking systems.
• They operate 24/7, and market volatility can mean a chance of greater returns.
• The blockchain technology underlying cryptocurrency is inherently secure.
• Cryptocurrencies can be viewed by anyone, anywhere, so you can take part in the financial markets and make transactions with no intermediaries.
• The crypto markets are always open, so investors can generate returns outside of normal working hours.
• Cryptocurrencies aren't tied to a single currency or economy, so their price reflects global demand rather than national inflation.
• Cryptocurrencies have the potential to provide financial services to the unbanked and underbanked populations around the world.
• Cryptocurrencies are gaining momentum every day and are becoming more popular.
• Cryptocurrencies are marked by cryptography, a network that’s distributed across a large number of computers, making it nearly impossible to counterfeit or double-spend.
• Cryptocurrencies are a cost-effective mode of transaction as they eliminate the need for third parties like VISA or PayPal to verify a transaction.
• Currency exchanges are smooth as cryptocurrency can be bought using many currencies, and varied cryptocurrency wallets and exchanges help convert one currency into another.
• Cryptocurrencies are secure and private as the blockchain ledger relies on different mathematical puzzles, which are hard to decode.
• It is easy to transfer funds with cryptocurrencies as verification requires little time to process.

Cons

• Cryptocurrencies often see extreme price fluctuations.
• There’s a steep learning curve, and it can be tough to scale widely.
• Despite the potential for high rewards, it’s still uncertain whether cryptocurrencies will stay viable in the long term.
• There are also security vulnerabilities that may pose significant risks, especially to new investors.
• Cryptocurrencies can be an extremely volatile investment as the market fundamentally thrives on speculation, and its relatively small size makes it more vulnerable to price fluctuations.
• Cryptocurrencies haven’t proven themselves as a long-term investment yet as they have only been around for just over a decade.
• Crypto has serious scalability issues as it runs into major issues which make it difficult to roll them out on a large scale.
• Crypto newbies are vulnerable to security risks as they could lose the private key that lets them access their coins.
• The rules and regulations around cryptocurrencies aren’t set in stone, and the regulatory landscape is still evolving.
• Cryptocurrencies have high consumption of energy as mining requires plenty of computational power and electricity input.
• Cryptocurrencies are vulnerable to hacks as exchanges store the wallet data of users, which can be stolen by hackers.
• There is no refund or cancellation option in cryptocurrencies. If there is a dispute between concerned parties, or if someone mistakenly sends funds to a wrong wallet address, the coin cannot be retrieved by the sender.
• Cryptocurrencies can be used for illegal transactions as it is hard for the government to trace down any user by their wallet address or keep tabs on their data.

How to buy cryptocurrency

There are four main ways to buy cryptocurrency: through a cryptocurrency wallet app, a brokerage, a centralised exchange, or a peer-to-peer exchange platform. Here is a step-by-step guide to buying cryptocurrency:

• Choose a broker or crypto exchange: A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have relatively low fees, but they tend to have more complex interfaces. A cryptocurrency broker takes some of the complexity out of purchasing crypto, offering potentially easier-to-use interfaces that interact with exchanges for investors.
• Create and verify an account: Once a cryptocurrency broker or exchange has been chosen, investors can sign up to open an account. Depending on the platform and the amount they plan to buy, they may have to verify their identity to prevent fraud and meet anti-money-laundering regulatory requirements.
• Deposit cash to invest: To buy crypto, investors will need to ensure they have funds in their account. This might mean depositing money into their crypto account by linking their bank account or making a payment with a debit or credit card.
• Place a cryptocurrency order: Once there is money in their account, investors are ready to place their first cryptocurrency order. There are hundreds of cryptocurrencies to choose from, ranging from well-known names like Bitcoin and Ethereum to more obscure cryptos. With most exchanges and brokers, investors can purchase fractional shares of cryptocurrency, allowing them to buy a sliver of high-priced tokens.
• Select a storage method: Cryptocurrency exchanges are not backed by protections, and they're at an additional risk of theft or hacking. Crypto owners could even lose their investment if they forget or lose the codes to access their account. That's why it's so important to have a secure storage place for cryptocurrencies. There are three main options: leaving the crypto on the exchange, using a hot wallet, or using a cold wallet.

The risks of investing in cryptocurrency

Volatility and Manipulation

Cryptocurrency prices are extremely volatile, with frequent and rapid fluctuations. This volatility is driven by sentiment, speculation, and market manipulation. The unregulated and anonymous nature of digital asset markets, combined with the susceptibility of cryptocurrencies to sentiment, emotion, and publicity, makes prices unpredictable and unstable. Crypto exchanges, media owners, and influential investors can manipulate prices, and the lack of regulatory frameworks means there is a high degree of uncertainty.

