Unlocking Wealth: Cryptocurrency Investment Advantages

Investing in cryptocurrency has become an increasingly popular option in recent years, with many investors recognising the benefits of this relatively new asset class. Cryptocurrency is a digital or virtual currency secured by cryptography, which makes it almost impossible to counterfeit or double-spend. One of the key advantages of cryptocurrency is that it is decentralised, meaning it is not controlled by any central government or bank, and transactions can take place directly between two parties without the need for a trusted third party. This makes transferring funds faster, easier and often cheaper, and it also removes the possibility of a single point of failure, such as a large financial institution collapse. The relative security of cryptocurrencies, underpinned by blockchain technology, is another significant benefit. Additionally, cryptocurrency can offer investors diversification from traditional financial assets, acting as a hedge against inflation. However, it is important to note that investing in cryptocurrency carries risks, including high volatility, regulatory uncertainty and the potential for scams.

Inflation protection

Firstly, cryptocurrencies have a limited supply, and their decentralised nature safeguards them from manipulation and interference by external forces. Unlike traditional currencies, which central banks can print endlessly, many cryptocurrencies have a fixed supply. This scarcity means that as demand for cryptocurrencies increases, their value tends to rise, making them a potent defence against inflation.

Secondly, cryptocurrencies are highly portable and accessible. They can be easily stored in digital wallets, making them a convenient and portable way to secure your wealth. This feature has proven particularly valuable in countries like Venezuela and Zimbabwe, where hyperinflation rendered traditional currencies virtually worthless. Cryptocurrencies stepped in as a stable store of value, preserving wealth when national currencies collapsed.

Lastly, cryptocurrencies are not issued or controlled by any central authority, like a government or bank. They operate outside the traditional financial system, relying on blockchain technology to ensure secure, transparent, tamper-proof, and open transactions.

However, it is worth noting that the relationship between cryptocurrencies and inflation is complex and still evolving. While the theoretical case for cryptocurrencies as an inflation hedge is strong, the empirical data does not yet provide conclusive support.

Transaction speed

Cryptocurrency transactions are usually completed in a matter of minutes, whereas traditional financial institutions take several days to settle transactions. For example, a wire transfer through a US financial institution can take at least 24 hours, while a cryptocurrency transaction can be confirmed within minutes.

The speed of a cryptocurrency transaction depends on several factors, including block time, block size, transaction fees, and network traffic. For instance, Bitcoin transactions can take around 40 minutes, depending on the fees involved, while tokens like Cardano or Solana can be handled almost immediately.

The blockchain scalability trilemma, which states that blockchains can achieve only two out of three factors: decentralisation, scalability, and security, poses a challenge to increasing transaction speed. To overcome this, blockchain communities are exploring different theories and solutions, such as novel consensus mechanisms, on-chain solutions like SegWit and sharding, and off-chain solutions like sidechains and layer-2 protocols.

High transaction speed is crucial for the effective functioning of decentralised apps (DApps) and smart contracts, ensuring smooth operations and efficient execution. It also fosters economic efficiency by reducing costs associated with slow transactions and enabling faster settlement of cross-border payments and remittances.

While increasing transaction speed is desirable, it is important to balance it with other factors, such as security and decentralisation. This complex interplay of factors influences the overall efficiency and usability of a cryptocurrency.

Transaction costs

However, it's important to note that transaction costs for cryptocurrencies can vary and may sometimes be higher than traditional methods. For instance, in April, the daily average cost of a bitcoin transaction surged to over $127. Similarly, Ethereum's gas fees skyrocketed to thousands of dollars per transaction in May 2022 due to high demand for a series of Ethereum-based non-fungible tokens (NFTs).

When considering transaction costs, it's worth noting that some cryptocurrency exchanges offer commission-free trading, such as Robinhood, which eliminated trading commissions. Additionally, some exchanges provide lower transaction fees for specific trading pairs, such as exchanging stablecoins or stablecoins against fiat currencies.

It's also worth mentioning that transaction costs for cryptocurrencies can be minimized by choosing cryptocurrencies with lower fees, such as Nano, which has zero fees, or Digibyte, with an average fee of $0.0005.

Overall, while transaction costs for cryptocurrencies are generally lower, it's important to monitor fees as they can change regularly and vary depending on the platform and market conditions.

Accessibility

One of the biggest barriers to investing in cryptocurrencies is the technology itself. For those who are not technologically literate, the cryptosphere can be intimidating. However, this is also one of the biggest opportunities for growth in the industry. Cryptocurrency platforms are working to make their products more accessible to the average user, and this will be a key driver in the mass adoption of crypto.

User-Friendly Platforms

Platforms such as Eidoo are working to simplify the user experience by creating an all-in-one interface. Eidoo offers a single application that functions as a multi-currency wallet and hybrid exchange. This removes the need for users to navigate a sea of wallets and exchanges to manage their assets.

Education

The more people learn about cryptocurrencies, the more comfortable they will become with the idea of investing in them. Education will play a key role in increasing accessibility.

Lower Barriers to Entry

To invest in cryptocurrency, all you need is a computer or smartphone and an internet connection. There is no identification verification, credit check, or background check required to open a cryptocurrency wallet, making it faster and easier than opening an account with a traditional financial institution.

Access for the Unbanked

Cryptocurrency offers a way for the unbanked to access financial services without going through a centralized authority. There are many reasons a person may be unable or unwilling to have a traditional bank account, and cryptocurrency can provide an alternative way to easily make online transactions or send money to loved ones.

Security

The security of cryptocurrencies is one of their most appealing features. This security is achieved through a variety of measures, including cryptography, blockchain technology, and decentralisation.

Cryptography

Cryptographic systems and encryption algorithms secure cryptocurrencies, making it nearly impossible to counterfeit or double-spend. "Crypto" refers to the use of cryptographic techniques such as hashing functions, elliptical curve encryption, and public-private key pairs. These techniques ensure that transactions are secure and authenticated.

Blockchain Technology

Blockchain technology, a distributed ledger enforced by a network of computers, further enhances the security of cryptocurrencies. Each transaction on the blockchain is independently verified by multiple validators, making it extremely difficult to forge transaction histories. Additionally, the decentralised nature of the blockchain means that there is no single point of failure, increasing the overall resilience of the system.

Decentralisation

The lack of central authority in cryptocurrencies also contributes to their security. Without a central bank or government controlling the currency, there is less risk of interference or manipulation. This decentralised structure makes it more difficult for malicious actors to target the system and helps to ensure the integrity of the currency.

Private Keys

The use of private keys is another critical aspect of cryptocurrency security. Private keys are required to access and spend funds from a crypto wallet. As long as the private key remains secure and unknown to others, the funds in the wallet are protected. This places the responsibility for security on the individual user, who must take precautions to safeguard their private key.

Overall Security

While cryptocurrencies have a strong security foundation, it is important to recognise that there are still risks. These include user errors, such as falling for phishing scams or losing access to private keys, as well as the potential for exchanges and wallets to be hacked. Additionally, the complex nature of cryptocurrency technology can make it challenging for new users to ensure the security of their assets.

Frequently asked questions