The global pandemic has impacted people’s financial situation significantly. If you’ve been searching online for investment options to grow your money for future financial stability, you’ve likely come across cryptocurrencies such as Bitcoin and Ethereum. It’s garnered much attention over the last decade, Facebook even launched a cryptocurrency called Libra. However, as with all types of investments, don’t invest impulsively.
What is cryptocurrency?
A cryptocurrency is a virtual (or digital) asset created to work as a medium of exchange. It is based on a network that is distributed across an enormous number of computers. The appeal of investing in cryptocurrencies is due to its use of blockchain technology.
What is blockchain?
At its most fundamental level, blockchain is exactly as it sounds: a chain of blocks. However, in this context, ‘block’ refers to digital information stored on a database (chain) that is managed by a network. By design, blockchain makes reproducibility of the digital asset almost impossible. This factor makes it a very tempting investment.
Pros and cons of investing in cryptocurrency
- Huge potential for high returns
It’s a high risk, high reward approach. The value goes through extreme ups and downs, but at the time of writing this article, Coinbase showed that one Bitcoin was worth R156 682.
- Shorter time horizons
A lot of mutual funds require a long-term time horizon for the investment to real returns (e.g. the suggested time horizon in an equity fund is five years). The value of cryptocurrency can change almost instantly, and massive returns can be made over a short timeframe.
- Increased volatility
Investing in cryptocurrency is a massive risk. Due to the nature of blockchain, transactions are nearly untraceable which leaves the door open for fraudulent activity and increased potential for hacking incidents which can cause investors to lose money very quickly.
- Rates of return can’t be calculated
The rates of return aren’t proven because they have no connection to regulatory standards. Therefore, there’s no logical reasoning behind the upturn and downturn in value. At this moment in time, there is simply not enough data available to calculate returns accurately.
According to serial entrepreneur, Deep Patel, ‘Cryptocurrency initial coin offerings (ICOs) are gambles. They have the potential to create huge returns on your investment, but also come with great volatility and risk.’