Regulatory Uncertainties

Government regulations around cryptocurrency are constantly evolving and differ across jurisdictions. These regulations can impact how you use or access your crypto, leading to volatility and uncertainty in the market. The lack of clear and consistent guidelines makes it challenging to predict the long-term prospects of cryptocurrencies.

Security and Custody

Cryptocurrency holdings are stored in digital wallets, which are vulnerable to hacking and theft. If private keys are lost, destroyed, or compromised, investors may lose access to their holdings. Additionally, there is no protection or insurance for lost or stolen cryptocurrencies, and mistaken transactions cannot be reversed.

Scams and Errors

The lack of regulation in the cryptocurrency market increases the risk of scams and fraudulent activities. Some platforms and coins may be less secure than others, and new coins could pose a higher scam risk. It is also common for investors to make mistakes when sending or receiving cryptocurrencies, such as inputting incorrect addresses or sending funds to the wrong recipient. These transactions are irreversible, leading to potential financial losses.

Taxation and Legal Landscape

The legal and tax landscape for cryptocurrencies is complex and constantly evolving. Individuals are responsible for ensuring they comply with tax obligations when buying or selling cryptocurrencies. The classification of cryptocurrencies as currency or assets varies across jurisdictions, leading to uncertainty about tax treatments and record-keeping requirements.

The future of cryptocurrency

Firstly, cryptocurrency is becoming increasingly mainstream. The number of investors has been steadily increasing, and the profile of these investors has evolved. Cryptocurrency is no longer a niche hobby for anti-establishment investors but is now attracting everyday consumers who see it as a way to boost their portfolios with potentially rewarding, albeit risky, assets. This trend is likely to continue, with analysts estimating that the global cryptocurrency market will more than triple by 2030, reaching a valuation of nearly $5 billion.

Secondly, cryptocurrency is facing increasing regulation. While governments have previously taken a hands-off approach, the rapid ascent of cryptocurrency, coupled with the rise of DeFi (decentralized finance), has forced regulators to begin crafting rules for the emerging sector. The U.S., for example, has a highly qualified team in place to steer the cryptocurrency regulation process, and the SEC has approved the first set of exchange-traded funds that include Bitcoin. However, there are conflicting views on the impact of regulation. Some believe it will legitimize the marketplace and increase security, while others worry it will limit the peer-to-peer nature of cryptocurrency and the individual freedoms it offers.

Thirdly, cryptocurrency is facing growing pains as it scales. Cryptocurrency exchanges are vulnerable to hacking and other criminal activity, and investors have lost millions as a result of security breaches. Storing cryptocurrency safely is also a challenge, and many people don't like keeping their digital assets on exchanges due to the risk of companies controlling access to their assets.

Finally, cryptocurrency is facing environmental scrutiny. Bitcoin mining, in particular, is an enormously energy-intensive process, consuming more electricity than many countries. This has sparked fears about its contribution to climate change.

In conclusion, the future of cryptocurrency is difficult to predict, but it is clear that it is becoming increasingly mainstream and regulated. However, it faces challenges in scaling securely and sustainably.

How to store cryptocurrency

There are several ways to store cryptocurrency, each with its own pros and cons. Here are some of the most common methods:

Hardware Wallets

Hardware wallets are physical devices that connect to your computer and store your cryptocurrency. They are considered one of the safest options as they are not connected to the internet and are, therefore, not vulnerable to hacking attempts. Examples include the Ledger Nano X and Trezor Model T, which are usually connected via USB. While hardware wallets are secure, they can be inconvenient and are not free.

Custodial Wallets

Custodial wallets are managed by a third party, such as a cryptocurrency exchange like Coinbase. The custodian stores your private keys, guaranteeing their safety and sometimes providing insurance on holdings. While custodial wallets are convenient, they have been the target of many attacks, and you are relying on the security measures of the third party.

Software Wallets

Software wallets are browser extensions or desktop, mobile, or web applications. They are often designed for specific cryptocurrencies and may have different functions. Software wallets are typically free and easy to use but are connected to the internet, making them vulnerable to hacking.

Paper Wallets

A paper wallet involves printing out your public and private keys, usually as a string of characters and scannable QR codes. This method is secure and practically free but is the least user-friendly option.

Hot Wallets

Hot wallets are connected to the internet and are typically available as desktop or mobile applications. They give you control over your cryptocurrency and are easy to use, but they carry the risk of being hacked.

Cold Wallets

Cold wallets are offline crypto wallets and are considered the most secure option. In addition to hardware wallets, cold wallets can also include paper wallets or USB drives. While cold wallets are secure, they are less convenient as they need to be connected to a device to move cryptocurrency.

Frequently asked questions