Advantages and disadvantages of cryptocurrencies

 

Five advantages of cryptocurrencies

Although cryptocurrencies are a relatively recent invention (Bitcoin, for example, started operating in 2009), they are certainly here to stay, along with all their advantages. The world of cryptocurrencies has a lot to offer: from the prospect of great profits to the possibility of operating 24 hours a day in an extremely secure and transparent infrastructure — it is enough to know how to take advantage of it.

1. High risk and the possibility of high profits

In the current market there are more than 10,000 cryptocurrencies, each of them with its peculiarities. Now, all cryptocurrencies have things in common, such as the tendency to experience sudden spikes (and drops) in value. The prices mainly depend on the supply of coins from the miners and the demand from the buyers. This dynamic of supply and demand can generate important benefits. The price of Ethereum, for example, practically doubled from July to December 2021, a lucky date for those who invested at the right time.

2. Blockchain , the technology on which cryptocurrencies are based, is inherently secure

Some of the main advantages of cryptocurrencies are not related to the currencies themselves, but to the infrastructure on which they are based, that is, the blockchain (or chain of blocks), a decentralized data storage registry that tracks all transactions. transactions that take place on it.

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3. Goodbye traditional banks: let’s say hello to a fairer and more transparent financial system

In general, our financial system revolves around intermediaries who are responsible for processing transactions. This means that if you make a transaction, you are putting your trust in one or more of these intermediaries — during the recession of 2008, many people doubted that this was a good idea. Blockchain and cryptocurrencies represent an alternative. Everyone has access, from anywhere, so they allow you to participate in the financial markets and carry out transactions without any type of intermediary.

4. The cryptocurrency market is always open

Another advantage of cryptocurrencies — over banks — is that cryptocurrency markets never close. Since coins are mined and trades are recorded 24 hours a day, there is no waiting to buy, sell or trade cryptocurrencies, as is the case with the New York Stock Exchange, NASDAQ and other stock market exchanges. The impact has been such that traditional stock markets are considering operating outside normal banking hours, although at the moment it is something that is still a long way off. Thus, for investors who are active 24 hours a day, cryptocurrencies could be the best way to earn profits outside of conventional business hours.

5. Cryptocurrencies could help investors win the battle against inflation

Cryptocurrencies are not tied to a single currency or economy, so their price reflects global demand, rather than, say, national inflation. And what about the inflation of the cryptocurrencies themselves? If you have already invested, you have nothing to worry about (generally speaking). Since there is a limited number of coins, the amount available cannot get out of control and therefore there can be no inflation. Some currencies (like Bitcoin) have a global limit, others (like Ethereum) have an annual limit. In any case, this is the approach that keeps inflation at bay.

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Five disadvantages of cryptocurrencies

This all sounds very idyllic, but is the cryptocurrency landscape really that promising? Next we will see some of its drawbacks. Some have an easy solution, others, not so much, but they should always be taken into account.

1. Understanding cryptocurrencies takes time and effort

Understanding how cryptocurrencies work can take time. If you are not a digital native, the concept of cryptocurrency — not to mention blockchain — is likely to be a bit abstract for you. And trying to invest in something you don’t understand is a risk in itself. There are many online resources available (including the N26 blog series on cryptocurrencies), but you will still need to spend some time to really understand the pros and cons of investing in cryptocurrencies.

2. Cryptocurrencies can be an extremely volatile investment

Although the price of a cryptocurrency can reach dizzying highs (with attendant profits for investors), it can also plummet to terrifying lows just as quickly. Therefore, if you are looking for a stable return, cryptocurrencies may not be your best bet. Cryptocurrency markets are largely based on speculation and their relatively small size makes them more vulnerable to price fluctuations. This, in turn, can wreak havoc on the value of coins, one of the main disadvantages of cryptocurrencies.

3. Cryptocurrencies have not (yet) proven to be a good long-term investment

Although cryptocurrencies are widely known and still gaining in popularity, it is worth remembering that they have only been around for a little over a decade. The concept did not emerge until the publication of a white paper on Bitcoin in 2008. Stock markets, by contrast, have centuries of history behind them. The London Stock Exchange, without going any further, was founded in 1801, and gold has proven to be a carrier of value for millennia. But what about cryptocurrencies? Nobody really knows what will happen to cryptocurrencies in the future, and you have to be brave to enter these uncharted waters as an investor.

4. Cryptocurrencies have serious scalability problems

Ok, one would think that digital currencies work at lightning speed and, to a certain extent, they do. Arriving at a certain level, however, they present major problems that make it difficult to deploy them on a large scale. Cryptocurrency vendors themselves admit that this is a problem, with Ethereum officials claiming that the blockchain has reached “certain capacity limitations” that slow down the pace of transaction processing. This can be very frustrating for those involved in the transaction, not to mention the potential financial loss that could result.

5. Beginners are vulnerable to security risks

Cryptocurrencies may not present the risks that come with using central intermediaries, but that does not mean that they are completely free of security concerns. As a cryptocurrency owner, you could lose the private key that allows you to access your coins and thus all your holdings. And then there are hackers , phishing , and other attempts to gain control of your accounts through illicit means. Experienced investors tend to keep this in mind, while newer ones are more likely to fall into this type of trap.

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