Cryptocurrencies are essentially digital assets that can be used as a medium of exchange. These digital assets are “encrypted”, or made secure, via a technology called the blockchain, which is a decentralised digital ledger that everyone can view, but no one can edit or destroy. The technological applications of both cryptocurrencies and blockchain technology is a disrupting force across many industries, from banking to application design. However, besides the technological impact of cryptocurrencies, many are turning to them as a form of investment. This is hardly surprising considering the massive gains that the largest cryptocurrencies have amassed just over the last few years. As an example, Bitcoin, the most popular cryptocurrency, has risen from a price of roughly USD 11,000 for a single Bitcoin to levels of USD 60,000 just over the course of a single year. That begs the question, are cryptocurrencies suitable as a means of investment? Is it indeed wise to have coins like Bitcoin and Ethereum as part of your investment portfolio?
HOW SAFE ARE CRYPTOCURRENCIES?
Before diving further into the investment aspect of cryptocurrencies, let us first take a look at the general safety of cryptocurrencies. There are several inherent risks of investing in cryptocurrencies. For example, cryptocurrency exchanges are sometimes prone to cyberattacks. However, there are best practices that you can adopt to ensure your crypto holdings are as safe as possible. Firstly, we recommend you only use registered Digital Asset Exchanges (DAXs) like Luno, MX Global, Sinergy or Tokenize. These exchanges are recognised by the Securities Commission of Malaysia (SC), which means they meet a certain standard of cybersecurity. As long as you keep your personal information (e.g. your email and passwords) safe, and follow best security practices — exchanges like Luno will be able to help keep your coins safe. In Malaysia, there are currently 5 cryptocurrencies that have been approved for investing, namely, Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Litecoin (LTC) and Bitcoin Cash (BCH). Cryptocurrency holders are also known to be attractive targets for cybercrime such as phishing attacks. “Phishing” can be done by criminals using fake websites that appear to be legitimate in order to trick you into giving away valuable info such as your password. Phishing can also be conducted via emails or social engineering, whereby criminals try to impersonate trustworthy figures such as bank officials or representatives of cryptocurrency exchanges in order to obtain your vital info. Similar to keeping your banking info safe, these cybercrime attacks can be avoided by taking precautions such as double-checking your browser address bar to ensure you are at the right URL. You should also use two-factor authentication whenever possible to create an extra layer of security. Whenever you are in doubt, take a step back and analyse the situation to ensure you are doing the right steps. As long as you remain wary, you should be safe from these cybercrime attempts.
INVESTING IN CRYPTOCURRENCIES
Just like all other forms of investments, there are benefits and disadvantages to investing in crypto. It’s time to bust out the old yellow legal pad because it’s time for pros and cons!
THE PROS
Still Relatively EarlyCryptocurrencies are still relatively new, Bitcoin was first tabled out in a whitepaper by the pseudonymous Satoshi Nakamoto in January 2009. Compared to most other forms of investments, this means that Bitcoin and cryptocurrencies as a whole is a considerably young industry. What this means is that it has a lot of time to mature and stabilise. While this could result in inherent volatility, it also means there could be a huge potential upside. This is especially interesting, considering that the adoption of cryptocurrency is still growing. In fact, as of 2021, global crypto ownership is estimated at 3.9%, with over 300 million crypto users worldwide. While this might seem like a large number, this also means that if you are a cryptocurrency holder, you are a small minority of the global population. Besides this, there is much potential for technological breakthroughs in this space. Disruptions such as the introduction of new coins and regulatory changes could also be very exciting for investors in crypto. Potential for Diversification The development of cryptocurrency as an asset could mean greater opportunities for diversification for investors. In addition to more “traditional” forms of investments like stocks or bonds, cryptocurrency could mean a new frontier for investors as they opt for more variety in their portfolios. Many investors today already consider crypto as an alternative store of value, and many even prefer Bitcoin to gold. Increase in Institutional Investors Institutional adoption in cryptocurrency is also increasing every year, with large organisations like Tesla and Microstrategy holding significant amounts of Bitcoin. Even social media platforms like Twitter have taken a major step into cryptocurrency adoption by recently announcing a new feature by which content creators on the social network could ask for tips in Bitcoin. The confidence of institutional investors could be a positive sign that cryptocurrency is here to stay for the long run.
THE CONS
VolatilityDue to the fact that the cryptocurrency industry has still a long way to go to achieve maturity, it can be extremely volatile. Even the more established coins can be susceptible to huge dips depending on a variety of factors. For example, Bitcoin went from a price of around USD 55,000 to USD 35,000 just within the month of May 2021. The price of Bitcoin could rise and fall depending on public sentiment, for example when China announced that they were banning Bitcoin mining. This volatility is not something everyone can stomach, which is why you should only start investing in cryptocurrency with an amount you are willing to lose. Limited Acceptance In the current state of affairs, cryptocurrencies like Bitcoin are not considered generally accepted means of payment. Although the acceptance rate of crypto is growing, it is still considered very limited. In other words, you cannot walk into most restaurants and use your Bitcoin or Ethereum to pay for your meal, at least for now. Part of this is due to the inherent volatility of crypto as well as the regulation regarding crypto in many countries.
CONCLUSION
All said and done, cryptocurrency is undeniably a “higher-risk, higher-reward” investment. As such, you should definitely consider your own financial situation before deciding whether or not to invest in crypto. If you have sufficient funds, are already invested in lower risk assets like stocks or bonds, have sufficient knowledge in cryptocurrency and underlying fundamentals, then crypto investing is worth considering. You should also always remember not to invest what you cannot afford to lose. If you’re ready to invest in cryptocurrency, head on down to https://www.luno.com/en/my and register for an account today! We wish you all the best in your crypto journey! This article is brought to you by Luno.
